Generative AIs Impact on your Investments
Generative AI and Its Importance
Generative AI is a type of artificial intelligence that creates new content, such as text, images, and music; its importance lies in its ability to radically enhance creativity and increase productivity. It can automate tasks, generate innovative ideas, and solve complex problems that impact many industries. Given that this technology also presents significant economic potential, generative AI represents a major step in technological innovation with broad implications for society and the economy. The topic that continues to be on top of people’s minds today is how generative AI impacts jobs, the economy, social structures, and markets. But what exactly is generative AIThe topic that continues to be on top of people’s minds today is how generative AI impacts jobs, the economy, social structures, and markets. But what exactly is generative AI and why is it important?
Impact on Markets
When it comes to the economy and market, the main power of generative AI is in either or both:
Making labor much more productive
For instance, a study by GitHub found that developers using GitHub Copilot were 55% more efficient in completing tasks, highlighting the potential for significant productivity gains in the tech sector.
Companies replacing labor costs with technology
E.g. Instead of hiring a team of 10 engineers, only 5 are now necessary to get the same job done.
Regardless of which, both have the same impact: increasing profit margins. Either a company's costs have stayed the same and the added productivity is reflected in revenues, or revenues have stayed the same, and costs have been reduced with redundancies.
Increasing Profit Margins
An increase in profit margins is essentially great for holders of wealth as it translates to more profitability and wealth.
Case 1 - Competition
Profit margins don't usually just stay high without a challenge, and that challenge is usually competition. In sectors that are highly competitive, an increase in profit margins allows companies to reduce their pricing to take market share from their peers; this allows companies to reduce their profit margin for a larger share of the cake.
In this event, peers usually follow, which causes great gains for buyers as the extra benefit trickles down to them. This is the definition of deflation, a lowering of the cost of goods and services that impacts all of us consumers by giving us access to valuable goods and services at cheaper prices.
Governments and Central Banks don't like deflation, as it creates an incentive for most to hoard cash rather than buy goods and services, which lowers economic output. Therefore, the first policy response, as soon as deflation is forecasted, is the lowering of interest rates and printing of money to counter the effects of deflation.
The lowering of interest rates encourages cash to get invested, which makes wealth flow into the bond and equity markets in search of higher returns. This drives up both bond and equity prices. As both prices go higher, wealth flows into riskier activities such as private equity and venture capital, searching for better-priced opportunities. The excess wealth flowing into these markets gives corporations access to cheaper funds that allow them to finance new projects that they otherwise wouldn’t have been able to.
Case 2 - What if there is not enough competition to lower profit margins, and they instead stay higher for longer?
Excess profitability simply creates more wealth for the already wealthy pools of capital. This new ongoing wealth has to be parked somewhere:
It either gets reinvested into corporate projects; or
It gets reallocated elsewhere, held in cash, bonds, real estate, equity, and all investment asset classes. This reallocation further drives up investment asset prices as well.
Regardless of whichever case is made, more investment capital is created that now goes into new projects that otherwise would not have existed. This is the principal reason why technology creates new jobs that we couldn't even have imagined beforehand.
Techno-optimism and the Future
The Excel sheet didn't replace accountants. Neither did virtual meetings replace outdoor coffee meetings, it just made them more personal and focused on rapport building.
Technology saves us a lot of time on things we don't want to focus on and gives us the time to make higher value of things we do care about, creating new industries that were previously thought not to be feasible.
In regards to markets, technology really brings down the value of holding cash and missing out on the innovation game.
Technological innovation is essentially human progress, and its impact on markets is clearly positive. As debatable as its effect on jobs and labor is, there isn’t much debate on its impact on the holders of capital, as it is a shift from labor to capital after all. Regardless of whether that surplus remains for capital holders or the added efficiency creates new jobs and industries, we can agree on its positive impact on investing (whether lending or owning) in the production of goods and services.
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