In answering this question, we need to know 

1 What interest rates will be?

2 What will inflation be?

3 What will growth be?

But there is a new factor emerging which is going to completely change the outlook for productivity, employment, inflation and growth going forward. It’s a game changing, deflation creating, productivity boosting bomb.

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AI (Artificial Intelligence)

AI has been unleashed and it’s already having profound effects in a relatively short time.

Just in the last week as examples,

  • B.T announced it will have 40% fewer employees by 2030. AI can do those jobs
  • IBM announced it has stopped hiring in 30% of its operations. AI can do those jobs

This will happen everywhere.

The knowledge economy

The higher paid workers are those with knowledge. They are paid for years of intensive specific study to perform what they’ve learned. So, doctors, lawyers, accountants, architects, designers, computer programmers etc.

AI is knowledge at super scale. It’s the most knowledgeable on any subject because it has instant access to all the accumulated knowledge. It’s happy to help anyone and it’s free. It works 24 hours, 7 days a week for no pay.

If you are sceptical, the following quote from the CEO of Octopus, a U.K. company, is the tip of the AI iceberg.

A productivity boom, a deflation bomb, an employment hurricane.

If we look at AI alone, the reality is it’s only one of a number of transformative technologies getting ready for prime time.

The effects on economies are going to be profound…

PRODUCTIVITY- AI is going to create a productivity boom. GDP will rise. Profits will rise. Companies producing the most usable AI tools will grow very rapidly.

DEFLATION- It will be the most deflationary single change the western world has possibly ever seen. It will reduce costs across most sectors by large chunks. Forget current inflation worries.

EMPLOYMENT- It will transform the knowledge economy. If whatever isn’t better than the AI alternative, then it will be replaced by AI.

Back to the 70’s

It is ironic (don’t you think) that given the ‘Cambrian explosion’ we are about to see in technology advancements that 2022 felt like we revisited the 1970’s.

Raging inflation, strikes, transport shutdowns and a Russian created crisis.

As much as anyone who said ‘transitory’ about what was taking place got pilloried, it was/is transitory. 2022 was a very weird year which followed two equally weird and surreal years. 

What do we do now?

We invest going forward being confident of the likelihood of the following 

  • Inflation will not continue as the same issue 
  • Central banks will reduce rates because inflation craters and employment is weaker.
  • Technology innovations will be transformational and deflationary
  • For economies not to shrink rates still need to be the same or lower than GDP growth. We are still over 100% borrowed to GDP.
  • QE (or something similar with a new name) will be used to keep rates lower (yield curve control) and subdue the debt to GDP ratio. So, more liquidity which is good for asset prices.
  • Ideally for economies, interest rates continue to be lower than inflation. If a 2% differential exists, total debts can then increase 2% per annum at no extra servicing cost.

Essentially we go back to the 2019 playbook (before the pandemic) but with AI as new.

Nvidia which is the leading designer of the most advanced micro chips needed to power AI compute is up 113% YTD.

What worked best as investments?

Assets with consistent above average profits and growth trajectories

So that’s what we focus on moving forward.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.