The recent intervention in the USD/JPY pair, with explicit acknowledgement of U.S. oversight to "stultify the volatility," demonstrates a shift towards active, coordinated management of exchange rates. This undermines free market price discovery and turns FX trading into a game of predicting government actions.
Fiscal incentives and monetary policy, such as suppressing long-term rates, have made it cheaper for AI companies to fund massive build-outs. This government-enabled environment accelerates the AI arms race, potentially exacerbating job displacement faster than natural market forces would allow.
Just as inflation structurally broke the bull case for long-term bonds (TLT), the threat of AI disruption is causing a fundamental re-evaluation of software company valuations. Buying the dip in software ETFs like IGV may become a losing strategy as multiples compress permanently.
While investors penalize software companies over AI disruption fears, they are overlooking the massive capital expenditures by hyperscalers (Mag7). This AI-driven spending could permanently change their models from capital-light to capital-intensive, warranting a multiple re-rating that the market hasn't yet applied.
In the early 20th century, the U.S. horse population plummeted by 90% in 40 years as internal combustion engines replaced them. This historical event serves as a powerful, cautionary analog for the potential future of white-collar labor as AI becomes the new engine of productivity.
Many people's last experience with AI was with early ChatGPT in 2023, which was prone to errors. The rapid advancement of models like Claude is creating a shockwave, forcing a re-evaluation of AI's disruptive potential, similar to the societal shifts seen during major technological revolutions.
Typically, accelerating economic growth leads to higher inflation expectations and bond yields. The current trend of falling break-evens alongside positive growth data is unusual. The residual factor explaining this divergence is a market-wide bet that AI will unleash a massive, disinflationary productivity wave.
Real assets like prime real estate, energy, and materials are attractive in an AI-centric world. If AI causes job loss, governments will print money (e.g., UBI), inflating hard assets. If AI booms, it will require massive physical infrastructure, driving demand for these same assets.
As AI becomes capable of improving itself, capital may concentrate on these systems, seeking exponential returns. This creates a new paradigm where traditional value investing strategies, which rely on mean reversion, could fail as certain sectors get permanently disrupted while others achieve sustained, compounding growth.