The first quarter ended with both the bond and equity markets generating positive returns. The S&P 500 was up 5.5%, the MSCI 5.9% and the bond market followed with a modest positive return. Two things were surprising about this quarter. First, it occurred with very little volatility and second, despite the lack of volatility we also had the longest losing streak for the markets in 5 years. Needless to say Trump was a constant fixture in the news but what caught our eye were recent comments by US Treasury Secretary Steven Mnuchin. It is worrying that an administration ostensibly focused on job creation seems to be wholly unaware of the impact that artificial intelligence (AI) will have on the economy and employment.
When asked about AI during an interview in March, Mr. Mnuchin said “It’s not even on our radar screen.” Asked when it would become a concern, he said “50 to 100 more years.” It seems that yet another member of the Trump administration is divorced from reality. Whether it is driverless cars, automated fast food, medical imaging, bricklaying, inventory management and even journalism, all have AI applications that are in testing phases right now. The challenge of AI in the economy demands serious analysis and a timely, serious policy response. Just closing your eyes to the changes will not make them go away.
Consider the trucking and food service industries. At the end of this year platooning of trucks is expected to begin. Platooning means that the trucks, although with a driver, will be driven in convoy by computers that operate synchronized driving and braking, resulting in 10% cost savings in fuel alone. This is the first step to eliminating truck drivers all together. Similarly, McDonalds is implementing restaurants that are almost fully automated. The new robots work 50x faster with no chance for error. The payback on the investment is quick and the company’s profits rise. This is great for investors but a thoughtful government policy response to the broader social implications should be considered.
The typical response is that just like the ubiquitous buggy whip manufacturers of yore, the truck drivers and fast food workers will simply retrain and find other jobs. Here is our concern: when the buggy whip manufacturers were phased out, it occurred over a long period of time and at different rates in different parts of the world, and against a backdrop of industrialization that created many new opportunities. In today’s era of turbo charged capitalism we can see large numbers of people displaced in a short period of time, with no obvious source of new opportunities in the volume to absorb them. Trucking alone employs 3.5 million people in the U.S., with millions more around the developed world. No amount of trade barriers will stop this potential displacement.
For holders of capital, this may be a period during which returns continue to rise as labour continues to be displaced by capital. It would not be inconceivable to see a rush by companies and investors alike to participate in this technological change. Understanding how this trend will impact companies is key to identifying investments to buy and others to avoid. However in this period of prosperity we cannot lose sight of people who, through no fault of their own, will lose their jobs.
Arthur Heinmaa, CFA
CEO, CIO Cidel Asset Management