The mystery of new frontiers
The “fear of missing out” — a fear characteristic of the moment in financial markets — seems a prevalent enough sentiment that some consideration may not be out of place. Generally speaking, the sentiment combines a special optimism (as the “missing out” is associated with great potential profit) with a pessimism that borders on panic (i.e., “fear of,” which may by inference imply that this time could just be the last). But more than this, to miss out is to not participate when others do, and fear of that seems a competitor’s fear, in an environment that, perhaps, is seeped in competitive excess.
In markets, as in general, the sentiment may at least in part be rooted in a form of greed, on one hand, and idealism, on the other. It’s difficult to say, who knows, when emotion is involved. The inputs and the outputs are so numerous and complicated — and unstable — it would require a calculation of similar complexity and instability to decipher. One way to simplify — but it’s an oversimplification — is to explain sentiment with history, which is itself complex and multivariate, and in the case of FOMO as a general phenomenon, the history would be a general and simplified one. There are countless others.
The following is one such oversimplification and its speculations are merely that.
A recent essay by Byrne Hobart (Closing Industry Frontiers) and a source of its inspiration (The Significance of the Frontier in American History by Frederick Turner, 1893) led me to think about the importance that frontiers have played in the evolution of the modern economy. Besides the 19th century western expansion that is the subject of Turner’s essay, which was itself an extension of earlier European frontier settlements in the New World, (we can think of these spacial extensions, including subsequent urban and suburban sprawls, as “horizontal,” for purposes of this summary), the subsequent or in some cases concurrent “vertical” frontiers — in the form of transformational new technologies and systems that gave rise to vast new markets — have defined the modern economy for more than a century to-date.
The industrial revolution, electricity, telecommunications, automobiles, Hollywood, aerospace, television, Wall Street, have all played a transformative role in shaping individual potential, enterprise growth, the development of new sectors, capital formation, and a middle class that has in some ways followed and in some ways driven our consumption-led economy. More recently, the computing frontier, which together with its Internet and mobility offshoots can be thought of as “digitization,” has been a massive global frontier (still being settled) that may transcend both vertical and horizontal designations by redefining or reinventing just about everything in its path.
Given this history and its economic evolution, we may have come to take the emergence of frontiers for granted — often explicitly, like in the growth of and popular participation in venture capital and entrepreneurship — and at least implied, as illustrated by the long-run public stock market performance in the 100-year chart above. While the expectation of a naturally upward slope may every so often be shaken, it is usually not for long — as we have lately witnessed in bear market rallies — even as the shaking happens.
Reflecting on this and underlying movements that have brought us to this point, one could play devil’s advocate and consider the counterfactuals. What if the past century-plus era of breathless transformation was unique, or unsustainable? What if we only picked off lower-hanging fruit that big advances in math and science created? Are frequent monetary interventions of the past decades bridges to carry our impatience to the next leg up? Perhaps… it’s always prudent to “perhaps”… as we constructively envision where that next frontier will be and how it will then manifest itself.
A number of new candidates have been suggested by investors and enterprising counterparts: climate, biotech, energy, robotics (all of which, vertical); space exploration (vertical as a technology advance, horizontal as a practice); and, though having been around in more primitive forms for years, artificial intelligence and virtualization are now gaining in momentum as a big frontier (resetting vertical and horizontal definitions to the extreme, more than mere digitization). More on this below.
Beyond the vertical and horizontal, however, there are critical differences between frontiers, as we have come to know them and as we have come to expect. There are differences in size and impact, in growth and cultivation potential, in the speed with which these may develop and eventually mature, and, maybe most importantly, in their net balance of building up the new, on one hand, and destroying the old, on the other.
Thinking about this nuanced subject in such a fashion, there are three notable new frontier qualities, which in fairness may only have been less obvious before, but are now glaring:
1/ The digitization frontier has through its fast and scalable software foundation introduced a pace of change and concurrent emergence of new networks wherein power law competitive dynamics materialize (i.e., big winners take the disproportionately most) with unprecedented speed. In other words, a new frontier or its offshoot (such as AI, for instance) is prone to close in just a few years’ time from its initial opening — noting the meteoric ascent of Apple, Google, Microsoft, or, on a lesser scale, Airbnb, Uber, and others among recent category samples — and newer entrants are effectively blocked off.
2/ The referenced speed and its digital underpinnings often result in overlap between new platforms that emerge — in part because a multi-dimensional approach (e.g., Amazon’s many digital lines of business) is enabled by a shared technological profile, but also because the cost of failure is comparatively low when a repurposed or de novo software product is the building block and capital expenditure. The resulting state of flux is a turbulence for the occupied frontier and a perpetual (some would say, necessary) distraction for explorers.
3/ As the digitized global economy is now more interconnected, multilayered, and fast in both its stimuli and reactions, it has begun to resemble a complex biological organism, if you will, in more complicated ways than when, say, the airplane was invented. Figuratively speaking, the resulting nervous and cardiovascular systems, muscle structures, glands, etc., which collectively make up this body of discrete yet interdependent pieces, is simultaneously guided by a myriad of minds — none of which are even partly understood, incidentally — and now artificial ones as well, that aren’t either.
In medicine, continuing with the metaphor, the trained and experienced physician may take a cautious approach to interference with the natural order (“first do no harm”), particularly with treatments served in combination. These may initially be prescribed in small doses, conserving incremental options with the benefit of observation. Such points of interest would include second- and third-order effects, as unintended and undesired consequences (side effects) are carefully guarded against.
In the modern economy we don’t have this luxury, because the pieces are in competitive tension as much as in any harmony that may evolve, and, as previously suggested, this competition now follows a calculus of speed and scalability and flux. Moreover, there isn’t a supervising doctor, as it were, and there aren’t any in training even. There can’t be.
We thus fly blind, mixing metaphors, and perform big global experimentations outside of lab conditions. The downside of this new reality is being witnessed as I write, in cryptocurrency, for instance, and its effect on many other bodies.
So, looking ahead, let’s take the prospective artificial intelligence frontier as a case; and in particular, its latest mass market offering, so-called generative AI. With this new tool, sophisticated writing or artistic renderings of any subject or style can be machine-generated on command — a phenomenon that, in keeping with the scale and speed (and the impatient expectation) that are the hallmarks of our time, has lifted bidding to a $29 billion price tag, for a relatively nascent platform.
Do we know what the effect of artificial “self expression” may be on social norms, on education, on the way we think and observe and plan, on the way we communicate and receive, and by extension on culture, on industry, on markets, on the global economy? All of these things were substantially influenced by other historical frontiers, as previously listed, when both the speed and reach of the potential impact were less extreme.
Do we know what the effect of these qualitative AI mechanisms may be when combined with quantitative solutions that have already been adopted, for example, in finance? And what about the “metaverse” effect that is concurrently emerging?
What if (or rather, when) one or two technology giants stand out to dominate this unknown field, absorbing the bulk of economics and attention (which are now nearly synonymous anyway)? At which point the frontier is closed…
Will the broader outcome henceforth be one of growth, and if so, how evenly? Will employment be affected (I think we suspect the answer, to be honest) and if so, how and for how long? Will new industries that may emerge augment or displace the older fields? Will deflation be a likely path? Will there be a reaction? Will a next frontier emerge?
It’s likely, in fact pretty certain, that analysts fretted over such matters in the past as well, and the outcome proved satisfying enough in retrospect. But context and conditions change, and even if history repeats, as many assume to be the case, sometimes it repeats by analogy rather than subject.
Financial markets, especially, have been prone to analytic repetition, habit, and formulaic impulse (notwithstanding the “past performance is no guarantee” disclaimer, which deep down few speculators believe). The repetitive perspective happens at least for a while, until new lessons sink in and we, rightly or wrongly, redirect. Sometimes the adaptation proves exaggerated, as bubbles form or markets crash.
For longer-term investors, which we are, even when we think we aren’t, there are some morals to this FOMO story:
1/ This is a time for close attention. The frontiers happen fast, and their mysteries are quickly revealed.
2/ It is advisable to carefully think through what it may be that we believe we’re missing out on.
3/ Do not succumb to fear. As Microsoft is now said to be behind the discussed generative AI platform, the “new” frontier may actually be the old, and we’re there already.
Linear perception, exponential change, and the new value
Markets and the year(s) ahead: The Investment Thesis
Regaining our composure, or Swan risk on the rise
The end of cycles (Part 1 & Part 2)
The artificial services economy