The Week Ahead: Central Banks and AI

Bull and bear statues are pictured outside Frankfurt's stock exchange in Frankfurt, Germany
Credit: Ralph Orlowski - Reuters /

This week is all about central banks. It is widely anticipated that the Bank of Japan will announce their first rate hike in seventeen years when their meeting concludes on Tuesday, the same day on which the Bank of Australia will probably keep their cash rate unchanged. Meanwhile, the Fed is also expected to keep rates steady later in the week, as will the Bank of England.

That may seem like a lot of nothing given that most central banks will probably be holding steady, but “no change” would actually be quite significant. Investors around the world are waiting to see when and if the global tide turns towards interest rate cuts rather than hikes, and further delays in that transition will indicate some doubt that inflation is coming under control.

For us oldies who remember the seventies and eighties, when central banks and politicians around the world announced that inflation had been beaten only to see it come roaring back a few months after they started cutting rates, maintaining what look to us like “normal,” neutral interest rates wouldn’t be a bad thing at all. After a decade of ultra-low interest in most of the developed world, there are many today who see that as a norm, and are anxious to get back to a 2-3% base rate in the U.S. They will be disappointed by any suggestion that time is not coming soon.

Many of those people, however, won’t even be focused on central banks and their decisions this week. They will instead be watching the Nvidia (NVDA) conference on the future of AI. At that conference, it is believed that the poster child for the AI revolution will lay out the potential of the technology to change the way we operate as an economic society and even how we view the world. There is no doubt that machines that can “think” in terms of absorbing information and drawing conclusions from it, which will result in massive advances in the coming years, but there are a couple of problems with that march towards progress.

First, from a societal perspective, if machines can now perform tasks that seemed to be the last bastions of human endeavor, things like logical thinking and creativity, there will be at the very least a period of adjustment as those machines take over the jobs previously done by humans. History is full of these seismic shifts in the way we work that at the time seemed to many people like a potential disaster.

The Luddites destroyed machines they saw as taking away their livelihoods, and the advent of the motor vehicle put stablehands, carriage drivers and buggy whip manufacturers out of work, for example. Each time, the changes were absorbed, and workers transitioned into more productive work. But that only came about after a period of major disruption and unrest.

It is possible that the polarized political climate and the rise in populism around the world are signs that such unrest is already here, but if those who fully understand the technology are right, we are only at the beginning of this particular revolution, so there is a lot more to come.

If we are only at the beginning of a massive change, that brings us to the second issue with AI: the degree to which the market is already attempting to price in its potential. Those of us old enough to remember the seventies and eighties and the battle with inflation also remember the 90s and the dotcom boom. That too was a massive move up in stocks in anticipation of a technological shift that seemed inevitable. It was obvious to anyone with an open mind that internet-based commerce was coming, and traders and investors were racing to get in front of that fundamental change in the way we did business.

The problem, as we now know, was that potential and profit are two different things, and it took a decade or so for the productivity gains that the internet spawned to catch up with the disruption that it wrought. As that became clear, the stock market collapsed. I am not saying that that will inevitably happen this time around, but it does seem that we are getting ahead of ourselves again.

At some point, the here and now reality of the disruptive nature of progress will have to be considered rather than the entire market being based on what is to come. This week, investors will be better off making decisions based on what is happening in terms of central bank actions rather than what might happen based on the news coming out of the Nvidia conference.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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