Everyone Hates AI | Animal Spirits 453

Key Concepts

• AI Disruption: Rapid advancements in AI pose a potential systemic risk to the economy, particularly impacting white-collar jobs, though the timing and severity are debated.
• Market Sentiment vs. Reality: A disconnect exists between negative investor sentiment and positive economic data, particularly regarding consumer spending.
• Private Credit Vulnerabilities: The private credit market, specifically highlighted by issues at Blue Owl, faces potential risks related to interest rate changes, underwriting standards, and asset-liability mismatches.
• Investment Strategy Adaptation: Shifting market conditions and AI concerns are prompting investors to re-evaluate strategies, with a move towards rules-based, momentum-focused approaches and increased consideration of indexing.
• The Difficulty of Stock Picking: Despite the appeal, consistently outperforming the market through individual stock selection is challenging, as demonstrated by Netflix’s underperformance.

Investment Strategies & Market Observations

The discussion began with acknowledging a cooling in market enthusiasm following a peak in the previous year. Despite a generally positive economic outlook based on data from the BLS and large firms, media coverage leans heavily towards negativity. Market breadth remains strong, with 66% of S&P 500 stocks above their 52-week high – the highest level in 50 years, though the MAG 7 stocks are down 21% year-to-date. A key observation is the surprising underperformance of Netflix over the last five years, even after “winning” the streaming wars against competitors like Disney, Paramount, Prime, and Max. This prompted a debate on the value of individual stock picking versus indexing, with the hosts acknowledging the stress associated with actively managing a portfolio and the potential benefits of a more passive approach. Ben has shifted to a rules-based, momentum-focused strategy, selling individual stocks, while Michael continues to hold positions in Blackstone, Salesforce, ServiceNow, Microsoft, CrowdStrike, and Netflix, despite acknowledging the risks.

AI & the Labor Market – A Looming Threat?

A central theme revolves around the potential impact of AI on the labor market. A research report (from Catrini Research) predicts a recession by 2028 with 10% unemployment and a 40% market decline driven by AI-led job losses. Initial data shows negative job growth in AI-affected industries (management, consulting, graphic design) over the last three months, though this is currently attributed to overhiring during 2021-2022 rather than direct AI displacement. Charts indicate diverging payroll trends between AI-exposed and non-exposed sectors, suggesting a future impact. The consensus is that mass unemployment due to AI is more likely to be triggered by a recession, as companies are unlikely to initiate large-scale layoffs in a healthy economy. Michael expressed concern for the human cost of potential job losses, while Ben questioned the inevitability of the predicted outcome. The report’s assertion that human relationships are merely “friction with a friendly face” was strongly contested by Michael, who believes this underestimates their importance.

Conflicting Economic Signals & Consumer Behavior

The discussion highlighted a significant disconnect between economic data and public perception. A quote from Thomas Peddy, CEO of Interactive Brokers, encapsulates this: “If you listen to the BLS, the economy is doing great. If you listen to the big firms…the economy is doing great. If you listen to the newspapers…the economy is doing extremely poorly.” This is interpreted as media bias towards negativity. Data points included a drop in tech employment (2.3% of overall payrolls) and software publishing (4%), alongside observations from Walmart and Capital One CEOs indicating resilient consumer spending and stability. Notably, consumer behavior doesn’t align with negative sentiment, as highlighted by Truist Financial: “Consumers’ beliefs don’t match their behaviors…watch what people do more than what they say.”

Private Credit Concerns – A Potential Canary in the Coal Mine

A substantial portion of the discussion focused on the private credit market, specifically the issues surrounding Blue Owl. The situation is described as a “PR mega fail” stemming from peaking and declining interest rates impacting floating-rate loans, questions about underwriting standards, and the revelation that a key fund (OBDC2) always had a finite 10-year life. The market’s negative reaction to Blue Owl’s attempt to address redemptions (offering 30% back instead of the requested 5%) despite the company’s optimistic outlook was scrutinized. The discussion highlighted a potential asset-liability mismatch and the risk of defaults, drawing comparisons to the 2008 financial crisis. The speakers emphasized that the current stress in private credit is occurring without broader credit problems or economic stress, which is unusual.

Miscellaneous Observations & Cultural References

The segment included several lighter observations, including a humorous anecdote about a Japanese toilet company entering the AI chip market, references to the show Silicon Valley and its prescient depiction of AI mishaps, and a discussion of increasingly long movie runtimes. A recommendation was made for the show Industry, and a comparison was drawn between the pandemic and the current information overload.

Conclusion

The discussion presented a nuanced view of the current economic landscape, characterized by cautious optimism tempered by significant uncertainties. While economic data suggests resilience, particularly in consumer spending, the potential for disruption from AI and vulnerabilities within the private credit market warrant careful attention. The hosts emphasized the importance of data-driven analysis, adaptability in investment strategies, and a healthy skepticism towards both market exuberance and pessimistic narratives. The overarching takeaway is that navigating the current environment requires a balanced approach, acknowledging both opportunities and risks, and prioritizing risk management through diversification and rules-based investing.