‘An Enormous Misallocation of Capital’
“The Mechanical Turk, also known as the Automaton Chess Player, or simply The Turk, was a fraudulent chess-playing machine constructed in 1770, which appeared to be able to play a strong game of chess against a human opponent… The Turk was in fact a mechanical illusion that allowed a human chess master hiding inside to operate the machine.” –Wikipedia
It was announced this week that Amazon was ditching its “Just Walk Out” shopping technology platform that allowed shoppers to skip the register when shopping at some of its stores. The “artificial intelligence” powering the technology was built upon, “computer vision, sensor fusion, and deep learning” – oh, and more than a thousand human beings in India babysitting the relatively few stores utilizing it.
Those humans were sadly laid off as part Amazon’s giving up on this particular AI experiment. But the layoff announcement revealed the truth about the technology: it really was nothing more than a “mechanical turk” pretending to be fully automated when it was only made possibly by people doing the actual work. That these people literally call themselves “MTurkers” should perhaps have served as an important clue in this regard.
That this form of “artificial intelligence” failed after almost a decade of experimentation even with the assistance of more than a thousand human babysitters doesn’t speak highly of the prospects of similar attempts at automation or “artificial intelligence” more broadly, at least as it is being billed today. That it comes on the heels of Cruise, GM’s robotaxi division, shutting down after failing to meet the company’s targets for the technology (and dragging a pedestrian 20 feet in the process) even though each vehicle was also being remotely operated by “mechanical turks” is even more troublesome for AI evangelists.
Perhaps this is one of the reasons that, according to a recent survey, 98% of “IT leaders” at Fortune 1000 companies have put their generative AI projects on hold; they’re just not bearing much fruit. As venture firm Sequoia recently revealed, the industry spent $50 billion on Nvidia chips last year and generated only $3 billion in revenue as a result of those investments. That’s not a trend that is at all sustainable.
Behind the problem are a number of issues including the shoddy reliability of the technology in most cases, as is clearly suggested by Amazon’s and GM’s experience. In addition, though, are increased cybersecurity risks and legal liability rising out of the algorithms and data sets behind the technology. These are all issues that will not be easily remedied and thus could soon be cause for a major shakeout in the industry.
Already it appears that the increasing trepidation toward adopting the technology (aka, faltering demand) is becoming a problem for the rapidly growing volume of products and applications that are being made available by the massive investment in the space (aka, fast growing supply). As venture capitalist Bill Gurley points out, prices for licensing OpenAI’s GPT 3.5 have plummeted in an “unprecedented” way very recently.
This could prove problematic for markets given the fact that they have come to fully discount a “new era” of growth and productivity for the economy and profitability for its proprietors built entirely on the AI revolution. This can perhaps best be seen in the fact that, as the FT reports, “rampant optimism surrounding some of the Magnificent Seven (especially Nvidia) continues to obscure rising pessimism about the earnings outlook for the S&P 493.”
That “rampant optimism” could soon be met by a healthy dose of reality regarding both the truth of the technology itself and its potential for profit among the companies hyping it up. As to the former, “fraudulent” may be too strong a word but certainly “AI washing” may not be strong enough to accurately characterize all of the “mechanical turks” being built and sold today. And it seems people are only starting to come to that realization.
As to the latter, the history of technological revolutions is very clear. “Relentless techno-optimism and the illusion of inevitability is how Silicon Valley creates paper wealth. But remember, many of the proponents of ‘AI everywhere’ were touting web3, the metaverse and the benefits of the gig economy not so long ago,” reports the FT. They were also touting the inevitability of EVs and now many are beginning to worry about an “enormous misallocation of capital” in the space. It may not be long before those same worries extend to the AI space, as well.
Only a Rational Allocation of Capital
“There doesn’t seem to be a particularly good, fundamental reason that is clear and available to everyone to pin the move on.” So did Kyle Rodda, senior market analyst at Capital.com, sum up the consensus towards the recent move in the gold price. I’ve read at least three different articles recently from the Wall Street Journal, the Financial Times and Bloomberg (in this case) on the topic of “Gold’s Curious Rally” confirming the fact that this represents the popular opinion today.
First off, this is not the sort of sentiment you see at a market peak; it’s just the opposite. At major price highs, everyone and their mom can recite the bull case and in great detail. Thus the fact that most investors were clearly caught unawares and underexposed is only bullish for prices going forward.
Second, it’s not at all difficult to find a fundamental reason for gold’s recent price strength. As Craig Shapiro put it on X, “Issuing more t-bills at an accelerating pace is a precondition to becoming a banana republic. This is the type of thing you see emerging markets do, not the issuer of the world’s reserve currency and neutral reserve asset.” When the issuer of the world’s global reserve currency starts acting like a banana republic it’s probably a good idea to own some gold.
And it’s not just the treasury acting like a banana republic in issuing far fewer long-term bonds than they should do in order to prevent a problematic rise in interest rates. It’s also the Federal Reserve clearly communicating that it intends to allow inflation to remain above its own stated target at the same time.
Of course, both of these trends are merely symptoms of an underlying condition. That condition is the fact that, given almost any scenario, the U.S. government is headed for a debt crisis. Such is the conclusion of a recent analysis performed by Bloomberg Economics and inspired by a warning in this regard by the Congressional Budget Office. And so the Fed is beholden to the needs of the treasury and the treasury must facilitate the demands of a federal purse run amok.
In other words, the writing is on the wall. Just because you choose not to read the words doesn’t mean they’re not there. As more investors begin to notice them they will also begin to appreciate that, “gold’s prime virtue is that it’s nobody’s liability. It holds no national passport and has no politics,” as Jim Grant explains. And that’s precisely why it will find increasing favor in investment portfolios denominated in a currency that is being so rapidly and intentionally devalued.
