More GPT, Spikes and Limbo

GPT and AI tools

Microsoft recently invested $10B into OpenAI at a $29B valuation. This is reminiscent of Adobe buying Figma for $20B. Both valuations are extremely high, but these companies cannot afford to not participate in the future of these markets.

LLMs (large language models) like ChatGPT completely change how we gather, interact with and consume information. Whereas a Google search yields links to other websites, GPT provides direct and creative answers to prompts. Depending on how you word the question or prompt, you can essentially have a conversation. LLMs are gaining sophistication at an exponential pace. So far, ChatGPT has passed a practice bar test and recently passed all three parts of the US medical exam. It’s like a talented college student today, and sooner rather than later, it will be a subject matter expert. Personally, over the weekend I integrated the GPT API into Google Sheets which enables a =GPT() formula and the results are nothing short of incredible.

From a writing perspective, universities and schools are in panic mode trying to stop students from using LLMs to create “clean paragraphs, fitting examples and rigorous arguments”. Nature, the scientific journal, is in an ongoing argument with a handful of scientists who plan to list ChatGPT as one of their contributors.

LLMs are already adding tremendous value to programmers, saving hours and even days of work. Once these models surpass the early adoption phase, there should be a pretty significant increase in productivity. One parallel that comes to mind is replacing farmers working by hand to working with tractors. The skill sets, type of jobs done and productivity capacity changed entirely when farming machinery was introduced. Back to Microsoft, the implication here is that we’ll see ChatGPT tools in Word, Excel and Powerpoint by the end of the year. I think the biggest accumulator of value on LLMs will be society as a whole.


Spikes and Limbo

The Fed began hiking interest rates in March 2022 and will likely end March 2023. The 12 month, 5% rate hike is extreme. We’re at 4.5% now and in all likelihood will see two .25% hikes on Feb 1 and Mar 22. The yield curve is already predicting rates will fall as the entire curve has been falling consistently since the peak in Oct ‘22. The 10-year yield has already dropped a full point from 4.33% to 3.33% today. Falling rates boost all asset prices.

We’re still in limbo, but the market is trying to front run any and all good news. Falling rates is good news and falling inflation is good news (although don’t look at the rest of the world where 50% of countries still have double digit inflation). What I don’t understand is how the financial system can continue to operate smoothly while going from a 0% to 5% interest rate in one year. The money has to come from somewhere. The US government’s interest payments in 2023 and beyond are astronomical. Banks don’t pay those interest rates on deposits so I imagine banks are losing deposits at a steady clip in favor of 4.5% risk free yields. There are likely banks out there leaning on the Fed to help cover customer withdrawals.

The futures market and the bond market point to rate cuts by the end of 2023, if not sooner. In the meantime, until we stop rate hikes and inflation falls below the interest rate, we continue to sit in limbo. With markets down, many of the valuations will turn into generational buying opportunities.


Comments on commodities

I wrote in November, “A bull market in copper seems imminent at this point.” Copper continues to steadily increase in price and it doesn’t seem like that will stop anytime soon. We’re not investing in enough production (supply) and demand continues to increase, especially in the green energy space like wind turbines, solar, EVs and batteries.

It’s one thing to have a supply shock and see the price whipsaw, it’s another to systematically and persistently underinvest in new supply. We never had a lack of supply of lumber, for example, but the lack of labor and productivity at the lumber mills during covid sent the prices on a round trip from $350 to $1500 and back. Policy changes are needed to help secure the supply of critical materials for the short, medium and long term.

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