“First, let us postulate that the computer scientists succeed in developing intelligent machines that can do all things better than humans can do them. In that case, presumably all work will be done by vast, highly organized systems and no human effort will be necessary…it may be possible that human control over the machines may be retained. In that case…control over large systems of machines will be in the hands of a tiny elite… because human work will no longer be necessary the masses will be superfluous, a useless burden on the system.” -Theodore Kaczynski, aka the Unabomber
Two major interrelated themes have globally permeated the financial world. The first is that technology is accelerating at an accelerating rate. The second is that this acceleration is creating societies of winners and losers. I have discussed this before, but I think these are the most important topics affecting long-term investment strategies
Regarding the first theme, it was Ray Kurzweil who first popularized idea that technology was accelerating at an exponential rate in his 1999 book The Age of Spiritual Machines. Kurzweil’s book is filled with references to Moore’s law, artificial intelligence, robotics, genetics and nanotechnology. Kurzweil forecast a coming technological Singularity, a kind of techno-nirvana where progress is so rapid it outstrips humans’ ability to comprehend it. Technology for Kurzweil has taken over human evolution. Putting my economist hat on, if Kurzweil is right it is the global capital markets which will finance this accelerating technical change.
Kurzweil is now mainstream but that was not always the case. When it first came out, I can remember seeing his book in a Borders bookstore in the New Age section. (Alas poor Borders, I knew him well.) Served Kurzweil right for coming up with such a goofy title! But now (almost) everybody has jumped on the technology bandwagon. For example, none other than Robert Shiller, housing and market bubble expert and Nobel Laureate, declared in a Financial Times article “an important consequence of artificial intelligence will be a long trend towards unification of global culture.” And of course there is the now famous Mark Andreeson 2011 Wall Street Journal article that predicted that “software was going to eat the world.”
I have been a Kurzweil fan for a long time. It is my view which I have discussed in prior essays that investors have to be long technology one way or the other. That means buying tech stocks or stocks that are big users of technology, which most successful global corporations are. In fact, if I could do this, I would rank companies by their reliance on technology and include that along with metrics such as P/E ratios as guides to selecting stocks. If artificial intelligence and software are going to rule the world and the Singularity is coming, you want to be an owner. You want to finance the Singularity.
It should be pointed out that not everybody agrees with Kurzweil. Respected economist Robert Gordon has predicted that US productivity would slow down as in his opinion the recent spurt of tech breakthroughs exhaust itself. The naysayers point to a coming demise of Moore’s law. Moore’s law, named after then Intel CEO Gordon Moore, posits that the number of transistors that can be put on an integrated circuit will double every two years (the law is sometimes defined as doubling every eighteen months). In other words computer power wills double every two years. And since the computer revolution began, that is exactly what has happened. Amazon, Facebook, Microsoft, Google, Apple — all the tech giants– are children of Moore’s law and, to a large extent, Intel Corporation. Software couldn’t eat anything without Moore’s law.
But Moore’s law isn’t a law in the sense that a law of physics like Newton laws are. Rather it is a forecast that nobody expects to hold forever. And unfortunately Moore’s law will in a few years be running into some laws of physics. The next generation of transistors will be just 5-7 nm in width, which most engineers seem to view as a practical limit. But Kurzweil says not to worry. Something else will come along – quantum computing, 3D chips, graphene, yet to be discovered workarounds—that continue the geometric explosion of computer power. So it comes down to faith that the digital revolution and the acceleration of technology can continue even as Moore’s law becomes history. And that the technological/scientific revolution, which really began in the fifteenth century, will continue. I think it’s a pretty good bet.
Across the world — from Hong Kong, to Washington, to London– you hear the same refrain: the rich –the winners– are getting richer, the middle class is disappearing, and the poor – the losers– are falling behind. Some conservatives would take issue with this. Moreover, they would argue that everyone’s living standards have improved even if income distribution has worsened.
No matter. In populist modern democracies already burdened with high levels of government debt, the machinery of government (such as the progressive income tax) to confiscate the earnings of the “evil” rich is already in place. Investors – who are roughly synonymous with the rich — can expect higher levels of taxation. Erik Brynjolfsson and Andrew McAfee have argued accelerating technology favors capital, the intelligent and the well-educated. Wealth is essentially knowledge, futurologist George Gilder has argued.
In the United States and many other countries this has all sorts of racial and ethnic implications. I’ll avoid discussing these. Instead, I will simply refer to growing scholarly research which concludes that American children growing up in poor single parent families are at a disadvantage. Of course, there are plenty of exceptions to this but as a rule of thumb it makes sense. See for example Charles Murray’s recent book Coming Apart: The State of White America, 1960-2010.
It has been argued that technology is eliminating jobs and creating unemployment. I think this argument is completely wrong. Markets will always clear if allowed. I think Theodore Kaczynski, quoted above, overstated the problem. There is an equilibrium wage that will employ all society’s losers. Unfortunately, that equilibrium wage is deemed by society as “too low”. Hence the rash of minimum wage laws and transfers of various sorts such as subsidized housing and food stamps to the poor and unemployed. Obamacare is basically a wealth transfer program.
The losers in this process will feel that life is not fair, that it is not their fault they were born less intelligent and in poor single parent families. They will vote to have the government transfer income of the winners to them.
The left, although they may not phrase things as I just have, basically act as I have described. New York’s far left Mayor de Blasio is pushing for universal pre-kindergarten education, to be financed by a tax on the already highly-taxed rich. Underlying this proposal is the assumption that in the knowledge society education is key to becoming a winner. Agreed. But if the majority of people he wants to help via his massive government program are families headed by poor single parents, his program is not likely to succeed. How are children from single parent poor families going to compete with children from relatively more affluent two parent families? Put aside for the moment likelihood that big government programs as favored by the left generally turn into bloated monsters. Will de Blasio’s well intended big government program compete with the thousands of private hours of home reading, first hand computer experience and often violin, swimming, Mandarin, and preschool arithmetic lessons that children of two parent families typically receive at home? I note that the Head Start Program, a big government program designed to improve cognitive and academic performance of poor youngsters, has been judged a failure by the Heritage Foundation.
In 1812 a group of weavers in Nottingham, England under the leadership of a man named Ned Ludd, set up a guerrilla army to act and destroy the new factory machines that they viewed as threatening their traditional way of life and means of employment. They failed of course but the term Luddite has come down to mean anyone who is opposed to technological change. That’s a vague definition but today that would probably include most Occupy Wall Street types, anti-fracking groups, many so called environmentalists as well as anti-genetically modified food groups. Luddites have a visceral dislike of global corporations and feel that their own “guerilla” activities of obstruction and destruction are justified even though they violate the rights of others. As technology moves forward into the human birth process and selection for desirable traits in infants, the Luddites will no doubt appear there also.
Perhaps I shouldn’t be too smug since fear of change is a basic human survival reaction inherited over the millennia. But my own view is simply that technology is the current driving force in human evolution and that problems caused by technology such as explosive population growth (if you consider that a problem) or the need to increase agricultural productivity can only be solved by technology. And that of course technology underlies our investment opportunities. Problems become investment opportunities solvable by technology. I would argue the global corporation—a product of technology– represents an apogee of human achievement.
The solution to problems caused directly or indirectly by technology such as possible food and energy shortages can only be solved by technology itself. These problems become investment opportunities. But the Luddites have other ideas. Let’s take three examples:
Compounding this problem are growing water shortages and shortages of suitable farmland. The solution: technology and more technology. Increased output per acre via drought tolerant crops, insect resistant crops, computer assisted farming etc., etc. The leading global company in this field and in my opinion a great technology company: Monsanto. Monsanto of course is one of the companies most vilified by the Luddite crowd. It doesn’t seem to matter that Americans – and their cows—have been eating transgenic Monsanto corn for years and no person – and no cow—has died as a result. Study after scientific study (1783 according to one count by Italian scientists) find no problem with transgenic crops. Ironically, the anti-technology Luddites have used high tech social media to spread a low tech gospel of misinformation. Monsanto has been a good investment for stockholders so far but it would be a better one if irrational restrictions on its products – notably genetically modified wheat – were lifted. Productivity gains in wheat production has slowed down in recent years. Readers interested in a scientific discussion of the GMO question should consult the following website: http://www.
Most readers do not need convincing about a modern economy’s need for energy. Market driven technology – and that means fracking and nuclear – is the answer. The global stock markets offer a plethora of energy opportunities ranging from big oil to startups. In my opinion, government subsidized green energy with some exceptions ranges from the inefficient and wasteful to the just plain quixotic. It will be interesting to see how things unfold in Germany. The great Teutonic industrial powerhouse is phasing out nuclear and prohibiting fracking and replacing it with so far impractical wind and oil and gas imported from other countries that rely on conventional energy sources.
Not a Luddite problem. Yet. Meanwhile, the acceleration in digital technology has opened a whole new world of opportunities in the field of human health. In 2013 prices of biotech stocks and funds doubled and tripled. I’m not going to play market timer here. Investors should retain at least some positions in biotech, recognizing of course that this sector will be subject to all the normal vagaries of short-term bubbles and busts. The Luddites don’t object to gains in health care if it benefits them. But they will show up when it becomes clear that technology can allow parents (who can afford it) to create babies with the desired personality, physical and intelligence traits. Perhaps it will be a little unfair to call all opponents of these birth technologies Luddites. There will be genuine ethical issues here. But wealthy parents will travel to places where such technology is available. They could turn out to be pioneers.
I’ll conclude with a quote from William Gibson’s Neuromancer wherein the protagonist Case concludes that burgeoning technologies require outlaw zones, that Night City wasn’t there for its inhabitants but as a deliberately unsupervised playground for technology itself.
So where is Night City? Buy Dubai or Singapore or Shenzhen real estate now? Stay tuned.