The value of time is measured not in money, but in opportunity. This concept has been a cornerstone of human evolution and economic understanding.
The interest rate is the determining factor for the free market and every asset is priced through it. Asset prices can be inflated by lowering interest rates and vice versa.
Investors expected inflation from the 2020 lockdown’s increased money supply, but some economists were wrong as they argued the pandemic-driven shift in spending and increased savings balanced out short-term inflation pressures.
During periods of low interest rates, even negative rates in parts of Europe, investors turn to speculation. They chase the next big thing, sometimes unprofitable ventures like so-called “zombie companies” on platforms like Robinhood.
With a low risk-free rate, people flock to risky investments. It was a great time for asset owners but a frustrating period for bargain investors.
Former President Donald Trump favoured lower interest rates. If re-elected, he might push for lower rates, higher tariffs, and reduced regulation.
Historically low interest rates do not end very well for most investors. They often lead to speculative asset bubbles, weak economic growth and financial fragility.
Edward Chancellor argued in his book The Price of Time, “If interest rates are kept below their natural level, misguided investments occur: too much time is used in production, or, put another way, the investment returns don’t justify the initial outlay. It might involve some expensive white-elephant project, such as constructing a tunnel under the sea, or a pie-in-the-sky technology scheme with no serious prospect of ever turning a profit.”
Remember the Dutch Tulip Mania? There was so much speculation on things that did not have real-world significance.
Unlike Tulips, Artificial Intelligence (AI) is transformative, changing industries and impacting our daily lives in areas like writing, image creation, financial services and many more.
Over the past three years, $330 billion has poured into 26,000 AI startups.
As Nvidia CEO Jensen Huang stated at the company’s annual meeting, “The next wave of AI is set to automate the $50 trillion in heavy industries.”
But does this sound like a real investment opportunity or another bubble?
It’s often easier to hype a new technology like AI than to build AI that will truly be humanity’s next leap forward.
Benjamin Graham stated that “good businesses are generally considered those with strong barriers to entry, limited capital requirements, reliable customers, low risk of technological obsolescence, abundant growth possibilities, and thus significant and growing free cash flow.”
In the AI race, the winners aren’t clear, apart from equipment providers like Nvidia and Supermicro. Even Nvidia’s dominance could wane if competitors replicate their products, leading to commoditization.
Hyperscalers like Amazon, Google, Meta, Microsoft, and Oracle are expected to invest over $1 trillion in data infrastructure.
For instance, more data has been created in the last three years than in all of human history.
The old economy is rapidly changing and we must embrace the new economy companies. These companies have small workforces and require relatively small capital to scale.
History shows that every time money becomes very cheap, it will be squandered.
AI seems to be one of the most crowded investments now.
Is this time different or are we being super optimistic about the future and seeing the future through rose-coloured glasses?
I remember during COVID-19, I was talking to some people who couldn’t imagine we would socialise again yet here we are back in the same place.
It’s not new that human nature has always suffered from recency bias to outweigh the importance of our recent experiences.
John Templeton once said, “There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling.”
Does the market seem depressed today, especially in the AI space? In my view, there is too much faith in the AI hype. It’s time to approach it with caution. This doesn’t mean AI won’t change industries—it certainly will. But it seems investors are more afraid of missing out on gains than losing money. Therefore, we must prepare for unexpected market reactions.
Awet Ghirmay, Head of Investment Research
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
