Folks are 'not ready' for powerful AI; Interviews with Google DeepMind CEO Demis Hassabis and Meta Platforms CEO Mark Zuckerberg; Possibility of declining corporate profit margins
I continue to follow developments in the artificial-intelligence ("AI") space closely because I believe it will be as impactful and transformative as the Internet...
And like the Internet, stocks associated with AI will go through booms and busts that I want to help my readers take advantage of.
Here are some recent interviews and articles that I thought were particularly insightful...
1) First up, New York Times tech columnist Kevin Roose lays out the bull case in this article: Powerful A.I. Is Coming. We're Not Ready. Excerpt:
I believe that over the next decade, powerful A.I. will generate trillions of dollars in economic value and tilt the balance of political and military power toward the nations that control it – and that most governments and big corporations already view this as obvious, as evidenced by the huge sums of money they're spending to get there first.
And as he continues, most folks (and governments) aren't ready:
I believe that most people and institutions are totally unprepared for the A.I. systems that exist today, let alone more powerful ones, and that there is no realistic plan at any level of government to mitigate the risks or capture the benefits of these systems.
I believe that hardened A.I. skeptics – who insist that the progress is all smoke and mirrors, and who dismiss [artificial general intelligence, or A.G.I.] as a delusional fantasy – not only are wrong on the merits, but are giving people a false sense of security.
I believe that whether you think A.G.I. will be great or terrible for humanity – and honestly, it may be too early to say – its arrival raises important economic, political and technological questions to which we currently have no answers.
As Roose argues, "The right time to start preparing for A.G.I. is now."
2) Next, following up on yesterday's e-mail...
In it, I discussed Alphabet's (GOOGL) 7.3% stock drop on Wednesday due to fears that AI could impair Google's search business. And I wrote that "Alphabet is investing heavily in AI, and I think it'll be one of the winners."
One reason I believe in Alphabet is this in-depth interview 60 Minutes that aired on April 20 with Google DeepMind CEO Demis Hassabis, who won the Nobel Prize in chemistry last year for codeveloping an AI model called AlphaFold2 that can "predict the structure of virtually all known proteins."
You can watch the segment here on YouTube:
And here's the transcript. Excerpt:
Artificial general intelligence, in which computers have human-level cognitive abilities, is just five to 10 years away, Google DeepMind CEO Demis Hassabis predicted in an interview with 60 Minutes.
AI is on track to understand the world in nuanced ways, to be embedded in everyday lives and to not just solve important problems, but also develop a sense of imagination as companies race to advance the technology, Hassabis said.
"It's moving incredibly fast," Hassabis said. "I think we are on some kind of exponential curve of improvement. Of course, the success of the field in the last few years has attracted even more attention, more resources, more talent. So that's adding to the, to this exponential progress."
3) My friend, a pre-IPO investor in Meta Platforms (META) – whom I quoted in my May 1 e-mail on the company's latest earnings report – sent me a one-hour interview with Meta CEO Mark Zuckerberg with this comment:
If you have the time, read/listen to this. Zuckerberg is clearly thoughtful, understands and acknowledges his mistakes, and isn't dogmatic. And the company's strategy is deep and broad.
Here's a link to the interview and transcript: An Interview with Meta CEO Mark Zuckerberg About AI and the Evolution of Social Media. Excerpt:
What we did discuss were broader themes that place [AI large language model] Llama in Meta's historical context. We cover Meta's platform ambitions over the last two decades, the evolution of social networking, and how Zuckerberg has changed his thinking about both. We discuss the Llama [application programming interface] and the tension between GPU opportunity cost and leveraging training costs, and why Zuckerberg thinks that the latter is worth paying for, even if the company has to go it alone. We also discuss why Meta AI may actually bring many of Zuckerberg's oldest ideas full circle, how that ties into Reality Labs, and why Meta ended up being the perfect name for the company.
4) In November 1999, 17 years into a bull market and just a few months before the peak of the Internet bubble in March 2000, Warren Buffett had a famous article published in Fortune, Mr. Buffett on the Stock Market, in which he predicted:
I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like – anything like – they've performed in the past 17.
He estimated a compounded annual return of 6%. And sure enough, from 2000 through 2016, the S&P 500 Index (with dividends reinvested), compounded at 4.6%.
But one area where Buffett was wrong was corporate profit margins. As he wrote:
In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%.
In the article, Buffett shared this chart:
But in fact, as this chart in a recent Wall Street Journal article (This Could Be a Lousy Decade for Stocks) shows, corporate profits have steadily risen over the past quarter-century:
The article argues, as Buffett did in 1999, that corporate profit margins might revert to lower levels, which could pressure stocks:
Offshoring of manufacturing to China and elsewhere helped boost margins and keep inflation tame. It also funneled dollars back into the bond market, enabling the low interest rates that allowed American companies and homeowners to borrow cheaply. The federal government, too, was able to run big deficits, stimulating the economy. Rates have risen, though, and those low ones aren't locked in forever.
Without the full operating and financial benefit of globalization, margins could easily drift back to their pre-2015 level. Even assuming Trump's 2017 corporate tax cuts are permanent, that could mean a 20% drag for earnings – the "E" in the [price-to-earnings, or P/E] ratio.
My friend Marcelo Lima of hedge fund Heller House disagrees because he thinks AI could turbocharge profits. Here's an excerpt from his post on social platform X last month:
What about AI? If AI turbocharges productivity it would increase profits but also GDP. Interestingly, I "spoke" with [OpenAI's GPT-4o] about this, and it thinks corporate profits will rise FASTER than GDP in that scenario.
What about humanoid robots? In that case, 4o says GDP would go parabolic and corporate profits as a % of GDP "could break historical records – and stay there."
And that eventually we'll have a "Star Trek economy with dividend checks."
I lean toward the bearish argument here...
I think businesses, both large and small, benefited from the rise of fine-tuned global supply chains... which have now been severely (and I suspect permanently) disrupted. This will raise costs, which will be felt in higher prices for customers – but also somewhat lower profit margins for companies.
This doesn't mean a calamity for stocks, but investors should have modest expectations: I would guess that the S&P 500 Index compounds at 5% annually for the next decade.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.