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A Few Things: Narratives on Wall St, Invisible War, Marko's Latest, US Head Fake, Change The Way You Work, What are LLMs good for, What's Next for LLMs, How to Invest In AI, News You Missed....
February 16 2023
I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.
You can check out last week’s edition here: How To Have Transformative Ideas, The Score Takes Care Of Itself, The First Tycoon, Rules For Happiness, The Secrets of Art, The King Discovers The Halfways!!!
Quotes I’m Thinking About:
“When you’re good at something, you tell everyone. When you’re great at something they’ll tell you.”
- Walter Payton
“Wealth is above all an accumulation of possibilities”
- Gabriel Zaid
“Between two evils, I always pick the one I never tried before.”
- Mae West (American stage & film actress)
“This is the highest wisdom that I own; freedom and life are earned by those alone who conquer them each day anew.”
- Johann Wolfgang von Goethe
“The mind is not a vessel that needs filling, but wood that needs igniting — no more — and then it motivates one towards originality and instills the desire for truth. Suppose someone were to go and ask his neighbours for fire and find a substantial blaze there, and just stay there continually warming himself: that is no different from someone who goes to someone else to get some of his rationality, and fails to realize that he ought to ignite his innate flame, his own intellect.”
A. A Few Things Worth Checking Out:
1. Ben Hunt of Epsilon Theory was on the Smarter Markets podcast discussing how narratives and stories drive behaviour on Wall Street.
I think narratives are driving behaviour and asset prices more than ever before, so this is a good one to listen to on how to spot stories and when you are being sold one.
“What drives our behaviours to buy and sell? A story. Why should we do something? That’s story creation. And that’s what Hollywood and Wall Street do better than anyone else. Once you start thinking of it in those terms, it really changes how you can be an active participant in markets.”
Reminded of the movie “Wag The Dog” with Dustin Hoffman, Robert DeNiro.
Changed the way I looked at politics and news forever.
2. I only pay for a handful of blog subscriptions, one of these is Dr. Pippa Malmgren. She is usually thinking and writing about stuff that hasn’t hit mainstream. She spots narratives early.
Her latest post will feel “out there” for many of you, but think about it with an open mind. It’s titled: QE, UAPs, Aliens and The Invisible War.
Here are key bits, emphasis mine.
In the aftermath of the Great Financial Crisis, policymakers concluded that the prices in the market could not be allowed to fall. They made a concerted effort to prevent what they thought would be an unprecedented catastrophe. They dropped interest rates to zero and embarked on a policy of spreading free money around called Quantitative Easing (QE). Ben Bernanke got a Nobel Prize for spearheading the idea. It worked for a while. But soon, they realized that QE could not last forever. They needed another way to get liquidity into the markets. They found it. Defense spending. Today we are seeing the results of this massive jump in defense spending in the form of UAPs, light flashes in the sky, clashes in space, and poor explanations from The White House.
Today, I stand by all this and will now argue that many of the strange events around UAPs, odd lights in the sky, and other concerning events, are the result of this arms race and the ongoing invisible war that the superpowers are conducting with all this money and new tech in the places the public cannot see: near and far space, across and under the open oceans, within data/cyberspaces, and in, let’s call it, “Spygame land” where spies have returned as a “thing.” The Chinese “Sky Lanterns” floating across the skies have illuminated a previously invisible arms race and a war that we need to understand.
So, here’s the question: what if the spending is working? What if militaries have developed new capabilities that the public does not know about? What if new innovations are no longer in development but are now deployable or even deployed? Is it possible that your average person expects the new technology to look like an aircraft carrier or a fighter jet but, in reality, the new tech is much faster, much smaller, and deployed further away than anything we’ve seen before? Maybe China and Russia together have a David versus Goliath strategy? Maybe they have developed systems that are very small and which are quite literally under America’s radar.
This takes us to Unidentified Flying Objects, which were only recently and conveniently reconsecrated as Unidentified Aerial Phenomena. What if well-funded secret military programs have succeeded in creating aerial and even submarine capabilities that we don’t know about? Wouldn’t it be surprising if all that money had not resulted in new capabilities? It strikes me as very interesting that NORAD is loaded with all kinds of cameras and sensors for detecting inbound nuclear missiles, which is their principal mission. After the first Chinese balloon wafted straight over Alaska, Canada, and the entire US Continental land mass, NORAD decided to “open the filters” on these sensors so that they could detect smaller objects. Suddenly…….
The Pentagon did two things in response to the UAPs that are worth examining….first, the Pentagon promptly shot these objects down, as we all know. Second, they pretty promptly said the UFO/UAPs are not balloons. Air Force General Glen VanHerck, who is the head of North American Aerospace Defense Command (NORAD) and Northern Command, said, “We’re calling them objects, not balloons, for a reason.” He also explained that these objects have no known propulsion systems. This is where we begin to encounter the word “alien.”
So, is it 1. aliens, or is it 2. alien/new or unknown physics/technologies, or 3. is it both? Bill Ackman, and others, are right to ask, “What if the three UFOs shot down are found to use technology or be made of materials that are not native to earth? How does life change thereafter? What do we do next?”
3. Marko Papic at Clocktower Group shared his latest chart pack with the following introduction:
We are surprised by how quickly the recession narrative has given way to the soft-landing narrative. So, to stay ahead of the “provocation curve,” we are going to push further and claim that even a “soft landing” may be too bearish. We reiterate this month our claim that the US consumer is more than just “fine.” With real wages turning now strongly positive – thanks to the “mana from heaven” that is the CPI decline – US consumers will experience a jolt to their confidence. Not only will real wages be positive, but they are still sitting on ample savings, appreciated home values, and are working with banks more than willing to lend. Sure, a recession is coming. But when, we have no idea.
These charts stood out:
4. Gavekal had a good piece titled: The Ultimate Head Fake.
It argues that after Russia’s invasion of Ukraine, US assets seemed to offer a level of safety and security not seen in other markets. US assets outperformed after the invasion, but have now given those gains back.
If the key macro event of 2023 is China’s reopening, US underperformance is not that surprising. It could also be the case that last year’s US outperformance was a head fake and what we could expect going forward is further underperformance of US assets.
Change #1: A key factor that the Ukraine conflict is demonstrating is the changing nature of modern warfare. The US’s edge in advanced weapons is a key reason for its financial preeminence. The US offers some vary capable drone weapons...but so does Iran. If drones fundamentally change the battlefield, they will also change economic and financial realities on the ground.
Change #2: the Ukraine war may be ESG’s death knell. The Ukraine war forced Europe to re-embrace coal as an energy source. Europe may now ditch its ESG fundamentalism and reap rewards from financial markets as a result. If Europe today is willing to turn back to coal, as it did in the past year, it could regain some of the global production competitiveness that it lost during its years of ESG fundamentalism and the US shale boom.
Change #3: the Ukraine war might have “deisolated” China. The West’s exclusive focus on Ukraine has provided an opening for Chinese diplomats, which they have grabbed. For countries that do not feel threatened, China offers a more attractive “get rich” pitch than does the security-focused US.
Change #4: accelerated de-dollarization in resource markets. The West’s reaction to the Ukraine war has accelerated the dedollarization of commodity markets. Foreign nations save in US dollars, either to fund US weapon purchases—for until recently they were seen as a gamechanger—or to buy commodities like oil, metals and foodstuffs.
When the US kicked Russia out of the US dollar system, it did so to the largest, or second largest, exporter of most commodities of note. The effect, de facto, has been to start dedollarizing such markets: India can buy oil in rupees, Brazil can buy fertilizer in real and China can buy iron ore in renminbi. Indeed, mining giant BHP settled its first renminbi-denominated iron ore trade in July 2022 (probably on the threat of China doing more business with a renminbi-accepting Russia, and less with a US dollar-accepting BHP).
As Russian tanks rolled into Ukraine a year ago, investors rushed into the “safety” of US assets. This action may have provided the “blow-off top” for the absolute, and relative, performance of US equities, bonds and the dollar. Yet as a new economic order emerges in the wake of the war, traditional US comparative advantages may have been undermined: (i) having an air force worth hundreds of billions of dollars and a naval fleet worth trillions may no longer be such a flex if they can be incapacitated by a swarm of low-cost drones; (ii) Europe may have woken up from its self-imposed slumber as its policymakers abandon virtue-signaling energy policies; (iii) China and India have used the war to their advantage, which is increasingly apparent to other emerging economies that seem keen to latch their own wagons onto these behemoths’ growth stories; (iv) the war is moving the world away from a US dollar-based unipolar system towards a multi-currency system.
With all of this in mind, the recent underperformance of US markets should not be seen as a fluke, or a short term anomaly. Instead, it is testimony to the start of a new trend.
Which made me think of this chart I’d shared with a few friends. Thank you Wouter for flagging.
5. Rob Dannenberg was on the Smarter Markets podcast. Rob is the former Chief of the Central Eurasia Division at the CIA. They discuss how understanding how our adversaries think is the first step in finding smarter ways to navigate an increasingly risky geopolitical environment.
Lots of good nuggets on how to think about Russia, China and geopolitical risks broadly.
6. Some great investment principles I wish I knew in my 20’s.
7. Change The Way You Work. Aaron Dignan spoke to Shane Parrish at Farnam Street on what might be stopping us from doing our best work, and what separates a permission-based culture from a constraints-based one.
As the founder of The Ready – a global organizational transformation and coaching practice – Dignan helps companies large and small adopt new forms of self-organization and dynamic teaming.
He’s worked with clients such as American Express, Microsoft, Citibank, Hyatt, Johnson & Johnson, Airbnb, and Sweetgreen. He is also the author of Brave New Work.
A few key bits:
…when a metric becomes a goal, it ceases to become a good metric. The idea is that we’re optimizing for something that is a proxy for reality instead of reality itself.
If you actually bring multiple perspectives to the table and they integrate themselves, your likelihood of describing reality goes way, way up, actual reality, not your reality.
A permission culture is a culture where you guessed it, you have to ask permission to do anything. So the default assumption is you can’t do anything until you’re told that you can.
8. Why investors are leaning into alternatives by Apollo’s CEO and Co-founder Marc Rowan at Exchanges at Goldman Sachs.
B. The Tech and Crypto Section:
1. What is all this noise around ChatGPT and LLMs?
Google lost over $100B in market value last week on the heels of Microsoft announcing a trial integration of the large language model (LLM) ChatGPT with Bing search. Regardless of whether the stock market's fears prove right or wrong over time, it appears to me the market does not correctly grasp what LLMs are and how they might be used.
Here’s my take: Search is a utility. Utilities are about speed, accuracy, and results – getting the most information you need in the least amount of time. Internet utilities create the highest value - Google Search and Amazon Prime are the best examples - these are products designed for you to spend the least amount of time possible and get the best outcome. For example a web search should immediately give you an answer to a question - and this phenomena accelerates with conversational voice assistants. And, think about Amazon’s Prime e-commerce business - you want to quickly find the product and have it delivered as fast as possible.
Data driven utilities are highly monetizable with advertising and fees, and nearly impossible to breakdown once their network effects are established.
LLMs are clearly useful, I don’t their core usage today is in search. In the near to medium term, LLM’s have slow speeds, dated information, and propensity to hallucinate and make up incorrect answers. In addition using LLMs for search is expensive - on the order of 7-8x more.
What will they be most useful for? There is a possibility that chatbots (and AI broadly) will evolve into a new fabric for everything – a replacement for the Internet and apps we have today. This might look like a complete shift in user interface – like the mouse or multi-touch smartphone screens.
Rather than chatbots integrating into or augmenting search, think of search as just one part of a chatbot platform with a far greater set of functions. In a few years, when search is eventually subsumed by a new, personalised conversational AI that is trained daily for each individual person.
Remember the movie Her by Spike Jonze, starring Joaquin Phoenix and Amy Adams. That’s what I think LLMs will function as.
Artists often see the future before the rest of us and this movie shifted my perception on what is coming.
It is important to remember that the current state of the art in AI is far from an end state for AI’s capabilities. On the contrary, the frontiers of AI have never advanced more rapidly than they are right now. As amazing as ChatGPT seems to us at the moment, it is a mere stepping stone to what comes next.
What will the next generation of LLMs look like? The answer to this question is already out there, under development at AI startups and research groups at this very moment.
3. What does the Snowflake of AI look like? At what layer of abstraction will the value accrue in AI? Who will be the gate keeper in AI as Apple was in Mobile.
These are the types of questions discussed on the Infinite Machine Learning podcast with Pauline Yang.
She is a partner at Altimeter Capital, a tech-focused crossover firm based in Menlo Park. This is a deep dive into the investment opportunities in AI. The trends in AI/ML, the killer apps in AI and AI infrastructure.
Lots of insights if you are thinking about investing into AI.
4. If you want to go deeper into how ChatGPT works, this is a good dive into it’s functionality and structure.
C. News You Might Have Missed:
1. Influencers are promoting the off-label use of diabetes drugs for weight loss, prompting a spike in prescriptions and concerns about cost and possible shortages. More than 5 million prescriptions were written for Novo Nordisk's Ozempic or Eli Lilly's Mounjaro for weight management in 2022, up from about 230k in 2019, per reports.
The drugs are part of a relatively new class that mimic a hormone in the body and regulate appetite and blood sugar levels. Ozempic and Mounjaro have been approved by the FDA for treating diabetes while drugs like Novo Nordisk's Wegovy and Saxenda have been approved for treating obesity.
2. A breakthrough for psychedelic medicine in Australia as both psilocybin-based and MDMA-based treatments was approved by The Therapeutic Goods Administration for depression and PTSD from 1 July 2023.
There are still lots of hoops to jump through as psychiatrists haven't yet been told what kind of approvals they need in order to prescribe it. On top of this, the treatment will be expensive and medical insurance is not yet available. But all this will come with time and it’s a massive step.
3. Jennifer Doudna, along with her colleague, Joy Wang, co-released a piece in Science (journal) summarising the first decade of CRISPR and showing just how much has been achieved in that time since she (and a bunch of others) discovered the marvels of what it can do. The article also looks ahead with hope to the next decade and gives a few of the possible developments to come.
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