AI's Early Impact, Shifting Economy, and Market Consolidation

Key Quotes

"well i think we're in the early stages of ai adoption most of the talk about ai right now is about the infrastructure build but that's different than the downstream adoption we're in the first or second inning uh i think my own view and i think the view of my firm is when we talk five years from now we'll see a half a percentage point gain in productivity growth for gdp uh and it will help business but which use cases work and which don't we're going to spend the next three years uh trying to figure that out"

Robert Kaplan explains that while the infrastructure for AI is being built, its widespread adoption and impact on productivity are still in their early stages. Kaplan anticipates a modest productivity gain of about half a percentage point in GDP over the next five years, but acknowledges that identifying successful use cases will require further exploration over the next three years.

"i think the neutral rate nominal is about three and a half three and three quarters and some of the folks say with inflation at two and three quarters and the job market likely to firm in the next year we shouldn't be at neutral and i think overall they bought insurance in case the labor markets weaker than they thought but from here it will be a conventional fed meaning something's got to change to move the rate either unemployment needs to worsen or inflation needs to improve across the nation"

Robert Kaplan discusses the Federal Reserve's policy stance, noting that while the neutral interest rate is estimated to be around 3.5% to 3.75%, some believe the current rate is too high given inflation and the expected strengthening of the job market. Kaplan suggests the Fed may have increased rates as a precautionary measure against potential labor market weakness, and future rate adjustments will depend on changes in unemployment or inflation.

"well for a lot of the last 10 or 15 years uh the fed had the luxury pre covid of not having an inflation problem so it could focus heavily on what was going on in employment and if thought employment was weakening it could move uh post covid and i would argue with this boom in government spending we had in 2021 2022 and 2023 and that which probably caused supply chain dynamics to create an excess demand issue uh they got to deal with both and it's harder to deal with both and so then they have to make trade off decisions and that's hard to do"

Robert Kaplan explains the Federal Reserve's challenge in managing both inflation and employment post-COVID, a situation more complex than the pre-pandemic era. Kaplan notes that before COVID, the Fed could prioritize employment due to low inflation, but the significant government spending and resulting supply chain issues have created excess demand, forcing the Fed to balance both mandates, which he describes as a difficult trade-off.

"it's 100 a us focused game this is very exclusively if you're in capital markets and you're in ai it's us if you're in government spending it's china and europe is still sort of looking askance at the whole thing so i think there's a fomo element here as well with companies and they need to communicate to their shareholders that they're investing in next generation technology which today is ai"

Alexis Crow highlights that the current AI investment landscape is primarily US-centric, particularly in capital markets, while government spending in this area is concentrated in China. Crow suggests that companies are investing in AI to demonstrate to shareholders that they are adopting next-generation technology, driven partly by a "fear of missing out" (FOMO).

"i mean i think one thing that's striking tom is that over time the availability of key skills has been a key pressure point and a key concern for ceos regardless of jurisdiction regardless of sector and so i think ai is meant to be this panacea that's going to solve the world of all of its ills if we're thinking about a shortage of skills if we're thinking about an uplift in productivity if we're thinking about investment to support capital markets and returns and consumer firepower and so that continues to be the buzzword"

Alexis Crow points out that the availability of key skills has consistently been a major concern for CEOs across all sectors and regions. Crow notes that AI is often presented as a solution to various issues, including skill shortages, productivity improvements, and support for capital markets, making it a prominent topic of discussion.

"exclusively in the united states we have a situation where the k the top part of the k continues to appreciate right the top parts of the income distribution spending income wealth purchasing power all appreciating significantly but rather than a k the bottom part of the income distribution the bottom 50th percentile has flatlined it's not continuing to tumble okay net worth held by the bottom 50th percentile in the united states has more than doubled over the last five years 4 2 trillion really i didn't know okay we had a gini coefficient which is you know technical technical way of looking at inequality actually tumbled by the single greatest amount on record 2019 to 2021"

Alexis Crow describes the US economy as a "Pac-Man" pattern, where the top income earners are experiencing significant gains in spending, income, wealth, and purchasing power. Crow contrasts this with the bottom 50th percentile, whose economic fortunes have flatlined, though she notes that the net worth of this group has doubled in the last five years and the Gini coefficient, a measure of inequality, has significantly decreased.

"i think it's going to be a similar environment and i think what we heard we heard obviously from powell yesterday um they still got that easing bias in i think whatever the kind of really interesting comments that he's kind of almost slammed the door shut no one was really predicting hikes as the next the next move that said obviously yields have come down a long way so it's really in my mind more of a carry environment but that's still reasonably attractive carry and then you get the uh the opportunity that if things do go wrong you know the diversification of bonds i think is back which means there's a lot of capital gains if this labor market continues to deteriorate further and faster than the market expects and probably we expect"

Iain Stealey anticipates a similar market environment for the upcoming year, influenced by the Federal Reserve's easing bias. Stealey notes that while no one expected further rate hikes, yields have decreased significantly, leading to a "carry environment" that remains attractive. He also highlights the return of bond diversification as a source of potential capital gains if the labor market deteriorates more than expected.

"i think i think you make a good point there because it's the viewers should be aware that this isn't just a us phenomenon that curves are steepening around japan around the world japan outrageously but even if you look at the uk if you look at germany and the eurozone curves are steepening and that's partly because we're getting closer to the end of the the easing cycle again let's see what happens with the data on that but also there's a huge amount of government debt being issued globally