Wednesday, 8 May 2024

By Callum Newman Editor, Small-Cap Systems and Australian Small-Cap Investigator

[3 min read]

Dear Reader,

Today’s Fat Tail Daily begins with a hat tip to the ABC team behind their show Australian Story.

Their latest episode is on the impact Artificial Intelligence is having on the modelling industry and images all over the internet.

Instagram, Facebook, Twitter — you name of it.

You can see, for example, beautiful women, of every shape, everywhere. These days most of them aren’t real.

They’re just images, mashed together by an algorithm from billions of pictures all over the web.

That’s a problem when you’re like Chelsea Bonner and run a modelling agency. Chelsea is raising a warning flag on AI — hence the show.

The major theme is not hard to guess. AI is on the verge of wiping out businesses like hers.  

Chelsea is already losing work because her clients can massively cut their costs using AI images instead of a genuine model.

One of those models says, quite rightly, that it’s not just her job under threat.

It’s also the make-up artist, the hair stylist, the set designer and the photographer.

All true. This is the scary part. Maybe they can hang on for a while, but the writing is on the wall for these professions.

Chelsea Bonner can see this a mile off. She wants the government to do something to protect her industry.

It’s the battle of today. Government can protect industry — but only at the cost of the taxpayer and, ultimately, the consumer.

If we can find a cheaper way to produce an image, we should. That’s how economic progress works. Do more for less. That’s how we get richer.

If we get rid of models, hair stylists and photographers but still have an image, then we gain whatever those people go on to do instead. We progress by freeing up labour to do something additional…and, ideally, more productive! 

This is just a small example of how AI is going to upend one industry. There will be countless more.

Consider the firm that needs an image of a model for their advertising. They save a fortune.

That will show up in higher profits…or more money they can reinvest in their business.

If they are listed on the share market, this will be reflected in a higher share price, all else being equal. The market will sniff out the lower costs and better margins.

Here’s the crux of the thing…

In classical economics, hairs stylists, models and lighting experts are not considered productive labour. They provide a service and no more.

There are no more goods that can be exchanged — wealth — in the world after a slim (or not), young (or old) woman (or man) poses in a beautiful location.

I enjoy looking at a beautiful picture as much as the next person. But a classical economist would say that’s merely a satisfaction, and not wealth.

I’m not just picking on the modelling industry.

Here’s Adam Smith writing on unproductive labour — in a classical sense — in the 18th century…

‘In the same class must be ranked some both of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men-of-letters of all kinds: players, buffoons, musicians, opera singers, opera dancers, etc…

‘Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.’

You’ll see Adam Smith mentions men of letters there. That’s an old term for what I’m doing now. See…I’m not just picking on the modelling industry!

In other words, these roles have value — people will pay for them after all — but aren’t very productive in an economic sense.

In fact, Adam Smith would be knocked over that we gave actors any importance at all today, let alone Hollywood pay cheques. They certainly had no importance in his day. They might be heading that way again. 

We got a taste of all this as the Covid lockdowns rolled over the world.

Actors, casino dealers and football coaches discovered that, without a stage or a gaming table or a football field and a paying audience, their services weren’t required.

It didn’t really matter, either.

We discovered that we didn’t need football matches or theatre or a game of blackjack to get by. We did gardening and baking instead.

But we certainly needed petrol and semiconductors and toilet rolls and face masks and testing kits. More wealth, in other words, created from productive labour, alongside different satisfactions.

Covid, then, revealed how many of us have jobs Adam Smith would call unproductive labour.  

AI is going to do the same thing. We’re going to discover that if a firm can use AI to do it cheaper, faster and better, their business will do so because it makes them more profitable — productive — by doing so.

But for every job displaced, another one will be created elsewhere.

Human needs and wants are infinite so the demand for labour will still be there, just in different way.

Blacksmithing isn’t a job anymore. We found a better way to produce wrought goods. That’s ok. It’s ok, too, if an AI creates the image you see on a billboard.

What matters is not so much what jobs we have — but how much wealth we can produce with a given amount of labour.

AI should make labour more productive…and that’s a very good thing!

Granted, if you run a modelling agency or are a man of letters, and enjoy your work, you’re not going to like being disrupted.

Adam Smith would say something like, ‘Bad luck, chum!’

The history of the industrial revolution is ongoing innovation to make labour and capital more productive.

There’s a reason most of us don’t spend our days producing food like we did for most of human history. Productivity sent the general level of wealth skyrocketing.

AI should do the same thing. It’s no good trying to save models and fashion designers. Let’s find the best thing they can do instead!

Another idea is to find companies that can harness AI to become more productive…and therefore more profitable.

Think of the above.

You wouldn’t invest in a modelling agency. But what about the firm that benefits from cheaper advertising…or better data…or better sales?

I’ve got 5 ideas for you here right now.

Best,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.

By Bill Bonner Editor, Fat Tail Daily

[2 min read]

Dear Reader,

‘I can resist anything but temptation.’ 

Oscar Wilde 

‘I think it is unlikely that the next policy rate move will be a hike,’ said Jerome Powell. 

But why? US inflation is running about 100% above the Fed’s supposed target. Why cut rates rather than raise them? Herewith, we propose a hypothesis. 

Last week, colleague Tom Dyson gave us a simple way to connect the dots. We are near the end of the biggest financial experiment in history, he says. Condensing the following 700 words to just five: central bankers cannot resist temptation. 

In 1971, guided by Milton Friedman, the US did something extraordinary. It changed the whole world’s money system. And few people even noticed. 

At issue was whether the US dollar system could be managed better by professionals — Ph.Ds with more discretion over interest rates and other banking policies — so as to improve capitalism.   

The gold-backed dollar wasn’t easily managed at all. You can’t just ‘print’ gold. You had to mine it. And ship it. And store it. And in the end, you were lucky if the supply of new gold-backed money kept even with supplies of other goods and services in the real economy. 

Not a bad thing. The dollar was fairly stable...and hard to diddle. In 1913 — when the Fed was created — a dollar was worth almost exactly as much as it had been 100 years before. But the system limited the amount that US policymakers could spend. 

Temptation too much

The new system changed that. Gold was out. The Fed could create money on demand. In 2002, Ben Bernanke explained: 

‘The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.’ 

But could ordinary humans be trusted to resist the temptation to print too much? The answer, now in, is ‘no’. 

This experiment was not new. ‘Paper’ or ‘monopoly’ money systems have come, and gone, many times. The coming was always fun — people had more to spend. It was the ‘going’ that was painful — often ending in depression, war or revolution.  

After WWI, Germany was faced with huge war debts. It switched to paper money with no gold backing. By 1923, it took 4,210,500,000,000 marks to buy one dollar. 

France in 1960, after years of excess money printing, had to replace the old franc with a new one, at 100 to 1. China...Yugoslavia...Argentina...Zimbabwe...Lebanon — all were social, political and financial catastrophes.

Inflation in Germany led to such widespread discontent that gangs battled it out in the streets; Adolf Hitler’s national socialists won those street brawls and took over the country. Russia’s financial instability led to the Bolshevik Revolution in 1917. Chinese inflation in the 1940s brought Mao Tse-tung to power.  

On August 15, 1971, in the US, came the Nixon Shock. The new dollar looked just like the old one. But it no longer represented an asset — a dollar backed by gold; now it was essentially an IOU, a ‘federal reserve note,’ issued by a federal reserve bank. Most economists nodded in approval. The public nodded off.  

it was still only $800 billion. At that level, the Fed’s last honest chief, Paul Volcker, could still fight inflation with extraordinarily high interest rates. His top Fed rate — 20% in June of 1981 — caused the worst downturn since the Great Depression. That is what it took to wring inflation out of the system.  

It was a heroic move. Politicians and economists squealed. Volcker was widely despised. He was burned in effigy on the Capitol steps and denounced by thousands of economists. 

And today? A 20% Fed Funds rate would be impossible.  

Here’s why. After Volcker’s save, cheaper and cheaper credit made it profitable to borrow and speculate like never before. Consumers, businesses, investors, and the government all went deeper and deeper into debt. They bought bigger houses, better cars, more fighter jets and aircraft carriers...mergers and acquisitions...dotcoms...cryptos — whee! 

A subtle corruption infected the whole financial system. The new money was a credit from the banks, not an asset. It was borrowed into existence – at absurdly low rates — rather than earned. Who could borrow it most cheaply?

Big, credit-worthy institutions — big banks, big business, and big government. That’s how firms like BlackRock were able to outbid families and buy up thousands of homes; they could borrow at lower interest rates. 

‘Floating on a tide of ultra-low interest rates, debt seemed almost weightless. But the farther out to sea it floated, the harder it was to get back onto dry land. Today, even a 10% fed funds rate — half the level of 1981 — would be so devastating the Fed wouldn’t dare to try it.’  

Today, there is $34.6 trillion in federal debt, rising by more than $120 billion per month. And the Treasury, trying to keep its debt payments down, is choosing shorter- and shorter-term debt — 2-year notes, rather than 10- year bonds, for example. The result is that more of the total debt gets ‘marked to market’ each year. And the whole lot of it becomes more sensitive to interest rates. 

At 10%...debt payments would quickly absorb all income tax receipts. At 20%, all Hell would break loose immediately. 

What this means is that the Fed can no longer ‘save the system.’ It can’t afford to. There’s too much debt. 

Instead, its real goal is not to eliminate inflation, but to manage it...to ‘monetize the debt’ — reducing its real value with sustained price increases. But to do so, inflation must be higher than the rate of new debt creation. US debt is galloping along at nearly 7% of GDP per year. The inflation reading needs to get up to that level...and stay there. That’s the real reason the Fed is talking about cutting interest rates rather than increasing them. 

But watch out. Trying to manage inflation is like trying to control a block party in a bad neighbourhood. The bullets could fly at any moment.  

Stay tuned...  

Regards,

Bill Bonner,
For Fat Tail Daily