Manufacturing employment and trend

 The US has talked about a resurgence in manufacturing, but the numbers do not suggest it is happening. Where is the surge? Construction, perhaps a small uptick after being flat. Manufacturing no change in trend. The same with mining and logging. Transportation has fallen off a cliff. Utilities are also below trend. Employment is always fighting productivity. We may be doing more with less, but workers are not seeing the improvement.  

China - the electrostate

This chart from Ember has me thinking about how to classify China. I am not thinking about the politics or the finance, but China as an innovative state. The future of geopolitical power is centered not on the military but on the ability to bend others’ lives through technology. This does not dismiss the political, but we have seen politics devoid of innovation and technology, and its scope is limited to coercion. Technology drives hegemony.

 

Is AI a stochastic parrot?

There’s a well-known phrase that AI is not true intelligence, but just a “stochastic parrot”. But human beings do quite a bit of parroting in conversation, as it turns out. So maybe the comparison is a little more complicated.

Six Questions on the Value of Humanities Research

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I found this phrase thought-provoking. We all parrot what we hear from others. Perhaps most of our conversations are parroting what we may have learned from someone else. AI is just a sophisticated parrot because it can search through more work than we can. AI, like us, does this with noise. It is a stochastic process. 

So what makes us or AI more than a parrot? The difference is what we can call creativity. It is rephrasing or making extensions or narratives that are not just a repeat of what we have heard before. The reordering of fact. The prioritizing of data is a part of the creative process. This is done by AI, so it is more than just parroting with noise. However, we should be aware that AI is creating something new through this reordering. If we ask the questions differently or use a different algorithm, we will create something different.

Commodity shocks and financial markets

 

The first quarter is a commodity shock quarter. We had the gold and silver bubble and it bursting at the end of Jnauary. That seems like ancient history versus all the uncertainty from the war in Iran. The broad market is off more than 5%, yet the energy sector is up over 35%. More importantly, the price of oil is up over 50%, and gasoline futures are growing by 60%. There is a clear link between oil price shocks and financial markets. It is a one-two punch to equity and bond markets, and we have strong evidence of its effect across decades, dating back to the shocks of the early 1970s. Most of these large shocks are self-induced through violence. 

Beyond the magnitude of the shock, the key issue is the time required to return to normality. Short-term shocks can have a strong impact on short-term returns but then reverse quickly. The longer the shock lasts, the more likely it is to have a real effect on growth and inflation. The effect on growth is simple. An increase in energy prices is a tax on consumers and production. However, the US economy is less oil-price-sensitive than it was in the 1970’s, so it is hard to use this period as a control or base case. For inflation, the impact is closely tied to the actions of the central bank. An oil price shock is a relative price change, not an increase in the general price level; however, if the Fed lowers interest rates to support the economy, this price change can trigger an inflation surge.

All eyes are on whether this conflict will be prolonged, and with each day it continues, this short-term shock will be revised into a larger, economy-wide recession-inducing crisis. For many in the emerging markets, energy shortages are real and already disrupting growth.