In 1920, the world was still recovering from the momentous loss of life and geopolitical turmoil caused by the Great War. To protect domestic industries, especially agriculture, the US decided to increase tariffs on foreign goods by four-fold. Those tariffs stayed in place for nine years.
At the same time, Congress was debating a cut to immigration after a large influx of southern and eastern Europeans following the war. In 1921, it passed the Emergency Quota Act, which ultimately led to an 80% fall in immigrant numbers to the US.
Major tariff hikes and savage immigrant cuts would normally hit economic growth and result in higher inflation. Yet, instead, we got the ‘roaring 20s’.
How did this happen? The photo below offers a clue.
Source: Vanguard
The photo was taken in a small Alaskan mining town in 1920. The plane in the picture was one of four planes making their first long-distance flights from the US to Alaska.
Not only were airplanes changing the world at that time, but the diffusion of electricity was too. Electricity had been around for three decades by then, but it was only in the 1920s that it was used more fully to generate cheap power for the US economy.
These technological trends were enough to overcome the powerful deflationary forces of tariffs and immigration cuts and propel America’s economy over that next decade.
A change few saw coming
Source: Vanguard
Parallels to today
Vanguard’s US-based Global Chief Economist, Joe Davis, told this story to financial advisers in a recent presentation in Australia.
He went on to draw parallels between the 1920s and today. Like then, Trump is now hiking tariffs, though they’re nowhere near as harsh as those implemented a century ago. Also, he’s looking to slash immigrant numbers, raising concerns about the impact on economic growth.
However, like in the 1920s, Davis thinks that technological change can outweigh these growth dampeners to lift US economic productivity and tame inflation.
Source: Vanguard
Calculating AI’s impact
It’s all well and good to suggest that AI will transform the economy, but Davis has put numbers on the impact that the technology will have.
He’s mapped out 800 different occupations and calculates the effect that AI will have on each of them. He puts the impact into three categories:
Marginal. <20% time savings.
Augmentation. 20-40% time savings (where AI augments a current job).
Automation. >40% time savings.
Here are the results of his research.
AI’s future impact
Source: Vanguard
Davis calculates that AI will lead to 20-40% in time savings in more than half of all occupations. Also, the number of occupations that will be augmented or automated by AI outweighs those where it will have a marginal impact by a factor of four to one.
He gave an example from his own profession: an economist. He outlined how he asked ChatGPT to build an inflation prediction model and give a 100-word summary. Davis says AI can do this task in less than a minute compared to the five hours or so that it would take an economist. And he’s calculated that AI will lift productivity in the economist profession by 43% over the next decade.
Source: Vanguard
Davis gave another example of a financial adviser, and a breakdown of which tasks could be augmented and which could be automated:
Source: Vanguard
He thinks interviews with clients to gather financial information can be automated, though I’m not so sure. As for other tasks, Davis says AI can augment the work of advisers.
At the presentation, I talked to a financial adviser who detailed how he’d automated his administrative tasks as well as client letters and other tasks via AI. He says this led to two of his employees being made redundant. However, AI has allowed him to focus on the most value-added parts of his job – talking with current and prospective clients.
This story amplifies much of what Davis’ presentation was addressing.
Investment implications
So, we can look forward to surging US economic growth and muted inflation, according to Davis. What does this mean for markets? It’s here that Davis has some surprising conclusions.
He believes that if you believe in the AI transformation, you should own the broader market rather than tech stocks.
Davis thinks overweighting US tech is a mistake for two reasons:
- Much of the upside potential in US tech stocks is already priced in.
- The tech sector doesn’t usually outperform during periods of technological transformation. He expects some future tech stars to emerge, but there will be a large percentage of those in the sector that flop. For every Amazon that emerged from the Internet bubble, there were dozens of startups that failed. Davis also harkened back to the 1920s, where it wasn’t technology companies that ultimately benefited most.
If he’s right and AI is a transformative technology with positive economic outcomes, Davis expects AI’s influence to emerge most in sectors outside of tech, like healthcare, finance, and manufacturing.
For these reasons, he says investors should own value stocks over growth ones, like tech. And he expects the broader US market to outperform the US tech sector moving forwards.
My take
Davis offers an intriguing and compelling view of the future of AI and its impact on the economy and markets.
Yet, I’m sceptical of his forecasts on productivity growth from the tech transformation. Economists love to use numbers because they can seemingly give certainty to future outcomes. Unfortunately, the future is inherently uncertain.
Even Mike Cannon-Brookes, the boss of Atlassian, recently said in a company conference call that anybody who thinks they know what AI will do in a few years is kidding themselves.
I see three current issues with AI:
- It regurgitates rather than creates. Ask the AI engines to be creative, and they are found wanting.
- It sides with consensus over individual thought and truth. AI trawls through public data and often sides with what the majority think of an idea rather than the truth, or original thought.
- It makes us dumb. AI is providing shortcuts to research and writing, yet it's often in the process of research and writing where hard fought knowledge is won.
That said, Davis may be right about AI being a fillip for economic productivity. And I suspect he will be proven correct about AI being more positive for non-tech companies than the AI providers themselves.
* Disclosure: Vanguard is a sponsor of Firstlinks.
In my article this week, I cover the latest investment update from one of the most powerful fund managers in the country, Jon Pearce of UniSuper. Pearce warns that after two years of stellar returns, he expects markets will be flat this year, with the potential for a correction of 10% or more. Though cautious on short term, he's more positive on the long term outlook.
James Gruber
Also in this week's edition...
Clime's John Abernethy says Governments and policymakers have failed us for decades on housing, and it risks creating an underclass in a society that supposedly boasts one of the world's highest standards of living. He puts forward nine ways to fix the housing mess - some of them controversial and radical - before it's too late.
Meanwhile, Yunho Cho and colleagues investigate the impact of stamp duty on the housing market, and how reforming the tax could help mobility and improve overall welfare for households.
Australia has one of the world's highest dividend yielding sharemarkets, providing substantial benefits to investors and retirees. Despite this, Ashley Owen says that individuals often seek higher yields, to their detriment.
Schroders' Andrew Fleming wants MIGA - to make income great again. By this he means the market has rewarded unprofitable businesses with promises of future riches over the past few years, but that may be about to turn, highlighting recent updates from companies such as Domino's Pizza and Boral.
There are two articles on the US market. The first is from Eric Marais of Orbis who breaks down the key drivers of recent US market returns, such as revenue, margins, and valuations, and looks at how these drivers will shape future performance. Meanwhile, Tarek Abou Zeid and colleagues at Man AHL highlight how diversification in portfolios will become important once 'US exceptionalism' fades.
Lastly, in this week's whitepaper, Fidelity shares insights on AI, China, and the new Trump administration, along with compelling investment ideas, from Fidelity International's more than 100 analysts across the world.
Curated by James Gruber and Leisa Bell
Latest updates
PDF version of Firstlinks Newsletter
ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade
Monthly Bond and Hybrid updates from ASX
Listed Investment Company (LIC) Indicative NTA Report from Bell Potter
Plus updates and announcements on the Sponsor Noticeboard on our website