☀️☕️ Round Two: Google’s Magic Wand vs OpenAI’s new GPT-4

Happy Wednesday! 🐪

Market Roundup 📊 15-Mar-23

US large-cap S&P 500 closed 1.68% UP ▲
Tech-heavy Nasdaq Composite closed 2.14% UP ▲▲
Pan European STOXX Europe 600 closed 1.45% UP ▲
HK’s Hang Seng Index closed 2.27% DOWN 🔻🔻
Japan’s Nikkei 225 closed 2.19% DOWN 🔻🔻

— The MoneyFitt Morning (@MoneyFitt)
Mar 15, 2023

📝 Focus

Round Two: Google’s Magic Wand vs OpenAI’s new GPT-4 (Alphabet, Microsoft)

📊 In the Markets

And today, in SVB news…

📖 MoneyFitt Explains

🎓️ The Innovator’s Dilemma facing Google

📝 Focus

Round Two: Google’s Magic Wand vs OpenAI’s new GPT-4

Last month we saw Google rush out its response to Microsoft-backed OpenAI’s ChatGPT, which was probably necessary, but slightly hashed (slight factual error in the demo) and ended up with mostly ignored calls for Sundar Pichai’s head on a plate (too risk averse, too slow, too suited to “peacetime” etc). This time, two days ahead of a similar launch expected for Microsoft’s competing Word offering (“reinventing productivity with AI”), Google led with a “magic wand” for its popular Google Docs software that can craft slide presentations, draft a marketing blog and then revise its tone at users’ discretion. It can also summarise message threads in Gmail (super needed given the chaotic nesting system!) and take meeting notes in its upgrade of Google Workspace, a productivity suite with billions of free and paid users. Round Two to Mr Pichai in blue!

Sundar leads with his right, unaware of Satya’s cunning next move – Image credit: Marx Toys via Tenor

► Or is it? As if having laid a trap for Google, Microsoft-backed OpenAI released GPT-4, the latest version of the system that powers chatbot sensation ChatGPT, which is more creative, less likely to “hallucinate” facts and less biased, and which is a “multimodal” model. Not only is that fun to say, it means it can take images as well as text as input, so users can ask questions about pictures. And it is available TODAY for users of ChatGPT Plus, the subscription version of ChatGPT. The earlier version, known as GPT-3.5, ranked around the bottom 10% in a simulation of the US law school bar exam, but GPT-4 made it to around the top 10%, according to OpenAI.

“There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all… From now on, the [gross margin] of search is going to drop forever”

Satya Nadella, CEO of Microsoft, adding that the competition with Google was “asymmetric”

► GPT-4 is also going to be deployed in Microsoft’s once-and-future search challenger, Bing, obviously. But it is also in a new subscription tier of language learning app Duolingo, Duolingo Max, for AI-powered conversations in French or Spanish, as well as in payment processing giant Stripe, which is using GPT-4 to answer support questions from corporate users and help flag potential scammers.

► The generative AI race in Silicon Valley is ON! (See here for how it works, and see our Focus piece in this January MFM focusing on the Innovator’s Dilemma 🎓 facing Google.)

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📊 In the Markets

Equity markets were firmly in the red in Asian trade on Tuesday, with Tokyo, Hong Kong and Seoul all down more than 2% with the banks taking the brunt of the selling. Seems like a knee-jerk reaction to the unfolding (yet for now contained) turmoil sparked by the SVB collapse last week. Bloomberg News calculated that about US$465 billion had been wiped off the market value of global financial stocks in just three days.

► Even Japanese banks got caned, with the Topix Bank Index tumbling more than 7% on Tuesday, bringing its 3-day loss to nearly 16%. Giant banks Mitsubishi UFJ and Sumitomo Mitsui Financial both fell over 7%. In Japan, while sector exposure to USD bonds has risen, the exposure to JPY bonds remains far greater and is set against a totally different interest rate backdrop (USTreasury yields rose to 5% from almost zero, Japanese Government bond yields are still almost zero, though they did rise… to just 0.5%.) It appears to be slim to no risk to Japanese depositors (though Japanese banks have their own issues to deal with.)

Markets be like: Inflation. And then SVB. And back again. – Image credit: Everything Everywhere All At Once / A24 via Tenor

Different story entirely in the European and US markets, as the US inflation numbers out at lunchtime in Europe showed February consumer prices rose 6% year on year (meaning, compared to Fab-22), a slower pace than January’s 6.4% and broadly in line with expectations. Excluding volatile food and fuel prices, the “core” rate came in at 5.5% (down from 5.6%.) Still far higher than the target 2% rate.

► Banks crushed on Monday on contagion or related fears staged a strong comeback. The KBW bank index closed up 3.2% after an 11.7% hammering on Monday, with traders feeling that the “threat” of a 0.50% hike at next Wednesday’s Fed rate-setting meeting has receded, thanks to Tuesday’s inline-with-expectations inflation as well as the ongoing (though currently receding) jitters around SVB and the banking system. i.e. The Fed is still expected to hike, but by a smaller 0.25% rate so as not to add further turmoil, particularly as one of the root causes of SVB’s implosion was higher interest rates (in combination with SVB’s truly terrible balance sheet asset and liability duration risk management.)

This is the actual CPI, not the inflation RATE. Basket of food, clothing, shelter, fuel, transport fares, utilities and sales taxes, 1982-1984 = 100. – Image credit: FRED (The St. Louis Fed)

There’s more going on than just SVB+ and interest rates!

Annual sales of vinyl records in the US have outstripped CD sales for the first time since 1987, leading heavy metal band Metallica to buy their own factory to manufacture vinyl records. Meta (owner of Facebook, Instagram and WhatsApp) will axe 10k more workers (and leave 5k vacancies unfilled) after firing 11k only just last November, as advertising revenues remain under pressure. And United Airlines dropped another 5.4% to bring its 5-day loss to 15%, though it’s still up 24% for the year. UAL forecast a first-quarter loss of $0.60-1.00 from its previous forecast of a profit of $0.50-1.00 per share, citing weaker demand growth and higher fuel costs, plus a pilot settlement. Now, back to SVB+

And today, in SVB+ news…

► SVB Financial Group, its former CEO and former CFO have been sued in a shareholder class action suit over the collapse of Silicon Valley Bank for concealing how rising interest rates would leave its Silicon Valley Bank unit “particularly susceptible” to a bank run. Reports are that this is just the first of many likely lawsuits.

“The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve”

Fed Chair Jay Powell

► Sen. Elizabeth Warren urged Fed Chair Jay Powell to “publicly and immediately recuse himself from (the) internal review” of events leading to SVB’s collapse as Powell himself allowed “big banks like Silicon Valley Bank to boost their profits by loading up on risk.” Separately, the politicking will only get louder given the massive dilution under the previous administration of the Dodd-Frank Act, which was brought in after the 2008 GFC designed to prevent such events. (Co-author and chair of the House Financial Services Committee during the 2008 crisis Barney Frank actually supported the dilution after retiring from Congress, before hopping onto the board of Signature Bank.)

► The shuttering of crypto-friendly Signature Bank, the third largest bank failure in US history, was “nothing to do with crypto… (but) was based on the current status of the bank and its ability to do business in a safe and sound manner on Monday” according to the NY Department of Financial Services, adding that “Signature was a traditional commercial bank with a wide range of activities and customers” though a quarter of its deposits came from the crypto sector. Customers were yanking their deposits having been spooked by the closure of even more crypto-exposed Silvergate even before SVB failed.

Image credit: Snow White (1937) / Disney via Tenor

► More and more giant private equity firms are circling overhead. Blackstone, Ares, Carlyle and KKR joined Apollo and CSFB in looking to buy Silicon Valley Bank’s US$74 billion loan book. SVB was a bank! Besides its various advisory and investing activities, it lent money to startups and others. But when deposits (liabilities for a bank) flooded in, their balance sheet was disastrously deployed into too many almost-zero-default-risk long-dated government securities (assets for a bank) with reckless abandon, since their ability to increase loans (also assets for a bank) were pretty limited. Then everything blew up when deposits dropped and interest rates shot up, leading to the run on deposits that killed it. (Full, simplified but not dumbed-down saga in Monday’s MFM.)

► The US Justice Department and Securities and Exchange Commission are opening investigations into the collapse of Silicon Valley Bank, focusing on both the bank’s failure and the actions by senior executives in the lead up to it.

► One unexpected consequence has been falling US mortgage rates, which tend to follow the yield on 10-year US Treasury bonds, which fell to a one-month low on the failures of SVB and Signature Bank (though still higher than in January.) The average 30-year fixed mortgage rate dropped to 6.57% on Monday from a recent high of 7.05% last Wednesday, providing a glimmer of hope for the housing market.

📖 MoneyFitt Explains

🎓️ “The Innovator’s Dilemma”

“The Innovator’s Dilemma” is a concept in which established, incumbent companies decline because they fail to adopt new technologies or business models which new and more nimble competitors are deploying to disrupt their business since their established products and processes are too profitable to give up.

Example 1: Kodak and the shift from film to digital photography. Kodak was slow to embrace digital photography, due to its dominance in the film photography market and concerns about cannibalizing its own sales.

– Example 2: Blockbuster and the rise of online video streaming. Blockbuster was hesitant to embrace online video streaming services, as it would mean giving up their brick-and-mortar rental model, which was highly profitable at the time.

It is a useful way to think of the potential future decline of currently highly successful companies, though it can oversimplify the complex economic and organizational factors that play a role in a company’s decision-making, focusing too much on technological disruption as the main challenge facing companies.

(Harvard Business School professor Clayton Christensen conceptualised disruptive innovation in his 1997 book, “The Innovator’s Dilemma”)

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