1. Artificial intelligence is a big deal and will change the world in massive ways.
You’ve been hearing about the coming of the singularity for some time now. The singularity is the hypothesis that the invention of artificial super-intelligence will abruptly trigger runaway technological growth, resulting in unfathomable changes to human civilization.
The idea is that an upgradable intelligent agent would enter a “runaway reaction” of self-improvement cycles, with each new and more intelligent generation appearing more and more rapidly, causing an intelligence explosion and resulting in a powerful super-intelligence that would, qualitatively, far surpass all human intelligence.
This theory has been espoused by Ray Kurzweil, among others. The basic idea is that intelligence and knowledge will grow at an exponential rate, whereas humans only have the tools to deal with linear growth.
Much like the advent of smartphones, the singularity will come in evolutionary steps and then all at once. Next year will be a big step in that direction.
It Became Self Aware
The Gartner group is forecasting: “Enterprise technology powered by artificial intelligence will create more jobs than it eliminates within the next three years, accounting for two million net new jobs by 2025.”
That said, the growth will come at the expense of millions of jobs to be displaced by AI, with positions in the manufacturing sector hit hardest, as more companies deploy AI-enabled technologies to handle routine tasks.
By 2020, Gartner expects AI to create 2.3 million jobs, while eliminating 1.8 million, led by “new positions of highly skilled, management and even the entry-level and low-skilled variety.”
Gartner also expects AI-enabled tools to generate $2.9 trillion in business value by 2021, in part by saving 6.2 billion hours of worker productivity.
Goldman Sachs Group Inc. expects AI to add between 51 and 154 basis points to U.S. productivity by 2025. As of the second quarter, roughly 13% of S&P 500 firms have mentioned AI in earnings calls, it says.
Forrester Research expects total tech spending by U.S. businesses and government to reach $1.5 trillion in 2018, driven by the rising adoption of cloud services, AI, and other business tech.
To play this, I am long cloud companies like Microsoft (NASDAQ: MSFT) and Arista Networks, Inc. (NYSE: ANET).
2. Tax cuts pull Canadian companies south.
I was in Mexico City recently talking with some Canadian business owners. They mentioned that if the U.S. were to pass the corporate tax cut, hundreds of Canadian companies would set up shop below the border.
If a Canadian company is looking to spend money and grow, then lower taxes are a big incentive to do that capital expansion in the U.S. because in addition to lower tax rates, there is a provision that allows for the immediate expensing of capital property acquisitions and improvements over the five years after tax reform is passed.
And it’s not just Canadians. The Wall Street Journal ran this headline:
“U.S. Tax Reform Has Europe Worried”
Suddenly, the world’s biggest economy has lower corporate rates than the Continent’s giants.
The Trump tax cuts have less to do with how much you will save in a given year and more to do with creating a competitive environment in the U.S.
Money goes where it is treated best; in 2018, that will be the U.S.
3. The market is overvalued; it will end the year more overvalued.
Price-to-earnings ratios aren’t good short-term timing mechanisms but rather long-term valuation metrics. In 1999, the P/E on the S&P 500 was 35; today it is 25. It will go higher than 35 before this bull cycle ends.
4. Consumer debt goes up.
While it is true that total household debt is up, so is net worth. The household debt to GDP for the United States is low. People retrenched after the last crisis.
This gives people plenty of time to get into trouble.
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5. Housing prices will have a great year.
From the latest National Association of Realtors report:
The median existing-home price for all housing types in November was $248,000, up 5.8 percent from November 2016 ($234,400). November’s price increase marks the 69th straight month of year-over-year gains.
Total housing inventory at the end of November dropped 7.2 percent to 1.67 million existing homes available for sale, and is now 9.7 percent lower than a year ago (1.85 million) and has fallen year-over-year for 30 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace, which is down from 4.0 months a year ago.
There were some 6 million houses not built after the last crisis. There is a real housing shortage in this country that is going to get worse as the largest generational cohort aims to settle down and have babies.
We are barely back to previous cycle lows…
6. Emerging markets will beat the S&P 500.
The iShares MSCI Emerging Markets ETF (NYSE: EEM) is up 32% this year. Emerging markets are the last sector to start moving, as they are deemed riskier than EU or U.S. equities. They remain undervalued.
To parse it further, EM Energy is at a 20-year low, while EM tech has broken out and is turning into a growth sector.
7. IPOs will be on fire next year.
Final numbers for 2017 will fall in the range of 1,600 to 1,700 IPOs, with US$190 billion to US$200 billion in capital raised. This would mean 2017 will end up being the best year for global IPO performance since 2007.
I predict that 2018 will be even bigger.
8. Animal spirits will take the Dow up 22% to 30,231.
The insane rise of Bitcoin means speculation is back. Consumer sentiment is up, jobs are plentiful, wage growth is starting to kick in, the quit ratio is up, and people are feeling secure enough to start risking money. This is bullish for equities.
Here’s to a great 2018,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
