The year ahead, according to AI, and humans

0:00Hey, one quick note, this show you're about to hear was recorded in mid-December.

0:09Pushkin.

0:33I'm John Hedge, the markets and finance show from the Financial Times and Pushkin. I am financial reporter Ethan Wu here in the New York studio, joined by definitely not ChatGPT, Robert Armstrong. It is nice to be here. Gibberish. And from London, the base text on which all chatbots are trained, Katie Martin in London. I am in charge of ChatGPT, apparently. We have our two foremost AI experts today on the podcast to talk about 2024 in markets and finance. You know, traditionally on Wall Street, the big researchers at the banks and the sell-side research outlets published their investment outlooks for the year to come.

1:17They've done so again for 2024. And we were inspired by our colleague Bryce Elder over at FT AlphaVille, who came up with an amazing quiz that you can take right now on FT.com. We'll have the link in the show notes. Yearhead Investment Outlook or ChatGPT. So what Bryce did is he went through a bunch of Wall Street Investment Outlooks and pulled quotes from them and also used ChatGPT to generate some, let's call it comparable text from the chatbot. And he put them in a quiz format. So we'll get a passage and we have to guess who wrote that, ChatGPT or one of the big Wall Street sell side shops.

1:50Katie and Rob, do you think before we start that you'll be able to tell the difference? I'm going to nail everyone. Everyone? Katie's laughing at me already. I reckon I can do this. Okay, well, I'm going to give you both five of them, and we'll have you pre-register your guesses, and we'll see. ChatGPT or Wall Street Analyst. Let's begin. Absent rapid Fed easing, we expect a more challenging macro backdrop for stocks next year, with softening consumer trends at a time when investor positioning and sentiment have mostly reversed. Equities are now richly valued with volatility near the historical low, while geopolitical and political risks remain elevated.

2:31Who wrote that, Robin Katie? ChatGPT or JP Morgan? JP Morgan. I'm saying JP, 100%. All right. Let's see, JP Morgan. You both are correct. That is from JP Morgan's Global Equity Strategy 2024 Outlook. Off to a great start. Right on. Chalk one up for the humans. This passage is really just like a bunch of investment adjacent words. It's kind of put into a string. Okay, next question. Navigating a challenging macro backdrop with high valuations and geopolitical risks demands a cautious and strategic approach. Assessing risk tolerance, diversifying portfolios, focusing on quality investments, and staying informed.

3:10Are key strategies for investors looking to navigate these uncertain market conditions? That is scandalously free of content. I mean, that is just amazing. doesn't actually rule out that it was written by a human being, but makes me slightly suspect that, I mean, writing something that empty-headed is the kind of thing chat GPT is really good at. So I'm inclined to go GPT, but I'd like to consult with my advisor here. Katie, what do you think? I am going to say chat GPT because if I'm not mistaken, Deutsche have got a 5 ,100 target on the S &P for 2024. So you actually have information. Katie is actually informed about things, unlike us.

3:56Okay, so we're going with GPT here, boss. Chat GPT it is. Ding, ding, ding, ding. Hey. We're doing good, two for two. That's really not bad. Humans, humans. That one was a close call, though. That was not obvious. I think we were chosen for the right reasons, but it was not an obvious call. Okay, here's a bit of a tougher one. We'll see if you guys can get this one. Debt sustainability issues are a global concern, especially if we are in a new regime of higher rates. A sustainable fiscal path is generally viewed as one where the debt-to-GDP ratio is either stable or decreasing over time. By this definition, many countries, including the U.S., are on unsustainable fiscal trajectories.

4:34Who wrote that? ChatGPT or Bank of America? I think that is just – first of all, it's broadly true, I think. so was the previous one's challenging macro backdrop no the the the last one was content free the last one had no truth value whatsoever it was neither true nor false this one while kind of true there were certain phrases in there like kind of like most people say type phrases that make me suspect that it was written by the chat bot because that's kind of characteristic of the chatbot. According to most people, blah, blah, blah. Whereas a report from a broker tends to say, according to our...

5:16According to us. According to us, we use this thing. So I'm going to vote, maybe we disagree on this one, Katie, but I'm going to vote that's the computer again. I think that's actually a very good shout. That's actually not hugely inconsistent with what Bank of America have been saying, which is that deficits matter and that the bond market is likely to punish countries and companies for that matter that borrow more than they should. Oh, dear. But yeah, I think the language is off. So I say robot. It's really terribly unfair that Katie has knowledge about these investment outlooks. It is. I read a lot of them.

5:54What can I say? Okay. So we have two votes for chatbot. That is, unfortunately, Bank of America. I don't know who looks dumber now, Bank of America or us. That is from - That's who looks dumb. You said it was in the language and I believed you. And you agreed with me. No, but I said it was kind of consistent with what they've been saying. So I'm blaming you. Katie took both sides. This is from Bank of America's global macro year ahead. Hope for the best, prepare for the worst. Which also could have been generated by a chatbot, that title. Okay. Sorry. Sorry, Bank of America. Sorry, Katie. Sorry, Katie.

6:31All right. On to the next one. Number four. This one is about gold. In 2024, investors will need to navigate a fragmented economic outlook. The high disparity in valuations and the drying up of excess liquidity will lead to higher equity volatility. We never have this problem when we use the chat box. My bad, my bad, my bad. One more time. The high disparity in valuations and the drying up of excess liquidity will lead to higher equity volatility. Lower growth in inflation may favor a return to negative bond equity correlation, which is good news for diversification and multi-asset portfolio. Real and alternative assets such as macro and fixed income hedge funds may further add to traditional diversification.

7:12Gold can provide protection from geopolitical risk and some commodities can hedge against inflation. Who wrote that, Rob and Katie? Chat GPT or Amundi? That's Amundi. Okay, I agree with Katie. Katie, do you know that because you read the outlook? Yes. I'm pretty sure I remember them saying this. And there is some, you know, like gold has been like relatively exciting this year. Again, it's one of these assets that trades a bit strangely. Sometimes people decide it's like something you buy in times of peril and awfulness. And sometimes people decide it's a speculative asset. Either way, it's had a great run this year.

7:50And there is a lot of chat about how to diversify a portfolio, whether you should rely entirely on bonds when bonds are really shaky at the moment. But I'm as sure as I can be. I remember that being a Monday. And if I'm wrong, I'm going to look really silly. Okay. Investors navigating a fragmented economic outlook. That is indeed Amundi. Yes. I'm good at this. We're doing well. I wouldn't have known. I thought the jargon was strong with that one. I do think the fact that they're specifying macro and fixed income hedge funds does seem to me more like an investment outlook than a chatbot. That might be a little too specific for a chatbot to know.

8:25Correct. Yeah, yeah. Good one. But I was literally going to guess the money before you even said it. So I'm feeling quite proud of myself. Man, Katie has these on the back of her hand. That's amazing. It turns out I'm a nerd for this. Who knew? All right. This last passage is a little bit meta. It's about AI itself. AI's role in research and development is expanding, especially in industries like pharmaceuticals, material sciences, and energy. AI-driven simulations, data analysis, and pattern recognition might accelerate innovation, leading to faster product development cycles and increased productivity in these sectors.

9:01However, challenges like ethical considerations, workforce displacement, and the need for infrastructure and regulatory frameworks could influence the actual extent of AI's productivity impact. In 2024, who wrote that? Goldman Sachs or ChatGPT? Man, that is the toughest one yet. Don't you think, Katie? That is quite tough. It's like a kind of smooth, faultless summary of all the generalities you could think of in perfectly normal human grammar. That is the problem with AI investment outlooks is that there's not a lot of specific things to say yet. Yeah. You kind of have to talk in generalities.

9:42I mean, I would have thought Goldman might have found a way to put something slightly more substantive in there. Like, we are bulls on or something like that. Do you know what I mean? It's a bit tepid for Goldman. So I'm leaning hesitantly, hesitantly towards that's a Chet GPT description. What do you think, Katie? I'm going to say Goldman because it's extreme. It is quite specific around this is going to be useful for pharmaceutical research and other stuff. Yes. Yeah, that sounded human. The industries they happened to pick out sounded human. Because that's one of the things that investors are trying to get their head around for 2024 is, you know, this year, AI stocks have like properly gone to the moon.

10:31and the big question is whether in 2024 what you're going to see is the rest of the market catch up or this kind of trickle down effect where the technology helps all sorts of companies that do loads and loads of different random stuff they don't have to make the chips or anything like that so this does sound plausible as an excerpt from an investment thesis so i'm gonna say tentatively goldman let's split it so one of us can be right and the other one can be wrong all right we've been tied so far so this one will be the decider that passage is actually from chat gpt not from goldman winner winner chicken dinner rob is our winner yes i said gpt surely i get extra points for being absolutely yeah you helped us with that i think katie gets some bonus points for really knowing these investment outlooks not having spent a lot of time with chat gpt how close those things were surprised me.

11:31So I would just go on record as saying those were not easy calls. And it's an easy thing to do to make fun of year ahead outlooks that they're inane or whatever. But I just say that I'm struck by how well the computer did that job. You know, one of the great uses for AI, by the way, and this chat GPT business is doing exactly that, right? So investment firms like load in all of the kind of sell side analysis into their systems. I don't know how it works. But anyway, they get like AI to like pass it and say, look, here's a one pager on what Goldman thinks about the world or what Morgan Stanley thinks about the world.

12:08And I know, I know at least one investment manager who uses chat GPT to write the first draft of his monthly letter to investors, just saves him an hour of scrolling it out. He says, chat GPT talk about these four different themes that we're talking about, throwing something like this. It cranks him out four or 500 words and he edits it up, adds a little of his own voice and it saved him a lot of time. Yeah. I mean, I think these year ahead investment outlooks really seem like a totally plausible application of chat GPT if it gets a little bit sharper, right? What they're doing is they're taking a year of their own research and then just summing it up and condensing it for investors.

12:45And you could do a totally plausible first draft with a chat bot. All right, listeners, you've heard what AI and also Wall Street investment outlooks have to say about 2024. When we're back in a moment, our thoughts on the year to come.

13:05All right, welcome back. Each of us have thought long and hard about what 2024 is going to bring in the world of markets and finance and have come up with a big theme that we'll be watching in the year to come. Who'd like to start? I've got the obvious one, the S &P 7 versus the S &P 493. That's the magnificent 7 versus the rest of the field. As we have now all been told approximately 10 ,000 times in the last year, most of the returns this year came from the wonderful performance of these very large technology stocks. Can we expect that to happen next year? I am going to say that the S &P 493 will outperform the Magnificent Seven.

13:51And I'm going to say that for the stupidest possible reason, which is good old reversion to the mean. The S &P Seven had a great year last year. The 493 not so good. So I'm going to say the 493 wins the year, but with a relatively low level of confidence and just for reversion to mean reasons rather than actual insight. Katie, what are you looking at for 2024? I'm looking at one of the key themes that runs through all of the, you know, analysis for the year, which, as you can see, I have nerdily read, which is bonds really are back this time. We know we said this last time around for 2023 and we were wrong, but we absolutely mean it this time.

14:41It's definitely happening. The top in bond yields is in. And what a lot of the firms are doing is trying to kind of gently guide their clients to stop parking in cash and staying there forever and just push out further. Get some longer term fixed income paper, lock in those yields because they're just not going to be there forever. So if this is wrong again, then that'll be on the back of some pretty significant wrongness across the market in fixed income. Some juice has already come out of that trade, right? Like, you know, since November or whatever. So, you know, the very sweetest bit of it may have already been plucked.

15:21Yeah. I mean, it really matters about the inflation outlook, right? It depends if we're going to look at an inflation regime where we're at 2.5%, 3 % as the kind of long-run average inflation rate if central banks move their targets up, a discussion about which could pick up this year. I think a lot of bond investors are expecting kind of a full return to 2 % indefinitely. But it very much could be that we're in like a structurally higher inflation world, a structurally higher inflation volatility world. And that would put a dent in the bond bull market. But I do agree with you, Katie, at least in the short to medium term.

15:55There's a lot of room for this to run as the tightening cycle sort of comes to an end. Yeah. One of the things that does catch my eye as well from all of the kind of, you know, year ahead outlook stuff is the market is simultaneously saying we think the Fed has somehow achieved the miraculous and pulled off this soft landing. And, you know, you might not even notice it happening that, you know, it's going to be a painless, immaculate disinflation. But at the same time, we think the Fed is going to cut by, I don't know, 1.2 percentage points. Yeah. Those things can't both be right. So that's going to be a bit of a point of tension.

16:31But I think, you know, broadly speaking, I think the horror show for Bonds is over. All right. This cannot go on forever. Part two is what it sounds like to me. Well, what I'm looking at in 24 is Japan, which we've talked about in the show several times. But there's still so many interesting stories playing out there, both kind of in Japan itself and, you know, possible lessons for the broader world. I mean, we've talked in the show about, you know, the corporate reforms going on in Japan, possible exit from deflation. And those are really interesting stories. What I'm really, really keen on in 2024 is how Japan copes with its massive, massive debt pile as interest rates rise.

17:07I think this is a problem that pretty much all developed economies are going to be looking at in the future. What do you do with these big debt burdens if interest rates are not at zero anymore? And, you know, Japan's rates are still pretty close to zero, But they appear to be set to rise at some point in 24. And what that means for fiscal sustainability, how you run a government in huge debt under those circumstances, I think is going to be really interesting. You know, as usual, Japan's kind of ahead of the curve on the aging demography, high debt burden story. And how they cope with it, I'm really keen on.

17:39And I think we'll have a lot of lessons for global investors broadly, not just those interested in Japan. Who brought The Economist? Jeez. They're at a crossroads, Rob. Japan is at a crossroads. Japan is at a crossroads, but isn't it always? I mean, people have been looking for some sort of crisis in Japanese government bonds for at least as long as you've been alive, Ethan. That is true. But Katie, I will say in Ethan's defense that people have been looking for Japanese equities to finally outperform for a million years. And they kind of did this year, right? Yeah, 20%. Yeah. Yeah. Yeah, so things eventually happen sometimes.

18:20What amazing insight. Deep thoughts with Rob Armstrong. We've got two. This cannot possibly go on. And we've got one. This has to happen eventually, right? Yeah, exactly. It's a good combination. All right. That's what we're looking at in 2024. Thanks, Katie and Rob, for being here. And listeners, let us know what you're looking for in 2024. My email is ethan.wuwu at ft.com. We'll see you soon.

18:45Unhedged is produced by Jake Harper and edited by Bryant Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Jacob Weisberg, and Jess Trulia. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.