AI to the Rescue
Trend: Wealth Gap and Consumption and AI
Hereās the wealth distributionĀ
There is a large percentage of wealth that is concentrated in the top quartile. Furthermore, Baby Boomers have amassed generational wealth. Retirees have more time than they know what to do with and that is turning into consumption. Another demographic demonstrating strong consumption trends are single females, which was also highlighted by the NAR report. The upper income quartile has demonstrated that they have been able to sustain consumption habits despite a 500 bps rate increase, as luxury brand names outperformed in 1H 2023.Ā
Sophie (@netcapgirl) provided confirmation bias in a more eloquent form:
She highlights impacts from ozempic and AI. I agree with most of her points. The one point that I would contest is going to the gym. I would argue that the people who would choose to consume ozempic may use that as a replacement rather than something complementary. The ones that are already attractive know the key to staying fit is a balance between calories burned and calories consumed. The drug just helps suppress the consumption urge for those that are overweight and struggle against chemical induced urges to consume food and snacks. Not only is Eli Lilly fortifying their moat for this market, unhealthy fast food demand is likely to suffer. (H/T Citrini @Citrini7)
Other than the consumption component, I want to also comment on the populism angle related to wealth gap and AI. Wealth being distributed so top heavy is not healthy. Nominal growth being sustained by the upper income quartiles is what gave rise to populism, emerging in the forms of Former President Donald Trump and Bernie Sanders. What has been increasingly apparent is there exists a barrier to upward mobility and how to improve the quality of life for all. That barrier has recently taken the form of inflation.Ā
The following chart depicts the price changes of consumer and services over the last couple decades. The top four items on the following price change chart can all be addressed with AI. Cathie Wood might not have the best timing, but her core themes for innovation are likely correct. Although AI has become a buzzword lately with every company needing to address it or be seen as left behind, it truly has the potential to change the world. With the rise of chatbots and personalized/sector-specific large language models (LLMs), hospital services and education are ripe for disruption. Between faster drug discoveries to reduce R&D costs and streamlining insurance overhead, GPT models should help reduce medical costs and improve hospital care.Ā
Source: https://www.visualcapitalist.com/inflation-chart-tracks-price-changes-us-goods-services/
Here is Cheggās stock price chart:
Covid had already reduced college admissions. Now colleges and textbook companies may lose even more pricing power. Standardized testing is on its way out (https://www.chicagobusiness.com/education/universities-consider-keeping-test-optional-admissions-policy). People may begin to look for other areas to assess intelligence, such as gaming. I have an active position in Roblox corporation. Roblox absorbed Imbellus early on during the Covid pandemic. Rebecca Kantar is now their Head of Education and has long been an advocate of using simulation-based cognitive assessments that evaluate how people think instead of just what they know. (https://www.forbes.com/sites/amyshoenthal/2023/03/03/the-women-of-roblox-are-on-a-mission-to-make-gaming-a-force-for-good/?sh=4075e0d4a01b)
I have had the view that standardized testing is a poor assessment of a personās intellect since I was in grade school. Undergraduate studies is meant to teach people how to learn. College students are effectively focusing on a subject and learning to learn in that area. This becomes more apparent as college graduates progress into graduate studies and they are tested with fundamentally understanding how to ask the ārightā question and identifying the howās and whyās to solving the problem. Assessments that evaluate how people think instead of just what they know and what they can memorize are what are needed.Ā
With the introduction of GPT4, memorization loses its edge.Ā
MBA consultants that relied on case studies and simply proposing a plan will need to spend more time on implementation and achieving results. White collar jobs being replaced is likely to suppress wage growth of the upper income quartiles and has the potential to provide the necessary drag to bring it down to Fedās target for inflation.Ā
AI will be a big boost to productivity, in the sense that it will require humans less comprehension to interpret and understand data, changing the learning curve. English has become a programming language with the introduction of code interpreter. Ethan Mollick (@emollick) provides a compelling example in how code interpreter was basically able to do what a 2nd yr PhD student was capable of doing.Ā
The potential of English as a programming language has massive ramifications for unskilled labor. The combination of LLMs and a coding sandbox is an extremely powerful tool that changes the learning curve for data analysis. Instead of spending time on memorizing equations, future generations will jump straight to learning to learn and how to ask the ārightā question.
Source: https://arxiv.org/pdf/2307.02792v2.pdf
In summary, not only are upper quartile consumers positioned to sustain consumption, AI will boost productivity and provide a revolutionary tool for unskilled labor for the next decade. How Nvidia is valued in 10 years is anyoneās guess, but President Bidenās CHIPs act will further enable the US to maintain global competitiveness in this new regime. Those worried about deglobalization may be underestimating how much the internet contributed to globalization. Although reshoring initiatives may be inflationary short term, automation has the chance of balancing out those price pressures. Furthermore, GPT technology has the potential to provide the necessary drag to bring wage growth down to the Fedās target for inflation over time.
In my opinion, LLMās coupled with code interpreter is poised to more than offset deglobalization with respect to contribution to corporate capex and margin improvement, as productivity is increased for every sector. It is probable that the effects will be felt within a year and is faster than those treating AI as a Gartner hype cycle. The potential of English as a programming language is still underestimated. In addition, the easiest demonstration of adoption rate would be comparing asking your grandmother about Netscape back in the 90s compared to asking your grandmother about chatGPT now. The transmission and absorption of information is much faster now and Microsoft is poised to deploy OpenAI enterprise solutions globally.Ā
Source: https://blogs.microsoft.com/blog/2023/01/23/microsoftandopenaiextendpartnership/
Source: https://www.pwc.com/gx/en/issues/analytics/assets/pwc-ai-analysis-sizing-the-prize-report.pdf
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