AI’s Summer of Sorrow
Cue the Mainstream Kvetching About AI
The mainstream is starting to wring its hands over artificial intelligence.
“Silicon Valley’s tech bros are having a difficult few weeks,” sniffs The Economist.
“A growing number of investors worry that artificial intelligence (AI) will not deliver the vast profits they seek. Since peaking last month the share prices of Western firms driving the AI revolution have dropped by 15%. A growing number of observers now question the limitations of large language models, which power services such as ChatGPT. Big tech firms have spent tens of billions of dollars on AI models, with even more extravagant promises of future outlays.
“Yet according to the latest data from the Census Bureau, only 4.8% of American companies use AI to produce goods and services, down from a high of 5.4% early this year. Roughly the same share intend to do so within the next year.”
This sort of argument cuts no ice with Paradigm’s AI authority James Altucher — who’s seen many startups come and go during his decades in venture capital and hedge funds.
“Every technological revolution has two phases, the hype cycle and the build cycle,” he said in this space six months ago.
“The dot-com bubble was the hype cycle for the internet. Internet stocks rocketed to record highs before losing momentum and coming back down to earth.”
Or disappearing entirely in the case of pets.com and most of the stocks that CNBC’s Jim Cramer touted at the very top of the tech bubble in early 2000.
But look what happened next: “Then the build cycle happened and we had companies like Facebook, Amazon and Google take over the internet.”
Ah, but The Economist’s editors were anticipating James’ counter-argument.
They’ll acknowledge what happened in the early years of the World Wide Web. Something very similar happened with a bubble in British railroads that burst in 1847 — eventually leading to a buildout that transformed the economy.
But unable to shake its skepticism, the magazine put its researchers to work — determining how often the hype cycle actually results in a build cycle, examining scads of examples.
“Tracing breakthrough technologies over time,” the editors conclude, “only a small share — perhaps a fifth — move from innovation to excitement to despondency to widespread adoption.
“Lots of tech becomes widely used without such a rollercoaster ride [cloud computing]. Others go from boom to bust, but do not come back. [3D printing].
“We estimate that of all the forms of tech which fall into the trough of disillusionment, six in ten do not rise again.”
As their findings apply to AI, “There is no guarantee of success.”
All true, as far as it goes. But here’s what The Economist’s editors are missing this time.
As we told you last week, one of James’ most trusted contacts recently tipped him off to a $1.6 trillion shift taking place within the AI sphere. And the next big move is due this Thursday.
About That “Robust” Job Creation…
Now they tell us: “U.S. job growth in the year through March was likely far less robust than initially estimated,” Bloomberg reports — “which risks fueling concerns that the Federal Reserve is falling further behind the curve to lower interest rates.”
Tomorrow the wonks at the Bureau of Labor Statistics will issue revisions on the monthly job numbers from April 2023–March 2024.
This is an annual thing and not necessarily a politically motivated act. New data comes in all the time — and in recent years, employers don’t respond to the BLS’ surveys as often as they used to.
The big banks’ economists are guessing at how big the revisions might be. Wells Fargo estimates perhaps 50,000 a month, the biggest revision in 15 years. Considering the average number of new jobs over that time span was 242,000 a month, the revision is substantial.
Another factor in play is one we’ve mentioned through the summer — the BLS’ “birth-death model.”
This model is a statistical inference that tries to account for the survey’s shortcomings. New businesses come into existence all the time; the statisticians don’t necessarily know how many or where they are. Likewise, if a business doesn’t respond to the survey, it’s possible that’s because the business no longer exists.
The problem with the birth-death model is that it tends to underestimate the number of new jobs whenever the economy is coming out of recession. And — more relevant to the present moment — it overestimates the number of new jobs whenever the economy is going into recession.
As a result, Bloomberg Economics projects that “the underlying pace of monthly job growth is likely less than 100k — below the pace consistent with a steady unemployment rate. We expect the unemployment rate to reach 4.5% by year-end.”
For the record, it’s already 4.3% — up from 3.5% a year ago.
Timing is everything: Tomorrow’s release of the revisions comes two days before Fed Chair Jerome Powell’s vaunted “Jackson Hole speech” — an annual affair the fourth Friday of every August.
If he puts more emphasis on a softening labor market than on the pace at which the inflation rate is falling… the coming rate cut in September could be a half percentage point, not just a quarter. (The fed funds rate is currently 5.5%.)
As for the markets today, the standout number is oil — a barrel of West Texas Intermediate is below $74 for the first time in nearly two weeks. The climb down from $80 a week ago yesterday has been big.
And it’s come despite a drop in the value of the U.S. dollar relative to other major currencies. The U.S. Dollar Index sits at 101.58 this morning, the lowest it’s been all year and down steeply from 104.5 at the start of this month.
It’s this weaker dollar that’s given a lift to both stocks and gold the last couple of weeks.
The major U.S. stock indexes are taking a breather today after the big run-up going back to last week; the S&P 500 continues to hold the line on 5,600.
Meanwhile, gold continues to hold the line on $2,500 and silver is comfortably over $29.
In contrast, Bitcoin’s performance of late is undermining its street cred as a non-dollar asset. This morning it still languishes below $59,000.
“Super Premium” EV Batteries = Exploding Silver Demand
Assuming the latest headlines about “solid-state batteries” aren’t so much hot air… they could be a huge long-term boost for silver.
Solid-state battery technology — the next-gen evolution for electric vehicles — has been a long time coming. Last year Toyota pushed back its timeline for these batteries from 2025 to 2027. Only then would the company offer EVs with a range of 750 miles and a charging time of 10 minutes or less. And some experts said even that goal looked ambitious.
In recent days, South Korea’s Samsung has stepped forward with claims that it’s perfected a solid-state battery that can charge in nine minutes, deliver 600 miles of range and last for 20 years.
To be sure, they’re pricey — thus they’ll be limited to what Samsung calls the “super premium” EV segment once they go into mass production come 2027.
Among the battery’s key ingredients: silver. Samsung is keeping the numbers close to its vest, but one investment professional suggests a single cell in these batteries might contain up to five grams of silver.
“A typical EV battery pack containing around 200 cells for a 100 kWh capacity could require about 1 kg of silver per vehicle,” ventures Canadian resource investing pro Kevin Bambrough.
One kilogram is just over 32 troy ounces. At current silver prices over $29 an ounce, that’s close to $1,000 worth of silver. No wonder these batteries would be limited to the “super premium” market!
Bambrough runs some more numbers in an interview with Kitco News: “With global car production standing at about 80 million vehicles per year, if 20% of these vehicles (16 million EVs) were to adopt Samsung's solid-state batteries, the annual demand for silver would be around 16,000 metric tons (16 million vehicles * 1 kg of silver per vehicle).
“This would represent a significant portion of the current global silver production, which is approximately 25,000 metric tons annually, highlighting the substantial impact on the silver market.”
Even if that 16,000 metric ton number turns out to be inflated, silver’s use in next-gen EV batteries — to say nothing of next-gen solar panels — makes silver’s trajectory look unstoppable.
As Paradigm’s floor-trading veteran Alan Knuckman reminds us, silver’s most recent peak of $50 in 2011 translates to nearly $70 today.
This “Inflation Reduction” Thing Is Hard
Go figure: The 2022 “Inflation Reduction Act” is about to fuel even higher government spending than first expected — ergo, more inflation.
The background from Politico: “President Joe Biden’s IRA placed a $2,000 cap on out-of-pocket drug costs for older Americans, allowed beneficiaries to spread their annual drug costs over monthly installments and shouldered insurers with more responsibility to cover drug costs after a beneficiary spends a large amount. But the law did not anticipate just how much health insurance premiums would increase.” [Emphasis ours]
Two years later, the proverbial rubber is about to meet the road: Every September, everyone who takes part in Medicare’s prescription drug program gets an “Annual Notice of Change” in the mail.
It’s a straightforward summary of what you paid and what was covered this year… and what you’ll pay and what will be covered next year.
The Biden administration was running a severe risk that next month’s letter would feature a shock increase for 2025 — revealed only weeks before Election Day.
In a recent interview on the Financial Sense podcast, Medicare consultant Brian McArthur estimated many patients would be hit with premium increases of 50% or more — and their plans might no longer cover the medications they need.
To avert this election-season sticker shock, the Biden administration is improvising a new handout for the insurance companies.
The subsidy will amount to $15 per patient per month. Politico says the cost the first year will total $5 billion, but that’s a severe undercount.
Considering 68 million people get their drugs through either Medicare Part D or a Medicare Advantage plan, that works out to $12 billion a year in new spending that Congress never signed off on.
True to form, Republicans who never worry about “fiscal responsibility” when they’re in charge are crying foul because it’s the Democrats in charge.
“It’s using the federal treasury for political advantage,” Sen. Bill Cassidy (R-Louisiana), tells Politico. “This is a way for the executive branch to implement a policy which has very positive political ramifications for them, but with very sketchy legal standing.”
This scheme will be a “pilot program” for three years — presumably enough time for a Harris administration to come up with a longer-term fix? What a mess...
One could make a hypothetical argument that some of the Inflation Reduction Act’s provisions would create new wealth — i.e., the subsidies for “green” energy. (Emphasis on the word “hypothetical.”)
But this $15-per-patient-per-month subsidy to the insurers? It’s pure graft that will only run up the national debt further… and make inflation that much harder to get back to pre-pandemic “normal” levels.
Mailbag: About the Data Breach…
“Thanks again Dave for the info on the data breach,” writes one of our regulars after yesterday’s edition.
“I had heard some of it, but was waiting for more info. Luckily it came from you as our media is too enthralled with politics right now. (Party to remain anonymous, thereby adhering to new 5 rules, I think?)
“You're correct about the clumsiness of the Experian sign-in and creation. I had already received a free ‘monitoring’ from Experian from someone who had been hacked with the customary data leak and had created a free Experian ‘monitoring’ account. Funny, that freebie Experian ‘monitoring’ account won't get you to a credit freeze. Had to sign up at Experian’s clunky account to ‘freeze’ my credit report with them. That doesn't even make sense, does it? Lots of expletives…
“Oh boy, can't wait for the spam!”
Dave responds: Have to say Experian’s system is pretty responsive; I don’t think I’ve gotten anything since I irritably opted out sometime on Saturday.
As for the policy I implemented a few days ago, I’m already rethinking it. It’s doing nothing to tamp down the partisanship and hostility, which was the whole point.
People of both the D and R persuasion can’t let go of their groupthink, their hivemind, their tribalism — and they’re spoiling for a fight.
Exactly what I do about that in these virtual pages as summer turns to fall, we’ll have to see…
