Modest Proposal - AI Commoditization and Capital Dynamics

**Patrick O'Shaughnessy** (0:00)
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**SPEAKER_2** (2:07)
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**Patrick O'Shaughnessy** (2:36)
My guest today is Modest Proposal, joining me for our third conversation and the first in a few years. Modest is anonymous online, but one of the most thoughtful investors that I know, overseeing a large pool of capital in public and private markets. He offers insight into many different corners of today's landscape, covering AIs frontier models versus open source models, over capacity issues in transportation in our post-COVID world, and the potential economic impact of GLP-1 drugs and more. I always love hearing what Modest thinks about markets. Please enjoy our latest conversation.
Maybe a fun place to start would be to teach us about what mid-2000s commodity markets can teach us about today's market.

**SPEAKER_3** (3:19)
Yeah, so something that's been on my mind throughout COVID and really accentuated by what's transpiring today with AI is this idea of what happens when surging demand meets an elastic supply.
And the mid-2000s commodities just did a wonderful example of that, which is China had historically been out of the global economy for a long time, joined WTO, joined the global trading environment.
And within five, six years went from consuming very small amount of global traded commodities to a very large amount. And so the way this manifested in markets was one, commodity prices went up a lot. And if you remember the backdrop, which is late 90s tech bubble, emerging markets, 97, 98 total blow up. And so strong dollar, all the capital coming into the US, commodity prices crushed. Now all of a sudden tech bubble collapses, 9-11 in the US, big focus on international markets, China's growing fast and commodity prices are soaring. So money's flowing into emerging market, equity indexes, buying miners, buying banks, buying all sorts of this stuff.
And the idea was people were putting multiples on the way I think of it in microeconomic terms was temporary surplus. And when you put a multiple on something, you're implicitly capitalizing a long duration of cash flows. Capitalism in this case did its job, which was people went around the world and said, oh, look, there's some mines or there's some materials, let's go build mines. And magically over the course of three, four, five years, a whole lot of supply came online. We went through the GFC and still in the late 2000s, early 2010s, you still had China consuming an enormous amount of commodities. So prices stayed somewhat stable, but as China's growth slowed and supply continued to increase by 2014, the auto commodity collapse. And if you look at any of the indexes, oil is a little different because it sometimes has some geopolitical issues with it as well. But I mean, if you just look where oil was, it was 140 and now it's 80 You look at commodity indexes still down and that's not surprising because the supply is permanent. It came online. And the last time I was on, we talked about the capital cycle and this is the classic example of it. But the willingness of markets to continually put multiples on this temporary surplus is a constant source of confusion for me if you even go into parts of COVID. Soaring demand for everything digital in 2020 when the real world shut down, that probably wasn't going to persist unless the real world was shut down permanently and that did not happen. So you're seeing it today in a number of places. I mean, the most obvious place where surging demand is meeting an elastic supply is chips, where as fast as TSMC can make chips, they are being sold. The other places you're seeing it are in power generation, where we were talking before we started, 20 years power consumption in the United States is flat. I was reading a report last week that said they expect something on the order of 2.5% a year growth over the next seven, eight years. And that's summed up to over 30% aggregate growth in power consumption in the US.