VALUE: After Hours (S07 E40): The AI Paradox: Why Tech Burns Cash While Other Sectors Capture the Value

During their recent episode, Taylor, Carlisle, and Seth Cogswell discussed The AI Paradox: Why Tech Burns Cash While Other Sectors Capture the Value. Here’s an excerpt from the episode:

What I feel that many are completely missing, is that $20 billion in revenue has a reciprocal cost. So, companies are paying $20 billion for that service, which costs over a trillion dollars or so to provide. So, the interesting thing about AI, is it can be applied to pretty much anything to improve it. It’s not a tech thing. You can apply tech to financials, industrials, real estate, utilities, definitely healthcare. You can apply it to almost any approach to ideally, if you do it efficiently, to actually provide value.

Again, the companies that are using, that are paying very little while the companies are providing are paying a whole lot. So, everything around tech actually has the opportunity to immediately take advantage of AI and the services that these companies are providing, and they get this massive value gap. And so, people are piling into the things that are burning cash like nothing seen in history, and then they’re completely avoiding the things that can most immediately benefit. It’s pretty nuts. Who knows? Maybe that’s philosophical and I’m talking my own book, but it’ll be really curious to see how that plays out. For me, it seems obvious. But then, again, I’m not always right. That’s one of the things I’m really trying to get people to contemplate– [crosstalk]

Jake: Everyone’s going to have pink slips by Christmas time, or where’s the cost savings or productivity increases that are supposed to be justify all this spend?

Seth: Look, again, who knows? I mess around with AI. Tobias just mentioned that he’s a big fan in a number of ways. But MIT did a study. I’m going to mess this up, but it was 90% to 95% of companies polled have seen no return investment in AI. How many silly pictures are being created with AI? I wonder if that’s 50% of the usage of AI at this point is silly pictures or memes or whatever. It’s great. I guess, that improves life if you get some extra laughs out of it.

Jake: Or, targeted advertising. Hooray. [laughs]

Seth: Sure. Great. That’s what we need more of. So, I’m less positive on AI than I’d say Tobias is, as far as the impact on humanity. I think there’s positive Implications I do worry a lot about– This is getting really philosophical. But frankly, Jake, I blame it on-

Jake: That’s fine.

Seth: -you went straight on philosophy. I mean, you’re quoting a philosopher or a scientist. Regardless, I worry that– There’s a phrase by Eckhart Tolle that’s “Once a human surpasses survival.” Meaning, becomes extremely important. I would say that more people have surpassed the needs of survival than any time in history, let’s say, in the last hundred years. You’ve seen depression rates significantly increase. We’ll just completely overlook smartphones at this point. But just even in the last hundred years, you’ve seen that.

I think it’s because people are looking for meaning. But what if you start even then sucking out all their time that’s used to be productive. They go to work, maybe they do something of hopefully of value, and now that’s gone. Or, it’s even more efficient, so they spend less time in that. I don’t know, Jake, I love the way that you like position that in a way that could be positive, that maybe enables people to find more fulfillment lives or maybe increase their capabilities, so that’d be awesome.

Jake: If you had to think about that meaning and lack of meaning perhaps, would you imagine a world with UBI would have greater or less guillotine risk in it? So, everyone’s getting paid. Everyone’s can stay at home and watch Netflix or whatever. The machines are creating enough quality of life for all of us to survive, and yet most people have no meaning in their life. What are they going to do then? Are they angry about that or are they docile and happy to be in the zoo?

Seth: I think that’d be horrible. I have kids, but even pre-kids, I could probably quote Disney movies better than any grown man. Wally–

Jake: Let’s not unpack that one.

Tobias: Pixar. Pixar.

Jake: Yeah. [laughs]

Seth: Yeah, I love some Pixar– [crosstalk]

Tobias: Pixar gets surpassed.

Seth: Wally. You get to a point where everybody’s just hasn’t gotten up out of these like floating chairs where they’re just being fed whatever. It certainly seems like that is not out of the realm of possibility. At least in that, they were perfectly docile and not necessarily anarchists.

Jake: Storming the best deal.

Seth: Yeah. But if people don’t have a purpose, life is empty. So, that’s a major concern of mine.

Jake: Mm. Toby, how you think about that these days?

Tobias: Yeah, I couldn’t agree more. You need a purpose, otherwise it’s– There’s a lot of things wrong with the way that we’ve set up. Before we go too philosophical, I just want to go back to–

Jake: [chuckles]

Tobias: There’s a few things on AI. There’s a little chart that’s been doing the round showing there’s a whole lot of layoffs that coincide with the rise in AI, and then that seems to be reinforced by the fact that there’s a lot of excuses given by companies when they fire people saying that it’s an AI related firing. But there was a little research report out today that says that’s not true, which is the perspective that I have that they’ve already been.

They’ve over hired during the little 2021, 2022 stimmy, sugar high, and now they’re just letting people go, and we’re getting back to where we should be in terms of long-term unemployment. Do you have a view, Seth? Which way do you lean on that one? Is AI winning the race, or is it something else?

Seth: No, I completely agree without really numbers to back it. I think that there’s some numbers I guess that back it. It was next to impossible to hire people in 2020, 2021. Wage inflation was skyrocketing, because it was just so hard to get really good people. I do think that firms very clearly over hired then. Meanwhile, they did so when profitability was at pretty much all-time highs, which was partially driven by globalization, which is now reversing.

And so, if we see a recession, if we really see a meaningful change in globalization, if we see profit margins begin to decline, then you’re going to see the opposite of– I mean, you’re going to see unemployment rise. By pretty much, by many metrics, it appears like we might already be in a recession unless of course, you look at the most accepted metric which would be like GDP growth. I think half of the growth that we’ve experienced this year is strictly due to basically-

Tobias: [crosstalk] spending.

Seth: -CapEx investment in AI. Keep in mind, we have no idea whether that pays off anytime within the next 10 years.

Jake: Well, the chips won’t be. Thery’ll be gone by then.

Seth: Yeah. Well, I saw a number recently where they estimate that maybe 80,000 jobs were truly cut due to AI. So, yeah, to echo what you were saying, Tobias, it seems like that number, especially if you consider. Again, the MIT study, 90% to 95% of companies, they’re messing around with AI, but they don’t really have any idea how to add value. So, the odds are companies are making that decision. It’s an expensive decision to let people go. So, the odds that people are making that significant decision without actually having a plan in place seems doubtful.

Tobias: I saw that Mike Burry of The Big Short fame. He released his– I don’t know if it’s come out of his 13F or he tweeted maybe. I think he tweeted that something that– I think Jim Chanos might have said something like this six months ago. I don’t actually know where I got this idea from, but it’s something that I’ve been aware of for a little while that if you look at the rate of CapEx which is not then expensed, of course, it’s depreciated.

So, there’s a little bit of lag when it gets recognized. We’re now at the point where the depreciation, amortization, whatever, it’s going to run through the income statement and the numbers are quite– They’re hard for them to overcome even in terms of revenue, let alone in terms of–

So, we’re just not paying back the AI spend. You can already see it free cash flows falling off for a lot of these bigger companies. They’re very, very expensive. And at some point, it starts running through the income statement, so that’s how you get sort of a normalization. I don’t think it’s going to collapse. I don’t think it’s all over for those companies. I think they’re almost certainly bigger in 10- and 20-years’ time. But I do think it’s an interesting data point. Do you have any view?

Jake: Just shift the useful life out another 10 years, and that’s not as big a deal. 50-year mortgages, not a big deal. This is just-

Tobias: Kick that can, baby.

Jake: -extend and pretend everything.

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VALUE: After Hours (S07 E40): The AI Paradox: Why Tech Burns Cash While Other Sectors Capture the Value

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