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Back To School For A Monster Theme…

I’m running out of expletives. It’s a sort of “FOMO” thing which rules out obsessing on Labour’s implosion or the Epstein “hoax” which mysteriously keeps removing only British citizens from high profile roles. No, the headlines driving my heightened state of anxiety are derived from a familiar theme. However, it’s a theme which is now hitting warp speed. We have previously written that the best pulse-take of the monster AI trend was tracking the “picks and shovels” of AI/cloud infrastructure rather than the “gems” of digital intelligent progression. Well, this week is turning into a “biggie” for the AI infrastructure theme. I’d highlight three key developments and a few other snippets. So, here goes….

The creation of start-up billion dollar ‘unicorns’ has hardly any scarcity value these days. Maybe, we should think in trillions. Step forward almost 50-years old Oracle. Who knew Larry Ellison’s database software business would rack up a trillion dollar enterprise value at the beginning of this week? Probably nobody. Even the Wall Street analysts paid to follow every line of the Oracle business and financial model were truly shocked by the big reveal in Oracle’s quarterly update. In fact, earnings results were slightly shy of expectations. But, the share price proceeded to rocket 40%. Why? The future contract work backlog in its cloud(AI) infrastructure business grew 359% to $455 billion. I mentioned “warp speed” earlier so here’s what caught the eye. Oracle’s cloud revenues from Amazon, Google and Microsoft grew by 1,500% but the entire division this year is annualising revenues of circa $10 billion. That number will be $144 billion by 2030. Welcome to trickle-down AI economics. Oracle was barely mentioned in AI giddiness a year ago, now its owner is the richest man in the world. Oracle is not the only AI ‘unknown’ making waves.

Anyone heard of Nebius? No, me neither until this week but I do remember its former Russian search/e-commerce platform, Yandex. Anyway, Russian sanctions forced a sale of the Russian assets leaving Nebius as an Amsterdam-listed company specializing in cloud computing (GPU) infrastructure. This week Microsoft signed an agreement worth up to $19.4 billion for Nebius in exchange for 5 years’ access to its GPU datacentre infrastructure in Vineland, New Jersey. Nebius’ market value before that news was less than $15 billion. Not surprisingly, the share price has roared 50% higher and the company is now seeking to raise $3 billion in fresh funds to accelerate its growth plans. This was not the only Dutch tech/AI zinger story this week…..

Eindhoven-based ASML is the world’s dominant player in critical lithography technology used in chip manufacturing equipment. A single machine can contain up to 100,000 parts and cost $300-400 million. Clearly, semiconductor chips and AI are thematically closely connected. But investing in an AI start-up caught ASML analysts on the hop. ASML has just invested $1.5 billion in French AI player, Mistral, for a circa 11% stake valuing Mistral at close to $14 billion. Remember, Mistral raised $385m in late 2023 with a $2 billion valuation and early investor support from BNP Paribas, AndreessenHorowitz, Lightspeed Ventures and telecoms entrepreneur, Xavier Niel. Less than 2 years later, the Mistral valuation is racing towards a 7-8x return for those early investors. Apart from being an example of multi-layer AI investment activity, the deal is being hailed as a boost to Europe’s AI and semiconductor chip sovereignty. And maybe I’m not the only one feeling a bit FOMO….

It seems Ireland’s Taoiseach, Micheál Martin, has been thinking ‘sovereign’ too and looking at France’s early initiatives in funding AI startups. The Business Post has reported that Martin has sought the help of Eir owner, Xavier Neil (see above), in establishing an AI/tech incubator modelled on his highly successful Station F start-up campus. There might be good reason why Ireland needs to increase the pace of its AI and start-up readiness. I thought the next few little snippets should be focusing minds in Government buildings and elsewhere:

Private investing: The UK debt market is worrying many, but on a more positive note it was interesting to see Hargreaves Lansdowne and Schroders join forces to offer UK retail investors the opportunity to add private assets to their pension pots. Note to Irish government – start-ups need investor incentives first, then campuses.

Consumer behaviour: Wildfire Systems’ 2025 Consumer Shopping Trends Report shows 61% of consumers are now using generative AI tools like ChatGPT as a tool for deal-hunting.

Company growth speeds: Stripe’s Indexing the AI Economy report shows AI companies reaching $1m annual recurring revenues (ARR) 4 months faster than even the fastest growing SaaS/software companies. And… AI companies reaching $5m revenues are reaching that milestone 3x faster.

I feel my back-to-school mantra should read: The future is private, AI and fast. Very fast.

September 11, 2025
Big Beautiful Bull Market Or Bust?

It has been a very good week for the accused. Vlad Putin gets free war-crime shots at defence-stymied Ukraine courtesy of ‘Whiskey Pete’ in the Pentagon, P.Diddy is acquitted on the worst RICO charges, Bibi flies to Washington without fear of arrest and the US Supreme Court gives King Donald a July 4^th gift of even more freedom to ignore other judges. Oh, and Trump’s “Big Beautiful Bill” was passed in the US Congress. Tempted to laugh, cry or rant? Don’t. Investors need to focus on the ‘cards’ dealt and be alert to an investment environment which is increasingly looking like a “Big Beautiful Bull Market”. Despite ongoing tariff tantrums and confusion (Japan and South Korea getting their letters as I write) we should be keeping a close eye on a number of market developments.

The obvious pulse take on investment market health is the performance of stock markets. Irrespective of dollar weakness, the key US benchmark indices of the S&P 500 and Nasdaq hitting all-time-highs in recent days is a strong positive signal to investors. But it’s not just the headline numbers which are flashing green. There are additional promising signals in different parts of the capital markets. Many commentators believe the markets are entirely driven by AI optimism so it is no harm to see the AI chip poster child, Nvidia, regain its crown as most valuable company on the planet and gently ease its way to within 2% of a $4 trillion market value. The all-too-recent excitement about the first trillion dollar company (Apple in 2018) seems almost quaint amid such phenomenal acceleration in wealth creation. And, there’s more AI chip good news in Washington’s Big Beautiful Bill.

There’s a quasi-arms race going on globally in AI chip manufacturing which the Biden administration spotted and supported with the CHIPS & Science Act. Trump might be happy to burn the planet (and Elon Musk!) by reversing the electrification revolution championed by Biden but…. he’s not reversing the CHIPS tax incentives. In fact, Trump’s bill has increased investment tax credits from 25% to 35% for any manufacturers building new facilities on US soil. It’s not the only recent policy win for the industry. Last week, the US Commerce Department told leading semiconductor design software providers — including Synopsys and Siemens — that they are no longer required to obtain government licenses to conduct business in China. One can be sceptical about the true value being created by AI but there’s no doubt real money being spent by Big Tech companies like Microsoft, Amazon and Google has massive knock-on positive impacts in the global economy. Forget that old canard of “trickle down” tax reliefs for the wealthy benefitting the wider economy, but corporate incentives really do work. Indeed, if you want money to flow into the economy then it’s always good to see banks become more ambitious in their lending activities. Even better, if an entirely new bank comes along.

Silicon Valley Bank may have failed the basics of asset-liability matching (term horizons) in 2023 but the venture funding world never really managed to fill that $218 billion gap left by the early-stage champion. Now, there are reports Musk billionaire buddy, Peter Thiel, and an investing team of tech titans have applied for a bank charter. The new bank will be called Erebor, another Tolkien reference like Anduril and Palantir, to assist the ‘innovation economy’ and companies engaged in developing cryptocurrencies, AI and next-generation defence technology. Banks don’t usually emerge in risk-off moments so there must be some confidence bubbling back into the private early-stage investing world. Of course, it’s great to see new money or new bank flows IN to riskier parts of the investment market but what about getting OUT the other side of the risk journey? More good news.

IPO data compiled by Bloomberg shows that a slowish start to 2025 has delivered some very interesting performance figures. The weighted average performance of companies whose shares made their debut on US exchanges in 2025 was a punchy 53% compared to single digit returns year-to-date on the S&P 500. The highlights were stablecoin fintech Circle up a whopping 585% since its IPO in…. June. Not far behind, cloud computing player, Coreweave, has returned 300% since its March listing. Suddenly, but not surprisingly, it’s raining IPOs with another high profile fintech, Wealthfront, filing for IPO. Crypto exchange, Gemini, has filed for a public listing too. Europe didn’t miss out on the IPO fun either in the first 6 months of 2025– a weighted average return of 38% for its newly listed companies is not too shabby. They are the public liquidity or exit events a market needs to see for confidence to flow into the early stage private markets and there’s early evidence of increasing optimism.

Medtech VC funding activity had its best quarterly performance since 2022 with $4 billion invested globally in young companies (Source: Pitchbook). Meanwhile the value of VC exits hit a 3-year high in Q2 with almost $115 billion of deals completed and exits celebrated. It can be a little too easy to criticize the US these days at a political level but Europe needs to look in the mirror. This article mostly cites US capital market develoipments. For good reason. Mark Rubinstein in his excellent Net Interest newsletter titled “Ode to America” this week put it well:

“European policymakers bemoan that while households in their part of the world save more than Americans, they keep a third of their assets in low-yielding deposits, compared with a tenth in the US. European pension funds allocate just 0.02% of assets to venture capital versus 2% for their US peers. And the median European venture-backed company receives around half as much funding as its US counterpart. European Central Bank president Christine Lagarde recently calculated that, if Europeans matched Americans’ appetite for capital markets, some €8 trillion currently trapped in bank deposits would be unleashed to finance transformation.”

Wowzers. Eight trillion euro. Food for thought but we might need that eight trillion for other things. One can’t ignore that there is a critical part of financial markets which is not as cheery as a Republican pardon party. The half year reviews are in and the mighty US dollar is feeling the heat. A loss of purchasing power to the tune of 11% in just 6 months has not happened since Richard Nixon was President, and then he wasn’t. We might not want to draw a dreamy historical parallel but it is curious how quiet the bond market has been since the passing of the Big Beautiful Bill and its reckless debt implications. If the US dollar is pointing to a credibility issue and ultimately a US bond market BUST, it could be European savings pools which will be needed to stabilise things. The price will be a hell of a lot more than tariff tweaking and that’s not wishful thinking. Even if you’re on the beach, it’s worth following the money right now but do keep an eye on the bond market too.

July 7, 2025
Ten MEGA Signs Of Not So Much Winning…
Never thought I’d say this. I think I need those Freezbrury cold water challenge days to extend into March. Well, I need some shock therapy to dull the senses and distract from a rules-based world order which is crumbling by the hour. Should I care that a former Fox & Friends host has just instructed the US military to cease all operations against Russian cyber threats? Probably, but I’m not sure it’s helpful to follow the dizzying pace of breaking news and broken alliances. We have previously written about how the financial markets can rein in autocratic megalomania both East and West. In that instance we flagged the power of bond (debt) markets. Now, it looks like a regime which promised “so much winning” is losing the confidence of more than the bond market. Here’s a list of losers….

US Business Confidence: The silence or craven submission of US business leaders to the erratic ‘shake down’ of US allies and the established world order has been stunning to observe. However, as we often write, corporate actions can be more informative. Quietly removing DEI policies requires minimal leadership courage (I’m being very generous with that word). Dealmaking (M&A) on the other hand is way up there in terms of career risk for senior executives. Guess what? US M&A deal activity in January slumped to a decade low with a 30% drop year-on-year. Uncertainty is a strategic decision killer.

US Capital Markets: The US financial markets have dominated the world since the 2008-2009 financial crisis. US stock markets now account for more than 50% of the value of global equities after outperforming international stocks for more than 16 years. However, this year it’s a different or shifting story. At the end of February, international stocks had gained 7.3% in 2025 vs a 1.4% gain for the S&P 500.

US Growth: Investors in US stocks appear to be concerned. They are not alone. The much-watched GDPNow forecast of the Atlanta Fed is currently projecting US GDP will CONTRACT by 1.5% in the first quarter compared to the forecast of healthy 2.3% growth a week earlier. Also, US consumer spending has just fallen for the first time in two years.

US Technology: The “broligarchs” might have taken over the White House but the “Magnificent 7” technology stocks are experiencing slippage in 2025. Only one of Meta(+11%), Apple (-4%), Amazon (-3%), Google (-10%), Microsoft (-6%), Nvidia (-10%) or Tesla has seen its share price in positive territory this year.

Tesla: Tesla’s share price decline this year is a whopping 23%. Apparently, Elmo Musk’s fondness for autocrats and far-right parties in Europe has been a bit of a brand-killer. Sales in Europe for the first two months of 2025 are down 46% which can’t all be explained by consumers waiting for a Model Y refresh. Don’t expect any bravery from Tesla board directors either.

US House Sales: US existing home sales have dropped to the lowest levels since…. 1995. Yes, that’s when there were 80 million fewer people living in the US and didn’t have a President threatening a tariff war with its neighbour and construction-critical timber supplier, Canada.

US Dollar: As the world’s reserve currency the US Dollar (USD) is a long way away from any structural impact from the waning credibility of its sovereign’s political system. However, the USD is trading at an 11-week low against 6 major rival currencies. And….one of the better macro writers out there, Barry Ritholtz of The Big Picture blog, has flagged the dangers of policy error for the USD:

“Since the end of World War Two, the USD has been America’s “exorbitant privilege” as the world’s reserve currency. However, several factors threaten this privilege: wide-scale tariffs, the embrace of alternative digital currencies, the breaking of long-standing alliances, and dallying with dictators.

Since the end of World War II in 1945, the rise of the United States as the world’s dominant economic, military, and cultural power has led to a relatively peaceful 75 years in the Western Hemisphere, Pax Americana, has greatly benefited the U.S. and its allies. Putting that at risk would be one of history’s greatest unforced errors.”

US Supply Chain: The just released ISM Manufacturing survey for the US reveals the “prices paid” index for companies surged to a 32-month high as suppliers adjusted prices upwards ahead of threatened Trump tariffs. Oh, and don’t mention egg prices to the ‘Build-that-Wall’ cult – egg shortages are pushing prices up by 53% vs 2024 prices. Yep, you might remember there was some bloviating chat about inflation being fixed ‘on day one’.

US Jobs: There’s every chance Elmo Musk could end up being the DOGE that caught the car. Musk has been tasked/appointed himself to remove unnecessary spending by the US Federal government and its 3 million employees. But… the shock being applied to the US economy is possibly underestimated. The US government spent $6.8 trillion in 2024. For context, that’s more than 10x the size of the global semiconductor industry’s annual revenues ($628 billion 2024). Firing people in climate/weather forecasting roles and shutting down foreign aid (USAID) are just headlines. The bigger picture suggests one of the US economy’s most critical components (government spend) is in contractionary territory which will impact not just government jobs but the entire government supply chain in the private sector. Yep, a $7 trillion customer of the US economy is now being run by Elmo and his “Muskrats” with cute names like “Big Balls” and “First Buddy”. No seriously.

Brand America: As a symbol of American global reach and brand value it’s difficult to beat McDonald’s. Some of you may even recall the opening of its first Moscow restaurant with the famed “Golden Arches” in January 1990. You just knew the geopolitical sands were shifting. Less than two years later the Soviet Union collapsed. Now, check out the IPO of a company in Hong Kong this week. McDonalds is no longer the biggest food and beverage chain in the world. That title now goes to Mixue Ice Cream & Tea which has 45,000 branches in Asia and is opening approximately 21 stores……. every single day.

It’s a bit early to be suggesting a shift in global leadership but perhaps the competition has just shot itself in the foot. I’m thinking of Europe now and how a geopolitical crisis might just prompt real thought about making Europe great again (MEGA). Three financial data points caught the eye this week and suggested investors might be warming up to real policy action in Europe:
- The Swedish Krona is appreciating fast (2.4% today) as investors recognise Sweden has the highest military equipment production per GDP in Europe.
- Europe’s benchmark stock index, the Stoxx 600, has risen every week for 10 straight weeks.
- Germany’s Rheinmetal (+14%), Britain’s Bae Systems (+19%) and France’s Thales (+23%) have seen their share prices rise by double-digit percentages in a matter of days.
The $2.5 trillion global defence industry won’t be the only area Europe should target to compete as a “trusted partner” . Presumably, many countries and organisations seeking commercial partners in healthcare (medicine/vaccines) and financial services will have noted the risks of deal exposure to a US political leadership who ultimately might want a “piece” of a country in exchange for “peace”. Europe, by standing with Ukraine, could send a very powerful message on dependability to future partners as its former Washington ally works furiously to keep the KGB lieutenant colonel in the Kremlin happy.
March 3, 2025
What Returns Can Investors Expect In A Private World?

Well, I can’t promise you a future with a beachfront property in “Gaza Lago”. In fact, in the world of investing there are no guaranteed returns. As promised in our recent Private Portfolio Thoughts newsletter, I wanted to address expectations as to what long-run returns a private investor should be looking for in a portfolio of private assets. First, let’s take a look at ‘industry standard’ expectations based on global historic data compiled by research house, Pitchbook. Of course, these are just averages and no doubt are ‘skewed’ by supra-normal returns for a small number of successful funds in each asset class. However, the table below gives an approximate guide to expectations over various time horizons and types of investment.

The Spark focus is probably towards the top of this table summarising 5-year and 10-year returns for private equity (PE) and early-stage investing through venture capital (VC). However, if we strip out debt and real asset products the double-digit (%) performance picture is pretty similar across the board for private assets. The annual rates of return (IRR) implied by the performance of these private assets (in aggregate) are 13.4% over 5-years and 12.5% over 10-years.

Let’s be more conservative and suggest that portfolios of private assets after 10 years SHOULD have grown in value at a rate of 12%. In real terms (and compounding those rates of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600. Of course, the extra return earned by the private asset portfolios is the compensation required by investors for the higher risk exposure(reduced liquidity, business failure) compared to the shares of large established businesses trading every day. These return numbers (based on history) can be described as “hurdle” rates which investors are expecting to match or beat in order to justify putting their capital at risk over long periods of time. So, let’s apply some hurdles to our world of very young companies (VC) and small businesses (private equity).

We know that the industry standard in more mature private capital investment strategies is looking to turn €10,000 into something north of €30,000 over 10 years. We might describe this as an expectation to generate 3x your initial investment amount. Arguably, for higher risk investments in our earlier-stage world, investors could expect/demand an even higher return for their portfolios. If investors wanted 4x returns or €40,000 after 10 years that equates to a 15% annual return which is what private equity strategies have achieved(see table). So, that expectation is not unreasonable. But…. how realistic is it in a high risk portfolio of mainly early-stage business failure? We should touch on the key ‘push backs’ we get from investors who are wary of investing in start-up businesses or smaller private equity deals. The following are the most common perceived wisdoms….

“80-90% of start-ups fail”

“ Exits are more difficult as IPO markets for smaller companies have struggled”

“I can just buy publicly listed equities and earn similar returns”

There is an element of historic truth to all these statements but I’m going to use the most dangerous words in the investing lexicon by stating “this time it’s different”. First, the history of start-up failure should take into account the characteristics of older vintages of businesses. Let’s think about old economy businesses investing heavily in premises, equipment, overseas expansion facilities, logistics etc. These are, in most cases, “sunk costs” in capital-heavy businesses. Inevitably, if the business gets into trouble these ‘assets’ are not just worthless but can have an actual negative value due to ongoing liabilities/leases, maintenance costs, security, insurance etc. Now, think about many of today’s “asset light” businesses leveraging digital infrastructure and building value through the experience of the founders/team, the data gathered by the business and the development of relationships with clients and partners.

These businesses don’t have the same level of sunk costs/liabilities (as old economy businesses) which can swamp the value of the operational “franchise”. Instead, the value within a business which might not be meeting growth targets can be recognised by a third party and lead to another form of exit which doesn’t involve liquidation. In the Spark portfolio we have seen a number of businesses acquired by third parties in the same sector in exchange for shares in the acquiring company. These shares clearly have a value and also change the traditional calculations around start-up failure.

In the world of debt/credit one of the key financial terms/metrics is historic “recovery value”. In main street terms, this is the typical expected percentage of the debt which can be recovered when a business fails in a particular sector. You will see such sector recovery data displayed as a percentage of the debt ie 20 cents, 30 cents in the dollar. So, in the world of start-ups there is normally no debt and the equity in the business is a complete ZERO in the case of struggle or failure. But, now that’s not quite the case. If an acquiring business is offering a share exchange then the “recovery value” could by 20-50% of the original investment. And, the reason for ‘value’ being found in the business is the experience of the acquired team, the database and client relationships. This is happening on a far bigger scale elsewhere.

Ever heard of the term ‘acqui-hiring”? This refers to a situation in which a company acquires another company primarily for its talented team or employees, rather than its products, technology, or other assets. In an acqui-hire, the acquiring company may not be interested in continuing the acquired company’s business or product, but rather wants to bring the talent into its own organization. Now, here’s another bit of jargon monoxide…. ever heard of CVC? Well, you know what venture capital (VC) does but there’s a subset of the VC ecosystem called Corporate Venture Capital(CVC). This form of VC funding is in reality larger corporations investing in smaller businesses whose franchises/technology could ultimately be relevant and value-creating for the parent company.

So, you might think Sequoia, Index Ventures, Tiger Global and Andreessen Horowitz are the kings of VC investing. Now, think again. Amazon, Google, Microsoft and Nvidia are hugely active in the VC funding space. As an illustration, Nvidia deployed $1 billion in 50 VC funding rounds in 2024 alone. Furthermore, Google has acquired a whopping 222 start-ups over the years, and in 2023 the “Magnificent 7” tech stocks participated in 208 VC deals. So, the IPO market might not be as start-up friendly as in the past but Big Tech certainly is stepping up to the plate as a new and highly active exit event option.

Of course, there will always be those investors who believe they can earn approximately similar returns to private asset strategies by choosing a selection of publicly listed companies. Yep, the likes of Domino’s Pizza, Paddy Power, Apple and Nvidia tick those boxes but there’s also an assumption investors will avoid the temptation of selling while on the multi-decade rocket ride. However, the more significant point is about business failure. Think it’s only start-ups? Sixty years ago the average life-span of a company in the S&P 500 was over 50 years. Today, it’s less than 15 years! By 2027, almost 75% of companies who were quoted in the S&P 500 in 2016 will have disappeared (Source: McKinsey). Not for the first time, I’d suggest it’s worth a read of the excellent The Future is Faster Than You Think to grasp how fast business and technology leadership is changing.

We can’t forecast the future. However, we should recognise that the world of start-ups today has changed dramatically. As a final illustration, start-up funding was traditionally populated by a majority of consumer-focused businesses – think retail, textiles, manufacturing, food, fashion etc. The term “B2C” would be used to describe these business-to-consumer companies. Well, that’s changed too. Certainly, for Spark. A whopping 70% of funding deals completed by Spark have been business-to-business (B2B) opportunities. It should also be noted that our vetting process turns away approximately nine in every ten opportunities. Arguably, we are selecting the top decile of quality in the opportunity universe. No doubt we will get it wrong along the way, but this is still a robust risk starting point. And, it’s not the only starting point…

The purpose of this article is to set the scene for a follow-up piece on how these structural shifts can impact the average private portfolio and future expectations using sample portfolios and outcomes. But always remember…. if I could truly forecast the future, “Gaza Lago” might personally have an entirely different meaning and location.

February 7, 2025
A World Losing Control Of Truth….

You know that feeling. No control, just watching helplessly. On a personal level, I observed the devastating wildfires in Los Angeles from afar via Google Maps and X(itter) but was updated on the ground by my son dangerously close to events on the UCLA campus. Evacuation to San Diego was his fortunate escape while the estimates of fatalities and rebuild costs continue to climb. Sadly, the losses are not just in the physical world of lives and properties. Truth has also been scorched by the partisan politics of the US. Incoming President Trump and his oligarch allies have been quick to blame political incompetence for the fires and deflect from the urgency of the climate crisis. A cursory look at Xitter and other online channels reveals waves of misinformation on lack of water and firefighting resources, saving smelt fish(yep), DEI /woke policies (open season it seems) and even funding Ukraine as the ultimate source of blame. Now, for a few stubborn facts:

No rain in Los Angeles (LA) since May 2024

Highest summer temperatures in LA ever

Land/vegetation is the second driest on record – UCLA research suggests 25% drier than average

Strongest seasonal Santa Ana winds in 14 years (up to 150 kph)

That lethal combination of extreme heat, bone-dry fuel and tornado-like winds are climate change driven. Fires are nothing new for California, but the change in wind/heat patterns has dramatically increased the intensity of the fires and the speed-of-spread when they occur. However, the extent of climate denial deflection at the highest US political leadership levels is amply demonstrated by the words of the incoming Trump nominee for Energy Secretary, Chris Wright, at his Senate confirmation hearing just this week: “I stand by my past comments…..the hype over wildfires is just hype”. Not for the first time, the world of finance will have its say too. In particular, the exit of insurance companies and house protection coverage for residents of LA, West Virginia, Florida and Texas is probably more instructive than the internet warriors in their underpants shrieking about political mismanagement, conspiracy theories or super-powered immigrant arsonists. Credibility and truth are inextricably linked and the biggest bully of them all is flexing its truth-seeking muscles….

We have written in recent days about debt markets constraining the actions of autocrats in the geopolitical world. However, in the financial world there are increasing words of worry from some very credible players about a credibility gap emerging. So, without bamboozling with jargon, let’s flag two financial facts.

*Interest rates around the world are either falling or stabilising at lower levels than 18 months ago.

*Bond yields which usually track interests rates are not falling, or even stabilising. Longer term yields in the UK, Japan and US have broken free of their relationship with interest rates and are rocketing higher.

This divergence of trajectories for interest rates and bonds is HIGHLY unusual. So, what’s happening? Well, debt and bond markets do track interest rates set by the central banks….normally. But, in this instance, credibility or credit has come into play on two fronts. First, central banks like the Fed and Bank of England are facing increased scrutiny in their battle to tame inflation. Second, government bonds track the credibility of sovereign governments – their ability to confront or tell the truth. And that’s a problem now. Nobody believes current UK government policies are able to deliver growth and not many believe Trump’s tax cuts and tariffs menu will tame inflation. Bluntly, there are increasing fears in financial circles that the Fed has lost control of the most important financial market in the world: the US Treasury market. Again, truth and credibility (not denial) are critical to attract risk capital, insurance, investment etc.

Finally, we should note the warning in President Joe Biden’s farewell address to the nation this week. Critics might argue his presidency wasn’t bold enough, even cruel enough, but his departing words might resonate with those who read President Dwight D. Eisenhower’s farewell speech warnings in 1961 about the dangers of the “military-industrial complex”. Biden points to an oligarchy of “extreme, power, wealth and influence” in a “tech-industrial complex” which wields a very modern weapon to serve their own interests. The tacky million dollar Trump inauguration donations and spineless abandonment of content moderation by the tech oligarchs could be mistaken as the source of bitterness for an ousted president but I’ve a feeling the following statement will be revisited by historians as a prescient warning:

“Americans are being buried under an avalanche of misinformation and disinformation, enabling the abuse of power. The free press is crumbling [or] disappearing. Social media is giving up on fact checking. The truth is smothered by lies told for power and for profit…. Meanwhile, artificial intelligence is the most consequential technology of our time, perhaps of all time.”

I’ve got some bad news. That “avalanche of misinformation” is just the start, and the reference to AI is key. It feels like every funding round at the moment is attached to “AI-agents”, bots who will carry out the mundane content generating tasks of human workers. In fact, one in every two dollars of VC funding in the US right now is going to AI. The number globally is 37% (Source: CB Insights). However, let’s think about that ‘army’ of bots to be unleashed on the future of work and communications. First, know that an estimated 50% of all online traffic right now is bot generated. Yep, that’s bot created content, bot engagement, bot dissemination….. the whole false fly-wheel effect. Now, imagine a vicious circle of billions of bots, content pieces and false engagement. Then think false content.

You will hear more about “Dead Internet Theory” in 2025. It started out as a peripheral online conspiracy theory claiming the internet has been taken over by artificial intelligence(AI). Viral posts, engagement rankings, traffic stats etc all have a whiff of AI-bot promotion these days but there’s worse to come. The sheer volume of misinformation coming our way via AI-agency bots could kill online platforms’ utility value. Even this week, using Xitter was an exercise in dodging the underpants brigade + bots and finding real true information on the LA fires. And, now the chat is Elon Musk will be buying Tik Tok. A change of commercial control perhaps, but the reality at a higher communications level is more existential. We could lose control of not just the internet, but truth itself.

“You can’t handle the truth!!” – Colonel Jessup, A Few Good Men.

January 16, 2025
Still Some Golden Theme Tickets Left…

I’m going to save you some time. Forget about calendar-driven commentariat reviews and 2025 forecasts for investment or geopolitical risk. Sorry to be the “Grinch of Guru”, but calendars and structural investment themes have zero correlation. Opinion is cheap and even the betting markets are displaying their patchy predictive powers in recent weeks. Yip, just a 6% chance of the Ba’athist beast, President Assad, being toppled in Syria. About as much chance as a Chinese spy in Buckingham Palace… oh wait. Sadly, Prince Andrew is a multi-year clown car journey in particularly poor company but there’s a lesson there too. Almost all significant investment themes – risks and opportunities – are multi-year stories whose plots twist and turn but keep a very clear direction of travel. So, let’s take a look at some of the major themes we have previously visited and a few more developing ones; all with interesting plot twists.

Europe Crisis or Opportunity: Nothing good in the headlines…..German government falls, UK in second month of GDP contraction, France on its 4^th premiership in a year. But, but here’s a few twists on the negatives. The lists of where Europe lags the US is a long one, from labour productivity, to AI and innovation, to stock market performance. And yet, if you strip out the performance of AI hardware star, Nvidia, from the S&P 500 then Europe’s stock market (MSCI EMU) has actually earned better returns for investors than the US benchmark since the most recent bull market started in October 2022. That suggests there are lots of European companies doing very well despite ‘core’ European economies struggling. Check out also in recent days Spotify becoming only the second European tech company since SAP to crack the $100 billion market cap mark. The headlines do not lie but the narrative on Europe is more nuanced than you think.

Healthcare: Another structural theme from previous years’ writings, healthcare has actually been a winning area for Europe thanks to the miracle weight-loss drugs, Ozempic and Wegovy. Their Danish owner, Novo Nordisk, became Europe’s most valuable company in 2024. However, we might be about to enter an accelerated era of therapy/drug discovery for all types of medical illness. The clue is in the Nobel Prizes awarded in both Physics and Chemistry in 2024 to pioneers of AI usage in research. Now, for those already struggling with how AI large language models (LLM) work and the warp-speed calculations of the almost-monthly iterations of these technologies, get ready for the ultimate head wrecker. Google has just developed a quantum computing chip, “Willow”, which performed a computation in less than 5 minutes that would have taken today’s fastest computers 10 septillion years to complete. Yeah, that’s 25 zeros which exceeds known timescales in physics and vastly exceeds the age of the universe. Think about that. This chip created by quantum physics “used” time which theoretically can’t exist unless…… there are other parallel universes. Google Quantum AI founder, Hartman Neven, calmly wrote that the stunning performance of this chip indicates that “we live in a multiverse”. Maybe Willy Wonka wasn’t so wrong to say “Come with me and you’ll be, In a world of pure imagination”.

Artificial Intelligence (AI): Arguably, the world of AI has moved in a completely different direction. The shift of investment capital away from bits (software) to atoms (hardware) has been spectacular. Another company nobody ever heard of until recently, Broadcom, has become the latest technology hardware company to join the trillion dollar market capitalisation club. The US chip maker is now one of FOUR tech hardware companies in the list of the 10 most valuable companies on the planet. Clearly, investors see AI infrastructure as the early ‘win’ in the AI arms race. However, do NOT ignore software. Interestingly, the Clouded Judgment software newsletter has flagged a 20% expansion in median software valuation multiples since mid-November (from 5.6x to 6.7x revenues). Also, Nvidia has dropped in value by 11% in recent weeks. Yes, rotation from hardware to software and back again will be a feature of the multi-year AI revolution but the venture capital data from CB Insights confirms the direction of AI travel. Global venture capital (VC) deals in AI jumped 24% in Q3 to the highest levels seen since the Q1 2022 peak. In fact, one in every three dollars of VC investments went to AI start-ups.

Banking and Fintechs: Closer to home, Revolut has just confirmed it has more than 3 million customers in Ireland. A staggering 75% of all Ireland-based adults now use the UK fintech platform for banking and payments. Meanwhile, the US bank sector has rocketed 30% higher this year, Europe is seeing Italian banking M&A deals and the largest asset manager in the world, Blackrock, has embarked on a private asset acquisition frenzy. We have written before that the future is private and I’m wondering are big corporates thinking the same? Sticking with the fintech sector, it was striking in the past week to see the shipping/logistics giant AP Moller lead an €80m investment round for UK fintech, Zopa Bank. In the same week, we note another globally significant name, Walmart, was the lead investor in a $300m round for fintech platform, One. Hmmm….Private banking/fintech, private opportunity.

Climate & Electrical Vehicles (EV): Apparently, 11 out of 16 EV battery manufacturing projects in Europe have been canned or delayed. Of course, the $15 billion investment in Northvolt was the highest profile casualty in 2024 but there will be other twists and turns in the electrification journey. And, possibly a lesson in long-term planning. China 20 years ago had almost zero car production capacity. Now, it is on track to manufacturing 30 million cars a year and has surpassed Japan as the biggest exporter in the world with 5.17m units sent overseas. In fact, Chinese built EVs now account for 76% of the global EV market. So, if one were to be thinking 20 years ahead again what is most likely to drive investment returns in the transport world? Well, how about not driving. More specifically, self-driving. So, I’m quietly stunned that Google’s Waymo self-driving cars are clocking up 175,000 rides per week compared to 50,000 rides 6 months ago. That’s actually more than 1 million miles of autonomous transport delivered with an almost flawless safety record. I sense 2025 could see self-driving transport go mainstream and, as I write, Waymo have announced they are about to trial robo-taxis in their first non-US city, Tokyo, next year.

The list of themes above is not exhaustive but they are structural themes measured in decades rather than calendar years. These are the most likely golden tickets to deliver standout returns like Nvidia’s 27,000 % return over the last 10 years. But, as always, we should keep an eye out for reversals of long standing narratives too. Argentina might be the prompt for contrarian thought while on track to deliver the best stock market returns of 2024. Who knew! So here’s two thoughts to chew over for the festive season: i) A European refugee reversal as Syrian and Ukrainian citizens potentially return home in 2025 and ii) A renewed embrace of nuclear power/investment to drive the electrification of the global economy.

“Oh you should never, never doubt what nobody is sure about” – Willy Wonka

December 17, 2024
Does Europe Have Whatever It Takes?
This is tricky. Here goes… I’m going to sound like Boris Johnson for a moment. Relax. No Greg Wallace, Master Chef or “middle-class women of a certain age”. More like the Middle Ages, and a stunning personal discovery this week that, before counterparties sign off a private investment in Germany, a public notary must read every single word out loud. Yip, not a banana-straightener but for a venture capital investor this week that meant “12 hours and counting” for a Series A investment document to be read out loud in front of founders and investors. In person. It sort of feels like Germany has missed out on a few productivity hacks since the Gutenberg printing press arrived in 1439. Meanwhile, European leadership is in disarray as the French government collapses, Germany’s industrial base struggles and the UK paddles alone in its own faeces-filled waters. It is difficult to ignore the “Europe is Donald Ducked” chorus growing louder by the day. And yet, I believe Europe can change course for the better. First, let’s identify a few key problems…

Actually, why don’t we turn to the man who rescued Europe once before. Back in 2012 Mario Draghi as President of the European Central Bank (ECB) declared that “the ECB is ready to do whatever it takes to preserve the euro”. Remember the “PIIGS” who struggled in the crosshairs of European debt crisis traders for weeks? Well, Portugal, Ireland, Italy, Greece and Spain have more than survived that credit (or credibility) crisis. In fact, this week Greece was able to borrow at cheaper rates than France. Stunning. And perhaps, that should be Europe’s inspiration. Greece was a mess. Not now. However, the same Mario Draghi in his 400 page EU Competitiveness report is telling us Europe is in a mess and that “without action, we will have to either compromise our welfare, our environment or our freedom”. Draghi sees the following challenges:
1. Productivity: European GDP growth has lagged the US by 0.5% every year since 2000. Interestingly, demographics (population growth) has played its part in that too. How about building that wall? Maybe not.
2. Innovation: There are no leading technology companies in Europe. Draghi identifies a “middle tech” trap where Europe seems happy to be in “the peloton” rather than lead. Indeed, outside the information and communications technology sector, European productivity growth matches and often beats US competition.
3. Finance: Draghi bemoans the lack of joined-up thinking and fragmentation in the area of debt financing and regulation. Think about those hoarse notaries and the 1,330 banks servicing Germany. Then know that Canada has just 93 banks.
4. Security: Draghi deals with a number of distinct challenges in his report but I have lumped them together as almost existential threats: defence(war), climate crisis (decarbonisation) and industrial dependence(China).
There’s a danger these challenges are perceived as nothing new. Arguably, the outbreak of a full scale European war is the only really new challenge of recent years. The other challenges have been slow-moving train wrecks over a decade or more. However, the point to be made is, like our climate crisis, Europe is running out of time. As always, I try to use data to tell a story and here are a few standout numbers which have crossed my desk in recent weeks:

*In the 1950s to 1970s period European investment in innovation equated to 4% of GDP. That percentage is now 0.5%.

*Venture capital investment in Europe is 6 times lower than the US.

*71% of all current funding for AI globally is in the US. Europe accounts for just 14% of global AI investment.

*The performance gap between US and European stock markets this year is over 21%. That’s the biggest performance divergence since 1976. In fact, US stock markets now account for 65% of global stock market capitalisation but with just 26% of global GDP.

*According to Bank of America research, US to European equity valuations have risen to 3.6x in November, an all-time record. This ratio has DOUBLED in 8 years, and is 3 times the historic average.

*The US stock market has outperformed Europe in 12 out of the last 15 years.

*There are more than 270 regulatory bodies involved in digital networks in the EU today.

*The EU has 34 mobile network operators. China has four, and the US three.

If the list above feels a bit “money” oriented there is good reason. If investment, performance, valuations and growth gravitate to one economic region the knock-on effect is significant for competing regions like the EU. Stripe didn’t even bother starting out in Ireland. The Collison brothers went straight to California. It’s not just start-ups. One of Europe’s homegrown fintech stars, Revolut, is about to IPO but co-founder and CEO, Nikolay Storonsky, has said the US will be their public listing home as London “can’t compete”. Not surprisingly, CB Insights are saying 40% of the world’s AI companies (and talent) are located in the US.

It’s not just a money tale – those stats above about regulators and network fragmentation are massive hurdles to companies competing for investment capital based on growth. You don’t need a notary to grow GDP. However, like Greece and Ireland in the recent past, it is possible to be ‘forced’ into survival strategies which may require pain. As an illustration, the decision of VW to close manufacturing plants in Germany for the first time in 87 years might only be the start of bad news for the 100,000 VW workers striking in protest. Now for some better news, and a bit of European inspiration…

Europe has proven already it has whatever it takes to win the battle of the skies. In a truly pan-European collaboration project, Airbus has emphatically emerged as the dominant aircraft manufacturer on this planet. Even before Boeing’s troubles, Airbus was racing towards 60% global market share and currently is winning the market for large single-aisle planes on an 80/20 basis. The European champion of the skies has been beating Boeing for 5 consecutive years and has an order backlog of 8,600 planes. This is the inspiration and illustration of European collaboration. Now look to the skies again.

War is a tragic European fact of life in Ukraine. However, battles for survival can bring innovation. WW2 was the catalyst for Europe to invent radar, penicillin and jet engines. Today, you might consider the 200 Ukrainian companies currently manufacturing Unmanned Aerial Vehicles (UAVs). Yep, drones are the future and Elon Musk has had the temerity to suggest US F-35 jet fighters are “already obsolete”. If Musk is right and “Future wars will be drone wars” then Europe is the epicentre of UAV innovation. Interestingly, Germany’s start-up AI software company, Helsing, has focused on drones and jet-fighters and is now manufacturing its own attack weapons. These drones are armed and don’t need pilots or GPS, it’s all AI. And, Helsing is already valued at $5 billion.

Our other survival battle is climate. And Europe can lead. One of the key drivers of productivity and valuation divergences over the years has been energy costs. An auto factory or chemical plant in Europe can typically pay $500m to $1 billion more for its power supply…. each year. Electrification is not just the decarbonised future, it is European industrial survival. While Europe might be stuck in a “middle-technology” trap it might be the US and China who remain wedded to cheaper fossil fuel options. Draghi’s analysis envisages Europe spending €3-4 trillion on electrification, or about 25% (!) of EU GDP over the next 10 years.

Investment/spend is critical to innovation, and Europe right now looks like it is losing out in the energy race. So, we must hope a power crisis breeds innovation opportunity in electrification and perhaps gives Europe a head start over more complacent rivals. In fact, one of my favourite stats this week emerged in the decarbonisation space. A research paper from University of Chicago and Wharton estimates the total carbon burden of US corporates is $87 trillion. That’s 1.3 x the market capitalisation of US companies in 2023, and starkly demonstrates payment for damages caused by greenhouse emissions would bankrupt corporate America.

Adversity forcing dramatic shifts in industrial policy and investment capital could ultimately be Europe’s saviour. Furthermore, we should look east to see how countries and cultures free themselves from government and regulatory over-reach. Poland is now, per capita, as rich as Japan or Spain. Its military is arguably the strongest in Europe, and its GDP has grown by 3.5x since 1990. Quietly Poland is becoming a tech and innovation hub. And, behind that drive is a STEM graduate pipeline ranked 4^th in Europe between 2013 and 2019. That will only accelerate as Microsoft invests $1 billion, Google builds an R&D centre and a talent brain drain now moves into reverse. Inspiring stuff.

It can be done. However, it might need a further crisis to prompt Europe’s leaders to commit to ‘whatever it takes’ to survive and lift itself out of decades of decline. And… the data and vibes suggest we are close to that moment.
December 5, 2024
Torn In The USA: A European View
I know, I know. Who wants views, just get this bloody vote over with. Well, we hope the bloody bit doesn’t come true but, if you want Hitler’s generals and your chief cheerleader is a just-revealed Putin (pay)pal, then you never know. Anyway, forget the politics. Let’s pause and reflect where the US economy is today, not where it will be in 11 days. Also, note that financial markets, for the first time in 2024, through emerging market equities and inflation-measuring instruments (bonds, gold) are beginning to think about a different USA to come. However, in this article I’d like to highlight ten things which the average European would envy about our US ally today.
1. The US stock market now accounts for 50% of the global total, but is home to less than 5% of the world’s population.
1. The IMF this week (Financial Times) has provided some explanation for this dominance by highlighting stagnant European productivity growth since 2005. In the same two decade period US productivity has rocketed by 40%.
1. Technology you say. You’d be right. Just 5 US technology companies – Apple, Amazon, Google, Microsoft and Meta/Facebook – have a collective market value of $12.2 trillion which is more than the value of any other stock market in the world. Indeed, the new AI chip star, Nvidia, is worth more than the entire stock markets of five of the G7 countries.
1. The old stuff is going well too. US domestic oil production hit 13.4 million barrels a day in August. That’s the highest production number for ANY country(even OPEC) in history. The US is a NET exporter of oil while Europe watches its eastern gas pipelines anxiously. But, you won’t hear that on Fox News. Drill baby, drill…just not the facts.
1. Not surprisingly, US banks with the biggest corporate customers in the world are doing quite well. US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks.
1. Maybe Europe will disrupt US economic hegemony and bounce back with AI? Ehhhh…that’s not looking like a great bet right now. The sheer cost of talent and large-language-models (LLM) used to train and build AI applications are turning the AI race into Big Tech 2.0. Recent newsflow would suggest it’s only Microsoft/OpenAI, Amazon, Meta and Google who have the deep pockets to win the race. And, Asia will be watching anxiously too. The Asian dominance of hardware/semiconductor chip production is in “transition” as Taiwan’s TSMC just told the markets that the production yields in its new Arizona plant are 4% higher than in its home base Taiwan.
1. Speaking of home bases…US home owners are sitting on $32 trillion of value attached to their home equity. That’s a quadrupling of property wealth from the $8 trillion low recorded as recently as 2012. How did that happen?
1. Jobs, and lots of them. The US economy is at full employment, the highest seen in 100 years. Oh, and average hourly earnings are up 26% since 2020. In fact, US real (adjusted for inflation) wage growth is up 26% since 2000. More companies too…
1. Back in 2015, 2.8 million new companies were formed in that year. The number in 2023 was 5.5 million. That’s a near doubling of start-up activity in less than 10 years. And…. money doesn’t just talk.
1. Risk earns rewards. High risk venture capital (VC) is the oxygen of innovation and explains much of the US tech dominance. The US capital markets are the source of 50% of ALL venture capital funding globally. Asia is 40%. And Europe…… ahem…… 5%.
That’s enough. But, I could mention military dominance too as Russia impales itself on imperial delusion in Ukraine and is now resorting to throwing North Korean troops into meat-grinder combat action on its own soil in Kursk. Of course, the US is not in a perfect place, leaving aside its toxic partisan politics. Its health and hate crises seem to be impossible to address by looking overseas for solutions or perspective. Indeed, the sheer presence of 350 million guns in the most prosperous land on the planet are a startling reflection of fear in the midst of so much opportunity. We can only watch over the next few days, as US citizens cast their votes. The list of ‘wins’ above looks like a fabulous starting point. The polls suggest voters are not so sure.

As Europeans, we can attest to similar ‘win’ lists for Germany and the UK ten years ago. Not so today, and their voters painfully know they played their part in believing not-so-great-again political calculations in new energy and trade policies. Tick tock…..
October 25, 2024
Four Huge Trends For Your Private Portfolio

I scared a few people last week. Apologies. Then again, you could be a public servant or journalist in the US today and be referred to as “the enemy within” by the bookie’s favourite for the Oval Office. Or, how about being a lifetime Tory party member faced with the extremist choice of “KemiKaze” Badenoch or “Honest Bob” Jenrick as your next leader? Better still, put yourself in the shoes of the Tory tactical masterminds who ‘traded’ leadership votes and eliminated their own likely winning candidate, Jimmy “Dimly” Cleverly. Breathe, just breathe slowly. We can’t promise an end any time soon to populist buffoonery but in the real world big changes are afoot. Four developments, in particular, caught the eye this week and highlighted future opportunities for those building new businesses or investment portfolios.

Electricity: If $150 billion of hurricane damage in Florida doesn’t focus climate crisis minds I’m not sure what will. Indeed, there is an encouraging reality check beginning to filter into financial discussions. Just this week the Washington Post ran a story about the cost of extreme weather exerting further strain on an already challenged Federal government’s fiscal position($35 trillion debt). Of course, moving away from fossil fuels to electricity is already set to be the greatest financial shift ever experienced by the global economy – $275 trillion to be invested in the transition by 2050(Source: McKinsey). So, the following statistics really hit home. They are sourced from the International Energy Agency (IEA) and flag the recent growth of electricity use being twice as fast as the growth of energy demand. However, the future is about to turbo charge that relationship. Between now and 2035 electricity usage will outpace energy demand growth by a factor of 6x. Yep, that’s electric vehicles (EVs), AI chips, data centres all doing their future thing. Another way of looking at this shift is that this 6x electricity acceleration equates to the entire energy demands of Japan (4^th biggest GDP in world) being added EACH year to global electricity usage.

Banking: In the old days it was banks that provided loans, or credit. Now, every second ‘growth’ headline in investment markets is referencing “private credit”. So, what is it? It is quite simply lending by private pools of capital(not banks), usually sitting within large investment firms. The original “Barbarians at the Gate” were private equity firms who used debt to buy out big companies. Today you might read about Blackstone buying software Smartsheet for $8 bilion. Back in 1988 it was KKR buying RJR Nabisco for $25 billion. Historically, the debt part of the ‘leveraged’ buy-out came from banks. Now the Barbarians (private equity) want to do the banking (debt) too. In the last 12 months there have been 14 different partnerships announced between banks and private credit(debt) firms. Most recently, Citibank announced a partnership with private equity/credit giant, Apollo Global. Amazingly, this relationship turns banking orthodoxy on its head – Citibank’s investment bank will source the deals and Apollo will provide the money/debt. Bankers turned deal makers, deal makers turned bankers. Wowzers. Note, if the Barbarians are now keen to provide debt funding to companies, then they must see opportunity and excellent returns. Current estimates of the size of the market indicate private lending assets (AUM) currently at $1.5 trillion growing to $2.7 trillion by 2027 (Source: Prequin).

Life Sciences: Despite the anti-elite denial of science prevalent in the social media and political spheres, the incredible speed-to-discovery of vaccines seen during Covid-19 is set to continue. However, with a little AI twist. Arguably, AI won its first Nobel Prize in recent days. From The Japan Times….

“The recent awarding of the Nobel Prize in chemistry is an incredible vote of confidence in the potential for artificial intelligence to transform the way medicines are invented by using AI to illuminate and manipulate proteins, life’s most basic building blocks. The Royal Swedish Academy of Sciences honoured University of Washington professor David Baker and two scientists from Google DeepMind, CEO Demis Hassabis and senior research scientist John Jumper.”

Yep, AI machine-learning cracked the code to predicting protein structures with Google scientists right in the middle of it all. Meanwhile the Nobel Prize for Physics went to the “Godfathers of AI”, Geoffrey Hinton and John Hopfield, who developed the tools which power the neural networks underpinning today’s AI boom. Now, think about the Nobel tradition of rewarding decades of research and recognition. Then think about chemistry protein discovery work barely 2 years old and not one, but two, Nobel prizes. Simply astonishing.

Nuclear Power: It’s not just gold hitting all-time highs. Uranium mining stocks are flying too. Let’s face it, the news flow in nuclear power has been hard to miss. Japan has just re-started a 47 year old nuclear reactor at the Takahama nuclear power station. Amazon is pumping $500 million into nuclear capabilities, and Google has entered an interesting deal with Califormia start-up, Kairos Power. Google has committed to buying nuclear power generated by multiple small modular reactors(SMRs) built by Kairos. And, one for the nuclear history buffs – the infamous Three Mile Island nuclear power station will be restarted in a $1.6 billion deal struck between Microsoft and the energy utility, Constellation. Again, AI is the power demand trigger for these moves. And, mining stocks sitting on uranium reserves might just be the wrong price (low) if a Big Tech AI race goes nuclear on many levels.

So, there’s four thoughts or trends which are very much part of our future. You might spot AI as the common factor across a lot of these developments but that’s possibly not the only private opportunity. There seems to be some enormous shifts happening in traditional sectors like infrastructure, materials, banking, power and chemistry. The good news is that there are lots of private companies plugged into these transition sectors right now and many will need funding (debt or equity) in the years to come. If that sounds like a private portfolio-building strategy then you’d be right. It’s time to take a private dip. Even better, we might be able to help you very soon…..

October 17, 2024
Nightmare On October’s Street….
Hallowe’en has provided its fair share of horror movie classics, but Hollywood does not have exclusive rights to October fears. Wall Street is nervous every year. No pagan myths needed. The historic data shows that financial markets are at their most volatile this month. However, do not confuse volatility with sudden downward moves for stock markets. Yes, two of the worst market crashes in 1929 and 1987, and three of the four 10% + monthly falls for the benchmark Dow Jones Index over the past century all beat Freddy Krueger to the fear punch at the end of the month. However, as a professional risk observer it’s important to know that volatility and risk includes upside moves too. As gold, bitcoin, the German Dax, the S&P 500 and Nvidia hit, or threaten, all-time-highs this week you’d think the volatility this month is only going one way. I’m not so sure. Four things bother me….

1. US ELECTIONS: Maybe it’s the seasonal pumpkins, but my mood is more orange than blue. Foremost in my mind is that the polling for the US presidential election has increasingly moved into toss-up territory. I’m in danger of going into denial mode (and consistent with earlier articles) when I take comfort from German stock markets(Ukraine) at all-time-highs, bond market stability (inflation) and utilities/ electricity stocks (climate) smoking every sector in the US including technology over the past 3 months. None of these should do well in the event of a Trump regime taking power. Yet, betting markets with real money (Polymarket) are showing Trump a full 12% ahead of Harris in the probability stakes. Of course, this just reflects weight of betting on a Musk mate’s betting platform (and backer of JD Vance) rather than votes. Anyway, it feels like there’s a few things not quite in the price of various US financial assets right now. Here’s a list of US institutions and voting cohorts who could suffer a major crisis of confidence if Trump wins:
- US Federal Reserve – Trump making explicit noises about “control” of interest rate policy.
- US Supreme Court – the ship has sailed on the nation’s highest court swinging violently to the right. But, the five extreme “Justices of the Apocalypse” on the Court will be emboldened to interfere further with federal laws governing female health, the environment, public safety and corporate governance.
- US Media – Trump is talking about taking away licences from national broadcasting networks.
- US Clean Energy sector – the irony of Governor Ron DeSantis banning mention of climate crisis in Florida’s text books won’t be lost on many this week. But, expect Trump to try to undo many of Biden’s signature industrial initiatives in decarbonising the US economy.
- US Department of Justice – senior DOJ officers, the rule of law and 91 felony convictions could be about to ‘go through some things”.
- US Stock Markets – Trump’s plan to apply import tariffs across the board is not just inflationary, but could cause chaos for US manufacturing supply chains.
2.CHINA CYCLE: Trump is pretty clear about being “a dictator on day one” but what about his other autocratic heroes? Well, it looks like the Donald has been in touch reasonably regularly with his Kremlin handler (thanks Bob Woodward) which does not augur well for the defence of Ukraine’s sovereignty. However, we really should be watching China closely. The Beijing administration has launched a massive fiscal stimulus to lift China’s economic activity, with a further $238 billion economic package to be announced this weekend. Chinese stock markets have rocketed by 25% since mid-September and added $3.2 trillion of value to companies listed on the main Shanghai stock exchange. My fear is that this “whatever it takes” move by President Xi fails to alleviate the stresses in the Chinese property market and domestic economy weighed down by an estimated $15 trillion of debt owed (and much of it hidden) in local government financing vehicles (LGFVs).

Maybe it’s coincidental, but there is a distinctly soggy feel to lots of manufacturing activity data around the world – see September PMI in US, German GDP downgrades etc. So, it’s not just China which needs a boost, and a global cyclical slow down might be the least of our worries. If the Chinese economy continues to stall and Xi becomes worried about his ability to keep power, then the ultimate distraction is war. And, Taiwan is in the crosshairs of that option. Then, note that 90% of the world’s most advanced chips are made in Taiwan and 20% of global goods trade goes through its surrounding waters. Xi might even be watching developments in the Middle-East….

3.MIDDLE-EAST UNKNOWN: Israel’s Bibi Netanyahu seems quite keen on a permanent state of war, and staying in power. And, possibly out of jail. Sound familiar? Answers on a postcard to Mar-A-Lago. Meanwhile, Lebanon looks like the sixth country or region after Iraq, Yemen, Kurdistan, Syria and Gaza to face mass destruction and population displacement through a combination of rogue leadership and external powers forcing regime change miltarily. Now, we await Israel’s response to recent mass-missile attacks by Iran. The chat is Israel’s critical ally, the US, has asked for restraint. Apparently, Netanyahu might not be in agreement with that approach. Meanwhile, Israeli tanks are firing at UN peacekeeping bases in Lebanon. Bizarrely, these events could be described as fitting previous experiences – it’s Israel’s third invasion of Lebanon, and Iran actually attacked US bases and injured 100 servicemen during the Trump presidency. However, my real fear is that the pace of events is increasing rapidly and could potentially upset the “chaotic equilibrium”. I’m sensing an “unknown unknown” could be on the cards and create a whole new paradigm.

4.AI CONCENTRATION: Finally, we know AI can’t solve the leadership and power problems above. But, AI itself is inspiring financial markets and business spend. Be careful. A recent Fortune article flagged the dwindling number of contenders in the AI large-language-model (LLM) race. Yes, OpenAI just raised $6.5 billion at a whopping $157 billion valuation for the largest VC raise in history. Elsewhere, the numbers might just be getting too big. Or… should I say costs. Start-up Character.AI has abandoned its attempts to build an LLM to compete with Google, Amazon or Microsoft/OpenAI citing the model training costs as “insanely expensive”. In fact, the Character.AI team and its founder Noam Shazeer have been acquired (kinda) by Google. I say ‘kinda’ because other commentators have been saying this is, in reality, a monster $2.7 billion re-hire of the former Googler, Shazeer. Big bucks. Anyway, if the field of LLM contenders is shrinking, there’s a possibility we end up with concentrated Big Tech 2.0. On that basis, there is a real danger billions will be wasted trying to take on Big Tech in the LLM space. Even for the big wallets there are increasing reports of data limitations for LLMs. In other words, the exponential demand for data to optimise performance is now generating relatively small/linear improvements. Not quite what Moore or other technology scaling laws had in mind. Oh, and the tech sector’s weighting in the S&P 500 hit 42% this month, a record which puts TMT dotcom “bubble” levels of 32% into perspective.

Perspective indeed, maybe Hallowe’en has spooked my normal optimism. On a slightly more positive front and addressing my biggest current destabilising fear – a Trump win – here’s a few things probably not in the AI training models or the current US polling surveys. Don’t forget pollsters are facing an embarrassing hat-trick of misses, after under-polling Republican votes ahead of the 2016 and 2020 elections. What are the chances they have over-compensated this time? Here’s a few consoling changes in electoral intentions which could surprise on November 5^th:

Female vote: All actual votes in the last 12 months at a state level have missed the huge turnout of motivated female voters alarmed by the assault on healthcare choices waged by the Supreme Court’s reversal of Roe v Wade. See votes in Kansas, Michigan, Ohio, Montana and Kentucky as good lead indicators of what motivation means.

White college graduates: Apparently wild fantasies about eating pets, visits to Gaza, Hannibal Lecter and election denial is not a vote getter for non-cult GOP voters.

Senior vote: Like in the UK election, we can miss the senior votes. Literally. Approximately 12 million Americans have died since Trump lost in 2020. Many will have succumbed to old age. Given the average age of a Fox News viewer is 67, there’s a reasonable chance millions of Fox viewers/MAGA cult voters will miss this vote.

A slightly morbid end, but there could be a happy ending where the ghoulish baddie disappears as the cops arrive.

Who needs Freddy!
October 11, 2024