AI is Too High, Crazy Desert Dreams, & Can We Get a Recession Already?

Welcome back to The New Rules

A quick message before we jump in:

If you’re reading this online, subscribe HERE and join thousands of people who want to understand the world better in receiving these emails every week.

Let’s dive in…

Bob Elliott was the Chief Investment Officer of the world’s largest hedge fund, Bridgewater, and now has an ETF that replicates what hedge funds do. He throws some serious water on the earnings projections the market is expecting due to AI. The market sees AI adding significantly to the margins of key companies like Microsoft, Apple, and Meta.

There are two problems with this. First, the revenue isn’t in sight and the projected earnings are. It seems like the market is making a huge bet that revenues will grow incredibly fast. While AI is game changer technology, it takes a long time for technology to get adopted.

But even if that happens there’s a second problem. The gains in productivity from AI will come from eliminating jobs. For example, Company A made $10m in revenue and kept $1m in profit without AI. Now it can replace 5 employees and make the same revenue but get $1.5m in profit. That’s what Wall St is assuming but there are some problems.

First, Company A’s margins will go up but part of that increase will go to your remaining workers, so you are making $1.25m not $1.5m.

Second, if everyone gets laid off over a couple of years then what happens to the economy? For your company to keep making money, someone needs to buy things. People who get laid off don’t buy things and no one has made a credible case for what other part of the economy will hire enough people fast enough to create the economic activity needed.

slightly higher margins on much lower revenue isn’t a good trade.

Fortunately, Bob (and I agree with him) doesn’t see any of these projections getting met. It’ll take far longer to deploy AI and the productivity gains will be slower giving the rest of the economy time to redeploy the labor more efficiently. In the long run, everyone will be richer because of AI but for now, it looks like Wall St is stoking another bubble.

Patrick Boyle talks about the absurdity of the Saudi ruler, Mohammed bin Salman‘s (MBS), project to build Neom. I don’t really understand this but Neom is a built from scratch city in the middle of a desert. MBS plans to spend about $500b constructing it but, here’s the thing, he plans to build it in a straight line as one continuous building.

The whole project is very weird and Boyle does pitch perfect take down of this colossal waste of money. Boyle is pretty hilarious. Make sure to watch the part about getting from one end of Neom to the other. I plan to watch all his stuff going forward.

Ben Carlson points out that we’ve only had 2 months of recession in the last 15 years.

Holy f!@#$ that’s crazy!

As Carlson points out, recessions used to happen every 7 years on average. This is good in some ways but makes me nervous that we’ve propped up a bunch of zombie companies. Zombies are companies that are effectively never going to grow enough to pay back their investors or pay off their debt. Long stretches of good times allow these companies to limp along and recessions clear them out and free up the labor and capital involved for more productive purposes.

We are seeing some of these companies starting to succumb to higher rates particularly those funded by Private Equity with high levels of debt and Venture Capital with high levels of equity. I’m guessing the process is more advanced in VC. Start ups have been shutting their doors at record rates but PE companies are planning all sorts of financing tricks to try to avoid bankruptcies.

PE and real estate are worrisome. The Fed is cutting rates just in time to save some of them but it feels like we’ll get a huge flushing out of these over indebted zombies during the next downturn. Unless the government bails them all out again.

Keep growing,

Alan

P.S.

P.P.S.

• If you’re reading this online, subscribe and join thousands of execs, business owners, and working professionals receiving these emails every week.
  

• Be sure to follow me on X/Twitter and LinkedIn for my most up to date content.