No. of Recommendations: 14
Is It a Bubble?
https://www.oaktreecapital.com/insights/memo/is-it... Marks pulls (relevant) quotes from a number of recent thought pieces on AI and the valuation of the firms currently seen as leaders in the gold rush.
I know I don’t know enough to opine on AI. But I do know something about debt, and it’s this:
It’s okay to supply debt financing for a venture where the outcome is uncertain.
It’s not okay where the outcome is purely a matter of conjecture.
Those who understand the difference still have to make the distinction correctly. (Bolding in the original)
His summation:
There’s a consistent history of transformational technologies generating excessive enthusiasm and investment, resulting in more infrastructure than is needed and asset prices that prove to have been too high. The excesses accelerate the adoption of the technology in a way that wouldn’t occur in their absence. The common word for these excesses is “bubbles.”
AI has the potential to be one of the greatest transformational technologies of all time.
As I wrote just above, AI is currently the subject of great enthusiasm. If that enthusiasm doesn’t produce a bubble conforming to the historical pattern, that will be a first.
Bubbles created in this process usually end in losses for those who fuel them.
The losses stem largely from the fact that the technology’s newness renders the extent and timing of its impact unpredictable. This in turn makes it easy to judge companies too positively amid all the enthusiasm and difficult to know which will emerge as winners when the dust settles.
There can be no way to participate fully in the potential benefits from the new technology without being exposed to the losses that will arise if the enthusiasm and thus investors’ behavior prove to have been excessive.
The use of debt in this process – which the high level of uncertainty usually precluded in past technological revolutions – has the potential to magnify all of the above this time.
Since no one can say definitively whether this is a bubble, I’d advise that no one should go all-in without acknowledging that they face the risk of ruin if things go badly. But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward. A moderate position, applied with selectivity and prudence, seems like the best approach. (Ed: I sure hope he's sharing this perspective with his bosses at Brookfield. If I hear them repeat "backbone of the global economy: one more time with respect to data centers, I might take some painful capital gains).
Finally, it’s essential to bear in mind that there are no magic words in investing. These days, people promoting real estate funds say, “Office buildings are so yesterday, but we’re investing in the future through data centers,” whereupon everyone nods in agreement. But data centers can be in shortage or in oversupply, and rental rates can surprise to the upside or the downside. As a result, they can be profitable . . . or not. Intelligent investment in data centers, and thus in AI – like everything else – requires sober, insightful judgment and skillful implementation. (Ed: Invest with skill, got it. Yogi Berra said it better (and shorter): predictions are hard, especially about the future. But Mark's postscript hits hard, because he starts thinking through the implications of "thinking" machines (or at least machines that can replace some amount of human activity) in a knowledge/skills based economy.
Joe Davis, Global Chief Economist and Global Head of the Investment Strategy Group at Vanguard, says, “for most jobs – likely four out of five – AI’s impact will result in a mixture of innovation and automation, and could save about 43% of the time people currently spend on their work tasks.” (Exponential View, September 3)
I find the resulting outlook for employment terrifying. I am enormously concerned about what will happen to the people whose jobs AI renders unnecessary, or who can’t find jobs because of it. The optimists argue that “new jobs have always materialized after past technological advances.” I hope that’ll hold true in the case of AI, but hope isn’t much to hang one’s hat on, and I have trouble figuring out where those jobs will come from. 