The Robots Are Here

 October 2024 Client Letter 

In early October, 45,000 dockworkers went on strike at multiple ports along the U.S. East Coast and Gulf Coast, causing the largest port shutdown in 50 years. While the strike was primarily portrayed as a push for higher wages, what interests me most is the workers’ concerns about automation. They are seeking assurances for a ban on AI-powered robotic automation for loading, unloading, and handling freight.

While I understand the desire to protect jobs, automation is inevitable. The benefits of robotics—efficiency and reliability—are too significant to ignore. The integration of AI and robotics in port operations isn’t a question of if, but when.

In my view, automating our ports is critical for national interests. The COVID-19 pandemic exposed vulnerabilities in our supply chain due to labor shortages and lockdowns. Automated ports could have mitigated these impacts, allowing operations to continue with fewer health-related disruptions.

Failing to automate puts the U.S. economy at a competitive disadvantage. Global competitors like China, whose ports in Shanghai and Ningbo are highly automated, process goods faster and more efficiently. U.S. ports that lag in automation will struggle to keep up with increasing global trade demands. Automation offers reduced costs, increased speed, and advanced AI-powered logistics, making it essential for future growth.

Robots Don’t Go On Strike

The global robotics market is projected to grow significantly, from $71.51 billion in 2023 to $319.24 billion by 2030, with a compounded annual growth rate of 23.83%, according to Research and Markets. As investors, this presents an opportunity. Robotics and AI will transform industries much like the personal computer, the internet, and smartphones did. Companies that fail to adapt risk becoming obsolete. Robots, unlike humans, don’t take breaks, don’t need vacations, and don’t go on strike.

Automation and Robotics Trends 

One of the reasons I favor Amazon in our equity portfolios is its industry-leading focus on innovation. With over 750,000 robots deployed across its global facilities, Amazon has integrated robotics to enhance efficiency. These robots collaborate with human employees to perform repetitive tasks, streamlining operations. For example, in 2022, Amazon’s “Robin” robotic handling system sorted one billion packages, accounting for one-eighth of all orders delivered worldwide.

Amazon continues to innovate in the field of robotics and is not only a major user of industrial robots but also one of the largest manufacturers. This vertical integration allows Amazon to tailor its robotic solutions to its specific needs, driving further efficiencies and advancements.

Amazon’s leadership in robotics and automation provides a significant competitive advantage. The ability to efficiently manage and fulfil orders at scale is crucial in the highly competitive e-commerce market. The use of robots reduces operational costs by minimizing the need for human labor in repetitive tasks. Amazon’s robotic systems are highly scalable, allowing the company to quickly adapt to changes in demand. This scalability is particularly important during peak shopping seasons, such as Black Friday and the holiday season, allowing Amazon to meet customer expectations without compromising on service quality.

Technology Leaders in Focus 

When it comes to internet search, Google is a name that needs no introduction. The company has become so synonymous with search that to “Google it” is now a verb in everyday language, highlighting the company’s success and influence. However, Google’s parent company, Alphabet Inc., extends far beyond search engines. Alphabet’s diverse portfolio includes ventures in artificial intelligence, cloud computing, YouTube, autonomous vehicles through Waymo, healthcare innovations with Verily, and ambitious projects in robotics.

Google’s robotics program is a comprehensive and ambitious initiative that integrates advanced robotics technology with cutting-edge machine learning. At the heart of this program is Google Research, which focuses on enhancing robotics through unsupervised learning, skill acquisition, and reinforcement learning. This approach allows robots to learn and adapt in real-world environments, making them more versatile and capable. Google fosters close collaborations between machine-learning researchers and roboticists, regularly publishing research on topics such as robotic skill acquisition, vision-language models, and mechanical search. These efforts are aimed at pushing the boundaries of what robots can achieve, making them more autonomous and efficient.

A significant part of Google’s robotics efforts is driven by DeepMind, a subsidiary known for its AI research. DeepMind has developed models like RT-2, a vision-language-action model that helps robots understand and perform tasks in both familiar and new situations. This model exemplifies Google’s vision of creating robots that can seamlessly integrate into various environments and perform complex tasks with minimal human intervention. DeepMind’s research is crucial in advancing the capabilities of robots, making them more intelligent and adaptable.

Other companies we own for clients are also making contributions to the robotics industry through their advanced technologies and platforms. Nvidia provides powerful AI and computing platforms, such as Nvidia Isaac, which are used by leading robot manufacturers to develop, train, and build advanced robots. Broadcom, while primarily known for its semiconductor solutions, plays an important role in AI and connectivity technologies essential for modern robotics.

Qualcomm offers integrated platforms specifically designed for robotics, like the Qualcomm Robotics RB3 and RB6 platforms, providing advanced AI and connectivity solutions for autonomous robots. Texas Instruments (TI) supports advanced robot system development, particularly in industrial automation, with its wide range of integrated circuit products. Their technologies enable perceptive sensing, precise motor control, and real-time communication, enhancing the capabilities of industrial robots.

Gold’s Strategic Role 

Over the past year, the price of gold has risen 38% as it reached a record high in October of $2,700 per troy ounce. I feel the rise in gold prices has been somewhat overshadowed by the buzz around artificial intelligence, data centers, nuclear energy, and the U.S. elections. Despite these dominating headlines, gold’s performance has been noteworthy, and to me, a little surprising. With inflation trending downwards and the Federal Reserve beginning to cut interest rates, one might have expected gold to struggle. However, geopolitical tensions, including the conflicts in Ukraine and the Middle East, have played a role, even if these events have remained largely regional. The resilience of gold in today’s climate is a reason some investors view the position as a hedge against uncertainty.

A recent article in The Economist titled, What the surging price of gold says about a dangerous world,” noted that family offices, which manage the wealth of the privately wealthy, have seen their assets under management grow from $3.3 trillion in 2019 to $5.5 trillion today. These investors may be turning to gold to protect their wealth from potential economic downturns and currency devaluation. Gold’s relatively fixed supply, unchanging physical characteristics, and historical significance are thought to make it an attractive hedge against inflation, poor economic policies, and periods of unrest. According to Campden Wealth, a data provider, over two-thirds of family offices invest in gold, with significant demand coming from Asia, particularly China and India.

According to The Economist, central banks have also been significant drivers of the recent rally in gold prices. Historically, gold’s share of central-bank reserves declined from almost 40% in 1970 to just 6% in 2008. However, this trend has reversed, with gold now making up 11% of central-bank reserves, the highest level in over 20 years. The invasion of Ukraine by Russia and the subsequent freezing of its foreign-currency reserves highlighted the risks of relying on assets denominated in Western currencies. As a result, central banks in countries like China, Turkey, and India have significantly increased their gold holdings. Since the start of 2022, these countries have purchased 316, 198, and 95 tons of gold, respectively.

Not all central banks increasing their gold reserves have contentious relationships with the West. For example, the Monetary Authority of Singapore and the National Bank of Poland have also been accumulating gold. Poland’s central bank aims to keep 20% of its reserves in gold, viewing it as a strategic hedge with low correlations to other asset classes. Central-bank demand for gold is expected to remain strong, with a survey by Invesco Asset Management indicating that none of the 51 central banks surveyed plan to reduce their gold allocation in the next three years, and 37% expect to increase it.

For clients, we gain exposure to gold through exchange-traded funds GLD and GLDM. These ETFs are a low-cost way to gain exposure to the gold market without having to physically own the metal. The funds hold gold bars in secure vaults, primarily in London, and their values are based on the spot price of gold, minus expenses and liabilities.

Must-Own (MO)

When it comes to topping the list of dividend stocks to own, Altria Group (MO) is often a consideration. Formerly Phillip Morris, the American manufacturing company specializes in the manufacturing and production of cigarettes, tobacco, and other nicotine products. Regardless of your stance on smoking, the tobacco industry has historically enjoyed steady profits thanks to the persistent smoking habits of individuals. And while there has been a long-term decline in smoking rates in the U.S., the industry has strong pricing power, which has helped sustain its cash flow.

Altria is a prime example of a blue-chip stock known for its consistent dividend payments and increases over the years. Altria has a long history of paying dividends, dating back decades, a hallmark of blue-chip stocks, providing investors with reliable income. The company has a strong track record of increasing its dividend, having raised its dividend for 54 consecutive years. This demonstrates Altria’s commitment to returning capital to shareholders and its ability to generate steady cash flow. The company’s financial health supports its dividend policy, with strong cash flow and profitability enabling it to maintain and grow its dividend payments.

While it’s unclear if the term “must own” has been coined for Altria Group (MO), its current yield of 8.17%—one of the highest in the S&P 500—makes it an attractive option investors might find too good to pass up.

Investment Landscape: Balancing Innovation and Security

As we look across today’s investment landscape, three key themes emerge, in our view. First, the robotics and AI revolution, led by companies like Amazon and Google, represents a transformative force reshaping industries from shipping ports to warehouses. This technological disruption creates both challenges and opportunities, which is why we maintain exposure to companies we believe are at the forefront of this change.

Second, the increase in gold prices and increasing central bank purchases remind us of the importance of defensive positioning in uncertain times. While technology drives growth, gold has historically been seen as a store of value, particularly as geopolitical tensions persist.

Finally, steady-income generators like Altria demonstrate that, even in a rapidly changing world, investors can still benefit from traditional dividend-focused investments that provide reliable cash flow. This three-pronged approach—embracing technological innovation, maintaining defensive positions, and securing reliable income streams—reflects our commitment to building portfolios suited for today’s dynamic environment.

Have a good month. As always, please call us at (800) 843-7273 if your financial situation has changed or if you have questions about your investment portfolio.

Warm regards, 

 

 

 

Matthew A. Young 
President and Chief Executive Officer

Health

How Healthy Is Broccoli? The New York Times, 10/14/2024

Most of us inherently know to eat our broccoli, but reminders are always welcome when it comes to our health. Broccoli is a nutritional powerhouse, packed with vitamins, minerals, and phytochemicals that offer numerous health benefits. According to Emily Ho, a nutrition expert, broccoli is a “multitasking vegetable” that can help boost your body’s defenses. One of its standout compounds is sulforaphane, an antioxidant known for its cancer-fighting properties and ability to help the body expel toxins like air pollution and cigarette smoke. Additionally, broccoli supports heart health by aiding in blood circulation and lowering blood pressure and cholesterol levels. It’s also high in fiber, which is beneficial for digestive health and may contribute to bone strength. For optimal benefits, it’s recommended to consume about one cup of chopped raw broccoli daily, preferably steamed to retain its crunch and nutrients.

Due Diligence

That 5% CD Is a Great Deal—Until the Bank Calls It Back, The Wall Street Journal, 10/1/2024

The WSJ reports the allure and potential drawbacks of high-yield certificates of deposit (CDs). While these CDs can offer attractive returns, especially when interest rates are high, they can come with features that can impact their overall value. One such feature is the callable option, which allows banks to terminate the CD before its maturity date, returning the principal and accrued interest to the investor.

Before the Federal Reserve began cutting rates in September, banks offered certificates of deposit promising high yields for locking up cash years into the future. The highest-yielding ones, with returns in excess of 5%, had features allowing the bank to ‘call’ them before they mature, handing back the cash and accrued interest. Those features got little attention when rates were rising because banks weren’t about to call their CDs and borrow money at even higher rates. Now, banks … are calling back more high-yielding CDs before they mature to save on interest as rates begin to fall, according to people familiar with the matter.

This situation is an example that high yields may not always be the “great deal” they appear to be. Investors should be cautious and conduct due diligence before committing to many financial products. As the saying goes, there is rarely any free lunch in finance, and understanding the terms and conditions of high-yield CDs is helpful to avoid unexpected outcomes.

Microsoft Going Nuclear

Microsoft, Three Mile Island Deal Delivers a Blow to Wind and Solar Power, RealClearEnergy, 10/14/2024

Microsoft has entered into a significant 20-year agreement with Constellation Energy to power its data centers using nuclear energy from the Three Mile Island plant in Pennsylvania. This deal involves reviving a reactor that has been shut down since 2019, which was not affected by the infamous 1979 partial meltdown.

This strategic move by Microsoft is aimed at securing a reliable and low-carbon energy source for its AI-driven data centers. By opting for nuclear power, Microsoft aims to reduce its reliance on intermittent renewable energy sources like wind and solar power. The deal highlights Microsoft’s commitment to sustainability and its efforts to meet the growing energy demands of its cloud computing and AI operations with a stable and environmentally friendly energy source.

The revival of the Three Mile Island reactor is expected to deliver a blow to wind and solar power, as it demonstrates the potential of nuclear energy to provide consistent and large-scale power generation. This initiative aligns with Microsoft’s broader strategy to enhance the efficiency and sustainability of its operations, ensuring a steady supply of clean energy for its data centers.