Author Topic: Dalio's paradigm shift is nigh? anyone got a professional opinion?  (Read 1621 times)

bthewalls

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Ray Dalio / Bridgewater recently stated that we are at the 'pushing on a string' phase due to previous long term QE and long term low interest rates.  So there is very little left in the tank to deal with a significant financial recession, in terms of stimulating the larger economies.

This isn't my field of work, merely amateur interest.  Are there any financial specialist on here who study this and have an idea of were things can go now? 

Will Bridgewater's potential accumulated market drop theory and potential recession lead to another 2008/depression?
Could the dollar or Yen become seriously devalued
could hyperinflation actually occur
are we in for a great market sale for the long termers

thanks guys


Baz







in terms of stimulating the economies of the larger countries.....

marty998

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #1 on: March 06, 2020, 04:38:03 PM »
No one knows the answer to that. If if there was a recession, depression so what?

Most people will keep their jobs. Nurses will still bandage the wounded, teachers will still impart wisdom to children, cops will still place you under arrest for transgressions, plumbers will still fix your toilet when it breaks, hairdressers will still style your hair, the pub will still be open pouring drinks. Realestate agents will be out and about marketing foreclosures, lawyers will have a picnic with all the failed businesses.

Life goes on, even if the financial world gets fucked. The only losers are the 1000s of bankers and associated financial industry parasites* and maybe the people who sell up their investments at the bottom and never invest again.

*And I'm one of them :)

maizefolk

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #2 on: March 06, 2020, 05:49:20 PM »
Could the dollar or Yen become seriously devalued
could hyperinflation actually occur
Technically? Sure.

But right now we're seeing a "flight to safety" that is driving down the borrowing costs of the US government which is the exact opposite of what we'd expect in a scenario that would lead to devaluation or serious inflation.

Quote
are we in for a great market sale for the long termers

Perhaps? I'll continue my regular investments and see what happens.

chevy1956

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #3 on: March 06, 2020, 07:28:55 PM »
The doom and gloomers get their little moment in the sun and then it goes back to normal all too quickly. The world isn't ending.

MustacheAndaHalf

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #4 on: March 06, 2020, 07:49:00 PM »
Ray Dalio / Bridgewater recently stated ...

Will Bridgewater's potential accumulated market drop theory and potential recession lead to another 2008/depression?
Which article?  I assume it wasn't this one, since you're stating the very opposite of what Ray Dalio said:

"Bridgewater Associates founder and co-chairman Ray Dalio is predicting the outbreak of the novel coronavirus, COVID-19, will “come and go” and leave a “big emotional impact” on the world but “probably will not leave a big sustained economic impact.”

https://westfaironline.com/121925/ray-dalio-covid-19-will-create-emotional-but-not-economic-impacts/

Saving in Austin

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bthewalls

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #6 on: March 07, 2020, 12:18:27 AM »
Ray Dalio / Bridgewater recently stated ...

Will Bridgewater's potential accumulated market drop theory and potential recession lead to another 2008/depression?
Which article?  I assume it wasn't this one, since you're stating the very opposite of what Ray Dalio said:

Yeah I saw that one...no I’m referring to a more recent you tube

"Bridgewater Associates founder and co-chairman Ray Dalio is predicting the outbreak of the novel coronavirus, COVID-19, will “come and go” and leave a “big emotional impact” on the world but “probably will not leave a big sustained economic impact.”

https://westfaironline.com/121925/ray-dalio-covid-19-will-create-emotional-but-not-economic-impacts/

bthewalls

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #7 on: March 07, 2020, 12:31:08 AM »
Here found one of the you tube series...they do a pile of interesting ones

https://youtu.be/F0r2X0FmZtg

I like to research this stuff as it’s not my background area (def not doom and gloom!...have been waiting a dip!)....merely part of on going research that I find interesting ...Dalia reckon we’re in similar situation like 1930s...but I can’t see it being that bad so reading and watching everything I can to see what I’m missing

Baz

Buffaloski Boris

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #8 on: March 07, 2020, 10:06:18 AM »
Here is the paradigm shift article:

https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio/?published=t

He has an interesting read on it and is probably right.  I'm not a PM fan, but it does have it's place.  One thing I see as being interesting as well are international assets denominated in currencies that are not so likely to depreciate against the dollar. 

maizefolk

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #9 on: March 07, 2020, 10:10:11 AM »
One thing I see as being interesting as well are international assets denominated in currencies that are not so likely to depreciate against the dollar.

Which currencies do you see as particularly unlikely to depreciate against the dollar?

MaaS

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #10 on: March 07, 2020, 10:14:33 AM »
To be fair: This near-zero interest rate scenario has never played out in a globalized world economy before. Nobody, an optimist or pessimist on this topic, knows anything.

But, I think his advice, which is that cash is trash (own productive assets) and you should put 5% in gold makes sense.


Radagast

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #11 on: March 07, 2020, 10:26:29 AM »
Some one asked this about a year ago. The general trend of the thread:
The only really worrying thing about the 30s was they ended in a world war. It is most important to not let that happen.
Except for the first two years stocks did pretty well in the 30s, no particular worry there especially as a buyer. He seems to be saying we are in the 30’s not that we are headed for them. Pushing on a string is a reference to government monetary policy not stock markets.
Interest rates in the US bottomed out in the early 40’s, so he could be saying it is a worrying sign for bonds in 10 to 50 years.

Generally pretty vague and non actionable.

Buffaloski Boris

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #12 on: March 07, 2020, 11:19:56 AM »
One thing I see as being interesting as well are international assets denominated in currencies that are not so likely to depreciate against the dollar.

Which currencies do you see as particularly unlikely to depreciate against the dollar?

Good point. Currency devaluation is usually a race to the bottom.  But here are some that I'd be looking at: Swiss franc, Australian Dollar, Canadian dollar, Saudi Riyal, Singapore Dollar, Thai Baht, Iceland Krona, Kuwaiti Dinar, maybe even the Ruble.     

maizefolk

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #13 on: March 07, 2020, 12:01:12 PM »
Good point. Currency devaluation is usually a race to the bottom.  But here are some that I'd be looking at: Swiss franc, Australian Dollar, Canadian dollar, Saudi Riyal, Singapore Dollar, Thai Baht, Iceland Krona, Kuwaiti Dinar, maybe even the Ruble.     

Interesting list. Australian and Canadian dollars I could see.

Switzerland seems tied enough into the EU that they cannot let their currency continue to appreciate against the Euro without wrecking their own economy. Similar but less formal situation to the Danish Krone.

Persian gulf currencies seem a risky bet both with low oil prices, politicl instability, and now the large reservoir of coronavirus that seems to be largely uncontrolled next door in Iran.

No specific knocks against Iceland or Singapore, but currencies of extremely small economies tend to be much more volatile in either direction that larger economies. For investments with long time horizons, Singapore seems likely to come more and more under the economic, politicial, and military penumbra of China as China continues to solidify and expand its hold on the "nine dashed line" region and beyond.

Buffaloski Boris

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #14 on: March 07, 2020, 01:03:26 PM »
Good point. Currency devaluation is usually a race to the bottom.  But here are some that I'd be looking at: Swiss franc, Australian Dollar, Canadian dollar, Saudi Riyal, Singapore Dollar, Thai Baht, Iceland Krona, Kuwaiti Dinar, maybe even the Ruble.     

Interesting list. Australian and Canadian dollars I could see.

Switzerland seems tied enough into the EU that they cannot let their currency continue to appreciate against the Euro without wrecking their own economy. Similar but less formal situation to the Danish Krone.

Persian gulf currencies seem a risky bet both with low oil prices, politicl instability, and now the large reservoir of coronavirus that seems to be largely uncontrolled next door in Iran.

No specific knocks against Iceland or Singapore, but currencies of extremely small economies tend to be much more volatile in either direction that larger economies. For investments with long time horizons, Singapore seems likely to come more and more under the economic, politicial, and military penumbra of China as China continues to solidify and expand its hold on the "nine dashed line" region and beyond.

Diversification across assets and countries. Something I’m a big fan of.

As for the epidemic, it’ll eventually blow over. In the mean time, panic selling will offer up some bargains.

vand

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #15 on: March 08, 2020, 09:04:23 AM »
We are running the largest peacetime fiscal and monetary stimuli programmes ever conducted. Future earnings in financial assets have been pulled forward, but the piper must be paid eventually.

The CAPE and Buffett indicator suggests that (US) stocks still need to lose another 25-40% to return to reasonable value.

We are now in the timeframe for the yield curve inversion from last year to be past the market peak.

Historically the Fed starting a new phase of easing shortly preceeds market peaks.

Of course none of these guarantee rough times are ahead, but the confluence of indicators now strongly suggest that the next year or two could see a sizeable correction in stocks as economic conditions deteriorate.

None of this should dissuade any of us from following our long term plans, but if your long term plan was a portfolio that is specialised for benign economic conditions then you may be in for a rougher ride than most.

Buffaloski Boris

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #16 on: March 08, 2020, 10:02:14 AM »
We are running the largest peacetime fiscal and monetary stimuli programmes ever conducted. Future earnings in financial assets have been pulled forward, but the piper must be paid eventually.

The CAPE and Buffett indicator suggests that (US) stocks still need to lose another 25-40% to return to reasonable value.

We are now in the timeframe for the yield curve inversion from last year to be past the market peak.

Historically the Fed starting a new phase of easing shortly preceeds market peaks.

Of course none of these guarantee rough times are ahead, but the confluence of indicators now strongly suggest that the next year or two could see a sizeable correction in stocks as economic conditions deteriorate.

None of this should dissuade any of us from following our long term plans, but if your long term plan was a portfolio that is specialised for benign economic conditions then you may be in for a rougher ride than most.

It'll take quite a drop for CAPE ratios in the US to revert to the historic mean. A rough ride is coming for many I suspect. These 80, 90, 100% allocations to equities are going to result in some pain if the markets continue to head downward.   

My long term plan was to wait until the next sale and buy.  Looks like we might be getting a sale. Time will tell.   

maizefolk

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #17 on: March 08, 2020, 10:15:26 AM »
Given that even in the depths of the great recession the CAPE (Shiller PE) barely touched the historical mean value for that indicator and we've otherwise been above the mean since 1990, I'm inclined to believe the people who point to changes in accounting rules that have permanently and structurally reduced calculated earnings are correct.

Another factor that pushes in the same direction is the shift to share buybacks over dividends which have produced faster per share earnings growth. If P/E ratios stay constant, faster per share earnings growth means the Shiller PE will be higher.

That doesn't mean we're not in for a big further drop in stock prices. But I don't expect to see the stock market to revert to its historic mean for the Shiller P/E ratio long term because the numbers used to calculate that ratio are not the same ones that were used historically.

Buffaloski Boris

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #18 on: March 08, 2020, 10:36:05 AM »
Given that even in the depths of the great recession the CAPE (Shiller PE) barely touched the historical mean value for that indicator and we've otherwise been above the mean since 1990, I'm inclined to believe the people who point to changes in accounting rules that have permanently and structurally reduced calculated earnings are correct.

Another factor that pushes in the same direction is the shift to share buybacks over dividends which have produced faster per share earnings growth. If P/E ratios stay constant, faster per share earnings growth means the Shiller PE will be higher.

That doesn't mean we're not in for a big further drop in stock prices. But I don't expect to see the stock market to revert to its historic mean for the Shiller P/E ratio long term because the numbers used to calculate that ratio are not the same ones that were used historically.

I agree.  And Dr. Shiller has even commented on the accounting changes aspect; he thinks it's worth a few points.  FWIW, I think that the "revised" mean should be around +/- 20.  The CAPE for the SP 500 as of Friday was 28.22. We have a ways to go.  I don't have a crystal ball so I don't and won't predict that the US CAPE will get to 15 or 20 or even 27. Although my "gut feel" is that we're in for a heck of a ride. 

For me it doesn't hugely matter; I can buy in equities markets that have CAPE ratios in the low teens or even single digits. Those are much more intriguing right now from my point of view.  YMMV.   

ChpBstrd

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #19 on: March 08, 2020, 08:08:08 PM »
I do not agree with the claim that the Fed is out of ammunition. Interest rates are their fine-tuning tool. The big wrenches are (1) open market activities / QE, and (2) setting bank reserve requirements. The fine-tuning adjustment may be mostly out of room, but in the event of an actual financial crisis there is nothing stopping the fed from creating more dollars to buy more assets virtually forever. They could do a QE twice the size or 3x the size of what was done in the past decade. All it would take would be a vote of the board.

In terms of inflation, everyone held their breath in 2010-2011 waiting for the hyperinflation to hit and we actually got the opposite. Some people are still holding their breath. The error is to think of inflation like we think of shareholder dilution, where more units = less worth. Nope. This perspective has been proven wrong for an entire decade and counting!

Actually inflation/deflation relate to the velocity of money - how often the average dollar changes hands. If everyone quit spending money starting tomorrow, prices would plummet. Similarly, if we all tried our best to empty our bank accounts to buy stuff, prices would skyrocket. Events like 2008 cause people to tighten their budgets in an attempt to survive a job loss or to make up for lost investment money. QE and interest rate cuts are attempts to prevent this behavior from starting a downward price spiral.

vand

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #20 on: March 08, 2020, 08:26:11 PM »
I would be very, very surprised now if this isn't the end of the longest bull market in recorded history.

As I write, FTSE futures are sitting around 6080, which would be about 23% from its (2018) highs, so officially in bear market. Many other stock indexes will also be entering official bear market territory, and I would expect the US to follow.

There is no doubt that when you look at the Fed's loosening programme, which has been ongoing for a year now, the signs are that economic conditions were deteriorating anyway, and with the further damage inflicted by Coronavirus, the markets that were priced for perfection are now adjusting to the new, somewhat less than perfect reality.

I started buying the FTSE last week and will probably deploy most of my remaining cash continuing to buy it this week. Totally in contrast to the US markets, it actually looks cheap based on CAPE and Buffett indicator values, yielding 5.3%, and looks like it will be cheaper still when the markets open on Monday morning.

vand

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #21 on: March 08, 2020, 08:49:34 PM »
I do not agree with the claim that the Fed is out of ammunition. Interest rates are their fine-tuning tool. The big wrenches are (1) open market activities / QE, and (2) setting bank reserve requirements. The fine-tuning adjustment may be mostly out of room, but in the event of an actual financial crisis there is nothing stopping the fed from creating more dollars to buy more assets virtually forever. They could do a QE twice the size or 3x the size of what was done in the past decade. All it would take would be a vote of the board.

In terms of inflation, everyone held their breath in 2010-2011 waiting for the hyperinflation to hit and we actually got the opposite. Some people are still holding their breath. The error is to think of inflation like we think of shareholder dilution, where more units = less worth. Nope. This perspective has been proven wrong for an entire decade and counting!

Actually inflation/deflation relate to the velocity of money - how often the average dollar changes hands. If everyone quit spending money starting tomorrow, prices would plummet. Similarly, if we all tried our best to empty our bank accounts to buy stuff, prices would skyrocket. Events like 2008 cause people to tighten their budgets in an attempt to survive a job loss or to make up for lost investment money. QE and interest rate cuts are attempts to prevent this behavior from starting a downward price spiral.

The scenario that removes their ability to simply use every looser monetary tools is if we enter an inflationary recession such as experienced in during the 1970s. In that scenario the Fed's priority must be to fight inflation, which means tighter monetary policy.. Volker didn't raise interest rates to 15% or whatever it was just for shits and giggles, he did it to because confidence in the dollar was rapidly being lost at the time as inflation was destroying purchasing power. Stocks will get crushed under a scenario where the Central banks' priorities is to show that they are serious about maintaining the purchasing power rather than continually debasing it to support financial assets.

I'm not say that's what's going to happen.. I don't know exactly what will happen, but if we are talking about paradigm shifts, it is wise to consider it a possibility at least. Today's prevailing paradigm of low inflation gives them leeway to supports elevated financial asset prices, but it may not last forever.

ChpBstrd

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #22 on: March 08, 2020, 09:15:01 PM »
I do not agree with the claim that the Fed is out of ammunition. Interest rates are their fine-tuning tool. The big wrenches are (1) open market activities / QE, and (2) setting bank reserve requirements. The fine-tuning adjustment may be mostly out of room, but in the event of an actual financial crisis there is nothing stopping the fed from creating more dollars to buy more assets virtually forever. They could do a QE twice the size or 3x the size of what was done in the past decade. All it would take would be a vote of the board.

In terms of inflation, everyone held their breath in 2010-2011 waiting for the hyperinflation to hit and we actually got the opposite. Some people are still holding their breath. The error is to think of inflation like we think of shareholder dilution, where more units = less worth. Nope. This perspective has been proven wrong for an entire decade and counting!

Actually inflation/deflation relate to the velocity of money - how often the average dollar changes hands. If everyone quit spending money starting tomorrow, prices would plummet. Similarly, if we all tried our best to empty our bank accounts to buy stuff, prices would skyrocket. Events like 2008 cause people to tighten their budgets in an attempt to survive a job loss or to make up for lost investment money. QE and interest rate cuts are attempts to prevent this behavior from starting a downward price spiral.

The scenario that removes their ability to simply use every looser monetary tools is if we enter an inflationary recession such as experienced in during the 1970s. In that scenario the Fed's priority must be to fight inflation, which means tighter monetary policy.. Volker didn't raise interest rates to 15% or whatever it was just for shits and giggles, he did it to because confidence in the dollar was rapidly being lost at the time as inflation was destroying purchasing power. Stocks will get crushed under a scenario where the Central banks' priorities is to show that they are serious about maintaining the purchasing power rather than continually debasing it to support financial assets.

I'm not say that's what's going to happen.. I don't know exactly what will happen, but if we are talking about paradigm shifts, it is wise to consider it a possibility at least. Today's prevailing paradigm of low inflation gives them leeway to supports elevated financial asset prices, but it may not last forever.

True!

But I doubt it's going to happen because (1) demographic graying means reduced demand over time, (2) student loan debt mean millennials and gen Z are never going to spend like boomers and gen x did, and (3) a lack of unions has been proven to keep wages low, and very few people are in unions today compared to the 70s. For all these reasons, the fed has barely been able to keep inflation positive for a decade now, and each of the reasons is increasing in intensity.

The catch would be if there was a breakthrough in productivity on the scale of the personal computer or internal combustion engine. AI has the most promise to create such disruption. Imagine each worker assigning AI bots to perform the knowledge work they used to do by hand. However, progress so far has been incremental and slow.

maizefolk

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #23 on: March 08, 2020, 09:25:32 PM »
The catch would be if there was a breakthrough in productivity on the scale of the personal computer or internal combustion engine. AI has the most promise to create such disruption. Imagine each worker assigning AI bots to perform the knowledge work they used to do by hand. However, progress so far has been incremental and slow.

Wouldn't a big increase in productivity be deflationary rather than inflationary? If the same number of dollars* are chasing a growing number of goods and services, prices for equivalent goods and services should decline.

*Assuming a constant velocity of money.

MustacheAndaHalf

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #24 on: March 09, 2020, 02:56:33 AM »
Last year Vanguard Total World ETF returned over +26%, while Ray Dalio's Pure Alpha fund was flat at +0.5%.  So while reading his predictions, keep in mind his track record in predicting the shift for the future (which is what his article is about).

Others mentioned currencies, but Ray Dalio also mentions gold.  His claim is that while equities and bonds return almost nothing, commodities will do better.  He predicts a race to the bottom in bond and equity returns.

When I've looked at commodity index funds / ETFs, their expense ratios have been too high for me.  Maybe a way around that is gold, which then lacks diversification to other types (like wheat or oil).  But it certainly saves on expense ratios, as there are multiple gold ETFs with 0.17% to 0.25% expense ratios.

Apparently since gold is a commodity, not an asset, you pay higher taxes?  For example, the long-term capital gains tax is 15% for most people, which is what you pay after holding Vanguard Total World (VT) for over a year.  Apparently with a physical gold fund, you would pay 28% in the same situation - the tax burden is about double.

ChpBstrd

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Re: Dalio's paradigm shift is nigh? anyone got a professional opinion?
« Reply #25 on: March 09, 2020, 09:13:04 AM »
The catch would be if there was a breakthrough in productivity on the scale of the personal computer or internal combustion engine. AI has the most promise to create such disruption. Imagine each worker assigning AI bots to perform the knowledge work they used to do by hand. However, progress so far has been incremental and slow.

Wouldn't a big increase in productivity be deflationary rather than inflationary? If the same number of dollars* are chasing a growing number of goods and services, prices for equivalent goods and services should decline.

*Assuming a constant velocity of money.

Could be. The invention of the personal computer was accompanied by falling inflation and interest rates for the next 40 years as more kept being produced with less labor (disinflationary). However it was also accompanied by the rise of the information technology industry out of nowhere, which generated lots of economic wealth, employed millions of people, and caused the churning of a lot of money (inflationary). IDK if AI would work that way, or if like Google search it employs a relatively small group of developers and funnels rents to shareholders, which would be disinflationary. Will AI be merely a product quality improvement like Google’s web search or will it create a new set of needs and shift consumption?

I don’t think web searches are included in the CPI, because the cost is too cheap and abstract to measure, but computers, smartphones, apps, and data are now factors. The costs of self-driving car systems, automated ride share services, and AI personal assistant software will be included when/if they become established products. So maybe it depends on the properties of these technologies. Can AI be cheaply mass produced, like software or web pages, or will it require highly costly cutting edge hardware? Will it employ millions or, on net, put millions out of work?