Layoffs Will Affect Blue-Collar Workers, And AI Users Will Try To Out-Compete The Big Tech Companies

Several analysts believe that this year's stock prices, particularly in the tech sector, have been overpriced. Included in them is Josh Wolfe, the managing partner and co-founder of Lux Capital. The S&P 500 SPX, -1.19% is up 5% so far this year, and the tech-heavy Nasdaq Composite COMP, -1.73% is up 11% as of Thursday.

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The company cautions that investors may not be adequately valuing the serious risks of enormous misallocation and excess debt in its quarterly letter to investors, which Wolfe posted on Twitter.

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The fund notes that the S&P 500 market size to GDP ratio, a straightforward ratio made famous by Warren Buffett, may need to decline by 30% or more before it returns to trend. The price-to-earnings ratio, which is 29 times when adjusted for cyclical factors, would also need to decrease by 30% in order to resume its historical trend. At its highest points since the 1980s, the 2-year to 10-year spread is inverted.

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According to the fund, this signals the aftereffects of recent excess. "Falling price-earnings multiples, declining tech spending, and consequently falling earnings are all effects of rising rates. To soften the simultaneous hit of declining ratios (P/E) and rationing (consumer spending), labor is the logical and first target for cost-cutting, the fund writes.

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They believe that what has affected technology will also affect others. Notwithstanding the significant demand for blue-collar jobs, this trend may have started after COVID reopenings, when middle- and upper-class demand outweighed labor supply. The fund asserts that as layoffs spread from white to blue, the worst-off among us will suffer disproportionately in the coming two years, planting the seeds of societal upheaval.

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From an investment standpoint, conflicts give rise to interests, and the current battleground is artificial intelligence. The big tech behemoths, like Alphabet's Google GOOGL, -2.07%, Microsoft MSFT, -2.06%, and Amazon AMZN, -2.83%, want to monetize their computer capacity, but given the costs to train a fundamental AI model, Lux sees a shift among business owners and developers to a decentralized system, similar to the one that was built in the crypto frenzy.

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The company notes that it has invested in a significant player "that will come out of stealth shortly," adding that the availability of extremely advanced compute clusters originally utilized for bitcoin mining is now being repurposed toward the new need for training open-source AI models.

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Lux also invests in Hugging Face, which hosts AI models, RunwayML, a tool for artists to use machine learning, and MosaicML, which offers machine learning infrastructure and software tools.

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According to the fund, Chinese President Xi Jinping is one indicator of where the world is headed. The development of tech behemoths in e-commerce, social media, mobile, payments, edtech, delivery, and logistics was supported by XI when he served as vice president under Hu Jintao. Now, he is approving hard sciences and deep tech, including biotech, aerospace, defense, space, satellites, and semiconductors. The emphasis has shifted from Made in China to created in China under Xi, and "global capital will be advised to competitively follow his cues," according to the author.

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