TBills, Visualizing AI, Bank Fees

John Osbon’s T-Bill Comments: The Treasury Market is Still the Safest Place to Be

One subset of the Treasury market, the bill market, remains the safest investment option for several reasons.

1. Guaranteed Returns
The T-Bill market is unique in that it is the only place where the SEC allows the use of the term “guarantee” regarding returns. This is not permitted with money market funds, even though they invest in Treasury Bills, because the backing for these funds comes from the issuer, not the US government.

2. Inflation Protection
T-Bills are currently yielding more than inflation, a trend expected to continue even if the Federal Reserve begins to cut rates. There’s a strong case that the Fed will ensure T-Bill yields remain above inflation, making them a reliable option for preserving purchasing power over the coming years.

3. Fiscal Resilience
The case for higher inflation is already set for years to come due to substantial federal deficits. With a trillion-dollar deficit and an increasing national debt, the government’s fiscal situation underscores the need for safe investments like T-Bills. Despite routine delays in raising the debt ceiling and occasional government shutdowns, the government consistently prioritizes paying T-Bill interest, highlighting their safety and reliability.

The US government divides its over $30 trillion debt market into three sections:

• Bill Market: Short-term securities maturing within one year.
• Treasury Notes: Medium-term securities with maturities from one to ten years.
• Treasury Bonds: Long-term securities with maturities from ten to thirty years.

While Treasury notes and bonds are generally safe, their value is subject to uncertainty regarding future inflation rates. In contrast, the T-Bill market offers a clear advantage due to its predictable inflation protection.

Exploring Other Opportunities
For those willing to take on more risk, the private credit markets offer highly attractive returns, often exceeding 10%. However, these investments require substantial research and diligence. Our firm has been extensively researching private credit funds for many years and continues to do so.

Conclusion
For guaranteed safety and reliable returns, investing in T-Bills is the prudent choice. With over 150 issues ranging from one day to 364 days, there are ample options to meet various investment needs.

– John

Visualizing LLMs – Max

As we collectively learn more about LLMs (large language models), AI, and ML (Machine Learning), I found this visualization of a basic GPT calculation to be an interesting walkthrough of the different steps involved. The word that stands out to me more than anything is “tokens.” Gemini’s latest model boasts the capability of handling up to 2 million tokens in a single query, but what does that actually mean?

A token is any piece of information represented as a number. A token could represent a letter, a word, a punctuation mark, a section of a line in the road, a part of an image of a cat, the curves of a red balloon in a video, or even pieces of genetic data, and so on. A token could be an easily understood piece of information for humans but not necessarily for computers. The tokenization process is what converts any piece of data into a number so that it can interact with the model. Through this lens, it should be clearer that LLMs are in essence extraordinarily advanced probability calculators. These models will continue to evolve as more data is tokenized, more models are trained and the underlying processes are optimized.

I remember playing with OpenAI’s GPT-2 sometime in late 2019 and thinking it was neat but not all that useful. If I remember correctly, people used it to generate video game dialogues which have a pretty low quality threshold. It wasn’t until GPT3 and Dall-E came out that everything changed. Consider how these exponential leaps in quality can continue.

Goldman Sachs recently issued a study critiquing the spending on AI-related infrastructure and the revenue generated as a result. The title is Too much spend, too little benefit? The valuation question today is extremely difficult. There is parabolic growth in most AI categories: capex, user growth, revenue, media coverage, and stock prices and that makes it extremely difficult to make a decisive evaluation of the strength of the financial trajectory. Fast parabolic moves tend to carry greater risk but that’s offset by the obvious magic of what LLMs have unlocked to date. It’s clear that the models get better with greater investment. What’s not clear is how well the financial side will continue to keep pace over longer periods.

JPM and Junk Fees

New legislation may cap overdraft fees as part of a broad effort to reduce industry wide “junk fees.” JPM Chase responded by saying that if they cannot earn profits from overdraft fees, they may be forced to charge a fee on all checking accounts. I can’t see this going well for JPM or any other banks that collectively earn billions from overdraft fees and other “junk fees.” Banks are already having a hard time keeping customer deposits when they pay 0% interest.

I’m not sure most people are aware of this but investment accounts have all of the necessary features to act as a full replacement for bank checking and savings accounts. There are no minimums to opening most investment accounts. Someone with just $20 to their name could benefit from this setup and skip the bank fees altogether and they would earn a whole lot more than 0% interest. Unfortunately the people who benefit the most from this information are probably not reading this article, but if you know someone constantly being jabbed by junk fees you can use this to point them in a better direction.