I Wrote This Letter

April 2023

You may have been hearing about “Chat GPT” in the news recently (generative pre-trained transformer). It’s a way for you to prompt a search engine with a query, give the engine parameters or conditions, and receive back a response that is so complete and thoughtful, you’d have thought an articulate human wrote it.

But it’s application is far beyond a high school history student asking it to write 500 words about the Allied defense of WWII north Africa, from Rommel’s point of view.

Automated, generative artificial intelligence is so new to me, I don’t think I can be what sparks your imagination. Last night I listened to episode 124 of a podcast called All In. It’s hosted by a few venture capitalists who have a better understanding of the technology and potential. It was a lightbulb moment for me.

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While there are many ethical and regulatory challenges these AI bots will pose, I agree with the hosts that the pace of innovation has already started to jump an order of magnitude. Computers will do even more of the technical work (and do it better than humans), leaving humans to do what no machine can - dream up new ideas (that they ask computers to help design and implement). Fewer dollars will be needed to start up a company. The time to efficient production of an idea will shrink. Competition will increase.

These last 3 are all exceptional drivers for an economy. Artificial intelligence will be disruptive - like other tech before it - but, be a massive driver. I’m not sure how to invest in it yet, but the overall improvement in efficiency will be good for all businesses and makes me bullish for the future.

The other important news during the quarter was the failure of Silicon Valley Bank. While bank failures are extremely stressful, they are part of the economic and credit cycle, and usually a sign the we are approaching the bottom. There may be several more this year - I would guess mostly small banks you haven’t heard of - but the banking system will assimilate bad credits and move forward. The speed at which SVB experienced a run and failed was alarming, but then many of its clients were close to the tech industry and very connected to each other. Bad news traveled at the speed of cellphone texting, which is scary, but also the world we live in. The regulators and successor banks did a good job of containing the fear and as a result, other, weak banks are not failing in April, because depositors are reassured by the federal backstop. You may argue the cycle needs to shake out the weak players, and I don’t disagree, but in the banking sector, I like my survival-of-the-fittest to play out over the intermediate term, not the short term.

The bond market and recent corporate commentary suggests earnings are about to go down. Jobs have been resilient but may soon drop too. If the stock market falls this summer, maybe around the debt ceiling negotiation, I don’t think it will stay down for long. I have been writing for a few quarters that the Fed will stop raising rates soon, and how all the institutional investors know it, and are optimistic for that policy “pivot.” I think there is a good chance the Fed will raise rates one or two more times, and that too is likely to cause more fear in the stock market.

The bond market should be more stable this year, and generate 3-6% returns. Since we are diversified, and you have a human managing your portfolio, it ought to be a better year than last year.

Sincerely,

Chip