Thoughts about the markets, automated trading algorithms, artificial intelligence, and lots of other stuff

  • Talking Trading With Matthew Piepenburg

    In 2020, I had a Zoom meeting with Matthew Piepenburg of Signals Matter.  Even though it was a private discussion, there was so much value in our discussion we decided to share parts of it online. 

    Four years later, I still think it's a great watch. 

    While Matt evaluates markets based on Macro/Value investing, I'm much more interested in advanced AI and quantitative methods. 

    As you might expect, there are a lot of differences in how we view the world, decision-making, and the market.  Nonetheless, we share a lot of common beliefs as well.   

    Our talk explores several interesting areas and concepts.  I encourage you to watch it below
     

     
    Even though this video is four years old, the lessons remain true – markets are not the economy, and normal market dynamics have been out the window for a long time.  In addition, part of why you're seeing increased volatility and noise is because there are so many interventions and artificial inputs to our market system.

    While Matt and I may approach the world with very different lenses, we both believe in "timeless wisdom". 

    Ask yourself, What was true yesterday, today, and will stay true tomorrow

    That is part of the reason we focus on emerging technologies and constant innovation … they remain relevant. 

    Something we can both agree on is that if you don't know what your edge is … you don't have one. 

    If You Don't Know What Your Edge Is You Don't Have One _GapingVoid

    Hope you enjoyed the video.

    Let me know what other topics you'd like to hear more about. 

    Onwards!

  • Is Big Tech Faking AI?

    Last week, I shared an article about Amazon's "Just Walk Out" technology – and how it likely required a team of human validators and data labelers.

    My takeaway from the article was that we're right at the peak of inflated expectations and about to enter the trough of disillusionment. 

    Gartner hype cycle - Wikipedia

    Gartner via Wikipedia 

    One of my friends sent me this video, which he found in response.

     

    via Sasha Yanshin

    It's a pretty damning video from someone who is frustrated with AI – but it makes several interesting points. The presenter discusses Amazon's recent foible, Google's decreasing search quality, the increase of poorly written AI-crafted articles, GPTs web-scraping scandals, and the overall generalization of responses we see as everyone uses AI everywhere. 

    Yanshin attributes the disparity between the actual results and the excitement surrounding AI stocks to the substantial investments from technology giants. But as most bubbles prove, money will be the catalyst for amazing things — and some amazing failures and disappointments too.

    His final takeaway is that, regardless of its current state, AI is coming and will undoubtedly improve our lives. 

    If I were to add some perspective from someone in the industry, it would be this. 

    AI Is Overdelivering in Countless Ways

    There will always be a gap between expectations and reality (because there will always be a gap between the hype and adoption cycles). AI is already seamlessly integrated into your life. It's the underpinning of your Smartphones, Roombas, Alexas, Maps, etc. It has also massively improved supply chain management, data analytics, and more. 

    That's not what gets media coverage … because it's not sexy … even if it's real. 

    OverHype has existed for much longer than AI has been in the public eye. An easy example is the initial demo of the iPhone, which was almost totally faked,

    Having created AI since arguably the mid-90s, the progress and capabilities of AI today are hard to believe. They're almost good enough to seem like science fiction. 

    The Tool Isn't Usually The Problem 

    Artificial Intelligence is not a substitute for the real thing—and it certainly can't compensate for the lack of the real thing. 

    I sound like a broken record, but AI is a tool, not a panacea. Misusing it, like using a shovel as a hammer, leads to disappointment. And it doesn't help if you're trying to hammer nails when you should be laying bricks. 

    ChatGPT is very impressive, as are many other generative AI tools. However, they're still products of the data used to train them. They won't make sure they give you factual information; they can only write their responses based on the data they have.

    If you give an AI tool a general prompt, you'll likely get a general answer. Crafting precise prompts increases their utility and can create surprising results. 

    Even if AI independently achieves 80% of the desired outcome, it still did it without a human, a salary, or hours and days of time to create it. 

    Unfortunately, if you're asking the wrong questions, the answers still won't help you. 

    That's why it matters not only that you use the right tool but also that you use it to solve the right problem. In addition, many businesses lose sight of the issues they're solving because they get distracted by bright and shiny new opportunities. 

    Conclusion

    Sifting the wheat from the chaff has become more complicated — and not just in AI. Figuring out what news is real, who to trust, and what companies won't misuse your data seems like it has almost become a full-time job. 

    If you take the time, you will see a lot of exciting progress. 

    Public perception is likely to trend downward in the next news cycle, which is to be expected. After the peak of inflated expectations comes the trough of disillusionment. 

    Regardless, AI will continue to become more capable, ubiquitous, and autonomous. The question is only how long until it affects your business and industry. 

     - via Don't Walk Out on AI Just Yet

    What's the most exciting technology you've seen recently?

  • S&P 500 Performance In April

    "What goes up must come down" is a well-known aphorism. So is, "Actions have consequences, and so do inactions."

    On one hand, I try not to think about or predict markets (because I recognize the futility of trying to predict something random to me). On the other hand, it is an election year, and my opinion matters as a proxy for what people like me think or feel in an election year. So, with that in mind, I expected to see a brief market correction blamed on various geopolitical instabilities and partisan weaknesses, followed by a long and steady push higher as we approach the November elections.

    What do you think? Is the market's move downwards the start of something bigger, or is it just a temporary correction before a push higher into November?

    Looking closer, 10 of 11 sectors in the S&P 500 lost money in April

     

    GMdJmaYW8AE55MW

    via FinViz

    Not to mention, for the past few years, the top 20 stocks have contributed almost exclusively to the success of the S&P 500. In 2023, the top 20 stocks drove 7.08% of the 7.55% return. 

    Those stocks are almost exclusively AI & Tech Stocks. 

    Often, people look to the S&P as a sign of the economy, but this is a helpful reminder that markets are not the economy. 

    As we look at the S&P, it's also interesting to look at the top stocks over the past 40 years. Visual Capitalist compiled a chart that ranks the top S&P 500 stocks by calendar year returns.

     

    Top-SP-500-Stocks-by-One-Year-Return_Mainvia Visual Capitalist

    Qualcomm's 2620% return in 1999 is hard to imagine, especially with Tesla's 743% percent growth from 2020 being a distant 2nd place. 

    In case you were wondering, Qualcomm's growth in 1999 was primarily driven by patents for Code Division Multiple Access (CDMA) technology, which was the infrastructure for "fast" wireless internet access and the 3G network.

  • Don’t Walk Out On A.I. Just Yet

    Amazon's 'Just Walk Out' technology has revolutionized shopping convenience, but whispers suggest there might be more to it than meets the eye…

    Retail-robot-hospitality-1

    For years, shoppers have been able to walk into one of their Amazon Fresh grocery stores,  walk out, and never have to talk to a single person, or even check out. 

    This feat was supposedly made possible solely using machine intelligence. 

    Just Walk Out technology is made possible by artificial intelligence like computer vision and deep learning techniques, including generative AI, to accurately determine who took what in any retail environment. Amazon built synthetic datasets to mimic millions of realistic shopping scenarios – including variations in store format, lighting conditions, and even crowds of shoppers – to ensure accuracy in any environment.via an Amazon Spokesperson

    However, they just announced that they're removing technology from their stores and switching to smart shopping carts. 

    Along with that announcement came rumors that the technology only worked due to a team of 1000 out of India. Apparently, this team was required to verify orders and correct the technology when it missed items. 

    On the one hand, that seems like a classic case of overpromising and underdelivering, but it's also very common. Many public-facing AI systems rely on human moderators and data labelers. 

    So why is Amazon being flogged in the media?

    The problem for me is two-fold. 

    First, Artificial Intelligence is at the peak of inflated expectations on Gartner's Hype Cycle. That means the average user has high hopes and is being disappointed. It also means the average user is likely overwhelmed with apps and technologies that fail to deliver on their promises. 

    Second, transparency is the name of the game, especially in a black-box situation like most AI. The technology Amazon is creating is impressive—but they're also Amazon. Eyes are on them to be leaders, so when they fall short, it's a chance for naysayers to pile on. 

    Public perception is likely to trend downward in the next news cycle, which is to be expected. After the peak of inflated expectations comes the trough of disillusionment. 

    Regardless, AI will continue to become more capable, ubiquitous, and autonomous. The question is only how long until it affects your business and industry. 

    While Amazon has "walked out" on that technology in its stores, it's not time to "walk out" on AI just yet. Numerous stores still use that or similar technologies.

  • The Next Big Thing … Megacities

    Population growth is an interesting measure. Historically, growth has been slow … but something changed that, and the implications are stunning.

    Scientists estimate that humans have existed for over 130,000 years.

    It wasn’t until 1804 that the world’s population reached 1 billion. The population doubled once more by 1927, 123 years later, and then again by 1974, a mere 47 years later.

    The Agricultural Revolution spurred early population growth. Subsequently, since 1804, the Industrial Revolution, alongside new technologies and advancements in health and safety, has dramatically enhanced the quality of life and accelerated population growth.

    The global population continues to expand as more women are giving birth, despite the statistical trend of each woman having fewer children. Here is a chart showing that.

    Screen Shot 2019-05-24 at 1.44.29 PM

    via Axios (Click for an Interactive Graph)

    World population growth rates peaked in the late 1960s and have declined sharply in the past four decades. Nonetheless, world population figures continue to grow. We’re expected to reach 9 billion people by 2050, but a lot of that growth comes from developing countries—it also almost exclusively comes from urban areas. 

    Urbanization: Megacities

    Here is another trend worth noting. Since 2014, over 50% of the world’s population has lived in urban areas – today it’s approximately 55%. That number is growing.

    Ironically, as we grow more digitally connected, our world is shrinking, and our populations are concentrating. 

    An interesting consequence of this rapid urbanization and population growth in developing countries has been the increased development of Megacities – defined as cities with populations greater than 10 million. Today, there are 33 megacities – more than triple the number in the 1990s. 

    This creates a set of interesting opportunities and challenges. For example, how will these cities deal with infrastructure (e.g., sanitation, transportation, etc.)?

    Infographic: The World’s Next Megacities | Statista

    via Statista

    As information and money become increasingly decentralized, and it becomes easier and easier to trade and communicate globally, it’s interesting to see a centralization of the population. 

    What do you think the consequences will be?

  • The “Chart Of The Century” In 2024: A Look At Consumer Price Inflation

    This post considers the “Chart of the Century” created and named by Mark Perry, an economics professor and AEI scholar. This chart has received considerable attention because it contains extensive information about the challenges faced by the Fed and other Washington policymakers.

    The most current version reports price increases from 1998 through the end of 2023 for 14 categories of goods and services, along with the average wage and overall Consumer Price Index.

    It shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down worldwide. Meanwhile, the costs of so-called non-tradeable items — hospital stays and college tuition, to name two — have surged.

    From January 1998 to now, the CPI for All Items has increased by over 90% (up from 59.6% in 2019, when I first shared this chart).  

    Lines above the overall inflation line have become functionally more expensive over time, and lines below the overall inflation line have become functionally less expensive. 

    Time-Pricing-Mark-Perry-image-01

    via Human Progress

    At the beginning of 2020 (when I shared the 2019 post), food, beverages, and housing were in line with inflation. They’ve now skyrocketed above inflation, which helps to explain the unease many households are feeling right now. College tuition and hospital services have also continued to rise over the past few years—even in relation to inflation. 

    There are many ways to interpret this chart. You can point to items in red whose prices have exceeded inflation as government-regulated or quasi-monopolies. You can point to items in blue as daily commodities that have suffered from ubiquity, are subject to free-market forces, or are goods subject to foreign competition and trade wars.

    Looking at the prices that decrease the most, they’re all technologies. New technologies almost always become less expensive as we optimize manufacturing, components become cheaper, and competition increases. From VisualCapitalist, at the turn of the century, a flat-screen TV would cost around 17% of the median income ($42,148). In the early aughts, though, prices began to fall quickly. Today, a new TV will cost less than 1% of the U.S. median income ($54,132).

    Compare “tradable” goods like cell phones or TVs (with lots of competing products) to less tradable “goods” like hospital stays or college tuition, and unsurprisingly, they’ve gone in opposite directions. In 2020, I asked what the Coronavirus would do to prices, and the answer was less than expected. If you don’t look at the rise in inflation but instead the change in trajectories, very few categories were heavily affected. While hospital services have skyrocketed since 2019, they were already skyrocketing. 

    At this point, we’re pretty far removed from quarantine’s most extreme forces. Textbooks have come back down, as have childcare and medical care services. New cars and household furnishings have leveled out. Otherwise, the trajectories have been pretty unaffected.

    We can look one step deeper if we consider average hourly income. Since 2000, overall inflation has increased by 82.4%, while average hourly income has increased by 114%. This means that hourly income increased 38% faster than prices (which indicates a 14.8% decrease in overall time prices). You get 17.3% more today for the same amount of time worked ~24 years ago.

    It’s interesting to look at data like that, knowing that the average household is feeling a “crunch” right now. My guess is that few consumers distinguish between perception and reality. However, feeling a crunch isn’t necessarily the same as being in a crunch.

    For instance, we must account for ‘quality of life creep,’ where people tend to splurge on luxuries as their standard of living improves. With the ease of online shopping and access to consumer credit, it’s become increasingly easy to indulge in impulse purchases, leading to reduced savings and feelings of financial scarcity. This phenomenon is a function of increased consumption (rather than inflation), yet it still leaves consumers feeling like they’re struggling to make ends meet.
     
    Perry’s ‘Chart of the Century’ reveals the complex relationships between inflation, consumption, and economic growth. While households may feel financial strain, the data shows that income has outpaced inflation, and technology has made many goods more affordable. Nonetheless, our tendency to splurge on luxuries and increased consumption have contributed to a sense of financial struggle.
     
    How can policymakers address the sectors experiencing significant price hikes, like healthcare and education, without stifling innovation in tradable goods and services? 
     
    How do you think these issues will impact the Election?