Photo by Steve Johnson on Unsplash
 

“No more pencils

“No more books

“No more teacher's dirty looks, yeah…”

My dad was an inventor of prolific proportion and his compensation was seldom tied to what he created.And I realize now that was a greater value to his employers than what he actually invented.And at the same time, I grew up in a household with better toys than any kid could ever imagine having (prototype porta-subs, 100-mph go-carts with limited-slip differentials), often reminded that success just requires ingenuity.“Build a better mousetrap and the world will beat a path to your door.”

In those days (1950s-1970s), only a few far-sighted authors and educators such as William Golding (Lord of the Flies) had the insight to see that the future for public education was headed for the abyss in which it now resides, or that the cost of an engineering degree would be as out of reach to the ordinary guy with a good idea as is the price of a home.So we didn’t worry about whether the recipe for building the builders of a better mousetrap would run short on ingredients.But that’s what’s happened.

The technology industry became glamorous in the 1990s, and by that I mean it commanded more romance and intrigue among investors than anything else, both institutional and retail. They had seen the rise of Microsoft and Apple and the degree of adoption by individual users when, at that time, the promise was evening the score with big corporations by giving the individual his own tech power to use in his own individual life.But that adoption wasn’t limited to individuals; corporations became intoxicated with the power of the spreadsheet and the PC and, to a lesser extent, word processing which greatly improved the corporate bureaucracy.

By the dawn of the new millennium, tech dominated the stock market—and everything was connected by the internet.And former giants like Exxon/Mobil (XOM), along with all their brothers and sisters in the integrated oil segment, had slid to just three percent of total market capitalization.Today the “magnificent seven” accounts for about 45% of all gains year-to-date, and total market cap has never before been so concentrated in so few issues, even at the dawn of the Great Crash.

Tech makes a great story, and a great story makes a great pitch. It’s hard to think of a better story than Artificial Intelligence. So what if kids aren’t educated anymore? We’ve got AI at the ready to fill in the gap. Who needs to know anything?

What we’re really seeing is the creation of a new slave class. It’s even better than that, because it’s not human, and it can’t be called racist. And it dovetails with corporate, financial and cultural “needs” all at the same time, all three harmoniously in the same camp, even if they don’t realize it:

Corporate: companies like Microsoft (MSFT) and Alphabet (GOOGL) see that legacy search revenue has (nearly) reached the end of a product cycle with margins beaten thin. This should come as no surprise because the search-engine business and the pop-up ad revenue stream is no different from the traditional print and television platformed business it has displaced other than lower unit cost and larger scale.In both cases the end point is a commodity war waged with price competition in which only the largest (can) survive.

Financial: Wall Street is “on its uppers” in the investment banking business. What it hopes for, and is anxiously working to effect, is a spinoff of AI businesses from the big players where the pieces add up to more than the current whole, and also creates handsome fees for their disaggregation and reassembly talents.

Cultural: Not only does AI serve up a replacement for education for the ignorant, it also justifies a new look at who is the welfare class.This is happily being paraded around as Universal Basic Income (UBI), an ethical concept that avers that people who are put out of work by AI deserve to be compensated for their dislocation. Andrew Yang is probably the best-known political face associated with this idea.

Isn’t all this nice and neat? AI does all the work for us and all we need to do is sit back and relax, collect a check and, if we have something left over, own shares related to this enterprise and make hay on that too.

The Distinction Between Infrastructure and Applied AI

Building a lot of roads is not the same as having an auto industry or a commercial transport industry, but it’s certainly a near-prerequisite, just as you can’t have football teams without stadiums, network broadcasters without television sets or their computer and smartphone equivalents, or refrigerators or stoves without homes and restaurants to put them into where they are used residentially and commercially.

What we have so far in AI is a lot of infrastructure and a huge amount of capital investment/cost boosting the share values of companies like Nvidia (NVDA) and Broadcom (AVGO) who mostly make chips—what roads are to the trucking industry. But what markets are betting on is applied AI, or what will be “driven on those roads.”Most of that is on the come, but a lot of that is also already priced in share values.And also, a lot of the financing behind this is circular, such as a large company making an investment in a partner or collaborator (e.g., Opensource AI) in return for some kind of corresponding commitment to use that investing company’s chips or some other complementary business arrangement.One way to think of this is two guys playing poker, but all they do is push the same blue chip back and forth at each other.There is no net accretion until the applied end of the relationship until enterprises actually producing vertical streams of income generate revenue, overcome fixed and variable costs, and profits drop to the bottom line.The timelines on that are not only vague, but the manner in which depreciation schedules on the capital investment are being constructed for accounting and reporting purposes paints a fuzzy picture regarding return on this gigantic investment.

That’s a big bet. And several “clouds over the title” exist in bringing that dream to reality, among them the huge power demands current electric infrastructure is unable to provide.Does the recent power failure in San Francisco, image-highlighted by stalled driverless Waymo vehicles blocking intersections in the middle of the night, suggest that technological aspirations and ebullience may be a bit ahead of reality?

My concern is that this is too ebullient a picture with big drawdown risks and that, in the event of such a drawdown, we might not only have a collapse like dot com based on business hopes colliding with realities COMBINED WITH market instability similar to or greater than 2008-2009 given current levels of market concentration on top of massive leverage.

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