Wow, how about that stock market?
It’s a phrase we keep having to dust off and use again, as the years go by and the market keeps surprising us.
When it crashes, some of us worry because we see our retirement stash shrinking.
But even when it rises to record levels and then to super-duper-crazy record valuations, we find reason to worry. Because that just means an even bigger crash is coming, right? Especially when this boom-bubble is built on the back of something as frenzied as the present Artificial Intelligence boom… right?
For those who have been happily tuned out of this drama and just enjoying life: Congratulations! Keep up the great work. But just to give you a quick background for the purposes of this article, here’s the AI story in three points:
- Over the past few years, AI has reached a level where it can do complex thinking and reasoning tasks that most of us thought might not happen in our lifetimes. It’s shockingly useful.
- This has led to the fastest worldwide adoption of any technology in history: over 1.5 billion people are already using it, as are most large companies
- And this has caused a crazy cycle of growing sales, investor enthusiasm and data center buildout that is now the largest investment cycle humans have ever made in anything: 1.8 trillion dollars has been spent since just 2002, with another trillion going out the door next year alone. Which you can compare to:
– The cost of the 2700-foot-tall Burj Khalifa, the highest skyscraper in the world (about $2 billion in today’s dollars)
– Or the entire US interstate highway system, 48,000 miles of wide, flat, highly engineered roads (and 55,000 massive bridges) which cross countless mountain ranges, rivers and canyons: $660 billion in today’s dollars.
So where’s the problem?
Investors worry that while AI is definitely a major invention, the mania around it is still too much, too fast, and thus we are due for an even bigger version of the dot com crash we had in the early 2000s. Which happens to be an interesting subject for me, since that was the boom that boosted my own early career and got me on the path to early retirement … before the ensuing crash almost cost me my job and my citizenship application.
As an aging Internet Financial Guru, I have the privilege of getting lots of questions about this investment cycle, just as I have about past booms and busts. And to address them, I decided to not only write this blog article but also create a little talk about it – which I already gave for the first time at an event called Camp FI Midwest earlier this month. I also hope to polish it up and deliver an improved version at the Bogleheads conference in November.
So what that means is that today you not only get a blog post, but a few silly presentation slides to go with it for extra entertainment. All with no need for a plane ticket or all that hassle of leaving your house. So let’s get into it!
Will the AI Bubble Ruin our Retirement?
So I recently hit 21 years of retirement. This means I’ve grown pretty comfortable with the idea. But it still threw me for a loop one time when a friend asked me this question:
“How can you be retired, and comfortable in your retirement, and sleep at night, with everything that’s going on in the world? Aren’t you worried?”
And I was like, “No, what should I be worried about?”
But if you’re a news watcher and a worrier yourself, you can probably think of a few things I should be worried about. Perhaps stuff like this:
You’ve got our corrupt and/or dangerous politicians like Trump and Putin menacing the world. Inflation eroding our purchasing power, the AI Bubble, the towering US National Debt, the Iran war and the Ukraine war and all these other wars that are just on the verge of tipping us all into destruction.
But it turns out these were not the things my friend was asking about.
Because she actually asked me this question over twenty years ago… In the year 2006. So back then we were worried about entirely different things, right?
Back then we had corrupt and/or dangerous leaders like Bush, Hussein and of course Bin Laden. There was still a war in the middle east but it was Iraq instead of Iran. We were still worried about the National Debt and Inflation. And we also worried about our overvalued stock market. But back then it was because of the housing bubble instead of the AI bubble. And instead of AI taking our jobs it was going to be outsourcing to India and China.
Oh and here’s an interesting one: There was a big debate over Peak Oil, and whether the world was doomed because fossil fuel use was always increasing while supply was bound to decrease. And it turns out the opposite happened as you’ll see below.
So then after all this worry in 2006, what ended up happening?
Well we did get the Great Financial Crisis, which was caused by a combination of irrational exuberance over increasing house prices combined with a foolish degree of fancy leverage in the financial instruments used to issue mortgages. And it was the biggest crash since the Great Depression.
But even in that craziest of situations, look how minor it looks in the big picture. A $100,000 investment still ended up ballooning into $852,000 today. And if you look carefully in here you can just see the Covid Crash tucked in there in 2020. Remember that?
And not only that, the rest of the world got a lot better too:
The portion of people living in extreme poverty dropped from 20% in 2005 to only 8% over the next 20 years. Infant mortality – children who die in their first year of life – was cut in half. Clean energy became a thing as solar panels became about 40 times cheaper. So solar generation now makes up the vast majority of all the new generation we add today (the equivalent of 647 nuclear power plants of peak capacity added last year, but with much cheaper and easier solar panels). And sales of pure electric cars have gone from zero up to about a quarter of all the cars sold on Earth last year, on its way to 100%, which is where they already are in Norway.
So if we circle back to that question my friend asked me 20 years ago: do you think I should have focused my energy on worrying about an uncertain future, or optimism?
Which of course brings up the question: Is it different this time?
Maybe the US national debt is finally big enough to really start messing with us. Maybe the AI bubble is way bigger than the housing bubble and we won’t bounce back from that stock market crash. Or maybe AI will spin out of control into a super intelligence that takes over the planet and realizes it does not need us any more.
And the financial media loves to spin a good scary story about all of this. But you know what the fear mongers all seem to be missing?
It’s the fact that at the core, our prosperity does not come from the financial system or the stock market, which are just some made-up numbers on some computers.
Really, Prosperity comes from Productivity.
We first covered this lesson right here on MMM, in the 2014 Classic entitled, “Why we are not really all doomed”. And sure enough, twelve years later the timeless lessons therein remain just as true now as they were back then.
And that lesson is really simple: the world of capitalism is always choppy and prone to wild swings. But if you peek beneath the waves, there are real people in there, doing real work and coming up with real inventions.
In fact, the very idea of an “economy” or a financial system is just another human invention. If the whole system crashes because we don’t like the numbers we see in there, we can literally make up some new numbers and then get back to work. Which is exactly what we did in 2008 and many times before that, and it seems to have worked just fine.
Meanwhile, we still have every tool we ever invented to boost our productivity. And our standard of living, and our economic growth, and our possibility of retiring early, all come from high productivity.
But even Productivity and Prosperity aren’t all that important.
Because once we reach a certain standard of living, human happiness kind of tops out in that dimension. In first-world countries, we blew past those minimum requirements several decades ago. And then we start looking for other factors to maximize our overall happiness. All anybody really wants is to lead the happiest, most satisfying life they can manage
And when you think of it that way, your wealth is really just part of your life situation, which is part of this little green slice of the happiness pie.
Genetics is unfortunately the biggest slice – some people are just plain happier than others. But there are also quite a few choices that are within your control.
Focusing on good close relationships and being kind to people. Practicing Gratitude and Optimism as your lifelong philosophy. And making sure you pack as many healthy (outdoor) activities into your days as you can.
So, I didn’t invent anything new in this blog post. And most of it is just a repackaging of the same stuff I’ve been writing about since 2011. And yet some regular MMM readers who presumably know all this stuff are STILL afraid. Afraid to retire, afraid of things in their unknown future. Can we fix this?
I think the biggest problem is Fear Itself.
The problem is that as a Human Being, you are basically a Danger Detection Machine. And this pervasive background fear is just a trait we evolved to protect ourselves from danger.
But there’s a weird thing about our detection machinery. We can adapt and learn to function even in very dangerous environments, but when the danger goes away, we keep looking for stuff to worry about. In other words, there is a problem with fear: for many of us, it never really goes away. It just keeps moving the goalposts.
While Nature has wisely endowed us with a fear of predators and disease, if you solve those things you’ll just start worrying about whether or not you can get enough food. And supplies, and protecting yourself against scarcity.
If you succeed, next you’ll be worrying about if you can fit in with your tribe, because if you don’t, you might be exiled.
And if you don’t have to worry about that, you’ll go back to worrying about money for different reasons. Thanks to our tendency to use comparisons rather than absolutes (sometimes called “anchoring bias” and the “contrast effect”) when judging our lives, just getting out of poverty isn’t enough. We just move on to wanting more money.
And then, when some people get enough money to have a comfortable upper-middle-class lifestyle, they take the logical next step of starting a Homeowner’s Association, so they can worry about the unauthorized weeds on their neighbor’s lawn. Or maybe a Political Action Committee in hopes of controlling the color of their future neighbors’ skin.
And even if all the lawns and gardens are green and perfect and people get really rich, they just move on to worry about tax strategy, leaving a huge inheritance for their children, and avoiding RMDs.
Required minimum Distributions. This is when, if you get to 72 years old and you have too much money, the government will start making you withdraw some of that money so you can spend it and pay taxes on it. And people actually worry about this. I shit you not.
But wait! You can actually fight back against fear. It’s just a bit tricky because it requires some self awareness. But you have the advantage, because you have the ability to think rationally. And your fear is quite clearly irrational.
And the first step is to understand your own history. Are you afraid of certain things because of your childhood?
I might have been afraid of running out of money, because in my family there was always a perceived shortage of the stuff, possibly enforced by my Dad’s scarcity mentality. And he was aware that his own fears of scarcity came from childhood as well: he grew up in a truly low income family in the 1940s and 50s, under the care of parents who had lived through the Great Depression of the 1930s.
Even more significant is that survivors of trauma and abuse will very likely end up with fear issues in adulthood. It’s natural, and unfortunately abuse is way more widespread even in this country than we would like to admit. This makes it harder to eliminate, but it still helps to understand that your past is what is causing these feelings, rather than an objective understanding of the present.
Identify the Fear: One you understand yourself, it helps to talk through the nature of your fear in more detail. This is also often taught in therapy. What would happen if it really came true? What would the worst case scenario be? It’s often not all that bad.
In one post, why you’ll probably never run out of money, I went to great lengths to imagine what it would mean for a wealthy person like yourself to actually let the well run dry, and let’s say you’ll probably never come close.
Once you identify the fear, you can start taking action. And one of the best and most accurate slogans ever is that action cures fear. It’s because it makes the unfamiliar, familiar. And you get confidence that you can really create change. And then that learning creates Resilience – the ability to adapt to ANY new situation, which is a trait also known as Badassity. And with sufficient Badassity, nothing is scary.
Think about it: if you had the skills and abilities to handle ANY situation, skills in the mental and physical and even the realms of emotion and wisdom, would you really have to worry about anything?
The next thing you can do is tune out all the unnecessary crap from your daily mental diet. And for most Americans, this means the daily news.
The news is not helping you to keep informed, it’s just poisoning your mind with a hand-picked selection of the scariest stories of each day. If you want to learn about something, go find a book on the subject. And if you want to make a difference, the only thing that counts is not the news stories you watch – it’s only the actions that you take – in other words, your Positive Behaviors.
As a human being, you are wired to solve problems with both your body and your mind, and you are meant to do it outdoors. So if you spend all your days in a house and a car and in an office using the computer, of course you are going to have some mental health problems. This should not be a surprising thing you need to ask your therapist about, it is an expected result of not living the life that you were literally created to live as a Human being!
So you need to focus on learning, moving, and solving problems. And you need your food and drink intake to be in alignment with all of this too. Life will get a lot less scary as soon as you are living life in the way you were built to live it.
Then finally, you can start swapping out the fear-mongers in your life, for other positive, productive, optimistic people. And watch how much the positive mentality rubs off on you. In the FI community, at least the subgroup of people that I like to spend time with, nobody focuses on fear. It’s all just about living the best life we can, and helping other people do so as well.
So now that we know how to fight back against fear, we can start using a new approach when we go into anything new. And that approach is something I like to call Everything is an Experiment.
And this applies whether you are talking about something tiny like a new paint color. But it scales up to bigger things like switching to a new car, or a new house, meeting new friends, looking for new love by going through the sometimes hell of first dates, a new job, or even quitting your last job by taking an early retirement.
So let’s bring this back around to AI, the thing that everybody seems to be afraid of right now.
I think of our new AI era as just being another giant experiment. And because of this, I don’t find it even remotely scary. But I do find it endlessly fascinating.
First of all, it’s a change. A potentially unknown one, and for some people that’s scary.
But instead of just leaving it there and then doom-scrolling ominous news articles about it, why not learn why people are so excited about AI? As someone with a lifelong background in technology and economics (and a general lack of political affiliation), I can see a lot more potential upside than downside. And that mainly comes from the fact that I see AI as just a very fancy form of Cognitive Nail Gun.
It will boost our efficiency, which means our productivity, which means prosperity.. Because it’s really just a super smart brain that we all get to tap into for almost no cost.
Unfortunately, it will also displace workers like every other new productivity technology. It’s already doing so in things like entry level office jobs in software and finance. It will eventually replace car and truck drivers, and so on. But in exchange, these services will become cheaper, and new industries will be created because of the new technology. Much like the Internet itself, and then the enormous industries unleashed by smartphones and mobile apps.
And one unfortunate side effect of these new inventions is that they tend to concentrate their rewards on the people who own them. If you own a house building company and employ a bunch of carpenters and give nail guns to the best of those carpenters, you can now lay the other half and still get more done. If you own a company and roll out AI to the workers, you can do the same thing.
And if you’re a big public company, your shareholders also benefit, which happens to include most of the people reading this. As you’ve seen when looking at your portfolios over the past two years.
Artificial Intelligence is just like any other new thing that pops into your life: it’s an opportunity to make some choices. And it is up to you to decide if this is something to be afraid of, or to use as a trigger for learning, action, and living a more interesting life.
So that’s my little talk (and surprisingly long blog post) on Fear versus the AI bubble.
I hope that if you do feel fearful about this or any other issue in your future life, you’ll take it as a cue to learn more about your own fear and emotions and manage them as the root cause they are, rather than just trying to avoid the symptoms. Because in the wise words of my friends The Donegans:
Everything you want in life, that you don’t already have, lies on the other side of Fear. Because if you weren’t afraid to go out there and get it, you would already have it.
Source: www.mrmoneymustache.com…