Capitalogix

Here Are Some Links For Your Weekly Reading - February 19th, 2023

Here are some of the posts that caught my eye recently. Hope you find something interesting.

 

Lighter Links:

• Listen to Understand, Not to Respond. (FlowResearchCollective)
• 9 Habits of Creative Genius. (WayneDyer)
• OverHyped and Never Delivered: A Brief History of Innovations that Weren't. (BigThink)
• Introducing the AI Mirror Test, Which Very Smart People Keep Failing. (TheVerge)
• OpenAI CEO Sam Altman Frets Over 'Potentially Scary A.I. Tools and How People of the Future Will View Us.' (Fortune)

 

Trading Links:

• Warren Buffett Just Sent a Subtle But Terrifying Signal to Investors. (MotleyFool)
• The Fed Minutes May Reveal a Steep Rise in Rates on the Horizon. (SeekingAlpha)
• The Stock Market Has Been Flipped Upside Down. (Markets)
• IMF: World Economic Outlook is Starting to Recover. (WEForum)
• The Metric that Shows Why the World's Three Biggest Economies Could Be in Serious Trouble. (MarketWatch)

 

The Big Mac Index: Worth Paying Attention To?

Last week, I wrote about various “indicators” for markets that just don’t make sense — like the Superbowl Indicator.  The lesson from those indicators is that we crave order and look for signs that make markets seem a little bit more predictable, even where there are none.  This is especially true in complex systems like the stock market, where so many variables and factors are at play that it can be difficult to predict or explain why things happen.

Now, it doesn't mean there aren't patterns - and benefits to watching them. Warren Buffet has proven that. In order to improve your understanding of "markets" you can focus on the fundamentals of individual companies and industries rather than broader market trends. By conducting thorough research and analysis of financials, management, and competitive landscapes of companies, you can make informed decisions about which stocks to buy or sell. Another way to improve your understanding of the market is to focus on long-term trends and avoid getting caught up in short-term fluctuations.  It's about focusing on what doesn't change - instead of what does. But, ultimately, you should realize that if you don't know what your edge is ... you don't have one. And, market movements are getting faster, more automated, and harder to predict over time, not less. 

With that said, Wall Street is still inundated with theories that attempt to predict the performance of the stock market and the economy.  More people than you would hope, or guess, attempt to forecast the market based on gut instinct, ancient wisdom, and prayers.

While hope and prayer are good things ... they aren’t good trading strategies.

It’s true that there are many indices and economic indicators that can provide valuable insights into the workings of economies and markets.  While some of these indices may seem “out there,” or even frivolous, they can often shed light on underlying economic trends and realities.

One example of this is the Big Mac Index, which is published annually by The Economist.  This index is based on the idea of purchasing power parity, which suggests that exchange rates should adjust to ensure that the price of a basket of goods is the same in different countries.  The Big Mac Index uses the price of a McDonald’s Big Mac burger as a proxy for this basket of goods.  It compares the price of a Big Mac in different countries to determine whether currencies are overvalued or undervalued.

While the Big Mac Index is not a perfect measure of purchasing power parity, it can provide valuable insights into the relative value of different currencies and the economic factors that influence exchange rates.  By looking beyond the headline numbers, and digging into the underlying data and trends, investors and economists can gain a deeper understanding of the forces shaping the global economy.

Ultimately, the key to using economic indicators like the Big Mac Index is to approach them with a critical eye and a willingness to dig deeper.  By looking beyond the surface level and using data-driven analysis to understand the underlying trends and drivers of economic performance, we can gain a more accurate picture of the economic realities shaping the world around us.

In 2020, when I last talked about the Big Mac Index, the Swiss Franc was 20.9% overvalued based on the PPP rate.  That math was based on the idea that, in Switzerland, a Big Mac costs 6.50 francs.  In the U.S., it costs $5.71.  The implied exchange rate was 1.14, and the actual exchange rate was 0.94 - thus, 20.9 was overvalued.  At the time, the most undervalued was South Africa. 

As of the end of 2022, The Swiss Franc is still the most overvalued but has now increased to a whopping 35.4%.  Meanwhile, the South African rand has “increased” to only 45.9% undervalued, making the Egyptian Pound the most undervalued currency at 65.6%.

Click the image below to see the interactive graphic.

via The Economist

One of the main limitations of the index is that the price of a Big Mac reflects non-tradable elements such as rent and labor, which can vary widely across different countries and can distort the accuracy of the index.  This means that the index is most useful when comparing countries that are at roughly the same stage of development and have similar economic structures and cost of living. Consequently, while it can provide some useful insights into exchange rates and currency values, it is important to recognize that it is only a rough guide and has some limitations when comparing countries.

Another limitation of the index is that it does not consider factors such as taxes, trade barriers, and transportation costs, which can also affect the relative value of currencies.  These factors can be especially important in countries highly dependent on imports or exports. They can lead to significant disparities in currency values that are not reflected in the Big Mac Index.

Despite these limitations, the Big Mac Index can still be useful for gaining insights into global economic trends and currency values.  By using the index in conjunction with other economic indicators and data sources, investors and economists can achieve a more comprehensive understanding of the forces shaping the global economy and make more informed decisions about how to invest their money.

Obviously, there are more factors at play if something can be significantly overvalued or undervalued for multiple years without significant consequences. 

It is not meant to be the most precise gauge, but it works as a global standard because Big Macs are global and have consistent ingredients and production methods.  It’s lighthearted enough to be a good introduction for college students learning more about economics. 

You can read more about the Big Mac index here or read the methodology behind the index here.

The Importance of the Super Bowl

Thirty years ago, the Cowboys played the Bills in the Super Bowl.  As a Cowboys fan, I wanted to watch the game, but my second son was scheduled to be born that day. 

Luckily, our doctor said, “if you want me to be the one to deliver your baby, you need to induce early.” 

So, I got to watch the Cowboys win with my youngest in hand ... while his mother shot me angry looks as I woke him up with my screaming. 

That anchors the Super Bowl as a special day for me ... but some believe it’s also a "special day" for markets. 

The theory is a Super Bowl win for a team from the AFC foretells a decline in the stock market – while a win for the NFC means the stock market will rise in the coming year.  There is one big caveat ... the history of that "indicator" counts the Pittsburgh Steelers as NFC because that’s where they got their start.  If you accept that caveat, it has been on the money 33 years out of 41 - an 80% success rate.  Sounds good, right?

Come on ... you know better!

There is no substantial evidence to suggest that the outcome of the Super Bowl has any significant impact on stock market returns. 

The stock market is driven by many factors, including economic data, company earnings, and overall market sentiment, rather than the outcome of a single sporting event.

Ultimately, it’s important to recognize that the stock market is a complex system – and that no single event, such as the Super Bowl, can predict its performance.  While the Super Bowl may be a fun event and a source of excitement for many people, it’s not a reliable indicator of stock market returns.

Here are some other “fun” stock market fallacies:

• January Indicator
• Aspirin Count Theory
• Hemline Indicator
• Sports Illustrated Swimsuit Indicator
• Men’s Underwear Index
• Big Mac Index

Back to Reality

Rationally, we understand that football and the stock market have nothing in common.  And we probably intuitively understand that correlation ≠ causation.  Yet, we crave order and look for signs that make markets seem more predictable.

The problem with randomness is that it can appear meaningful. 

Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy.  The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.

More people than you would hope, or guess, attempt to forecast the market based on gut, ancient wisdom, and prayers.

While hope and prayer are good things ... They aren’t good trading strategies.

As goofy as it sounds, some of these “far-fetched” theories perform better than professional money managers with immense capital, research teams, and decades of experience.

Here is something to ponder...

What percentage of active managers beat the S&P 500 in any given year?

... Now, what percentage beat the S&P 500 over 15 years?

The percentage of active managers who beat the S&P 500 in any given year can vary, but it is typically low. According to research by S&P Dow Jones Indices, the majority of active managers underperform the S&P 500 over the long term.

For example, in 2020, only 24.5% of large-cap fund managers outperformed the S&P 500. In 2019, the figure was slightly higher at 28.2%, but in 2018 it was just 17.2%. These figures are representative of a broader trend in which a relatively small percentage of active managers outperform the benchmark index in any given year.

Over 15 years, the answer is about 5% of active managers are able to beat the performance of the S&P 500 Index (and that’s in a predominantly bull market). That’s significantly worse than chance.  It means that, in general, what they’re doing is hurting, not helping. 

It's worth noting that these figures represent the average performance of active managers across all market segments and time periods. The percentage of managers who outperform the S&P 500 in any given year can be influenced by a number of factors, including the overall performance of the stock market, the specific market segment being analyzed, and the time period being considered.

In conclusion, while there are some active managers who outperform the S&P 500 in any given year, the majority of them underperform the benchmark index over the long term.

via Gaping Void

There’s simply too much information out there for us to digest, process, rank, and use appropriately.

In 2009, I wrote an article about how things aren’t always what they appear to be.  In it, I mentioned the human predisposition to find patterns in data.  At the time, I was still analyzing and marking up charts looking for patterns ... but I was also using early AI and computers to find better patterns and remove my fear, greed, and discretionary mistakes. 

I suspect that the desire to find patterns is the same element of human nature that leads people to become superstitious, read their horoscope, or go to a fortuneteller.  It is also the reason so many authors and speakers sell access to their chart patterns that supposedly work. The successes are much more startling than the failures.  So the successes stand out.
    -"Things Aren't Always What They Appear To Be"

Today, my stance is even more extreme.  Every second you spend looking at a market is a second wasted.

There are people beating the markets — not by using the Super Bowl Indicator ... they’re doing it with more algorithms and better technology. 

There will never be less data or slower markets.

Onwards.

The Heartbeat Of AI Is Still Human

I'm proud of our team.  We have a shared sense of Mission, Values, and Purpose.

Also, we understand that robots aren't coming for our jobs.  We're creating the robots, the AI, and the automation – and it's exciting!

With that said, as tech becomes more capable, some will focus on the promise ... while others will focus on the peril.

We're seeing lots of hyperbolic promise and peril in the news cycle recently because of ChatGPT. Trends in technology news appear to come in cycles, with different names and topics but similar patterns. This is because, despite the constant evolution of technology and the world, human nature remains relatively unchanged.

While browsing a library of our old content, I came across an old news story from a local news channel that discussed finding tech talent and featured Capitalogix.  Here's the article.  You can watch the video below. 

via NBC DFW

We are always hiring.

It's not enough to invest in the right ideas or technologies.  You have to invest in the right people as well. 

"Standing still is moving backward ... so you don't only need new technology, you need a new level of data scientists – a new level of professional that can think about what's possible, rather than how to do what we want to do right now."

Even though we've got an incredible edge now, I recognize that edges decay faster than ever.  The trick is to stay ahead.  

The future is bright, and the best way to predict the future is to create it.

Onwards!

Capitalogix's 23rd Anniversary

Last week I started getting “Happy Work Anniversary!” messages on LinkedIn ... and I was a bit confused because people kept mentioning 23 years. 

Twenty-three years ... That can’t be right? Can it?

For context, here’s what I looked like around that time.

 

My eldest son (who’s now married with a baby) was in middle school. I was just out of the events I described in my TEDx talk. 

However, depending on your definition, the 23rd anniversary can be true or false. Legally, the Capitalogix that exists today is distinct from the initial iteration. Additionally, the company has expanded, its direction has shifted, and what was once a one-person operation has grown into a team of over 20 individuals focused on advancing and commercializing the field of Artificial Intelligence.

It reminds me of the Ship of Theseus (also known as Theseus’ Paradox), which is a philosophical thought experiment that poses the question of whether an object that has had all of its parts replaced is still considered to be the same object. It raises issues of identity, continuity, and change over time. The concept can be applied to physical objects, living organisms, and even organizations or businesses. It challenges our understanding of what it means for something to be fundamentally the same, and if an object can remain unchanged despite undergoing significant changes over time.

The name “Capitalogix” did originate in the year 2000 ... and a surprising amount of the original North Star “purpose” still exists. Honestly, I’m surprised by how much holds up despite 20+ years of passing ... but almost all of it has needed some course correction to adjust to changing tides.  

Regardless, it’s staggering to think about how long I’ve worked in A.I. (since 1991, when it was hard to spell A.I.) and how far we’ve come. 

If I had known how difficult it was at the beginning, I probably never would have pursued it. However, knowing how difficult it is, and how challenging it is to make meaningful progress, I feel better that I did because I realize that it’s not just a competitive advantage, it’s a sustainable competitive advantage. It’s easy for people to focus on a capability, it’s another to make it industrial-grade, robust, reliable, and able to work in difficult conditions. They say that things that don’t kill you make you stronger, it’s true for people, but it’s also true for technologies.  

As we celebrate Chinese New Year, it also feels like a new beginning for Capitalogix as we chase after new possibilities and probabilities. 

We didn’t come this far — just to come this far! Onwards!

Happy Chinese New Year!

Chinese New Year happened this weekend.

So, Gong Xi Fa Cai … which translates to "Best wishes for a prosperous New Year!"

Often, Jennifer and I go to Indonesia to celebrate with Jen's family, but this time we stayed home and celebrated here. 

via Statista

On New Year's it is a lot easier to celebrate when you have a party to go to ... The trick is finding the celebration in the first place.

It's interesting to think about how many New Year celebrations there are.  In addition to Chinese New Year, Muslims have Hari Raya Idul Fitri; Jews have Rosh Hashanah; of course, there is January 1st (and many others).

Which is correct?  I think the answer is all of them.  Regardless of your chosen New Year, it provides an opportunity to celebrate, share, reflect, plan, and commit to the right actions.  If you've already fallen off the wagon of your new year's resolutions, this can be your reason to get back on them. 

As I think about it, the same principle applies to trading.  It's all a matter of perspective.

At some level, there really isn't a correct answer as to which trading style is best.  The best technique is the one that works.  Trading styles go in and out of phase, and if you get too attached to a particular technique, you can too easily get detached from profit.  As any experienced trader can tell you, edges decay, people catch on, and trends change.

As businesses increasingly adopt Artificial Intelligence, the way forward is becoming evident.  This involves utilizing AI to selectively activate and deactivate specific capabilities based on their effectiveness.

In trading or business, while no single method is guaranteed to succeed, there is always a method that can be effective.  You just have to be flexible enough to know what you want and still be willing to accept something better.

The World's Biggest Hedge Funds

Hedge Funds have seen a downtick since COVID-19. There are still 15,000 of them (amounting to $4.5 Trillion in assets under management).

Seventy percent of Hedge Funds are North American. 

Visualcapitalist put together a guide to the 20 biggest funds. It puts the consolidation of wealth into perspective. 

via visualcapitalist

Unsurprisingly, Bridgewater tops the list by a wide margin with nearly double the assets of their closest competitor. And, despite poor performance by many funds, the overall state of the market means that many funds still saw growth. 

The expansion of hedge funds may not always align with general market trends – and is not necessarily a reflection of the overall economic situation. However, studying and evaluating their growth and results can still be beneficial. 

AI Tools For Your Business

Last week, I talked about the time value of time - and the benefit of quality peer groups. 

On Friday, one of those peer groups spent hours talking about the promise and peril of generative AI. While some people remained skeptical or in fear of what tools like ChatGPT made possible. 

One of the members shared an AI tool directory that I thought was worth sharing as well. It's called Futurepedia.io 

via futurepedia.io

My contribution to the discussion was brief, but it amounts to this ... Nothing you're hearing about AI should scare you. It should scream opportunity.  You don't have to rush.  AI is at the beginning of a long upwards sloping cycle of impact and capability. However, AI isn't duct tape, and for most, it's not a business ... it's a tool to help you create a bigger future that wasn't possible before.  Much like "internet" companies came and went in the late 1990s ... yet almost every company uses the internet in ways that were unimaginable at the beginning of the cycle.

People often get stuck searching for 'something' (often a singular goal or result). But, in their myopia, they miss the possibility of 'or something better.' 

In my business, I'm rarely happy to settle for less than I'm aiming for ... but I am willing to happily take the 'or something better'. Nonetheless, it is hard to see (let alone be open to) other targets or possibilities when you myopically focus on achieving the lesser (but specific) goal or target you initially chose to focus upon.

So, here is a thought to ponder ...

What is opportunity, and when does it knock? It never knocks. You can wait a whole lifetime, listening, hoping, and you will hear no knocking. None at all. You are opportunity, and you must knock on the door leading to your destiny. You prepare yourself to recognize opportunity, to pursue and seize opportunity as you develop the strength of your personality, and build a self-image with which you are able to live -- with your self-respect alive and growing. ~ Maxwell Maltz

Imagine what you believe this tipping point indicates is possible personally and professionally.

Hope that helps. 

How'd These 2022 Predictions Fair?

As we brought in 2022, I asked the question:

What's going to happen as a result of the continuing pandemic, inflation, interest rates, the ongoing supply chain issues, and the growing anxiety and unrest brewing underneath the surface of the new normal? In January, we'll get to see VC's predictions. Before that, what do you expect to happen in 2022? - How'd These 2021 Predictions Fair?

I proceeded to share visualcapitalist's 2022 predictions: 

via visualcapitalist

Well, there was undoubtedly increased volatility. 

While the whole board isn't correct, there's a surprising amount of prediction accuracy. On some level, predictions benefit from being generally vague. Also, many of the predictions that may not seem as accurate "today" seemed more accurate at some point this year. For example, we heard a lot about NFTs in the first half of the year, and while Big Tech is currently laying off employees, there was massive growth this year. 

What are you surprised they got right? In what areas were the predictions most off-base? Why?

And, of course, what are your mega-trend predictions for 2023?

Interesting stuff! 

OpenAI's ChatGPT is Pretty Cool

One of my go to claims about AI is that it can do almost anything ... but it can't do everything. Specific AI systems are becoming incredibly robust. Last year, I wrote an article emphasizing how big of a jump GPT-3 was from past language processors.  I also shared a Seinfeld sketch created by GPT-3 that was so good it was almost unimpressive ... it just felt like a Seinfeld sketch. 

It feels like every week, there's a new breakthrough in pop AI. OpenAI just released ChatGPT (for free) to the public. The promise of ChatGPT is to give a cogent reply to conversational discussions. It can help you code, it can write a poem, can answer your questions, and more. The code it produces is stellar, and it can even create a convincing romantic comedy using characters from various famous shows. It does a lot very well, but it does have some failings. 

ChatGPT via OpenAI

 

GPT-3 is 100x bigger than any previous language AI model and comes pre-trained on 45TB of training text (499 billion words). It cost at least 4.6 million US dollars (some estimated as high as $12 million) to train on GPUs. The resulting model has 175 billion parameters. This was impressive enough, but ChatGPT is actually not based on GPT-3 but GPT3.5 an even more robust model that improved on the ability to answer in a way that feels natural. 

ChatGPT can talk about almost any topic you can think of, and even create prose that feels human; however, it's not perfect yet. 

Unfortunately, this chatbot fails in many of the same ways as its predecessors. To start, it can present false information as true because it's essentially a "stochastic parrot" basing its answers on statistical regularities in its data sources, not on an actual understanding of the world. As well, a lot of its answers can include meaningless fluff that sounds good but doesn't actually answer the question meaningfully ... almost like a high schooler that forgot to read the book before writing an essay. It also can't produce ASCII art despite the advancements in AI art we've recently discussed. 

Regardless of ChatGPTs faults, it's a very impressive piece of software. It can answer trivia like Google, write poetry and dialogue, it can pretend to engage in philosophic discussion, and it can help you correct your code or improve your writing. 

Here's a sonnet I had it write about Artificial Intelligence:

AI, the future's shining light,
A force that shapes our world anew,
A source of endless possibility,
A tool that cuts our burdens in two.

From language translation to deep learning,
AI's capabilities are vast and grand,
It helps us solve problems, find solutions,
And gives us new ways to understand.

But with great power comes great responsibility,
As AI transforms our world and lives,
We must ensure that it's used ethically,
That it helps, rather than subverts or deprives.

So let us embrace this technological marvel,
And use it wisely, for the common good,
For AI has the power to unravel
Our deepest mysteries, as well as hurdles.

 

It does what it is supposed to do very well. It is much more conversational and robust than previous chatbots. Obviously, it doesn't do everything well, and I doubt a chatbot will any time soon. Nonetheless, it is a step forward … and it will create ripples of progress.

What do you think?