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"The human understanding when it has once adopted an opinion draws all things else to support and agree with it."
Francis Bacon, Novum Organum (1620), Book I, Aphorism 46

Haunting words from an old timer who knew a thing or two.

Bacon the man, not the food which isn't kosher, has been called the father of empiricism. He argued for the possibility of scientific knowledge based only upon inductive reasoning and careful observation of events in nature. He believed that science could be achieved by the use of a sceptical and methodical approach whereby scientists aim to avoid misleading themselves.

You may be familiar with Karl Popper, who is a little more contemporary (100 years ago) and who shared a similar approach. He believed things were false until proven true.

Two guys who make me look more positive than a cyclist on the Tour de France.

When it comes to managing money (this idea is not confined to investing), the biggest danger is falling in love with a thesis that has no objective way of being falsified.

I have said before that the markets are extremely expensive, and therefore the science suggests, in probability terms, that we are going to experience investment underperformance over the next 10 years.

However, the more the market continues to go up despite global wartime conflicts, an energy crisis, runaway inflation and government spending and borrowing, the more you still cannot falsify the thesis that markets are expensive and you should lighten up.

It was helpful listening to Jeremy Grantham speak about the brutal business and emotional damage of calling the Japanese Nikkei expensive and cutting exposure completely in the early 1990s. He sees the current markets the way I see them, but he thinks the current “bubble” (my words) is tiny compared to Japan in the last century.

The above introduction is me saying that I am humble enough to notice that I am falling into the trap of looking for evidence to support my thesis and that no matter what evidence appears, it is simply being filtered into my narrative, as a contrarian value investor that uses statistical probabilities and common sense has no way of falsifying my beliefs.

Now for what I really wanted to discuss.

If you assume that everyone is adopting the new AI technology, imagine an economy where:

Now ask:

Who actually captures the gains?

This is the question I have spent the last few months thinking about. According to classic free market economics, competitive forces will see output rising from the increased productivity, and prices will fall, but this is the most important point: Margins may NOT expand.

In this scenario AI is deflationary rather than massively profitable because everyone benefits in a similar way.

Borrowing from evolutionary biology and competitive systems, everyone has to run faster just to stay in the same place. Yikes. I thought I was already sprinting. No wonder the marathon record was broken. Marathon running is the new sprinting. We will need agents to go to the bathroom for us who will have time to sleep.

Before you throw my thinking in the trash with my hidden potato chip packets, the diet starts Monday; I said this is a thought experiment.

Of course companies and workers are not going to all adopt AI equally; there are going to be early adopters, and there are going to be better operators who adopt AI more productively.

What I think is that widespread adoption is going to happen; it is one of those technology revolutions that change how we all operate. Nobody still uses a fax machine. People don’t write letters anymore. I could go on and on. My point is that AI will in a decade not be the edge. The edge will still need to come from us.

In closing, there are two other points worth making.

Anthropic just released their financial numbers overnight. It's just staggering; they are going to do $10 billion in revenue in their latest quarter, and they are going to turn an operating profit. They are sticking to their turning profitable fully in 2028. I suspect this quarter is an accounting trick to juice the investors for their upcoming IPO.

The main providers of the AI, such as Anthropic and OpenAI and Nvidia, who also released their latest financials last night, are probably going to be the main winners in this two-level AI economy. By the way, Nvidia did $82 billion in their first quarter. What shocked me was they run the business with a 75% profit margin, and they believe this margin will continue for some time.

Consumers are likely to benefit from much lower prices. The concern is it assumes consumers still have jobs and are consumers, not paupers.

I have written about this before: that corporate profit and GDP growth are closely related and that corporate earnings are the handbrake on GDP growth going to the moon.

I must be a miserable person, as I just don’t share Jensen Huang's optimism and understanding of economics when he said this week there is nothing stopping GDP from quadrupling over the next growth era.

My argument for corporate profits normalising through competitive forces should not be dismissed too quickly. I may be a few years early, but what is the difference when it comes to long-term investing? 😀

I think this chart brought the scale of the AI electricity needs home for me. Excuse the pun.

I consider myself an early adopter with most things tech and have been part of the AI agentic revolution, which I believe is the future.

However, I have been watching from front-row seats the OpenClaw mania. When agentic is gratuitous and lacking in productive substance, you get boom-bust spikes like this chart. The truth be told, industries are forged by mavericks who play with the unknown, so we will thank this community even if they disappear as quickly as they appeared from nowhere.

Skipping today.

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