The AI revolution is here.
Most of the content written about price action in financial markets so far this year focuses on the current state of the economy and the path of interest rates. That's missing a big part of the picture.
What changed everything this year is ChatGPT. It launched and so have a host of other AI tools that will cause millions of job losses and spike productivity. The release of these tools have opened the market's eyes to the possibilities and consequences.
The job losses will loosen the employment market and the jump in productivity will ensure another long disinflationary period. In short, the idea that this decade will look like the 1970s is dead. We can argue over timelines but it's coming and given how quickly ChatGPT has exploded, I'd bet on real-world impacts sooner rather than later.
What that means is that the Fed funds rate might go to 5.00-5.25% or even higher but those hikes will turn to cuts and ultimately be ammunition for long duration trades as rates will be cut back to zero and persistent disinflation returns.
That sentiment is a big part of price action in markets so far this year. Megacap tech is surging and for good reason. The integration of ChatGPT into Microsoft Teams is remarkable. Soon, Facebook will be using generative AI to send you custom ads. Google is hosting an AI announcement on Wednesday and the stakes are enormous.
AI has been unlocked and will touch every part of our lives. These are the early days of the AI revolution, embrace it but note that markets move quickly and optimistically. Money is piling into companies that could benefit from AI and pricing in disinflation. The latest jobs report indicates that there might be some short-term pain but this is a secular theme that will overpower the short-term macro.
