I want to write a bit about artificial intelligence from the standpoint of a market person who knows little about technology.

But first, if you haven’t heard, we’re officially underway with the 2023 Strategic Investment Conference—with an action-packed third day set for tomorrow, May 5. I’m scheduled to speak alongside Jason Brady, president and CEO of Thornburg Investment Management, at 1:45 pm Eastern… and again later in the afternoon at 3:55 pm.

If you’re already registered, you can view the rest of tomorrow’s lineup here. Or, if you still need to secure your pass, it’s not too late. Anything you may have missed is available for replay via the archive. Just click here to get started because there’s a lot left to discuss live in the days ahead.

Okay, AI…

The Greatest Opportunity Since the Internet?

Some people think that programmers will create a superintelligence that will kill us all. I tend to doubt it. What I really foresee unfolding is perhaps the greatest investment opportunity since the internet.

The internet unleashed a huge productivity boom. Dumb example: You can order a book online instead of driving to a bookstore and spending 10 minutes poking around the bookstore looking for the book. You no longer have to order the book if they don’t have it, drive home, then drive back to pick up the book.

Our lives were so much more difficult before the internet, and everyone has pretty much forgotten how difficult things were. Everything was hard. Everything involved a phone call, a fax, or snail mail. When I started The Daily Dirtnap in 2008, I was still taking orders via fax.

But the investment returns didn’t necessarily follow the productivity boom. The investment returns were amazing in the beginning, then terrible for about 10 years, then amazing again.

Every new technology follows this pattern, and the same will be true with AI. The challenge is to find pure-play AI companies. Otherwise, you are investing in things like Microsoft and Google, and it’s all mixed in with the soup.

My guess is that there will be some pure-play AI companies at some point. It doesn’t matter at what valuation they go public—you need to buy them.

Trust me. I have seen this movie before.

An Investment Boom

Typically, what happens with Wall Street is that it gets ahead of itself. It seizes on an investment opportunity—like the internet—then everyone plows billions and trillions of dollars into it, and you have money chasing bad investment opportunities. Then the whole thing implodes and goes back to zero.

And then what happens is, over time, the potential of the technology is realized. In 1999, there were thousands of dot-com companies. Today, there are just a handful. If you have the ability to pick the winners, you can earn 1,000X returns.

But the point is that in the beginning, everything goes up, and you can just throw wet paper towels against the wall, and they’ll stick. Remember VerticalNet? Mamma.com? Global Crossing? Exodus? They’re all gone and have been gone for a while, but for a period of time, you could have done very well in these stocks.

I am fond of saying that it is difficult for smart people to make money in the markets. In bull markets, you have to pretend you are dumb. Just pretend you are a dummy—it’s got AI in the name? Buy it! And then you have to be smart on the way down. Dumb on the way up, smart on the way down.

This newsletter is all about being dumb on the way up. There will be an AI boom, and it is going to be big. Another theory of mine: Sometimes you have to be credulous, and sometimes you have to be skeptical. Now is not the time to be skeptical.

Killer Robots

My theory on AI is that it’s going to drastically improve productivity, setting off another productivity boom like we had in the ‘90s, which will offset some of the inflation we are experiencing. The only thing you will need a lawyer for is the letterhead. The demand letter will write itself.

It will also displace a lot of jobs. There is nothing to fear here, and this is no time to fire up the universal basic income. We will destroy some jobs and create other jobs. Everyone had the same fears about the internet. The internet destroyed some jobs and created new ones, with lots more productivity. We were better off in the long run.

Weird things are going to happen. People will develop romantic relationships with chatbots. Get ready to hear more about this. Especially teenagers. Young people will form attachments to chatbots instead of other humans. Wives will “cheat” on their husbands with chatbots. People will get divorced over chatbots. Wait and see.

A friend of mine, Chand Sooran, observed that when the internet was invented, it obviated the need for memory. Now that AI has been invented, it will obviate the need for intellect. What remains? Emotional intelligence—dealing with other people. People skills will become even more valuable in an AI world.

As someone who used to be a professor (and will be again shortly), I’m not thrilled about this because I used to give writing assignments in my classes. That’s gone out the window. A brave new world, I guess.

Right now, people are screwing around with ChatGPT, seeing what sort of things it can do, and we are barely even scratching the surface. Exciting stuff… but do not be afraid.

Jared Dillian

subscribers@mauldineconomics.com