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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss the impact artificial intelligence might have on the labour market and whether the industry is in a bubble. TD Epoch's Kevin Hebner joins us. MoneyTalk's Anthony Okolie is going to give us a preview of what to expect from this week's Canadian GDP report. And in today's WebBroker education segment, Hiren Amin is going to tell us a little more about how to use the web broker platform to find a I stocks. Look at that, it dovetails together.
Here's how you get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Seven let's get you an update on the markets.
We will start here at home with the TSX Composite Index.
We've got some modest screen on the screen. Modest being the key word. We are up barely 8 points were just four ticks.
We have the kickoff to banks earnings season which usually rounds out earnings season in Canada. There are two names out of the gate today, among the most actively traded names on the TSX at this hour, the Bank of Nova Scotia and the Bank of Montréal.
Bank of Nova Scotia is up a little more than 3%.
And for the Bank of Montréal, at $122 per share, DMO is down 3 1/2%. That's a reaction to the latest quarterly report.
South of the border, the S&P 500 not up to much today. Pretty much flat. Read on the screen, 1/3 of a point to the downside.
Last week it broke above 5100 for the first time in history.
Right now it's a bit more of a cautious trade. Later in the week we will get one of the Fed's preferred ages of inflation so investors might be trying to figure out where we will be headed on that front.
The tech heavy NASDAQ, at 15,995, it is up 20 points or 1/10 of a percent.
The cruise lines today making big moves, including Norwegian. And 18% pop on this name. They are lifting up some of their competitors as well. And that is your market update.
While there is a lot of excitement around the development of artificial intelligence technology, there is also concerned about how disruptive it could be for the labour market and whether assets in the space are in a bubble. Lots to discuss here. Joining us is Kevin Hebner, global investment strategist with TD Epoch.
Great to have you on the program. I know there's a lot of interest.
Let's go through the disruption. I think this is what people are worried about. How disruptive could it be to our lives and the labour market?
>> Hi, Greg. I think that's true.
Certainly, when you look at poles, people are more worried than excited about AI because they are concerned about what will happen with their jobs going forward.
In our view, there's going to be about 60% of job significantly affected by AI but that's pretty normal. If you think right now, 60% of occupations that exist today did not exist in 1950 so the labour market is always very dynamic with lots of change.
But the way we come up with these numbers the US Department of Labor divides the labour market into a thousand different occupations, and each occupation they break into 15 to 20 different tasks, so 18,000 tasks overall describing the US labour market. Then you look at which task can be impacted by existing AI, so not AI that will be in five or 10 years, but as it exists today, and then you get these numbers, 60% will be significantly affected, and 50% of jobs, over 20% of tasks will be affected. There will will be a lot of jobs changed or displaced by AI, but it means a lot of change going forward.
We all have to respond to this.
>> We hear about it from people who are proponents of it, they say it will take away the drudgery work.
Some people I talked about financial services say, I spent a lot of time charting this are putting these numbers together, AI does it for me and frees me up to do other things. I think were people get concerned is that they have one of the drudgery jobs and that job will be gone altogether.
>> I think for most of us, and it's interesting, if we were having this conversation 18 months ago, we thought AI would be coming after blue collar, then white-collar than creative jobs, but with generative AI and OpenAI, this has been totally flipped and no it's creative jobs, then white-collar jobs, and then blue-collar jobs that are being the most impacted.
So I think it is important to see that as this evolves, how we do things is going to be changing a lot.
I'm in the white-collar sector.
For a lot of us, AI is augmenting what we can do so the Excel work IDU, data mining, regressions, creating charts, AI will certainly be improving my productivity saved by 20%.
I've got a long to do list so that's going to help me get through more things. I think broadly for white-collar workers, it's true. For creative workers, it's even more so. People who write, it will increase your productivity by 40%.
Marketing copy is the number one use of generative AI so far.
People create digital economy and content animation. If you saw solo, it's a tool created by OpenAI, it immediately increases people's productivity in the automation business, video games and so forth, by about 90% so it's pretty dramatic and we will see a lot more content, hopefully excellent, engaging content coming forward.
>> You gave some concrete examples of productivity, whether it's in financial services, the creative arts. What does that mean on a national level and we start to manage the economy's productivity, GDP?
Could AI be the thing that kick starts productivity where we have perhaps leg for a while?
>> We think that is going to increase productivity relative to baseline by 10 to 15%. We come up with that number by looking at what happened with electricity or computers or the Internet.
You can also do it by bottom-up, what we were mentioning before with the 18,000 tasks and looking at the impact on productivity and output. Either way, we come up with a number say in the next decade of or so of about 15%. That's a very big number.
Similar to the Internet boom that was experienced in the late 1990s.
So it is a big deal.
>> From you talk about productivity and we talk about it happening across a broad swaths of society in different industries, as investors, we start to think about companies that are more productive will probably make more use of their inputs and see better output. Is there an outflow to the investment community where more productive organizations produce healthier profits?
>> Certainly if you have higher productivity and higher growth, you're going to have a higher top line going forward for companies. But we are also seeing right now, at least for companies who are directly benefiting from the buildup of infrastructure platforms, a dramatic increase in margins, return on invested capital, generating pretty phenomenal free cash flow.
That's a small number of companies in the overall markets who are seeing concentrated returns as we build out the infrastructure for AI.
>> I think about the chipmakers. In the early innings of our discussions about AI, we are about a year into the real, proper discussion and the chipmakers have benefited.
It must play out beyond chipmakers.
>> We are building out the infrastructure for platforms, SMEs. Right now, we don't have much in terms of applications.
Typically when you have a new disruptive general-purpose technology, it takes a long time for it to diffuse across the economy.
It can be 20s and 30 years. AI might be faster but it's still a very slow process.
Right now, we've got this boom has we build the infrastructure but then going forward, we have to go to the point of, where are the killer apps that help companies and households going forward?
I think that is going to take longer than many people think. In our view, we are going to keep enjoying the type of returns we have had over the past couple of quarters but at some point there is going to be this chasm where the headlines are going to be saying, where is the meet, the killer apps, how is this really helping companies and households?
I think that might take a lot longer than investor communities are currently expecting.
>> The investment community, if it will take longer than they are currently expecting in terms of seeing our daily lives change due to killer apps, as you call them, we have seen our run-up in chips, Nvidia has been the poster child.
If you look at what's happening in AI right now and the market run up, are we in an AI bubble?
>> There are three reasons to think that we might be in a bubble similar to what we were in the 1990s. One is the concentration of returns.
In fact, since 1920, there have only been two other times when returns have been so concentrated in a small number of names, the late 1990s and the late 1920s.
Neither of those ended up terribly well.
The second reason is valuations.
Valuations are stretched. Not as much as they were in the 1990s but stretched beyond norms. The third reason I think is the quite euphoric tone of many pundits and a lot of commentary about AI. That's three reasons to think we might be in a bubble but what is different this time it is in the 1990s, companies were burning through a lot of cash and ultimately what burst the 1990s bubbles were the headlines saying oh my God, we are running out of cash, we are burning money.
Right now, we've got an enormous free cash flow generation, great margins, great return on invested capital.
That makes it different.
It means that now it is more like 1997 then 1999.
>> Fascinating stuff and a great start the program. We are going to get your questions about AI for Kevin Hebner in just a moment's time. And a reminder that you get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker. 's Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Slowing demand for pricey home renovations are weighing on sales at Lowe's.
The home-improvement retailer says comparable sales were down more than 6% year-over-year in its most recent quarter and it expects continued softening demand for big-ticket items. That said, Lowe's did beat Wall Street expectations which were lowered after their forecast in November. The stock at $236 and change, a little more than 2%.
Videoconferencing company zoom is still growing the business but at a much slower pace in a post-pandemic world. The company increase sales by 3% year-over-year to $1.12 billion. That is a far cry from the massive growth it's all during the pandemic lockdowns.
At the same time, you take a look at the stock, it's up to 7%. It appears to be enough for the market getting a boost on an earnings beat, doing better than the streets expectations. Macy's is going to close some 150 department stores as it works or changing consumer habits. It will focus more on attire and banners including Bloomingdale's and Bluemercury and less on its Métis locations that are in struggling malls. Right now all of the stock at $20.11 per share, it is up more than 4%.
Let's check in on the markets.
We will start off on Bay Street with the TSX Composite Index. We kicked off bank earnings season. It mixed reaction amongst Scotia and PMO. You're up seven points on the TSX, nothing too dramatic.
South of the border, we been on the record run for the S&P 500. A bit of a pause heading into this week. Right now you're basically flat.
You are down 0.1 on the S&P 500.
We are back with Kevin Hebner, take your questions about artificial intelligence.
Let's get to the first one. A viewer wants to know if the US is best position for AI development orca China, Europe or other nations be in a better position?
>> Our view is that US exceptionalism, the US has been for at least the last 25 years, we think it continues for at least three reasons. One reason is the ecosystem in the United States.
That's really the secret sauce of the US economy.
That was developed after World War II with the help of the United States Department of… But that's a key factor, the US VC ecosystem.
The second is the light regulatory touch in the US. In Europe, it seems to be wrinkling their way to last place. They are in a hurry to regulate too much tech.
That's one reason why there are so few tech companies. The other reason is the US contracts most private-sector AI… Most AI leaders are based in the United States even though most were not born in the US.
For example, the head of AI for Meta now lives in Europe but he was born in France, a head of AI at Google is from the UK but now works for Google, or people like China, another AI leader. These are the three main reasons that make us think that United States will continue to be the hegemon for tech. Europe because of its heavy regulation, it is strangling tech innovation. China is a different thing.
China is spending an awful lot of money in AI.
For example, AI patents, China leads relative to the US but it's a very different approach. It is very focused on tech hardware applications, so quantum computing, semiconductors, autonomous vehicles, the entire EV supply chain, and then military applications which could be drones, hypersonic missiles and surveillance systems.
China leads the world by a lot. In terms of the diffusion of AI across the Army, very active in the United States but in China it will be very strangled by the government and he won't see a lot of diffusion and you certainly won't see really powerful tech companies and really powerful tech leaders arise in China. The times we have had that, they have been squashed by the government.
We see very different developmental trajectories amongst the US, China and Europe.
>> Nvidia has been a clear winner in the early innings and it's been facing restrictions on the kind of chips and can export to China.
My understanding is that you can export chips, they just can't be as powerful as the chips you are making for us.
There are geopolitical concerns. China and the US don't exactly get along.
>> This is part of codeword 2.0. The US State Department and national security have been clear. Their objective is to keep China to generations behind the United States. The leading tech companies like Nvidia for graphics processing or TSMC for fabrication, they consulted China but they can only sell equipment or software designs that are to generations behind. I think the USA Department and the Department of commerce will be effective in keeping China to generations behind.
The purpose of data so that the military applications of AI, hypersonic missiles, drones and so forth, that if there is something unfortunate happens in the South China Sea or Taiwan, the US has military capabilities that are superior to those in China. But it's very much a reflection of Cold War 2.0.
>> Let's talk a bit more about that.
That's an intriguing term, Cold War 2.0.
Intriguing and frightening when we think about advancements in technology. There have been people concerned about AI and what it can do and what it may want to do with us. Let's talk about those concerns.
Are they well-founded?
>> I'm just an economist so I'm not really in a position to talk about more existential or philosophical issues about general AI or when machines can learn on their own and evade human control.
There is some very good science fiction on but as an economist I don't really have insight or expertise on that.
>> Good point. Maybe I need to start looking at my science-fiction see if I can entertain or scare myself before bedtime.
As always at home, make sure you do your own research before making any investment decisions.
We are going to get back to your questions for Kevin Hebner on artificial intelligence in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking about AI. If you are looking to screen for AI stocks, the WebBroker platform has tools which can help. Hiren Amin, Senior client education instructor with TD Direct Investing has more.
>> When it comes to investment themes, AI or artificial intelligence is a buzzword you here in different pockets of the investing world. It goes without saying there is a lot of chatter around artificial intelligence and its vast potential. Natural cash that might be bubbling at the top of your mind is how do I get started with researching AI stocks?
That can be difficult since AI is not actually a sector or industry but rather an investment theme that spans multiple sectors. We've got you covered your own web broker and will show you how to get started.
We sat, let's jump right into web broker and show you how to get started.
So once you have logged into web broker, what we are going to do is head over to our screeners tool. That will be found under the research tab at the top. Under our tool column in the drop-down, you can see third from the bottom, that's where screeners is. Click on that.
We have it preloaded up here for us.
It will bring you to this page we are on right now.
One way you can get started with this is one of the good things that the screeners tool is they have created themes for us.
Lo and behold, one of them that we have is in fact artificial intelligence.
If I go ahead and click on this, we will see what happens. It takes us right into the screen.
It has some field applied. One thing that is important to notice some things that are already applied and this is how you can do it from the top down or bottom up if you wanted to do it yourself.
What we have done here is you can pick your exchanges that you want to look at.
We want to look at both markets. We have already picked a theme out of the ones we have here. AI is one of them. You can choose some others.
Artificial intelligence is what we are looking for today. You come in here and what you can further do from here is you can choose additional filters if you wish to. All they've done is added the stock price, price-performance over five days, because really the only thing we want to see out of this is just we just want to see just the list of AI stocks that we have available to us.
Once you have done that, you will see a list of all of these different artificial intelligence stocks, ones that will be a mix hardware-based ones and software-based ones. They are also ranked. That's important to know. It's based on the filters you have chosen. We have chosen only price-performance and stock price but you can choose those additional filters to narrow down those. Once you have this, it's what you can look at and then filter the list further and see what you-- what is going to warrant further research on your end. That's a quick look on how you can get started with doing AI research on those stocks and get you going there.
>> Our thanks to Hiren Amin, senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Now before you get back to your questions about artificial intelligence for Kevin Hebner, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Okay, we are back with Kevin Hebner from TD Epoch, taking your questions about AI.
We skirted around this briefly. How could regulation impact AI? You talked about the American advantage of having a lighter regulatory touch.
>> Yeah, I think it is something that our clients ask about a lot.
I think regulation isn't going to be a major factor for the AI industry and how it develops, not just pure this year or next year but probably for this decade.
There are three reasons for thinking that.
The first reason is the power of tech lobbyists. They spend billions of dollars in DC lobbying effectively to make sure that there isn't regulations coming into place that would hurt their returns. One example of that is for example social media. We have known for over a decade that social media is a real problem, pernicious Lee influences young children and lots of harms from that, but we've had almost nothing on the regulatory or legislative front resolve from that and that's been over a decade.
A second reason to think that's true is you want to regulate where the money is going. You are regulating a new industry.
We really don't know how the industry will develop. So much has changed even in the last 18 months. It was just November 2022 that OpenAI came out with its most recent version of ChatGPT, and our views on this have changed a lot. For example, the EU legislation that is coming out, by the time he gets past, that's probably going to be 2026 or so, it will be at regulating AI as it existed in 2020.
The industry is nascent, it is changing a lot, so it's too early.
The regulation of any industry takes 10 to 20 years after you have the first commercial applications, save for airplanes, auto, nuclear, any different industry.
There are now 220 different regulatory agencies in the US. Every new industry gets regulated but it takes a decade or two and I think that's probably sensible.
There's a lot of discussion right now about regulation and and all of the places that we need it and certainly concerns about social media, deep fakes, a lot of concerns with content but I think it will take probably well into the next decade before we get a regulatory framework in place that really does affect how the industry develops.
>> Kevin, I believe in your work on this area, you look to history and new technology, whether it's railroads or the Internet, regulations emerge. I believe three common mistakes often get me. What are they and how do you avoid them?
>> One mistake is the EU mistake. So you strangle innovation and by being too heavy-handed with the regulatory framework. A second mistake is a type of mistake that's made when you have very heavy-handed government, pushing industry, helping it is industry to evolve but keeping it very cloistered so you don't get the diffusion of the technology across businesses and households.
That's actually very important to an innovative economy. The third type of mistake is the one that the US regularly makes and that is industries become so powerful and have so much money and the stakes are so high, they spend billions of dollars on lobbyists, there is not much AI expertise within the government so effectively, big attack dictates what happens in terms of regulatory agencies and different types of legislation that comes forward. So lots of ways to do this wrong.
And each region seems to have their own specialty.
>> That last one you talked about, when the industry has all the expertise and the government doesn't, that seems to be a hard one to get around because these technologies move fast and the fuel you are trying to regular the ones who have all the answers.
>> That's true. Biden did have the big executive article come out on October 30 and pertains lots of agencies in the US but there is an expertise in-house to manage that. The most important part of an executive order was any large model has to be… You designate a group of people within the firm, same Microsoft or Google, pass that to hackers and try to get your bottles to do bad or nefarious things and then you report the results of the red team testing to the government but there isn't an agency in the government or the expertise to report these to so it's not even a roadblock or a speedbump to these big models.
>> Do companies in this kind of environment and up self-regulating and should we trust them to self regulate with this technology?
>> If you look at opinion polls, people are very suspicious of self-regulation pretty much for any industry but certainly that is true for tech.
Self-regulation is not something people are optimistic will address any of the harms. And other than saying tech doesn't need regulation, there are lots of areas where regulation can make a difference.
It's just unrealistic to think this could be happening in the type of timeframe that most investors have in mind.
>> Interesting stuff.
We will get back to your questions for Kevin Hebner on artificial intelligence in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are all keen waters of a lot of economic data points, trying to figure out when the central banks might want to start cutting rates after getting so restrictive on borrowing costs. This week in Canada, it is fourth-quarter GDP getting released, one to keep an eye on.
The economy unexpectedly contracted in the third quarter. What are we looking for?
Anthony Okolie joins us now in TD Securities outlook on the economy.
>> The Q4 GDP will be closely watched for clarity around whether or not Canada can avoid a hard landing after the contraction we saw in the third quarter when Canada's economy pulled back at an annualized rate of 1.1% in the third quarter and that third quarter reading came in below market estimates as well as the Bank of Canada's .8% projected gain.
The economy avoided slipping into a technical recession.
When you look at the breakdown, international trade was a real drag for GDP exports weighing heavily on economic activity in the third quarter. Inventories accumulated at the slowest pace in two years as well, according to Statistics Canada.
Look ahead to the fourth-quarter release, the economy has built a little bit of a nice talent for a healthy gain in December retail sales.
TD and the market consensus are looking for a tepid 0.8% seasonally adjusted annual rate rebound from the -1.1% that we had in the third quarter.
Industry level GDP for December is expected to print slightly below the flash estimate of 8.3% month over month gain.
That would confirm, according to TD Securities, a soft landing and provide some added momentum into the first quarter but it does leave per capita growth in negative territory.
TD Security says that monthly activity has evolved largely in line with projections from StatCan, but labour markets do hint at more subdued growth conditions with a modest increase for hours worked in December and higher jobless claims.
Public-sector labour disputes will exert a mild headwind to education while real estate will provide a key source of strength on higher retail activity according to TD Securities in the fourth quarter.
Even with GDP printing below flash estimates, TD Securities expects the December report to confirm a rapid improvement and growth momentum after the sluggish. That we saw between May and October and should provide a strong hand off to first-quarter GDP.
>> So this is the base case and the view.
The big question that people want to know is what does the Bank of Canada do with this? When do we start to see interest rate cuts?
>> TDC was they continue to look for the BOC to deliver its first rate cut in July 2024.
The persistence in underlying price pressures will make it more challenging for the bank to start easing for the first half of 2024, according to TD Securities, with headline inflation projected to remain above the target range until mid-2024.
Now, TD Securities says the bank needs to see more evidence of three-month core inflation slowing before it will be in a position to discuss easing. TD Securities looks for the bank to deliver 100 basis points of rate cuts over 2024 before achieving a 3% rate by the fourth quarter of 2025.
>> Interesting stuff. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. This is the heat map function which gives us a view of the market movers.
We will start with the TSX 60, looking at price and volume. Both BM oh a and VNS, Bank of Montréal and Scotiabank, out of the gates first.
This is bank reporting season this week.
You can see the market reaction.
BM oh at a fairly active volume, down about 4%.
Scotiabank up about 2 3/4 of a percent.
Across the screen, Cameco getting a bid for a second day, a uranium play.
Uranium stocks took off at the start of the year, chop your trade since then. We also have MG, Magna International auto parts maker up a little more than 3% and First Quantum, bouncing around a lot lately, down about 3% today.
South of the border, I want to check in on the S&P 100. Later this week we will get one of the Fed's preferred measures of inflation.
Ahead of that, the market has been mixed and not dramatic south of the border this week.
Looking at the screen right now, if we are talking AI which we are today, you have Nvidia barely moving but AMD up about a full percent and some of the financials including the Bank of America getting a modest bid, the stock is up a little shy of 2%.
You can find more information on TD Advanced Dashboard by visiting TD.com/advanceddashboard.
Okay, we're back now with Kevin Hebner from TD Epoch, talking artificial intelligence. He is an interesting question.
We've talked a lot about regulatory approaches and the promises of productivity. Someone wants to know, how do we approach it from an investing perspective?
Hello, Kevin, can you hear me?
>> Yes. Sorry about that.
Our thinking is particular. If you think about the late 1990s, one problem existed in terms of investing. A lot of companies were pure hype or hope stocks, very speculative. Our view in terms of investing is to make sure you are looking at companies which have a good return on invested capital, well above their cost of capital, high operating margins and also generating a lot of free cash flow. For example, if you look at the Magnificent Seven, all of those have those three characteristics but you could look at companies like Google and Meta, they priced in a relatively little earnings growth. On the other hand you have companies like Nvidia and Tedla, and their pricing in pretty exceptional earnings growth.
For example, Nvidia, on our numbers, we think the stock price has incorporated earnings growth of 20% per year for the next 18 years.
Other companies have done that, Apple and Microsoft have done that, but they did it when they were much smaller companies and there's never been a case where such large companies have produced numbers like that.
So we think it's improbable. The other three companies in the Magnificent Seven, Apple, Microsoft and Amazon, so somewhere between those two, pricing and growth but not what we think is sort of an improbable level of growth that is priced into Tesla and Nvidia.
Our key point in the platform type companies is make sure they have a strong return on invested capital relative and are not hype you mentioned big players there. There's a lot of money that goes into developing a I, a lot of infrastructure.
You've spoken about this in the past and use the term winner takes most.
I think intact small players can come in and disrupt.
But do tech winners take most?
>> You have to invest an enormous amount of front and with those upfront investments, there are some move fast, break things, but capture a large market share and then once you've done that, you create a moat and it is more difficult for other players to get in.
It could be platform companies, cloud providers and then different levels whether you are design, equipment company or fabrication and then the applications, it will be winners take most, in some cases it will be 2 to 3 winners, some 4 to 5. The winners get enormous margins, free cash flow, return on invested capital and pretty much everyone else struggles to get a return that is even higher than their cost of capital, so not creating any economic value.
So it's very much a winner takes most environment, digital tech. We think the notion of the increased concentration, we don't think this is going to normalize. We are not going to have a reversion to something normal and this continues and maybe accelerates as AI represents a bigger part of the market.
>> There is a lot of excitement in the space. Last year at this time ChatGPT got in the hands of the general public and people started getting excited on a big scale about AI. The naysayers say the companies brought us excited about electric cars and it's not that they bond away with things are slowing down.
You are seeing some picks and shovels plays in electric vehicles under pressure.
Is there a danger that here?
>> Our view is that AI is a general-purpose technology. It's going to be highly disruptive and that is real.
It's not a head fake in the way that may be crypto current he was.
I think electric vehicles is a big technology but not a general-purpose technology like AI. AI will affect many different sectors, is going to be improving a lot of things and we think it will create a lot of value for shareholders and consumers and companies.
So I would not think the comparison to… Other periods of hype stay with bitcoin and crypto currencies, I don't think that's appropriate.
>> Before he let you go, I want to round out to an idea we talked about at the outset. With investing in AI, there are concerns that it is a bubble. Remind us of your thinking on that idea.
>> There are three reasons to think it's a bubble: the concentration, the valuations and the euphoric tone of a lot of commentary. The big differences so much cash flow being produced, the return on capital are impressive. We are at a place where we are building the infrastructure and that will run for another couple of years but at some point we will say, where is the beast, the benefits for consumers and household?
Where are the killer apps which can be new antibiotics, it can be a lot of things that we can't imagine.
An experience with other GPT's is this takes a long time to happen.
For the Internet and electricity to get broad diffusion it took decades. AI will be faster but longer than investors think.
We think this period of euphoria that we have right now will last a little bit longer but soon there is going to be this chasm and there will be headlines saying, where are they killer apps? We spend all this money building the infrastructure, where are the returns on that info structure? There's a big bridge we built.
Our people going to use it? I think at that point we are going to have retrenchment or retracement in the overall market.
But that is still a couple of quarters away.
>> Fascinating discussion. Really glad you could join us today.
>> Thank you.
>> Our thanks to Kevin Hebner, global investment strategist with TD Epoch.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Sam Damiani, Dir.
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[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss the impact artificial intelligence might have on the labour market and whether the industry is in a bubble. TD Epoch's Kevin Hebner joins us. MoneyTalk's Anthony Okolie is going to give us a preview of what to expect from this week's Canadian GDP report. And in today's WebBroker education segment, Hiren Amin is going to tell us a little more about how to use the web broker platform to find a I stocks. Look at that, it dovetails together.
Here's how you get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Seven let's get you an update on the markets.
We will start here at home with the TSX Composite Index.
We've got some modest screen on the screen. Modest being the key word. We are up barely 8 points were just four ticks.
We have the kickoff to banks earnings season which usually rounds out earnings season in Canada. There are two names out of the gate today, among the most actively traded names on the TSX at this hour, the Bank of Nova Scotia and the Bank of Montréal.
Bank of Nova Scotia is up a little more than 3%.
And for the Bank of Montréal, at $122 per share, DMO is down 3 1/2%. That's a reaction to the latest quarterly report.
South of the border, the S&P 500 not up to much today. Pretty much flat. Read on the screen, 1/3 of a point to the downside.
Last week it broke above 5100 for the first time in history.
Right now it's a bit more of a cautious trade. Later in the week we will get one of the Fed's preferred ages of inflation so investors might be trying to figure out where we will be headed on that front.
The tech heavy NASDAQ, at 15,995, it is up 20 points or 1/10 of a percent.
The cruise lines today making big moves, including Norwegian. And 18% pop on this name. They are lifting up some of their competitors as well. And that is your market update.
While there is a lot of excitement around the development of artificial intelligence technology, there is also concerned about how disruptive it could be for the labour market and whether assets in the space are in a bubble. Lots to discuss here. Joining us is Kevin Hebner, global investment strategist with TD Epoch.
Great to have you on the program. I know there's a lot of interest.
Let's go through the disruption. I think this is what people are worried about. How disruptive could it be to our lives and the labour market?
>> Hi, Greg. I think that's true.
Certainly, when you look at poles, people are more worried than excited about AI because they are concerned about what will happen with their jobs going forward.
In our view, there's going to be about 60% of job significantly affected by AI but that's pretty normal. If you think right now, 60% of occupations that exist today did not exist in 1950 so the labour market is always very dynamic with lots of change.
But the way we come up with these numbers the US Department of Labor divides the labour market into a thousand different occupations, and each occupation they break into 15 to 20 different tasks, so 18,000 tasks overall describing the US labour market. Then you look at which task can be impacted by existing AI, so not AI that will be in five or 10 years, but as it exists today, and then you get these numbers, 60% will be significantly affected, and 50% of jobs, over 20% of tasks will be affected. There will will be a lot of jobs changed or displaced by AI, but it means a lot of change going forward.
We all have to respond to this.
>> We hear about it from people who are proponents of it, they say it will take away the drudgery work.
Some people I talked about financial services say, I spent a lot of time charting this are putting these numbers together, AI does it for me and frees me up to do other things. I think were people get concerned is that they have one of the drudgery jobs and that job will be gone altogether.
>> I think for most of us, and it's interesting, if we were having this conversation 18 months ago, we thought AI would be coming after blue collar, then white-collar than creative jobs, but with generative AI and OpenAI, this has been totally flipped and no it's creative jobs, then white-collar jobs, and then blue-collar jobs that are being the most impacted.
So I think it is important to see that as this evolves, how we do things is going to be changing a lot.
I'm in the white-collar sector.
For a lot of us, AI is augmenting what we can do so the Excel work IDU, data mining, regressions, creating charts, AI will certainly be improving my productivity saved by 20%.
I've got a long to do list so that's going to help me get through more things. I think broadly for white-collar workers, it's true. For creative workers, it's even more so. People who write, it will increase your productivity by 40%.
Marketing copy is the number one use of generative AI so far.
People create digital economy and content animation. If you saw solo, it's a tool created by OpenAI, it immediately increases people's productivity in the automation business, video games and so forth, by about 90% so it's pretty dramatic and we will see a lot more content, hopefully excellent, engaging content coming forward.
>> You gave some concrete examples of productivity, whether it's in financial services, the creative arts. What does that mean on a national level and we start to manage the economy's productivity, GDP?
Could AI be the thing that kick starts productivity where we have perhaps leg for a while?
>> We think that is going to increase productivity relative to baseline by 10 to 15%. We come up with that number by looking at what happened with electricity or computers or the Internet.
You can also do it by bottom-up, what we were mentioning before with the 18,000 tasks and looking at the impact on productivity and output. Either way, we come up with a number say in the next decade of or so of about 15%. That's a very big number.
Similar to the Internet boom that was experienced in the late 1990s.
So it is a big deal.
>> From you talk about productivity and we talk about it happening across a broad swaths of society in different industries, as investors, we start to think about companies that are more productive will probably make more use of their inputs and see better output. Is there an outflow to the investment community where more productive organizations produce healthier profits?
>> Certainly if you have higher productivity and higher growth, you're going to have a higher top line going forward for companies. But we are also seeing right now, at least for companies who are directly benefiting from the buildup of infrastructure platforms, a dramatic increase in margins, return on invested capital, generating pretty phenomenal free cash flow.
That's a small number of companies in the overall markets who are seeing concentrated returns as we build out the infrastructure for AI.
>> I think about the chipmakers. In the early innings of our discussions about AI, we are about a year into the real, proper discussion and the chipmakers have benefited.
It must play out beyond chipmakers.
>> We are building out the infrastructure for platforms, SMEs. Right now, we don't have much in terms of applications.
Typically when you have a new disruptive general-purpose technology, it takes a long time for it to diffuse across the economy.
It can be 20s and 30 years. AI might be faster but it's still a very slow process.
Right now, we've got this boom has we build the infrastructure but then going forward, we have to go to the point of, where are the killer apps that help companies and households going forward?
I think that is going to take longer than many people think. In our view, we are going to keep enjoying the type of returns we have had over the past couple of quarters but at some point there is going to be this chasm where the headlines are going to be saying, where is the meet, the killer apps, how is this really helping companies and households?
I think that might take a lot longer than investor communities are currently expecting.
>> The investment community, if it will take longer than they are currently expecting in terms of seeing our daily lives change due to killer apps, as you call them, we have seen our run-up in chips, Nvidia has been the poster child.
If you look at what's happening in AI right now and the market run up, are we in an AI bubble?
>> There are three reasons to think that we might be in a bubble similar to what we were in the 1990s. One is the concentration of returns.
In fact, since 1920, there have only been two other times when returns have been so concentrated in a small number of names, the late 1990s and the late 1920s.
Neither of those ended up terribly well.
The second reason is valuations.
Valuations are stretched. Not as much as they were in the 1990s but stretched beyond norms. The third reason I think is the quite euphoric tone of many pundits and a lot of commentary about AI. That's three reasons to think we might be in a bubble but what is different this time it is in the 1990s, companies were burning through a lot of cash and ultimately what burst the 1990s bubbles were the headlines saying oh my God, we are running out of cash, we are burning money.
Right now, we've got an enormous free cash flow generation, great margins, great return on invested capital.
That makes it different.
It means that now it is more like 1997 then 1999.
>> Fascinating stuff and a great start the program. We are going to get your questions about AI for Kevin Hebner in just a moment's time. And a reminder that you get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker. 's Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Slowing demand for pricey home renovations are weighing on sales at Lowe's.
The home-improvement retailer says comparable sales were down more than 6% year-over-year in its most recent quarter and it expects continued softening demand for big-ticket items. That said, Lowe's did beat Wall Street expectations which were lowered after their forecast in November. The stock at $236 and change, a little more than 2%.
Videoconferencing company zoom is still growing the business but at a much slower pace in a post-pandemic world. The company increase sales by 3% year-over-year to $1.12 billion. That is a far cry from the massive growth it's all during the pandemic lockdowns.
At the same time, you take a look at the stock, it's up to 7%. It appears to be enough for the market getting a boost on an earnings beat, doing better than the streets expectations. Macy's is going to close some 150 department stores as it works or changing consumer habits. It will focus more on attire and banners including Bloomingdale's and Bluemercury and less on its Métis locations that are in struggling malls. Right now all of the stock at $20.11 per share, it is up more than 4%.
Let's check in on the markets.
We will start off on Bay Street with the TSX Composite Index. We kicked off bank earnings season. It mixed reaction amongst Scotia and PMO. You're up seven points on the TSX, nothing too dramatic.
South of the border, we been on the record run for the S&P 500. A bit of a pause heading into this week. Right now you're basically flat.
You are down 0.1 on the S&P 500.
We are back with Kevin Hebner, take your questions about artificial intelligence.
Let's get to the first one. A viewer wants to know if the US is best position for AI development orca China, Europe or other nations be in a better position?
>> Our view is that US exceptionalism, the US has been for at least the last 25 years, we think it continues for at least three reasons. One reason is the ecosystem in the United States.
That's really the secret sauce of the US economy.
That was developed after World War II with the help of the United States Department of… But that's a key factor, the US VC ecosystem.
The second is the light regulatory touch in the US. In Europe, it seems to be wrinkling their way to last place. They are in a hurry to regulate too much tech.
That's one reason why there are so few tech companies. The other reason is the US contracts most private-sector AI… Most AI leaders are based in the United States even though most were not born in the US.
For example, the head of AI for Meta now lives in Europe but he was born in France, a head of AI at Google is from the UK but now works for Google, or people like China, another AI leader. These are the three main reasons that make us think that United States will continue to be the hegemon for tech. Europe because of its heavy regulation, it is strangling tech innovation. China is a different thing.
China is spending an awful lot of money in AI.
For example, AI patents, China leads relative to the US but it's a very different approach. It is very focused on tech hardware applications, so quantum computing, semiconductors, autonomous vehicles, the entire EV supply chain, and then military applications which could be drones, hypersonic missiles and surveillance systems.
China leads the world by a lot. In terms of the diffusion of AI across the Army, very active in the United States but in China it will be very strangled by the government and he won't see a lot of diffusion and you certainly won't see really powerful tech companies and really powerful tech leaders arise in China. The times we have had that, they have been squashed by the government.
We see very different developmental trajectories amongst the US, China and Europe.
>> Nvidia has been a clear winner in the early innings and it's been facing restrictions on the kind of chips and can export to China.
My understanding is that you can export chips, they just can't be as powerful as the chips you are making for us.
There are geopolitical concerns. China and the US don't exactly get along.
>> This is part of codeword 2.0. The US State Department and national security have been clear. Their objective is to keep China to generations behind the United States. The leading tech companies like Nvidia for graphics processing or TSMC for fabrication, they consulted China but they can only sell equipment or software designs that are to generations behind. I think the USA Department and the Department of commerce will be effective in keeping China to generations behind.
The purpose of data so that the military applications of AI, hypersonic missiles, drones and so forth, that if there is something unfortunate happens in the South China Sea or Taiwan, the US has military capabilities that are superior to those in China. But it's very much a reflection of Cold War 2.0.
>> Let's talk a bit more about that.
That's an intriguing term, Cold War 2.0.
Intriguing and frightening when we think about advancements in technology. There have been people concerned about AI and what it can do and what it may want to do with us. Let's talk about those concerns.
Are they well-founded?
>> I'm just an economist so I'm not really in a position to talk about more existential or philosophical issues about general AI or when machines can learn on their own and evade human control.
There is some very good science fiction on but as an economist I don't really have insight or expertise on that.
>> Good point. Maybe I need to start looking at my science-fiction see if I can entertain or scare myself before bedtime.
As always at home, make sure you do your own research before making any investment decisions.
We are going to get back to your questions for Kevin Hebner on artificial intelligence in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking about AI. If you are looking to screen for AI stocks, the WebBroker platform has tools which can help. Hiren Amin, Senior client education instructor with TD Direct Investing has more.
>> When it comes to investment themes, AI or artificial intelligence is a buzzword you here in different pockets of the investing world. It goes without saying there is a lot of chatter around artificial intelligence and its vast potential. Natural cash that might be bubbling at the top of your mind is how do I get started with researching AI stocks?
That can be difficult since AI is not actually a sector or industry but rather an investment theme that spans multiple sectors. We've got you covered your own web broker and will show you how to get started.
We sat, let's jump right into web broker and show you how to get started.
So once you have logged into web broker, what we are going to do is head over to our screeners tool. That will be found under the research tab at the top. Under our tool column in the drop-down, you can see third from the bottom, that's where screeners is. Click on that.
We have it preloaded up here for us.
It will bring you to this page we are on right now.
One way you can get started with this is one of the good things that the screeners tool is they have created themes for us.
Lo and behold, one of them that we have is in fact artificial intelligence.
If I go ahead and click on this, we will see what happens. It takes us right into the screen.
It has some field applied. One thing that is important to notice some things that are already applied and this is how you can do it from the top down or bottom up if you wanted to do it yourself.
What we have done here is you can pick your exchanges that you want to look at.
We want to look at both markets. We have already picked a theme out of the ones we have here. AI is one of them. You can choose some others.
Artificial intelligence is what we are looking for today. You come in here and what you can further do from here is you can choose additional filters if you wish to. All they've done is added the stock price, price-performance over five days, because really the only thing we want to see out of this is just we just want to see just the list of AI stocks that we have available to us.
Once you have done that, you will see a list of all of these different artificial intelligence stocks, ones that will be a mix hardware-based ones and software-based ones. They are also ranked. That's important to know. It's based on the filters you have chosen. We have chosen only price-performance and stock price but you can choose those additional filters to narrow down those. Once you have this, it's what you can look at and then filter the list further and see what you-- what is going to warrant further research on your end. That's a quick look on how you can get started with doing AI research on those stocks and get you going there.
>> Our thanks to Hiren Amin, senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Now before you get back to your questions about artificial intelligence for Kevin Hebner, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Okay, we are back with Kevin Hebner from TD Epoch, taking your questions about AI.
We skirted around this briefly. How could regulation impact AI? You talked about the American advantage of having a lighter regulatory touch.
>> Yeah, I think it is something that our clients ask about a lot.
I think regulation isn't going to be a major factor for the AI industry and how it develops, not just pure this year or next year but probably for this decade.
There are three reasons for thinking that.
The first reason is the power of tech lobbyists. They spend billions of dollars in DC lobbying effectively to make sure that there isn't regulations coming into place that would hurt their returns. One example of that is for example social media. We have known for over a decade that social media is a real problem, pernicious Lee influences young children and lots of harms from that, but we've had almost nothing on the regulatory or legislative front resolve from that and that's been over a decade.
A second reason to think that's true is you want to regulate where the money is going. You are regulating a new industry.
We really don't know how the industry will develop. So much has changed even in the last 18 months. It was just November 2022 that OpenAI came out with its most recent version of ChatGPT, and our views on this have changed a lot. For example, the EU legislation that is coming out, by the time he gets past, that's probably going to be 2026 or so, it will be at regulating AI as it existed in 2020.
The industry is nascent, it is changing a lot, so it's too early.
The regulation of any industry takes 10 to 20 years after you have the first commercial applications, save for airplanes, auto, nuclear, any different industry.
There are now 220 different regulatory agencies in the US. Every new industry gets regulated but it takes a decade or two and I think that's probably sensible.
There's a lot of discussion right now about regulation and and all of the places that we need it and certainly concerns about social media, deep fakes, a lot of concerns with content but I think it will take probably well into the next decade before we get a regulatory framework in place that really does affect how the industry develops.
>> Kevin, I believe in your work on this area, you look to history and new technology, whether it's railroads or the Internet, regulations emerge. I believe three common mistakes often get me. What are they and how do you avoid them?
>> One mistake is the EU mistake. So you strangle innovation and by being too heavy-handed with the regulatory framework. A second mistake is a type of mistake that's made when you have very heavy-handed government, pushing industry, helping it is industry to evolve but keeping it very cloistered so you don't get the diffusion of the technology across businesses and households.
That's actually very important to an innovative economy. The third type of mistake is the one that the US regularly makes and that is industries become so powerful and have so much money and the stakes are so high, they spend billions of dollars on lobbyists, there is not much AI expertise within the government so effectively, big attack dictates what happens in terms of regulatory agencies and different types of legislation that comes forward. So lots of ways to do this wrong.
And each region seems to have their own specialty.
>> That last one you talked about, when the industry has all the expertise and the government doesn't, that seems to be a hard one to get around because these technologies move fast and the fuel you are trying to regular the ones who have all the answers.
>> That's true. Biden did have the big executive article come out on October 30 and pertains lots of agencies in the US but there is an expertise in-house to manage that. The most important part of an executive order was any large model has to be… You designate a group of people within the firm, same Microsoft or Google, pass that to hackers and try to get your bottles to do bad or nefarious things and then you report the results of the red team testing to the government but there isn't an agency in the government or the expertise to report these to so it's not even a roadblock or a speedbump to these big models.
>> Do companies in this kind of environment and up self-regulating and should we trust them to self regulate with this technology?
>> If you look at opinion polls, people are very suspicious of self-regulation pretty much for any industry but certainly that is true for tech.
Self-regulation is not something people are optimistic will address any of the harms. And other than saying tech doesn't need regulation, there are lots of areas where regulation can make a difference.
It's just unrealistic to think this could be happening in the type of timeframe that most investors have in mind.
>> Interesting stuff.
We will get back to your questions for Kevin Hebner on artificial intelligence in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are all keen waters of a lot of economic data points, trying to figure out when the central banks might want to start cutting rates after getting so restrictive on borrowing costs. This week in Canada, it is fourth-quarter GDP getting released, one to keep an eye on.
The economy unexpectedly contracted in the third quarter. What are we looking for?
Anthony Okolie joins us now in TD Securities outlook on the economy.
>> The Q4 GDP will be closely watched for clarity around whether or not Canada can avoid a hard landing after the contraction we saw in the third quarter when Canada's economy pulled back at an annualized rate of 1.1% in the third quarter and that third quarter reading came in below market estimates as well as the Bank of Canada's .8% projected gain.
The economy avoided slipping into a technical recession.
When you look at the breakdown, international trade was a real drag for GDP exports weighing heavily on economic activity in the third quarter. Inventories accumulated at the slowest pace in two years as well, according to Statistics Canada.
Look ahead to the fourth-quarter release, the economy has built a little bit of a nice talent for a healthy gain in December retail sales.
TD and the market consensus are looking for a tepid 0.8% seasonally adjusted annual rate rebound from the -1.1% that we had in the third quarter.
Industry level GDP for December is expected to print slightly below the flash estimate of 8.3% month over month gain.
That would confirm, according to TD Securities, a soft landing and provide some added momentum into the first quarter but it does leave per capita growth in negative territory.
TD Security says that monthly activity has evolved largely in line with projections from StatCan, but labour markets do hint at more subdued growth conditions with a modest increase for hours worked in December and higher jobless claims.
Public-sector labour disputes will exert a mild headwind to education while real estate will provide a key source of strength on higher retail activity according to TD Securities in the fourth quarter.
Even with GDP printing below flash estimates, TD Securities expects the December report to confirm a rapid improvement and growth momentum after the sluggish. That we saw between May and October and should provide a strong hand off to first-quarter GDP.
>> So this is the base case and the view.
The big question that people want to know is what does the Bank of Canada do with this? When do we start to see interest rate cuts?
>> TDC was they continue to look for the BOC to deliver its first rate cut in July 2024.
The persistence in underlying price pressures will make it more challenging for the bank to start easing for the first half of 2024, according to TD Securities, with headline inflation projected to remain above the target range until mid-2024.
Now, TD Securities says the bank needs to see more evidence of three-month core inflation slowing before it will be in a position to discuss easing. TD Securities looks for the bank to deliver 100 basis points of rate cuts over 2024 before achieving a 3% rate by the fourth quarter of 2025.
>> Interesting stuff. Thanks for that.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. This is the heat map function which gives us a view of the market movers.
We will start with the TSX 60, looking at price and volume. Both BM oh a and VNS, Bank of Montréal and Scotiabank, out of the gates first.
This is bank reporting season this week.
You can see the market reaction.
BM oh at a fairly active volume, down about 4%.
Scotiabank up about 2 3/4 of a percent.
Across the screen, Cameco getting a bid for a second day, a uranium play.
Uranium stocks took off at the start of the year, chop your trade since then. We also have MG, Magna International auto parts maker up a little more than 3% and First Quantum, bouncing around a lot lately, down about 3% today.
South of the border, I want to check in on the S&P 100. Later this week we will get one of the Fed's preferred measures of inflation.
Ahead of that, the market has been mixed and not dramatic south of the border this week.
Looking at the screen right now, if we are talking AI which we are today, you have Nvidia barely moving but AMD up about a full percent and some of the financials including the Bank of America getting a modest bid, the stock is up a little shy of 2%.
You can find more information on TD Advanced Dashboard by visiting TD.com/advanceddashboard.
Okay, we're back now with Kevin Hebner from TD Epoch, talking artificial intelligence. He is an interesting question.
We've talked a lot about regulatory approaches and the promises of productivity. Someone wants to know, how do we approach it from an investing perspective?
Hello, Kevin, can you hear me?
>> Yes. Sorry about that.
Our thinking is particular. If you think about the late 1990s, one problem existed in terms of investing. A lot of companies were pure hype or hope stocks, very speculative. Our view in terms of investing is to make sure you are looking at companies which have a good return on invested capital, well above their cost of capital, high operating margins and also generating a lot of free cash flow. For example, if you look at the Magnificent Seven, all of those have those three characteristics but you could look at companies like Google and Meta, they priced in a relatively little earnings growth. On the other hand you have companies like Nvidia and Tedla, and their pricing in pretty exceptional earnings growth.
For example, Nvidia, on our numbers, we think the stock price has incorporated earnings growth of 20% per year for the next 18 years.
Other companies have done that, Apple and Microsoft have done that, but they did it when they were much smaller companies and there's never been a case where such large companies have produced numbers like that.
So we think it's improbable. The other three companies in the Magnificent Seven, Apple, Microsoft and Amazon, so somewhere between those two, pricing and growth but not what we think is sort of an improbable level of growth that is priced into Tesla and Nvidia.
Our key point in the platform type companies is make sure they have a strong return on invested capital relative and are not hype you mentioned big players there. There's a lot of money that goes into developing a I, a lot of infrastructure.
You've spoken about this in the past and use the term winner takes most.
I think intact small players can come in and disrupt.
But do tech winners take most?
>> You have to invest an enormous amount of front and with those upfront investments, there are some move fast, break things, but capture a large market share and then once you've done that, you create a moat and it is more difficult for other players to get in.
It could be platform companies, cloud providers and then different levels whether you are design, equipment company or fabrication and then the applications, it will be winners take most, in some cases it will be 2 to 3 winners, some 4 to 5. The winners get enormous margins, free cash flow, return on invested capital and pretty much everyone else struggles to get a return that is even higher than their cost of capital, so not creating any economic value.
So it's very much a winner takes most environment, digital tech. We think the notion of the increased concentration, we don't think this is going to normalize. We are not going to have a reversion to something normal and this continues and maybe accelerates as AI represents a bigger part of the market.
>> There is a lot of excitement in the space. Last year at this time ChatGPT got in the hands of the general public and people started getting excited on a big scale about AI. The naysayers say the companies brought us excited about electric cars and it's not that they bond away with things are slowing down.
You are seeing some picks and shovels plays in electric vehicles under pressure.
Is there a danger that here?
>> Our view is that AI is a general-purpose technology. It's going to be highly disruptive and that is real.
It's not a head fake in the way that may be crypto current he was.
I think electric vehicles is a big technology but not a general-purpose technology like AI. AI will affect many different sectors, is going to be improving a lot of things and we think it will create a lot of value for shareholders and consumers and companies.
So I would not think the comparison to… Other periods of hype stay with bitcoin and crypto currencies, I don't think that's appropriate.
>> Before he let you go, I want to round out to an idea we talked about at the outset. With investing in AI, there are concerns that it is a bubble. Remind us of your thinking on that idea.
>> There are three reasons to think it's a bubble: the concentration, the valuations and the euphoric tone of a lot of commentary. The big differences so much cash flow being produced, the return on capital are impressive. We are at a place where we are building the infrastructure and that will run for another couple of years but at some point we will say, where is the beast, the benefits for consumers and household?
Where are the killer apps which can be new antibiotics, it can be a lot of things that we can't imagine.
An experience with other GPT's is this takes a long time to happen.
For the Internet and electricity to get broad diffusion it took decades. AI will be faster but longer than investors think.
We think this period of euphoria that we have right now will last a little bit longer but soon there is going to be this chasm and there will be headlines saying, where are they killer apps? We spend all this money building the infrastructure, where are the returns on that info structure? There's a big bridge we built.
Our people going to use it? I think at that point we are going to have retrenchment or retracement in the overall market.
But that is still a couple of quarters away.
>> Fascinating discussion. Really glad you could join us today.
>> Thank you.
>> Our thanks to Kevin Hebner, global investment strategist with TD Epoch.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Sam Damiani, Dir.
of equity research at TD Cowen, will be our guests take your questions on real estate investment trusts. You can get a head start with this question.
Just email MoneyTalkLive@TD.com.
You can find previous episodes of MoneyTalk Live on what broker or our website, moneytalkgo.com. That would be in the MoneyTalk Live archive. That's all the time we have for the show today. Thanks for watching. We will see you tomorrow.
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