Since the depths of the Great Recession, semiconductors stocks have been star performers, with the Philadelphia Semiconductor Index (SOX Index) returning 24% annualised compared to 16.6% for the S&P 500, including dividend reinvestments.
Outside of widening deployment in consumer products, semiconductor growth has been driven by an explosion of investment in everything from cloud-based infrastructure and cryptocurrency mining to artificial intelligence (AI), big-data processing and “deep learning”. But in 2020, diminishing returns will mean that semiconductors are set to hit the wall.
In fact, a new “AI winter” is likely coming soon, following the two previous AI winters in the 1960s and 1980s, where actual results for semiconductor applications failed to live up to the hype. This time around, the hype bar has once again been set very high, with AI researchers such as Andrew Ng claiming that AI is the new electricity.
On the physical side, transistor density and clock speeds in semiconductor chips were approaching theoretical limits years ago. Those constraints have meant diminishing returns on R&D efforts. Intel has spent a cumulative $86bn in capital expenditures since 2010, with 2019 at three times 2010 levels. But neither shareholder value nor operating profits have scaled with this huge increase in spending.
On the application side, “deep learning” algorithms have created the last leg of hype and the number of researchers in deep learning is around double the level seen in 2014. But according to Francois Chollet, one the of leading figures in the deep learning community, the rate of progress in deep learning applications is the slowest in five years. The AI industry also has a scaling problem: it costs more and more in energy to train their ever-larger models, with less and less marginal improvement. Only the largest companies such as Facebook, Microsoft and Google can keep up. A higher bar of entry will eventually dry up venture capital and innovation for new AI ideas.
Then there is valuation: while earnings in the MSCI World Semiconductor Index are down 17% since 2018, the index hit a new all-time high in October 2019. As reality sets in on the limitations of AI, the SOX Index collapses 50% with deteriorating earnings growth as investments freeze in a new AI winter.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.