Artificial Intelligence (AI) faces imminent financial strain

Artificial Intelligence (AI) faces imminent financial strain

The world is buzzing with the prospect of Artificial Intelligence (AI) transforming the way we live and work, a sentiment echoed by The Economist. However, as we delve deeper into the subject, it becomes clear that the reality of AI's capabilities may not be as grandiose as initially perceived.

Oscar Lopez Alegre, CEO of Nextway Technology and president of the Spanish Chamber of Commerce in Vietnam, has pointed out that while AI is widespread today, its actual intelligence and accuracy remain limited. Similarly, Daron Acemoglu of MIT argues that the AI buzz often obscures the reality of what is, in fact, a quite limited technology.

Despite the high expectations, AI has almost no discernible impact on business practices or productivity so far. This lack of immediate impact is not unprecedented. Just like the IT development in the 1980s and early 1990s, the benefits did not significantly raise US productivity until the late 1990s.

Moreover, AI machines have an "intrinsic feature" of making up answers when they can't find a reliable one, a problem known as "hallucination". This raises concerns about the reliability and accuracy of AI's decisions, which could have significant implications in various sectors.

The AI spending splurge may lead to capital incineration on a vast scale, much like the railway mania of the 1840s. During this period, investors were attempting to capture the benefits of new technologies ahead of them fully materializing in the real economy. Similarly, today, there is a growing backlash to the AI boom, as noted by Neil Shearing of Capital Economics.

However, it's important to note that the boost to productivity from AI is expected to be substantial, but it may be a few years before it feeds through to corporate earnings and GDP. In the meantime, investment analysts are highlighting the technology's shortcomings.

But not all is doom and gloom. Jim Covello of Goldman Sachs suggests investing in chip manufacturers, utilities, and other companies exposed to the coming buildout of the power grid due to AI spending. If important use cases for AI don't start to become more apparent in the next 12-18 months, then investors' enthusiasm may begin to fade.

In conclusion, while AI is a promising technology, it's crucial to approach its potential impact with a dose of realism. The period of disillusionment with AI was inevitable, as it often takes time for new technologies to have wider economic effects. As we move forward, it's essential to focus on the long-term potential of AI and navigate the short-term challenges with caution.

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