In this article I've juxtaposed excerpts from Tr@cy R. Twym@n's non-fiction book Money Grows on the Tree of Knowledge with the latest (October 2024) open sourced issue of Evercore Wealth Management's Magazine Independent Thinking: The New Standard in Wealth Management.
"Just like those who came before us, we have been sold into slavery by our ancestors, who were simultaneously plied with promises of blessings and threatened with curses, until they agreed to offer their children up for sacrifice. As we know, in 1913, the Federal Reserve was created. Known colloquially as “the Fed,” or “the Temple,” they magically created a gold-pegged money supply out of nothing through fractional reserve lending, using the multiplier effect, and allowed the other banks in the country to do likewise. It was this faith that was the secret ingredient in the magical recipe that allowed the alchemy of fiat currency to work. This process involved selling bonds, backed with the full faith and credit of the United States government." (pg 85)
-- Money Grows on The Tree of Knowledge (2010) by Tracy R. Twyman
That made me laugh when I first heard it. Logging into websites has become a chore for all of us, albeit
for good security reasons. But it also made me think about how quickly our world is changing, as we begin to realize – and hopefully harness – the potential of Artificial Intelligence. That’s a subject we are addressing in
detail, in these pages and in several client events. Our focus to date has been on the investment side, although we are exploring ways in which AI can support and enhance – but never replace – our very human work with client families.
CapEx: Too Much of a Good Thing?
"One of the effects of this system is to create surplus labor, the very thing that Karl Marx said would bring about the downfall of capitalism. This, by its very nature, brings unemployment and low wages, destroying a country’s standard of living, and plunging its population into deep poverty. It has turned the planet into a giant slave labor prison, where everyone who is lucky enough to have a job has to work at an ever-increasing level of productivity for an ever-decreasing value of remuneration in order to compete."
-- Money Grows on The Tree of Knowledge (2010) by Tracy R. Twyman
Public and private capital expenditure, or CapEx, is at record highs in the United States. From semiconductor manufacturing to cloud infrastructure expansion, to boosting the energy grid, incorporating Artificial Intelligence, or AI, into our lives isn’t cheap. At the same time, companies are also re/onshoring manufacturing, to control more aspects of critical supply chains and convert to greener energy. As the costs total up, thoughtful investors need to reconcile the benefits and the risks.
he scale of the investment is enormous. The largest cloud service providers –Amazon, Microsoft and Google parent Alphabet – are committed to over $150 billion combined in estimated CapEx spending this year. 1 The lion’s share is earmarked for AI adoption, including infrastructure, services and research – to drive ever greater computation at ever greater speeds and scale. As illustrated by the chart below, that’s up almost 50% from collective CapEx spending by these three companies last year, and up over 85% from their five-year average.
"Before you can even get a job in the present system, you have to first prove that you are an ideal slave. You must be in good health (and submit a DNA sample to prove you don’t have any bad habits). You must have a record of always obeying the law, always paying your debts, never quitting your jobs, never getting fired, and never having any lapses in your employment. You must be willing to sacrifice your family, your wealth, and even your health (which is supposedly so important) in order to fulfill your master’s wishes. You must anticipate his needs before he speaks them. Most importantly, you should have no personal ambition, but be overzealous in your desire to achieve your master’s goals for him. If you cannot meet these requirements, there are 1000 other eager slaves waiting to take your place."
-- Money Grows on The Tree of Knowledge (2010) by Tracy R. Twyman
In addition to these hyperscalers, next-tier cloud providers such as Oracle and IBM are ramping up their own CapEx to support internal AI programs. Indeed, Oracle is projected to double its CapEx in the year ahead. And Meta and Tesla have similarly massive spending requirements for their own networks, projecting $50 billion and $10 billion in CapEx over the next 12 months, respectively. Next up should be spending by corporations inthe broader economy, including in the energy, healthcare, consumer productsand financial services sectors, which will require the software, data centers
and services that the hyperscalers are building out. In addition, plenty of money will be spent on the delivery of AI to people – the so-called Edge AI, which brings the tools to people’s phones and computers – and the energy necessary to enable all of this.
"Those who cannot compete are cast out of the system, like Cain, forced to play the role of the vagabond and the fugitive. Like the righteous in the Revelation of St. John the Divine, those who refuse the Mark of the Beast are not allowed to buy or sell. They must beg, borrow, and steal to get their bread. They are not permitted to sleep anywhere, and are always in violation of some law, merely for existing, merely because they cannot afford to bribe the authorities they run into at every corner who demand a toll for passage, or rent for staying put." (pg 90)
-- Money Grows on The Tree of Knowledge (2010) by Tracy R. Twyman
As for the energy grid, the United States has a deservedly terrible reputation. The demand for capital investment is only more pressing now, as the data centers that power AI are using tremendous amounts of energy. The incremental electricity consumption projected from 2024 to 2030 will be the equivalent of three times that of New York City. And re/onshoring manufacturing, as well as increasing electric vehicle usage, will only add to domestic energy consumption. Much of this cost will be borne by government-led initiatives, of course. But the private sector is contributing as well, in the power grid, in transmission and distribution, in pipelines, and on alternative energy sources, including natural gas, nuclear and renewables. Utilities across the country are looking to seize the opportunity to address an uptick in energy demand by targeting high-return investments in expanded capacity. At the same time, supporting the grid is an area of some bipartisan support, with proposed legislation released this past July.
Hell, or the present situation
"Whether or not the gods ever really existed, or any particular theology is correct is incidental to our inquiry. What is important about these myths is that they portray society as the maladapted stepchild of a dysfunctional family that has lived through thousands of years of intergenerational abuse. Everyone alive has grown up in a system where the main goal was to take power away from others and abuse others less powerful than they were: eat them, before they eat you.
Profits are already showing up at the cloud service providers: Microsoft and IBM have both detailed a direct line to revenues from their massive capital spending, as they have been able to convince many of their customers to spend more on AI-enhanced products. Longer term, this cycle has one big advantage over past debt-fueled CapEx booms. The biggest spenders are the biggest and best capitalized companies in the world, with massive research and customer bases. They are primarily using operating cash flow, not debt, to fund AI-driven spending. They should have time to make sure that their investments pay off.
Historically we have put up with this, and participated in it, out of the irrational belief that it was necessary to achieve prosperity and security for ourselves. We have been traumatized, hypnotized, and conditioned into believing this. We feel trapped and imprisoned, but we also believe that there is no life outside of the prison, and greater punishment to come if we try to escape. So we never do. But the situation is changing. The brutal, cannibalistic matrix that has nursed us for so long is dying."
-- Money Grows on The Tree of Knowledge (2010) by Tracy R. Twyman
It is unclear yet whether AI-related productivity enhancements will be worth the cost for the average small- or medium-size company. Call centers, pricing algorithms, supply chain and inventory management, and improved customer interactions are among the many use cases posited, but all need time to be implemented before rates of return on investment become clear. Bigger picture, the prospect of autonomous vehicles, AI-enhanced robotics, new and faster research and development in healthcare, energy, space travel and more could have a massive impact on productivity.
This infrastructure needs to be built, regardless of the AI cycle, and a strong CapEx cycle generally bodes well for the economy. To date within energy infrastructure, we do not see signs of overbuilding or bubble economics. Indeed, the question here is whether the developments in these areas will proceed fast enough to support advances in technology. This is an important consideration as the AI investment cycle unfolds unpredictably in parallel.
We continue to believe that overall portfolio diversification, with exposure to cash, defensive and credit-sensitive fixed income, stocks and illiquid alternative investments, if appropriate, is the best risk mitigator. We are always mindful of having too much exposure to any single trend or investment thesis, regardless of the surrounding hype.