I’m of the view that autonomy’s impact on the economy (i.e. via self-driving cars, bots, generalized AI, etc.) will be this century’s version of electricity—an inflection point of profound GDP growth, a deflationary boom, and a colossal redistribution of wealth. (I also think it will trigger an equally colossal destruction of wealth among many incumbents and asset classes…) This MIT Technology Review article highlights how a few startups are pursuing an end-to-end path of reinforcement learning for autonomous vehicles. It’s a good primer for those interested in this subject; it also offers a framework to understand the different technical approaches being pursued.
“Investors have sunk more than $100 billion into building cars that can drive by themselves. That’s a third of what NASA spent getting humans to the moon. Yet despite a decade and a half of development and untold miles of road-testing, driverless car tech is stuck in the pilot phase. ‘We are seeing extraordinary amounts of spending to get very limited results,’ says Kendall. That’s why Wayve and other driverless car startups like Waabi and Ghost, both in the US, and Autobrains, based in Israel, are going all in on AI. Branding themselves AV2.0, they’re betting that smarter, cheaper tech will let them overtake current market leaders.”
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Demand destruction and “taking the juice out of the system”
In my opinion, forecasting interest rates and future levels of inflation should be considered a form of financial astrology, but I found Altimeter’s CEO and founder Brad Gerstner’s take on the macroeconomic situation to be pretty on point and data-driven: Over the past year, the Fed has effectively wiped out $15 trillion in household wealth, core CPI has likely peaked, and consumer confidence is at 10-year lows—which is a good leading indicator to think about the current and near-term economic environment. (His remarks begin around 5:00.)
“Everybody on television is always telling us what just happened. It’s like big red arrows: Inflation going up! But [lower prices] is what’s going to happen, and what we [as investors] care about is what’s going to happen. We destroyed $15 trillion of household net worth in the last five months. The expected path of household net worth would have taken us from $110 trillion to $125 trillion over the last two years. That was the trend we were on. Instead, we got all hopped up [on fiscal and monetary stimulus] and went from $110 to $142 trillion. But now we’re all the way back to $127 trillion. That’s what I call “on trend.” So the Fed has done exactly what it wanted to do. It ruined all the SPACs, it took the juice out of the system.”
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It’s all about duration
John Candeto, founder and managing partner of the Phronesis Fund, asks a smart question in a recent post: “Imagine you were going to buy a business today that you were required to sell next month, next quarter, or next year… How much would you pay?” The hypothetical is instructive because, as John argues, the vast majority of public market participants are planning to sell in under one month, which skews the price one is willing to pay for that asset. In times of fear and uncertainty, prices will naturally decline, just as when times are euphoric, prices skyrocket. But the longer you go out on the duration curve, short-term prices tend to be less meaningful, while fundamentals drive value. Doing nothing while prices crater may be psychologically hard for some, but if you own an asset that you believe to be increasing in value, you should simply enjoy the discount. “We are doing something psychologically hard,” John writes, “acting against our human nature to fight volatility or flee from it.”
“This creates two basic options. Option 1: Become short-term capital. This places one in an enormously competitive arena that has a very mixed track record of success, is a de-facto attempt to time the market, and with a strategy that elevates fees and taxes. Option 2: Be grateful for the opportunity and take advantage of it. This places one in a far less competitive arena with a good track record of success that does not require one to time the market, and with a strategy that generally has lower fees and taxes. Option 2 is the most rational for this partnership’s disposition and capital duration. We are doing something psychologically hard — acting against our human nature to fight volatility or flee from it. However, this also allows us to build the position while the discount exists and exposes us to long-term rewards if we are correct about the long-term intrinsic value of the business.”
“Facing escalating pressure from governments and investors to reduce emissions, a number of steelmakers—including both major producers and start-ups—are experimenting with low-carbon technologies that use hydrogen or electricity instead of traditional carbon-intensive manufacturing. Some of these efforts are nearing commercial reality. ‘What we are talking about is a capital-intensive, risk-averse industry where disruption is extremely rare,’ says Chris Bataille, an energy economist at IDDRI, a Paris-based research think tank. Therefore, he adds, ‘it’s exciting’ that there’s so much going on all at once.”
“So I suspect we are either in a recession right now or headed to one, brought on by tightening money supply/higher rates that are being used to control inflation. That recession could easily last until the end of 2023. But we don’t really know how long it will take for this cycle to play out. Markets have already corrected and I think that public tech stocks have already seen most of the damage they are going to see. I don’t know if we have hit bottom but I think we are closer to the bottom than the top now. But that does not mean they will turn around and go right back up.”
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