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Tag: Investment

  • Fintech Is The Forgotten Network Card To Play

    Fintech Is The Forgotten Network Card To Play

    Brexit has delivered a win. There, I said it. Now, before you all head off to lobby on my behalf for a co-anchor slot on GB News with the Moggster, Bad Enoch and the Rishibot, there’s a distinct possibility I could be clutching at correlation rather than causation. However, the numbers – for a change – are real. According to KPMG’s bi-annual report, Pulse of Fintech, last year was a tough year for global fintech with funding levels hitting a 6 year low. The UK did not escape the bear market as its $12.3 billion of new investment represented a 34% drop. But….the UK remains, by far, the capital of European fintech and ranks second globally behind Silicon Valley. For global context (and Nigel Farage cartwheels), UK-based fintechs attracted more funding in 2023 than France, Germany, China, Brazil, India and Canada combined. That feels like winning to me but also prompted thought on networks and London’s global positioning in the financial ecosystem.

    London is blessed with an enormous talent and innovation pool thanks to centuries of being the dominant global financial centre and a time zone which straddles the Americas and Asia. This global positioning means there is a bigger and more realistic point to be made than Brexit. It is striking to me that when a country is in the middle of a political, institutional and trading meltdown there is a sub-sector of economic activity which defies the gloom. Fintech might have suffered investment flight in 2023 but the resilience of UK fintech in the midst of a national mental health event points to the recovery of a structural story we have written about many times before.

    It’s a network story but it has had to play second-fiddle to two much ‘hotter’ networks in recent times. Social network platforms (quasi-relationship processors!) are now bigger than sovereign nations – billions spend hours of screen time with Facebook, Instagram, YouTube, Tik Tok etc. And yes, Meta may have picked the wrong name but its share price is at all-time-highs. Also, this week we got another blow-out pulse-check on the hottest network story of recent times; Nvidia’s leading role and 400% y-o-y growth in supplying AI-capable chips for data centres. The computer/digital processor network now lives in the cloud powered by a rapidly growing network of data centres operated by Amazon, Google, Microsoft, Apple etc. However, this week we were reminded that the global financial network is the biggest beast of all and still searching for next-generation financial processing. In the vast field of fintech covering regulation, cybersecurity, analytics, flashboy trading, execution algos, insurtech and blockchain the Big Daddy of them all is payments, call it financial processing.  And this week, we saw some big payments developments.

    First, US bank Capital One announced it is buying Discover Financial Services in a $35 billion deal. At first glance this looks like Discover’s credit cards were the target and, indeed, the combined card operation would create the No.1 US credit card company, passing out JP Morgan and Citigroup. But, no, what caught my eye is that Discover also operates a payments network. Furthermore, Capital One CEO, Richard Fairbank, said that by adding Discover, he could start building “a payments network that can compete with the largest payments networks and payments companies,” a reference to Visa and Mastercard, which dominate the industry. To put the card deal in context, the $35 billion deal is not even a tenth of Visa’s $550 billion market value which is fast catching up on Nasdaq poster-child, Tesla. It’s not just traditional banks like Capital One eying up payments networks. Closer to home, there was an interesting private deal announced.

    UK digital bank, Monzo, is reported by the FT to be close to completing a £350m funding round with a £4 billion valuation. So far, so unremarkable. After a bit more reading, two things struck a chord. First, little Monzo now has a whopping 9 million customers, with 2 million coming aboard in 2023. That’s quite the banking network build and I wasn’t the only one intrigued. Apparently, the lead investor in this round is Google’s very own investment wing, CapitalG. Note Monzo is a banking service which includes payment processing but guess who is the processor behind Monzo? Stripe. And, Stripe wasn’t the only hot payments fintech I was reading about this week.

    When Mario Gabriele of the Generalist newsletter flags a disruptor company I usually pay attention. This week he did a deep dive on Australian payments fintech, Airwallex. It’s not in Stripe’s league – they raised $6.5 billion in 2023 –  but Airwallex has just raised $160m at a $5.6 billion valuation supported by 100,000 corporate customers (including SHEIN, Qantas, Canva) generating $80 billion of annual volume and $400m in revenues. The service offers payouts in 150 countries in 46 currencies, is executed by a couple of clicks and costs markedly less than traditional financial institutions. Once again, the issue of costs and tolls charged by traditional financial intermediaries looks like a key ‘win’ for fintech disruptors, and even traditional banks like Capital One. Check out the words of their own CEO, Fairbank (perfect name when you think about it);

     

    “Owning a network allows us to deal more directly with merchants rather than a network intermediary…..We create more value for merchants, small businesses and consumers and capture the additional economics from vertical integration.”

     

    That network word seems important. Arguably, there already exists a disruptive network and it’s already worth a trillion dollars. Yes, the blockchain-powered cryptocurrency, Bitcoin, traded back to the $50,000 mark in recent weeks and put the total value of the currency at $1 trillion. Of course, the recent decision of US regulators to allow funds (ETFs) invested in Bitcoin to trade on public exchanges like the NYSE is a further validation for this particular ecosystem. However, Bitcoin’s connectivity to the merchants, consumers and businesses which Fairbank covets is still very limited. What is not in doubt is the size of the global digital payments market which is, per Statista, going to exceed $15 trillion by 2027. The good news for fintech disruptors and start-ups is that reducing the “tolls” on these money flows can be a quicker route to profits than other sectors.

    In Europe, just two of the ten most valuable venture capital (VC) backed companies are making profits. Interestingly, both are fintechs –  Revolut(neobank) and SumUp (mobile merchant payment hardware). Clearly, route-to-profitability is an increasing focus of investors as higher interest rates bring tighter funding conditions. However, investor interest in payments networks appears strikingly robust. Check out the following recent funding deals:

    • UK-based Kriya secures £50m funding boost to supercharge B2B payments revolution – TechNews 180
    • Valar Ventures backs Berlin fintech, Monite, with $6 million – CB Insights
    • Colombian payments startup, Bold, secures $50m in Series C funding, led by General Atlantic – HUBFX
    • Payment orchestrator, Navro, raises $14m Series A from Bain Capital and Motive Partners – Dealroom

     

    The truth is that payments funding has ‘only’ seen a 30% fall in funding activity compared to wider fintech funding collapses of 50-70%. So, perhaps my Brexit blurt was too impetuous and the stronger logic attaches to London’s critical positioning in the payments ecosystem. There goes my GB News career but I’d rather you keep an eye on the forgotten third giant network – payments. And, now you know there are 15 trillion reasons why.

  • Get On The AI Bus Or Lose Business..

    Get On The AI Bus Or Lose Business..

    As somebody who has been watching, I’m still stunned. No, not that Rishi Sunak has his own GB News TV show and that the regulator, Ofcom, hides. Not even the fact that a former US President has thrown his NATO allies under the Vlad bus in plain sight of the forever fear-filled US media. Of course, I’m sure Poland and Estonia are terrified by Joe’s age or Hilary’s emails. Mind-boggling. However, on a brighter note there’s another bus which is enabling millions to work better. The AI bus is flying. Again, the mainstream media headlines run with AI fear but the flow of money and corporate action point to an extraordinary business revolution. The numbers are now simply too big for businesses and investors to ignore. Let’s do a brief tour of developments…

    This week kicked off with the staggering news that AI chip maker, Nvidia, has now achieved a $1.84 trillion market valuation which is higher than both Amazon and Google. To understand the expectations baked into that valuation, reflect on Amazon’s projected 2024 revenues of circa $600 billion. Then know that Nvidia is expected by Wall Street analysts do just one tenth of that revenue number. The 90% revenue catch-up is somewhere in the future but the future numbers look big, very big. The famous AI evangelist and rescued CEO of OpenAI, Sam Altman, is actively seeking funding for the development of AI chips like those of Nvidia. The word ‘funding’ doesn’t really do this exercise justice. It’s almost nation building. Sam reckons he will need $7 trillion, or the combined GDP of Japan and France. Sounds dreamy, but he’s not alone.

    Consulting firm, McKinsey, have published research suggesting the creator-focused application, Gen AI, deployed in 63 actual use cases could add $2.6 trillion to $4.4 trillion of economic benefits. Note these are actual business ‘use cases’. There’s more than dreaming going on here. In fact, Google has launched its Gemini workflow assistant to “supercharge your creativity and productivity”. Gemini is multi-modal which means it can create content using text, voice/audio, images and video. Its output can also be multi-modal. Think about a medical professional using an ‘assistant’ which can ingest a physician’s audio snippets/notes, X-ray images and MRI video scans. Also, we have moved past Chat GPT text prompts and free trials. Google is charging a $20 monthly subscription for its Bard successor, Gemini, to assist with email summaries, research, code-free data analytics and audio visual staff and customer education. Microsoft is also charging $20 a month for its Copilot AI Tool. Oh, and people and businesses really do pay for access to these AI tools.

    While OpenAI started out in life as a not-for-profit entity, it is amazing to see that the OpenAI business is already generating annualised revenues of $2 billion. The use cases might even surprise. For example, McKinsey analysis shows that 73% of fashion executives named generative AI as a priority for their companies in 2024, but only 28% have actually deployed AI so far. It’s not just business prioritising AI adoption. The investment world, particularly in our world of early stage funding is acutely aware of venture capital (VC) funds pulling in their bullish horns and nursing some of their existing investments out of sick bay. However, AI-related VC investment is bucking that trend. Check out these data points from CB Insights:

     

    • Broader venture funding fell 43% in 2023, but AI funding slipped by just 10%.
    • The US actually witnessed AI investment grow by 10% in 2023. Europe dropped by 29% and Asia saddled with a China confidence crisis cratered by 61%.
    • There were 22 AI unicorns (start-ups valued at $1 billion or more) created in 2023 which accounts for 31% of a global total of 71.
    • Generative AI unicorns, in particular, are hitting warp speed wealth creation mode. Gen AI unicorns reached the $1 billion valuation mark in a little over 3 years, or half the time taken by unicorns in other sectors.

     

    However, investment doesn’t just happen at a company level, big or small.  If we consider Sam Altman’s funding estimate of $7 trillion, this investment capital will mainly be used to build facilities to manufacture those AI chips (fabs) and then house them (data centres).  I have written previously about the linkage between the explosive growth of AI and the race by Big Tech to build the data centres supporting their digital cloud businesses. As a proxy for this linkage, the Financial Times has highlighted Nvidia’s dominance in the area of data centre spending:

     

     

    Closer to home, the opportunity presented by data centres has attracted private equity giant, Blackstone, and prompted talks on a $900 billion acquisition of data centre construction leader, Winthrop Technologies. Clearly, the ramp up in investment activity on both a company and an infrastructure basis is signalling real AI revenues and real usage from businesses. And, it would be wrong to assume it’s part of the future. It’s now.

     

    • Forbes reckon 83% of companies deem AI to be a top priority in their business strategy.
    • MIT have said 9 in 10 organizations back AI to give them a competitive edge over rivals.
    • More than 50% of Americans use voice assistants for information purposes (Source: Edison)
    • Manufacturing businesses that utilize AI are performing 12% better than those using traditional methods only (Source: Microsoft)

     

    Remember this is AI in its infancy. That 12% ‘edge’ is only going to grow. For me, there is now an additional competition-critical question for every business to add to existing queries on the progress of their digital and sustainability transitions. Have you boarded the AI bus yet….?

  • The Value Of Good Times Revisited

    The Value Of Good Times Revisited

    My first year on this planet was the first for humanity on the moon. A good year but no memory of it. Probably my earliest happiest memory was lying on the floor playing with Airfix toy soldiers in a Waterloo battle scene at Christmas time as Simon & Garfunkel’s ‘The Boxer’ played on my parents’ hi-fi. Happy times, and always grateful for plenty more over the following decades. However, last week another ‘good times’ feeling was prompted by the radio belting out “The Boxer”, quickly followed by a news update on another lunar expedition. Yep, it was Japan’s turn to visit the moon but also a reminder of how much I loved living in Tokyo in the ‘90s. Good years, many memories. I won’t be visiting there any time soon but the memory-jog from the East could be timely. Japan might just be about to revisit its own good times…..

    The main stock market index in Tokyo, the Nikkei 225, recovered to a 34-year high this week. That’s a positive headline but doesn’t escape the fact that the Japanese stock market has only returned to index levels last seen when I first landed in Japan. However, there’s a lot more going on than headlines highlighting 34-years of zero wealth creation. In fact, I’d almost use the word ‘progress’. Progress might not sound like a big deal to readers, and I might have shared that very same view until I came across a fascinating piece of data in the Financial Times(FT) in recent weeks. Thanks to the Google AI tool, Ngram Viewer, one can explore language usage trends over time by searching millions of books, documents and other text sources.

    According to the FT’s John Burn-Murdoch, usage in the West of English, French and German words for “progress, advance, future, rise and improvement” have been in decline since a few years after Apollo 11’s daring touch-down on the moon. Meanwhile, usage of the words for “threat, worry, caution, risk and caution” have increased significantly to suggest a multi-decade cultural shift to risk-aversion, or ‘safetyism’ which is being used a lot these days in AI discussions. Indeed, a recent excellent David McWilliams podcast with Burn-Murdoch explored this potential connection between culture, language and growth. For Japan, this analysis must genuinely resonate. After decades of trying to unwind huge debt levels in its financial system, and persuade its ageing population to spend, there are interesting developments which point to a significant cultural shift.

    Leaving aside the ambition to be only the 5th nation in history to successfully ‘soft’ land on the moon, Japan is flexing its ‘progress’ and ‘advance’ muscles further afield. How about the daring move by Nippon Steel last September to buy iconic US industrial asset, US Steel, for $14 billion? Or Softbank swooping for Ireland’s Cubic Telecom in a €473m deal pre-Christmas? Perhaps the even bigger deal is the incoming capital landing on the island nation. Last April we wrote about Warren Buffett buying up significant stakes in Japanese sogo shosha, 150-year old industrial trading houses, described by Buffett himself as “a cross-section of not only Japan, but of the world”. In some ways, Japan is the beneficiary of a global China de-coupling. Indeed, its trading houses could be considered a new de-risked staging post to access the Asian middle-class; a cohort which will account for a stunning two thirds of the global total by 2030. And….Buffett is not the only financial guru revisiting Japan.

    Steve Cohen, has opened a Tokyo office of his Point72 hedge fund and US private equity player, Ares Management, has announced plans to do the same in 2024. Ken Griffin’s Citadel, the most successful hedge fund in history, has also decided to reopen its Japan office. So what’s the deal? Well, when an iconic Japanese industrial giant like Toshiba agreed in September 2023 to a $14 billion sale to local private equity firm, Japan Industrial Partners (JIP), that was a very big deal. Not the size, but the business cultural signal. Typically, underperforming companies on the Japanese market have stubbornly rebuffed shareholders’ demands for maximizing returns on invested capital. In fact, the Japanese authorities have frowned upon the unfettered threat of Anglo-Saxon-style unsolicited takeover bids. Without the threat of takeovers, Japanese companies, in aggregate, have displayed the following unique features:

     

    • Japan’s listed companies sit on enormous cash piles amounting to almost 45% of their market capitalization. That’s about three times what UK or US companies hold (Source: IMF)
    • Prior to Covid-19, Bloomberg reported that total cash held by Japanese companies on their balance sheets had reached 90% of Japan’s $5 trillion GDP.
    • 40% of companies listed on the Tokyo Stock Exchange finished 2022 with net cash holdings equal to more than 20% of their equity. (Source: Carlyle)
    • 50% of companies listed in Japan are trading below the value of the assets on their balance sheets. In financial valuation terms this is expressed as a price-to-book ratio of less than 1x. (Source: Schroders)

     

    So, cash is king. But, in a super-low interest rate Japan, un-deployed cash is killing investment returns. This is reflected in so many companies trading on valuation multiples less than 1x price-to-book, but is now poised for a shake-up. The Tokyo Stock Exchange (TSE) has formally instructed all listed companies whose price-to-book ratio is less than 1x to raise their multiple above 1x, or risk being de-listed. One way to do that is to reduce the book value in the ratio by handing cash back to shareholders. The TSE has published a “name and shame” list and this is raising investor expectations of better governance and deployment of capital. In fact, more than 50% of Japanese companies have increased their cash dividends to shareholders in the last year. Sounds like Warren, Ken and Steve have their eyes on the ball. And, if you like ball games, then Japan is making waves there too..

    Shohei Otani from Iwate Prefecture has just signed a $700 million contract with the Los Angeles Dodgers baseball franchise. This is the biggest individual contract signed in history, in any sport, and it feels like ‘a moment’ for Japan. I sense other moments too. Tokyo’s stock exchange has just passed out Shanghai in market value and regained its place as Asia’s biggest equity market. And, it’s not just investment capital coming to Japan. Back in the mid-1990s tourist numbers were just over 3 million. That number had rocketed to over 30 million before Covid struck. Anecdotally, Japan seems to be on so many ‘bucket lists’ as the last advanced economy which is truly a different experience for travellers. Also, thanks to its price stagnation problem over the last 30-years Japan is presenting far better relative value attractions than its “pricy” reputation. Of course, value is a huge factor in financial markets so my final Japan revelation might surprise.

    We mentioned earlier that Japan’s stock market has only just returned to levels last seen in 1990. In other words, the long-run multi-decade returns on Japanese assets (on average) have been close to zero. However, the annual valuation “bible” published by Nobel Prize winner, Eugene Fama, and Kenneth French has just thrown up an amazing bit of data. Japanese stocks which qualify as value stocks (low valuation ratios like Price-Earnings, Price-Book etc) have compounded returns at 6.5% annually in the period 1990 to 2022. In a global market recently dominated by Big Tech and “Magnificent Seven” turbo-charged valuations and share price gains this is a timely reminder of Warren Buffett’s super-power, TIME, and his focus on value for long-run returns. For investors today, the investment question should always address value but also… timing. Right now, watching these moments, I’m wondering is it Japan’s time for good times again?  It certainly has a fighting chance.

    “In the clearing stands a boxer
    And a fighter by his trade
    And he carries the reminders
    Of every glove that laid him down”      –    Simon & Garfunkel

  • More Blue Sky Than Blue Monday

    More Blue Sky Than Blue Monday

    Apparently, the Monday of this week is the worst every year for negative thought. Furthermore, the new UK Foreign Secretary, Lord Cameron, fresh from launching war in the Red Sea, told us in a weekend TV interview that “the lights are absolutely flashing red” on the global risk dashboard. Excellent. Well, that’s settled then – I mean Lord “Call Me Dave” gets all the big calls right doesn’t he? Ok, let’s not invite the rest of the world to turn the air blue. In fact, let’s do what should have been done in 2016 and pay attention to what’s really happening in the world right now. Not surprisingly for this writer, January is already confirming themes established and developing from earlier years and we are more than happy to keep screaming about them until we are blue. So, here we go with a little whistle-stop tour of the real world….

    We truly believe the ‘convergence’ of various technologies is about to turbo-charge the acceleration of change in the global economy. An existential crisis also helps focus minds and….. money. The climate change crisis has prompted the greatest capital shift in history as $6 trillion of annual spending on cleantech is forecast every year until 2050 (Source: McKinsey). Indeed, one of the key investment destinations in moving away from fossil fuels has been electric vehicles(EVs), and the batteries used to store energy and power these vehicles. Chemistry advances have been key in driving costs down and capacity up where lithium-ion type batteries are the predominant storage technology. However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%.

    Yep, Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction,  but also counter an unhealthy commentariat focus on AI ‘safetyism”. The social and economic basics of health, shelter, mobility and food are in dire need of blue sky thinking but might just have found a genuine innovation accelerator. Microsoft themselves have told the BBC that one of the company’s missions was “to compress 250 years of scientific discovery into the next 25.” Thankfully, this was not the only positive solution speed surprise of recent weeks.

    The IEA has confirmed that renewable energy capacity increased globally by 50% in 2023 alone(!). That’s the biggest growth seen in more than two decades. At that pace, it is conceivable renewable energy could be 50% of electricity generation by 2030 and, brace yourselves… would actually meet the renewables ‘tripling’ target agreed at Cop 28. Germany – not getting great economic press in recent times – is already at the 50% renewable electricity production level with CO2 emissions currently at a 70-year low. Furthermore, coal usage at a 60-year low in Germany makes for clearer skies but the gloomy headlines could have obscured another Teutonic trophy win.  The EU has given the go-ahead for Germany to provide €902 million of state aid to battery producer, Northvolt, for the construction of a gigafactory producing EV batteries. Without that aid, Northvolt would have probably moved the project to the US. Instead, the €2.5 billion project at Heide will be the first to avail of the new ‘matching aid’ exception allowed by the EU to support more flexible/higher amounts of state aid to prevent an investment exodus to the US.  Expect more good European news on this front as the region is forecast to build a further 250 battery factories by 2033 (Source: Buck Consultants). These are real actions and projects (not headlines) but companies are also showing confidence with more traditional strategic moves.

    We perennially write “watch what they do, not what they say” and the big “tell” is often M&A activity. Given acquiring other companies results in wealth destruction almost 50% of the time, we tend to see a flurry of M&A activity as a positive illustration of executive confidence and found the headlines of recent weeks interesting.  You might think the announced $14 billion purchase of Juniper Networks by HP was just another example of the technology sector enjoying the benefits(and valuation multiples) of a stellar 2023 but back in the ‘old economy’ things are stirring too. And, if M&A was tricky enough why not try to acquire a national icon, as a foreign company? Cue the Japanese execs at Nippon Steel have decided to swoop for US Steel in another $14 billion deal. Once the most valuable company in the world, US Steel could become a political football but both boards have agreed the deal and are acutely aware that the most recent offer from domestic rival, Cleveland Cliffs, was just over $7 billion. You don’t need the finance gurus to figure that one out. Anyway, they are busy too. The world’s biggest asset manager, BlackRock, has announced the $12.5 billion purchase of Global Infrastructure Partners (owner of Gatwick Airport and Melbourne Port). Clearly, the $10 trillion giant sees a future for the old stuff.  As for the new stuff…

    The SEC in the US has just approved funds (ETFs) which invest in cryptocurrencies (Bitcoin). This is massive for the crypto and blockchain ecosystem. In simple terms, this approval by the SEC means funds invested in Bitcoin are now regulated and can be considered an asset class in their own right. Nine funds (ETFs) have been approved to trade on New York regulated exchanges, and in the first two days of trading attracted $1.5 of investor inflows. BlackRock’s fund led the way with $500m followed by Fidelity’s fund bringing in $422m. For me, cryptocurrencies are a very good indicator of risk appetite, or confidence. So, if Bitcoin is trading close to $40,000, this feels like the world is not about to fall apart. Other new stuff is doing well too.

    We’ve already touched on AI’s benefits to humanity but, if you’re an investor, the AI posterchild is still Nvidia. While the broader equity markets have spluttered in January, Nvidia continues to march to new record highs. Its market value is now in the region of $1.4 trillion. For context, if Nvidia’s share price increases by another 15% its valuation will match that of Amazon. Then consider Microsoft, another AI play, which overtook Apple this week as the most valuable company in the world. You might think all the AI excitement is in the big tech names but CB Insights has published data showing AI start-ups benefitting from  significant valuation premia when raising capital. Median valuations for early stage/seed fundings were 21% higher, larger Series A fundings saw a 39% premium and Series B funding rounds clipped an extra 59% from investors compared to non-AI companies. Get ready for more AI references in investment ‘story telling’, but also watch out for the continuing battle for authentic stories and content needing no AI.

    Over the weekend, the exclusive rights to the NFL game between the Miami Dolphins and the Kansas City Chiefs were sold to NBC’s streaming service, Peacock, for $110 million, or $1.8 million per minute of game time. According to the superb sports finance newsletter, Huddle Up, this is all about Peacock/NBC being given a foothold by the NFL as streaming overtakes cable consumption over the next 5 years.  That means Apple, Amazon and Netflix will be a big part of media rights negotiations in many sports in the coming years. Think Hulu and Wrexham, then marvel at the Rightmove data showing Wrexham as the busiest property rental market in the UK in 2023. That certainly wasn’t forecast on those Brexit red buses in 2016.

    Of course, a market whistle-stop tour would not be complete without a check on the ‘Big Daddy’ driver of all asset classes; the cost of money. Here too, the news was not blue. The cost of two year money in the US in the past week (measured by the yields on traded 2 year US Treasuries) was back to levels not seen since May 2023. In fact, the world’s most profitable bank, JP Morgan, didn’t just announce record profits last week but also told investors they believe the Fed will cut interest rates SIX times in 2024. We shall see, but it is clear that capital is “climbing a wall of worry” in lots of interesting parts of the global economy. That does not mean we can ignore the concerns of some serious and credible analysts. The world’s risk experts continue to watch Russia vs Ukraine, Israel vs Hamas and China vs Taiwan. More than enough volatility, and enough for Ian Bremmer, CEO of the Eurasia Group consultancy, to describe this year as…

    “Politically it’s the Voldemort of years. The annus horribilis…. and then there’s the biggest challenge in 2024… The United States versus itself”.

    Again, voting like sport doesn’t need AI. Who would have thought that US democracy would be the greatest geopolitical risk of 2024? Simply stunning. Yet, I am hopeful that younger voters, business leaders, investment capital and credible domestic influencers will begin to spell out the true potential cost of burning the US Constitution in front of the whole world. Just imagine fighting the “Red” threat of totalitarian Communism for decades and then discovering you have your very own Red totalitarian party at home? Now that must make more than a few voters go blue……

  • Five Numbers Say Don’t Give Up….

    Five Numbers Say Don’t Give Up….

    Perhaps it’s the prospect of beginning a 100 day no-alcohol stint which is causing, on my part, a sudden obsession with numbers. Then again, it could be just a time thing. I mean, who knew one of the World Darts finalists would be younger than the iPhone? Or, that just 9% of UK voters believe Brexit is going to plan? Well, probably the rest of the world knew that a policy to sanction your own economy more heavily than Russia was going to end in tears. However, the rest of the world should drop the sermons-in-smug and pay attention to the first of five key numbers we are watching in 2024….

    Climate Crisis: The temporary visit on November 17th of global temperatures more than 2 degrees above pre-industrial averages is a five-alarm-bell ringing of an existential crisis for the planet. Given we have been in perpetual storm mode since late November, and the storm-naming cycle is already past “H” with Storm Henk, there is a personal sense that bad news could be good news. In particular, catastrophe losses in the insurance and capital markets could focus political leaders’ minds on the sheer cost of loose non-urgent language in the recent Cop 28 commitments.

    Bond Markets: We regularly remind readers that the cost of money (interest rates) is the critical driver of ALL asset prices. The number which caught the eye this week was that bond prices (which fall when interest rates/yields rise) have been in negative territory for 41 consecutive months – the longest ever draw down in history. And, forgive the repetition, but again bad news might actually be good news for bond prices. In other words, a slower economic environment and some employment weakness could be the trigger for global central banks to ease interest rates and allow bond prices recover.

    Venture Capital: In the Spark world of start-ups we are always watching the private markets as well as the more liquid (and better performing) public equity markets. The S&P 500 might have sucked in AI-excited investment and delivered 25% gains in 2023, but for younger companies access to capital was far more difficult. The VC data research team at PitchBook reckons global VC funding fell to $345 billion in 2023, down from $531 billion the previous year. In private equity, deployment of capital dropped by 29% and exit activity was down by 26%. That’s the worst combined performance since 2016. However, the silver lining in these numbers is that funding activity has shifted away from more mature private opportunities to early-stage, seed-type investments. In fact, two in every three deals done were in early-stage companies.

    Cleantech: While Tesla is overtaken by Chinese rival, BYD, as the top electric vehicle(EV) producer globally, there is strong evidence that Europe is ramping up its capabilities in the EV ecosystem. Buck Consultants have published research forecasting the installation of 250 EV battery gigafactories in Europe by 2033. This won’t be a huge surprise to those who have seen McKinsey estimates of annual cleantech spend until 2050 exceeding $6 trillion. Imagine investing more than the entire GDP of Japan every year…..for decades.

    Democracy: Of course, investment in our survival and a phasing out of fossil fuels can only happen with strategic political leadership. The shift to right-wing populism has been a striking feature of the global political landscape in recent years but 2024 is truly the “Year of The Vote”. The US and UK are high profile elections on the horizon but the global stakes are much much higher than that. Seven of the ten most populous countries in the world, with a combined 4 billion voters, go to the polls in 2024. That’s 46% of the world’s population, or 54% of global GDP, deciding where we go next. Oh, and don’t forget European/MEP elections this year too.

    So, we can perhaps understand why financial markets are opening up 2024 in a jittery manner. However, as Sergeant Kenneth “Hutch” Hutchinson departs in his iconic red Gran Torino for his celestial precinct in the sky, I’m hopeful that young companies and young voters can put the five numbers above on the right trajectory. In particular, we must hope that younger voters reject the fear fraudsters and focus on the sustainability of their own future. Dare we suggest that the temperatures of both hate and climate are the key dial-down numbers to their survival, and engagement? Or, as David Soul might sing, “Don’t Give Up On Us Baby…”

  • What’s The Score For ’24?

    What’s The Score For ’24?

    It’s that time of year again to pause, reflect and hope to do better in future. Unless, of course, you’re the Conservative Party in the UK or the Republican Party in the US and ‘the race-to-most-nasty’ is the leadership badge of shame soon to be re-spelt with a ‘Z’. Back in the do-better world, a review process can help shape future efforts. So, let’s do a quick check on our four multi-year investment themes we identified almost a year ago in “Four Pictures To Develop This Year”.  First, we will remind ourselves of what was written, and then score/review how things developed for AI, Housing, Corporate Credit and Cleantech/Batteries. We kick off with the biggie….. Artificial Intelligence (AI):

    “The excellent database resource, Our World in Data, shows annual corporate investment in AI doubling from circa $80 billion in 2019 to over $160 billion by mid 2021. More specifically, the explosion of interest in generative AI (ChatGPT, DALL-E etc) has seen VC investment increase by 425% to $2.1 billion since 2020”

    Review: Well, at the half-way stage of this year, 18% of global venture(VC) funding went to AI, clocking a total of $25 billion(Source: Crunchbase). Furthermore, with the tech-heavy Nasdaq index gaining almost 50% this year, Nvidia reaching a trillion dollar market cap and OpenAI hitting an $85 billion private market valuation, it is not hard to identify AI as the single biggest positive driver of investment markets this year. Of course, the trajectory of the cost of money (interest rates) also helps with the confidence bit, but we have written before that November 17 has more than one revolutionary connotation. As of this year, the night of November 17th will be remembered for the $200 billion swing in value between Google and Microsoft in a matter of hours, and entirely driven by the relative success or failure of their respective cloud computing divisions. The AI revolution is in full swing and will continue into 2024

    While the cloud has become the housing proxy for AI, what about our own housing markets? A year ago we were concerned:

    “Of course, rising interest rates don’t just impact companies. The biggest item on an individual’s balance sheet is likely to be a house and as interest rates rise, so do mortgage rates. The push/pull effect of higher interest/mortgage rates can reduce the price of the assets being purchased, in this case houses rather than growth companies…… indicates a more difficult 2023 for a number of major housing markets.”

    Review: Arguably, this theme did not play out in a significant way, unless you were Chinese. Bluntly speaking, the doomsday predictions of housing crashes in the US, Australia, Canada and the UK just did not materialise. However, house prices are somewhat softer in many markets. The St Louis Fed has said median house prices in the US are off 10%. Even the UK with its dysfunctional government, and one Prime Minister(Liz Truss) having a good go at crashing the property market all by herself, has seen price slippage of just 1% (Source: Halifax). The key flaw in the doomster arguments was that most people kept their jobs. Major economies in a state of full employment was not expected as the “vibecession” never turned into a recession. And, if recession is avoided then there’s another asset class which has dodged a bullet; corporate debt/credit. Here’s what we feared….

    “In real world terms, the knock–on effect of tighter funding conditions will begin to reveal themselves in 2023 as companies with challenged balance sheets/indebtedness – aka ‘zombies’ – move into distressed territory.”

    Review: As a proxy for corporate stress you’d expect high yield bond (lower quality debt) spreads to have risen through the year. But no. They’re actually at their lowest since April 2002. However, we’ve had a few big bankruptcies through the year – Silicon Valley Bank, WeWork, Diebold Nixdorf, Rite Aid, Van Moof, and even Birmingham City Council. By June UK bankruptcies were up 40% on the year before. According to S&P Global, in the first 10 months of this year 561 companies sought bankruptcy protection in the US. That’s more than any year since 2010, except for the Covid-19 hit in 2020. So, I’d give us a pass mark on this but feel there’s another year of stress ahead. In particular, commercial real estate as an asset class is going to witness some very painful write-downs and outright collapses. Check out the recent travails of Austrian billionaire, Rene Benko, and his $25 billion property empire, Signa, for a very current case study.  However, not all building is in trouble….

    “In some ways, the best proxy for the planet’s race towards reducing fossil fuel dependence is the enormous investment currently being ploughed into production facilities for batteries to power a generational shift to electric vehicles(EV). China in 2020 accounted for 75% of global battery production capacity but that’s going to change. Europe intends to up capacity 5-fold by 2030 and the US isn’t just home-shoring semiconductor manufacturing.”

    Review: Like AI, I think this gets us pretty good marks. The cleantech and energy storage(battery) revolution is in full flow. McKinsey reckon $6.5 trillion will be spent every year on capital expenditure/building facilities which, in the words of the latest Cop-out 28 text, will “transition away from fossil fuels”. We did say catch up was required by Europe and the US in battery manufacture, but arguably the US has accelerated faster. Thanks to ‘Bidenomics’ and the IRA Act the US is seeing capital investment in manufacturing reach levels not seen in four decades. According to MIT, cleantech investments in the 12 months to July 2023 hit $213 billion, and was mostly allocated to EV battery manufacturing, renewable energy and green hydrogen infrastructure. No wonder the old-economy barometer, the Dow Jones Index, just hit an all-time-high level of 37,000 points. More amusingly, Trump whisperer, Maria Bartiromo, on Fox Business was forced to say “the economy is doing much better than most people understand.”  Wonder how that misunderstanding developed, Maria?

    So, there’s a temptation to stick with the same four themes for 2024, but in the spirit of Christmas we’d like to give a bit more. The bonus good news is that Christmas might also be easier on the waistline in the coming years. Yes, AI has stolen many of the headlines this year but there’s a 100 year old company in Europe breaking records too. Denmark’s Novo Nordisk is now the most valuable company in Europe with a $437 billion market capitalisation thanks to its insulin product, turned weight-loss miracle drug, Wegovy. This semaglutide-based drug is a game-changer for up to 750 million people living with obesity. However, there might be even bigger break-through treatments to come. And, it’s all about BIOLOGY.

    We are entering the world of gene editing spearheaded by CRISPR technology. Get used to that term. CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats. It is a component of bacterial immune systems that can cut DNA, and has been repurposed as a gene editing tool. Only this week we were reading that the FDA has approved two ground-breaking cell-based gene therapies, Casgevy and a new one, Lyfgenia, for treating sickle cell disease (SCD) in patients aged 12 and older. Notably, Casgevy is the first FDA-approved therapy utilizing CRISPR.

    Now, think about healthcare spend being almost 11% of global GDP, or $11-12 trillion. The prospect of biology rather than pharmacology being used to eliminate various life-changing diseases is mind-blowing. Furthermore, as the first attempts to regulate AI emerge let’s open our minds up to the probability that these massive new computing powers can save decades of research time. So, as a final thought, perhaps 2024 will deliver a break-through global healthcare solution through the combination of AI and biology. Just imagine, our health becoming your wealth…. I definitely think that would score well.

  • Take Your Pension Or Portfolio To Another Level

    Take Your Pension Or Portfolio To Another Level

    Fizzle sticks! There goes another billion dollar ‘unicorn’ I didn’t back. Sound familiar? This week’s news that Ireland’s Cubic Telecom has entered the ‘unicorn’ club thanks to a €473 million investment from Japan’s Softbank should focus financial planning minds. In particular, we should focus on two things very familiar to readers of these pages. Firstly, speed. The business world is moving faster and faster. Secondly, technologies are rapidly merging and compounding value.

    Just over a year ago, Cubic Telecom was reporting annual sales(Sept 2022) of circa €30 million with its connectivity software installed in 10 million vehicles. Yep, €30 million not €300 million. So, what prompted Softbank to enter into discussions for a 51% stake purchase on a valuation multiple of 31x the previous year’s revenues? One could hazard a guess that speed of growth was one consideration, given installations of its software have ramped up to 450,000 vehicles per month and are expected to go ‘exponential’. Also, one suspects the compounding of a number of technologies is beginning to drive traction. Cubic is at the fortunate intersection of the Internet of Things(IoT), 5G connectivity, electric/battery powered vehicles (EVs), cloud computing and Artificial Intelligence(AI). We need to start thinking about multiple technologies compounding at speed rather than focusing on one technology advance, and it’s not just Ireland illustrating these two themes.

    All the gloomy headlines this year have put us all in a strange place. And, awkwardly so for financial advisors who possibly went into ‘bunker’ mode. I have been asked to look at 3 different pensions in the last week where returns to date were hovering at just over 3%. That’s actually less than you’d earn on risk-free US Treasuries currently. However, the killer data point is that the tech-heavy index, the Nasdaq 100, is up 48% year-to-date. Oh, and despite all those war headlines and oil worries from Russia/Ukraine and the Middle-East, the energy sector is DOWN year-to-date. Even Germany which is staggering into recession boasts a stock-market (DAX) hitting all-time highs and returning 18% gains this year. Note, the DAX is definitely NOT filled with tech names. However, the Nasdaq is telling us lots of technology from energy storage(Tesla) to cloud(Microsoft) to AI(Google) are emerging at the same time. Just yesterday, Google showed us a new AI bot, Gemini, and its market value jumped by $85 billion over the day. That’s the equivalent of Citibank’s market capitalization after 211 years in existence. Just one day. It feels like wealth creation cycles are shrinking.

    Latest reports suggest the AI team at French start-up, Mistral, are raising funds again. Recall that this crew of AI gurus raised over $100 million 6 months ago with no product, no business or revenues. Just a PowerPoint presentation deck. Now the team have a product (large language model(LLM) for Generative AI) and want to raise more than $300 million. The current valuation level for Mistral is ….. reported to be over $2 billion. Six months. However, before we go all dollars dreamy, note that the hard yards and years are still the norm. For example, Cubic Telecom started up back in 2005. At a higher level, consider it took Microsoft 44 years to hit the trillion dollar market value mark, Apple 42 years, Amazon 24 years and Google 21 years. Keep those tech and time thoughts and let’s move to the other end of the business life spectrum.

    We have already referenced pensions, but for many investors these are vehicles for a variety of funds investing in a mix of blue chip publicly listed company shares and their debt(bonds), government bonds, possibly some real estate and a bit of cash. Given the fast-moving tech world we live in, it is increasingly apparent that investors’ pensions or savings portfolios should allocate a small portion of monies(5-10%) to early-stage companies. Pensions are not the ideal vehicle(for the majority of people) for these investments, but the good news is that the government provides incentives with a similarly attractive taxation impact.

    For years, starting with BES schemes and then evolving into the current EIIS funding initiatives, government has encouraged private investor capital to support employment and growth for early-stage companies by offering tax rebates against income generated in the year of investment(s). That rate of rebate has been a standard 40% but is due to change. More on that later but first, let’s briefly explain the mechanics of EIIS.

    If a company is eligible for EIIS investment it will typically be introduced to private investors in three ways. Note, not all companies qualify for EIIS treatment eg. financial trading businesses are not eligible. Companies which do qualify, offer shares through the following:

     

    • Direct Investment: The investee company offers its shares directly to investors. These direct investment opportunities are typically offered to small groups of investors known to the company’s founders or its financial advisors, and not made public.

     

    • EIIS Funds: These funds are managed by financial intermediaries/brokers and request lump sums up front from private investors. The capital raised is then deployed across EIIS investment opportunities. The up-front sums can be significant(> €10,000) and the managers will charge annual fees.

     

    • CrowdFunding Platforms: A platform like Spark (or Seedrs or Crowdcube in UK) will give thousands of signed-up investors access to 12-15 fundraising campaigns by EIIS qualifying companies each year. The business model of these platforms is different to a fund. The investors do not pay any up-front lump sums or fees. Investors can invest as little as €250 in each EIIS investment with NO commissions, and NO management fees. Instead, Spark and other platforms only charge the companies a fee(and only if successful). One other variation on this is Angel Networks, or syndicates, which invest as opportunities arise. However, the entry level investment size (€5,000 – €10,000) and lead times are not for everyone.

     

    So, after paying for your shares, those shares will sit in a broker account, or a fund, or in a nominee account(independent of platform). The company will then apply for EIIS certification from the Revenue. On receipt of this notification, investors will get a certification confirming same which can be filed with the Revenue to offset taxes paid in that year.

    What sort of people could this interest? The income which qualifies for tax rebates includes employment income, rental income, dividends and ARF distributions. The amount of income which can avail of EIIS has been increased from €250,000 to €500,000 in a single year under new rules to come into effect in January 2024. Also, note the investment must be for a minimum of 4 years. The new rules in the Finance Bill also have broken the standard 40% rebate rate into different bands which we have summarised in a previous article as follows:

     

    • 50% for businesses that ‘have not operated in any market’;
    • 35% for a business in its first EIIS fundraise within 7 years of its first sale;
    • 20% for a business in its second or subsequent EIIS fundraise;
    • 20% for a business expanding into new markets or regions; and
    • 30% for investments via a ‘Qualifying Investment Fund’, of which there is only one in Ireland.

     

    Quite apart from introducing potential confusion, the ‘core’ or standard EIIS rebate of an equity investment will now be reduced from 40% to 35%. On a more positive note, the 50% relief for early-stage pre-operating companies could be very interesting for Ireland and Irish investors. It won’t have escaped your attention that the trillion dollar tech club is entirely US based. That can be attributed to deeper capital markets and Silicon Valley tech leadership but could Ireland be a leader now? I’m thinking three big areas where the Irish ecosystem is quietly building real scale and a pipeline of early-stage opportunities. Here we go:

    Medical Technology/Bio-pharma: 14 of the 15 biggest MedTech players have significant operations including critical R&D functions in Ireland. Also, 12 of the biggest global pharma players are there too. That ecosystem is beginning to deliver a fly-wheel effect of training, management, success, entrepreneurial juices and world-class innovation.

    Cleantech: Irish engineering and construction companies are already leveraging their experience of executing huge hi-spec projects for tech giants like Microsoft and Intel, and global life sciences companies. These Irish companies are now key players in the build-out of EV battery gigafactories, data centres, clean energy manufacturing plants, pharmaceutical plants and chip manufacturing facilities all over the world. It is highly likely this hi-tech project expertise will generate new innovations and young companies to drive the cleantech revolution.

    Artificial Intelligence(AI): The creator economy is a $250 billion monster with all the major players from Google to LinkedIn to Meta/Facebook positioning their European HQs in Ireland. It is clear the creator economy is in the cross-hairs of AI and one can expect the Silicon Docks of Dublin to spin out a number of AI innovations. In fact, Spark will be bringing an exciting AI play to investors very soon.

     

    Furthermore, or a bit further afield, we should note interesting developments in Europe. Spark as a newly regulated entity with EU ‘passport’ will be looking at potential investment opportunities and encouraged by the latest data from Atomico’s “State of European Tech 2023” report:

     

    • Investment levels in European tech has reached $45 billion which is up 18% on 2020. Every other region is down over the same period.

     

    • Europe’s talent pool has grown from 750,000 to 2.3 million in the last 5 years. And, in 2023 Europe was a net beneficiary of people moving from the US to Europe. How Trumpy….

     

    • Europe now has 4,000 growth stage tech companies.

     

    • Europe (not just Mistral) can compete in AI globally. In fact, Europe has more resident AI talent than the US (120k vs 112k).

     

    There will be early stage investment opportunities in a faster world. And, frankly, waiting for IPOs could be a long way off. Thanks to huge private investment pools, companies like Stripe, Shein and OpenAI can stay private for longer, or forever. In the US alone, 70% of early stage/VC funding comes from pension funds and educational endowments. Europe has a bit of catching up to do; only 20% of funding comes from institutional sources. But….. on a contrarian view, this presents an opportunity for European and Irish private/individual capital to step into the gap and seize opportunities that typically might have gone straight to institutional/professional players. So, instead of fizzle sticks maybe think about sticking some funds into one of the EIIS access vehicles referenced above. As always, we recommend a portfolio-building approach, spreading your risk in smaller amounts across 8-10 investments per year. See the table below as a quick summary of what might work for you:

     

     

    Finally, if it’s speed and technology you’re looking for, then a 3-minute sign up process on the Spark platform is a pretty slick start to your early-stage investing journey.

     

  • Joe Biden’s Letter To Santa

    Joe Biden’s Letter To Santa

    If Joe Biden were to ask for just ONE thing this Christmas it would have to be a new writer or storyteller. I was reading various geopolitical scribes this week describe the poorly-polling Biden’s problem. According to the middle-ground commentariat, the Biden administration is describing an America with fantastic headline achievements on the economy but which the average American is not feeling on Main Street. Well, go ask the rest of the world. In fact, if Biden’s team were to follow through on their belief that “America is an idea, not a geography” then the solution to their messaging woes is staring right at them. Simply put, The USA has never been in a stronger economic or geopolitical relative position in its entire history. So here goes the report card….

    The latest GDP print for the US shows an economy roaring along at 5% growth rates. That’s the first time in decades the US growth rate has overtaken China and there’s more relative superiority to report. Other large economies at a European or Asian regional level are not seeing that growth and you will only find US-envy among German or UK voters currently enduring stagflation.

    US voters may not know it but international investors have already spotted US relative dominance. US stock markets clocked a stunning 8% monthly gain in a very rocky geopolitical November. The broader S&P 500 index is up almost 20% year-to-date and the tech-heavy Nasdaq indices have rocketed just shy of 50% this year.

    We always write about how the cost of money drives asset prices everywhere. A lower cost of money is good news and the US bond market has indicated a 0.75% drop in interest rates in the last few months. In real life terms that’s the equivalent of the central banks cutting rates by 0.25% three times in 6 weeks. It is US businesses and mortgage holders reaping that benefit, not any Europeans.

    Oil prices are back below $74 per barrel despite a Middle-East war. Of course, you won’t hear any Trump-cult Republican blowhard talk about the fact that US oil production is currently roaring along at 13.2 million barrels per day. Yep, that’s more than any country has ever produced in history. Not great for the climate, but a historic mark for US energy independence. Hold that climate thought….

    On climate and cleantech the US is leading the way in transforming the industrial base of America. The Biden IRA Act is pumping more capex investment into the US economy in this presidential term than in any of the last 3 decades. The nation is at full employment, but to paraphrase Jeff Daniels’ famous monologue in the TV series Newsroom, the average American and all Fox News viewers have “become fearful”. The daily dose of fear on US media is staggering – “deep state”, Qanon conspiracies, baby-snatchers, immigrant hordes storming the borders, lawless cities, race replacement theory, and on and on it goes. No wonder there are more guns owned (350 million) than the number of people living in this fear frenzied nation.

    It is clear that Biden’s story must feature the rest of the world. These are challenging times for the whole world, but somebody needs to tell the average American they are doing better than pretty much everyone else. The US is not perfect but it is definitely leading the planet on multiple opportunity metrics. Even better, the “America as an idea” vision is truly happening; eight of the US’s largest corporations including Microsoft, Adobe, IBM and Google have Indian-born CEOs. Incredibly, of the 700 US ‘unicorn’ start-ups with valuations above $1 billion, 100 of those companies have Indian founders. And, the beauty of nation power without borders is that it can drive activity globally.

    We already have supra-sovereign corporations with billions of customers from Google to Microsoft to Facebook. Others will want to follow from outside the US. We are now reading about China retailer Shein readying for a potential $80 billion IPO. Elsewhere, in the venture capital world Q3 funding activity globally was up 11% at almost $65 billion(Source: CB Insights). And, for those of us in the start-up universe, we are always watching exit activity. So, check out Q3 M&A activity in acquisitions which were valued at more than $100m each; deals in that $100m + category were up 38%. Also, it was interesting to see VC Q3 activity in retail fintech increasing at a 53% clip.

    Back in the US, inflation has been tamed and month-on-month price increases reduced to ZERO %. That will help Biden along with a crippled Russian military, a non-escalation by Iran or Hezbollah over Gaza, and a critical uptick in US consumer confidence. We don’t need Gen AI to write this story, albeit the US controls the 3 largest AI models globally through Microsoft(OpenA)I, Google (Bard) and Amazon (Claude/Anthropic). So, we will put that down as another Biden win too.

    In the interim, I will just wait for that call……or write to Santa myself.

  • And You Thought Only The Bots Did Comebacks…

    And You Thought Only The Bots Did Comebacks…

    As pantomime season approaches, it almost explains why most of the Conservative Party front bench are off the front pages. Unless, of course, you’re new Home Secretary, James Cleverly, and a wee bit envious of the coverage given to Nigel “I’m A C…….. Get Me Out Of Here”. Poor James, affectionately known in the corridors of Westminster as “Jimmy Dimly”, has been caught not once but twice using expletives in awkwardly public circumstances. However, if we are looking for real awkward stuff, consider the board of OpenAI. It has been quite the week. The board room coup and firing of CEO Sam Altman last weekend shocked the AI world and threatened to incinerate $90 billion of corporate value in OpenAI. However, a whirlwind four days later we were on to our fourth CEO, a potential 600 resignations out of 700 personnel, thousands of worried start-ups built on OpenAI’s flagship ChatGPT model and a potentially costless acquisition by Microsoft. Anyway, the fourth CEO happens to be Sam Altman who seems to have had the comeback of comebacks. So, all is back on track? Ehhh… not quite.

    The details as to what was the exact cause of the original board room bust up are not yet clear. But… the general gist of things is the tension between executives wanting to develop AI at break-neck speed and board members worried about the risks involved with super powerful models capable of Artificial General Intelligence(AGI). The advance hidden in the AGI acronym is the ability of a machine to reason and think, potentially in a superior way to a human being. Now, AGI(vs AI) was supposed to be some way off on development timelines, but reading between the lines something has spooked the members of the OpenAI board. The existential threat of out-of-human-control technology is a genuine fear but there are two key drivers as to why the “growth” champions want to keep moving, and fast:

    The Stakes: At a corporate and sovereign level, the risk of your competitors or geopolitical rivals gaining a lead in AI has huge market and political power implications. If someone gets a sufficiently big technological lead, you could be corporately or literally dead.

    The Incentives: We saw this week the incentive to be ahead in AI. The company nobody had ever heard of 6 months ago, Nvidia, released its Q3 results. Expectations were sky high evidenced by the market giving it a current market value of more than $1.2 trillion. And, yet it still beat expectations with its data centre chips (AI) revenues up 279% year-on-year and exceeding the sophisticated forecasting models of Wall Street’s finest by a whopping $2 billion.

    So, this tension between technology risk and technology development/growth is going to dominate AI discussion and regulation in the coming years. We have already seen the Biden administration put in place an Executive Order on AI safety and security, and Europe’s AI Act is imminent. However, these attempts to mitigate risk might lead to another comeback by a technology closely connected to another Sam.

    Unfortunately, Sam Bankman Fried faces Federal incarceration and won’t be restored any time soon to the helm of crypto platform FTX. Indeed, this week another platform founder in the space Changpeng Zhao or “CZ” of Binance was convicted of money laundering, fined $4 billion, stepped down from his executive role and narrowly avoided a prison sentence. Those are the bad headlines in the crypto world and could cause readers to miss the bigger picture. The reality is that one of the huge risks of AI is fraud, caused by deep fake imagery, false ID and misrepresentation. Now, crypto can help. Well, not crypto or cryptocurrencies because they are applications/digital assets. However, they are built on a really powerful technology, blockchain. And, blockchain technology is really good at ID verification, security and transparency/ traceability. Clearly, this could help with fears over AI and, like Nvidia, blockchain technologies could be a way to play or track the opportunity in AI. As always, we like to follow the money for evidence of our thinking. So, consider the following…..

     

    • Bitcoin is up 130% this year.
    • PayPal has launched a US dollar stablecoin ie a digital currency layered on to blockchain technology.
    • For those that giggled at NFT madness and wealth destruction, note Disney has launched its own NFT market platform in recent weeks.
    • And if you thought nobody wanted to read about their crypto wealth destruction, you might be surprised to hear that crypto exchange, Bullish, has just acquired industry publication, Coin Desk.
    • Blockchain.com just raised $110 million with a $7 billion valuation.
    • Blockchain payments firm, Fnality, in London just did a funding round for $95 million backed by Goldman Sachs.

     

    The funding rounds in particular indicate significant capital seeing a future for blockchain. Indeed, AI and its risks look like they are driving a faster blockchain comeback than investors expected. If the OpenAI rumours of a big AGI breakthrough are true, then the risk genie is truly out of the bottle and blockchain is on for a BIG comeback.

     

  • Get Ready For The Cloud Wars

    Get Ready For The Cloud Wars

    When the value of just two companies changes by $200 billion in a matter of hours I usually take a closer look. That can even happen when “Married At First Sight”, and not Gaza, has brought you to the point of giving up on humanity. More Gaza later. For now, let’s revisit the events of October 24th. Despite the glow of its recent 25th birthday, Google’s quarterly earnings results failed to impress investors and the subsequent share price dive clipped the guts of $75 billion off the value of the Mountain View tech giant. In contrast, investors were excited by the update on the same night from the world’s second most valuable company, Microsoft, as investors rushed to buy shares and added a cool $125 billion to the valuation of the Seattle tech giant.

    The only word on any traders’ lips that evening in New York was ‘cloud’. More specifically, the revenues earned by the critical data storage and processing architectures which support all our personal and business digital apps and services. The ‘cloud’ is where big tech has leveraged its scale and offered enormous computing power to live and work your digital existence. However, these apps and services are now feeding off a new digital super-power – Artificial Intelligence(AI).

    Generative AI with its large language models(LLMs) and enormous data learning appetites have turned the cloud into a battle field fought by the big three – Microsoft, Google and Amazon. And, the cloud is flying – not quite literally but Microsoft’s Azure cloud business revenues are rocketing at 29% annual growth rates. Google’s cloud business was perceived the ‘loser’ last week with a growth rate of just….. 22%. You get the picture – the cloud is big money, but it’s also really all about AI. Revenues earned by cloud services (powered by data centres) are a proxy for measuring who is winning the AI ‘war’. Let’s be very clear Google and Microsoft have lots of other revenue channels but there is no doubt that the $200 billion shift in valuations between the two giants was entirely driven by the cloud, and by AI. Still sceptical? Allow me to expand on this thread…

    Remember Mistral? Yep, that was the company with 4 guys who raised $120 million with no business and no revenues. Just a PowerPoint presentation. Well, that was 4 months ago. And, now they’ve reportedly raised another $300 million. This time they can actually demonstrate a proprietary large language model(LLM) built with 7 billion parameters for AI training. Yes, built… in 4 months. In valuation terms, Mistral is already a ‘unicorn’ – a startup worth more than $1 billion. If you thought this was merely VC excitement about ‘disruption’ then think again. It feels like the world is still figuring out which of emerging disruptors (with new AI models) or big tech (with its massive proprietary data head start) will win the modelling wars. However, big is still beautiful in investors’ eyes.

    Check out all the gloomy headlines – inflation, painful interest rate hikes, war, recession. You’d think stock markets would be cratering. And, you’d almost be correct. If you strip out the share price performance of just 7 technology companies – aka the “Magnificent 7” – then global equities are probably in negative territory for 2023 so far. Now, think about what is driving Apple, Microsoft, Tesla, Google, Facebook, Nvidia, and Amazon who, on AVERAGE, have rocketed in value by 80% this year. For this writer, it is clear these 7 companies possess the best databases on the planet and are in pole position to train AI models to do whatever they want. Some are happy to use 3rd party models like OpenAI’s ChatGPT or Anthropic’s Claude and the investment monies are still flowing fast.

    Microsoft has already put $10 billion into OpenAI and the latest reports of funding activity suggest OpenAI’s valuation has jumped from $20 billion to $85 billion….in 8 months. Amazon is putting $4 billion into Claude but, as we have illustrated, there are about 200 billion reasons and counting to be in this race. We can’t forecast the future but it is worth remembering that this is AI in its infancy, or to put it another way, at its worst.

    I had the genuine pleasure of chatting to “the Oracle of AI”, Jim Dowling, who presented at an IIBN business event last week. He’s usually based in Sweden and, uniquely, is that country’s only resident lecturer in Deep Learning. It was fascinating to hear him talk about “emerging reasoning” in some of the very large AI models and how lots of well-known businesses are using his company, Hopsworks, to re-configure their data architecture for pending AI applications. What was less fascinating was my estimate that probably 75% of the questions from the audience were fixated on deep fakes, misinformation, AI ‘hallucinations’ and cheating on…. homework. I know, how do we sleep at night!

    Now, recall my earlier words that these early building stages are seeing AI ‘at its worst’. Then just repeat one word to yourself, quite a few times. GAZA. As a species we seem to be perfectly good at bringing ourselves to the brink of World War III or demonstrating barbaric behaviours which, on reflection, didn’t quite end with Ghengis Khan or the Inquisition. Bluntly, we can do far better and AI could help – think of education, the unbanked, healthcare, medicine, energy, decarbonisation, urban planning or agriculture. You know, all the bits to do with living. Of course, all important things must have governance and guardrails. How many unapproved foods, drugs or banks do you know? So, get ready for more of the following:

    Biden Executive Order Imposes New Rules For AI – ABC News

     

    The excellent Tech Brew newsletter gives a good summary in the following bullets:

     

    • The directives in the order cover everything from housing discrimination to bioweapons, and aim to address AI at each stage of development.

    • Developers must share safety test results with the government, and various agencies will work on developing standards designed to mitigate threats from AI-created biological weapons and deceptive deepfakes.

    • The order includes a regimen of new privacy research and rules that aims to better govern how developers use information they collect on users.

    • A section of the order homes in on algorithmic discrimination; it calls for guidance to landlords, federal contractors, and welfare programs on reducing bias in any AI tools they use, as well as new guidelines for the Department of Justice to probe this type of discrimination and more rules around AI’s use in the criminal justice system.

    • The general consumer protection section focuses mostly on developing standards for AI’s use in healthcare and education.

    • The order calls for a report on AI’s impact on the workplace, and lists directives for working with allies to implement AI standards internationally.

     

    Meanwhile, over the other side of the pond……

     

    UK, US, EU and China sign declaration of AI’s ‘catastrophic’ danger – The Guardian

     

    Hosted by the British government this week, twenty-eight governments signed up to the so-called Bletchley declaration on the first day of the AI safety summit. One can understand the British government’s eagerness to exhibit some form of responsible stewardship given the stunning revelations coming from the ongoing Covid-19 inquiry in Westminster. An “unfit” Prime Minister surrounded by “f*ckpigs and morons” administering a staggeringly incompetent response to a global pandemic is truly a review for the ages. And a relative reminder of AI’s infancy and humanity’s ability to be……. ehhh…..almost inhuman, or non-human.

    So…..GAZA or AI? My money (and clearly a lot of investment capital) is on cloud wars potentially delivering a better humanity. Keep watching, and hoping. It will be worth it.