Dear Reader,
This week has certainly been full of surprises, and the last twenty-four hours haven’t disappointed either.
The calamity that we’ve all been witnessing should raise some serious questions even amongst the most optimistic of us. And for many, we’re left wondering how bad can this really get?
Yesterday, we witnessed what appeared to be the forthcoming collapse of Credit Suisse, the second largest bank in Switzerland, a country known for its skills in safely managing money.
Yes, the stock chart of Credit Suisse looked like a waterfall cascading into the depths of a dark pool. But what was far more interesting was the chart of a Credit Suisse 1-year credit default swap (CDS). It looks like a rocket ship headed to orbit.
As a refresher, a credit default swap is a financial instrument used as a hedge, or insurance, against a position held. A seller guarantees the value of the debt purchased in the event of a default and in exchange receives regular premiums for the risk that they are taking.
In the chart above, we see the price for a 1-year CDS for Credit Suisse. Back in June of last year, we could buy a Credit Suisse 1-year CDS for just 67 basis points, or just 0.67% of the debt that we owned. This low level of price implied little to no risk in owning Credit Suisse debt.
But just look what happened in the last 48 hours. That same 1-year CDS jumped to where it’s trading today at 3,460 basis points. That’s a cost of 34.6% to insure the debt. Imagine loaning $100,000 to a bank and having to pay $34,600 over the course of one year to insure against a default!
Anything at 1,000 basis points or above implies a high likelihood of default. 3,460 basis points is unbelievable. Last night, this essentially told us the bank would default and go under if it wasn’t rescued.
But two odd things happened after spike in the CDS pricing for Credit Suisse, the first of which is not surprising.
The Swiss National Bank swooped in with a 50 billion Swiss franc credit line to backstop the bank, basically guaranteeing that there will be no default. Crisis averted? Perhaps not.
While the price of the CDS fell slightly as we can see on the far right of the chart above, it is still priced assuming that there will be a default. Even the five-year Credit Suisse CDS is priced above 1,000 basis points – not good at all.
And yet amidst this absolute chaos in the European banking sector, the European Central Bank steps up with another 50-basis point hike in three key interest rates. As if there weren’t enough problems…
That brings the main interest rate to 3%, which lags the U.S. Fed Funds rate of 4.75%; but is still material given the current fragility of the European banking sector.
The ECB assured us all that everything is fine, and it further indicated that it was prepared to provide additional liquidity to the sector if necessary. That shouldn’t give us comfort after what we just witnessed in the U.S. And it only raises the question, how bad can it get? And why continue to aggressively raise rates when we all know what’s going to happen?
The skeptics amongst us will know that this is intentional, and the end goal will be revealed in the months ahead. And those of us that believe that the central banks and their respective governments are “on top of it” and “know what they’re doing” will believe this is what we need to do to get inflation under control.
Either way, there is a massive cost to these actions, a cost that all of us will have to bear. And it is the result of years of profligate deficit spending and misuse of debt for political purposes.
It can appear to be manageable for a period of time, but eventually the burden of those debts becomes too heavy to carry.
Look out below…
Elon Musk is back at it again. He’s now in talks with several artificial intelligence (AI) researchers about building a new AI company. As if Musk didn’t have enough on his plate…
Musk’s goal is to build an unbiased, “un-woke” competitor to OpenAI’s ChatGPT. Musk’s position on this topic is highly relevant considering he was a founder of OpenAI when it was just a non-profit and left the organization when he didn’t like the direction it was heading.
As a reminder, ChatGPT is a generative AI that can produce content and write software code upon demand. And it can have intelligent conversations with humans as well.
And it’s been an incredible success. In a matter of months, it now has more than 100 million users and still growing exponentially. And it’s already been embedded in hundreds of other software applications.
But there’s a problem that’s starting to pop up…
OpenAI’s Chief Technology Officer (CTO) recently acknowledged that they made mistakes when programming ChatGPT. He admitted that some inherent biases were built into the software. And the CTO emphasized that AI shouldn’t possess such biases.
So this is a big deal given how far and fast ChatGPT spread.
And that’s why Musk is stepping in.
One software engineer Musk has been in contact with hails from Alphabet’s DeepMind AI lab in the UK. Regular readers know well just how talented and capable the DeepMind team is.
It appears Musk is mining for talent here. He may get this prominent engineer from DeepMind to serve as a lead architect for a new generative AI.
And here’s the thing – building the large language model that powers generative AI isn’t overly expensive anymore. That’s thanks to the incredible decline in computational costs that we’ve seen over the last twelve months.
So it’s not like Musk will have to come up with billions to fund this new company. I believe that he could get it up and running for a sum in the tens of millions of dollars. Even with what he has going on with Twitter, that will be no problem for him.
And I’m confident that at least one or two top venture capital firms will jump to help fund the venture as well. From there, it’s just a matter of finding and hiring the right people to spearhead the initiative.
This is an exciting development. Genuine competition will only push generative AI companies to be better.
And there might be another reason for Musk’s interest in funding a competitor. Here’s what he had to say recently:
Elon Musk on OpenAI
Source: Twitter
Longtime readers may remember that we covered OpenAI’s progress long before the launch of ChatGPT. And Musk did indeed “donate” roughly $100 million to the organization. Or did he invest it? If OpenAI is now a for-profit company—it’s charging customers for access to ChatGPT—does that mean Musk is owed equity?
Either way, Musk has a history of identifying opportunities for disruptive new companies in high technology. His record of success is unparalleled. A Musk-backed competitor to ChatGPT could be scaled up quickly and could deliver an incredible return in a short period of time.
This is a very exciting development, and one that is critically important given the rapid adoption of generative AI.
Google recently took the lead in a $135 million funding round for a biotech firm. It’s called Chroma Medicine.
Chroma is absolutely a cutting-edge biotech company. It focuses on epigenetics-based therapies. They stand in stark contrast to genetic editing therapies.
Take CRISPR, for example. CRISPR is like software editing for DNA. It involves cutting and replacing parts of our DNA that have unwanted mutations with “corrected” DNA. This therapeutic approach permanently alters an individual’s DNA.
Epigenetic therapies are less invasive. They typically do one of two things.
Either they silence a gene to prevent the production of unwanted proteins. Or they can boost gene expression. This increases the output of desired proteins.
There are no long-term changes to a patient’s DNA here. This eliminates the risk of undesired genetic changes.
So epigenetics is quite an exciting approach. But of course we have to ask – why is Google investing so heavily?
After all, Google’s business is data collection and advertising. It’s not a healthcare company.
Well, Google has an underlying motive here…
Google views biotech companies and healthcare providers as untapped data sources. That’s been the case for a long time now.
If we go back to 2005, Google was an early investor in 23andMe. That’s the popular genetic sequencing firm. I bet many readers once saw ads for its services.
23andMe sequences significant portions of the human genome for a small fee. Its service was originally positioned as providing health insights and later expanded to ancestry. Potential access to this data is what drew Google’s interest.
If Google can pair a consumer’s genetic information with their behavioral data – well, that creates an incredibly robust profile for targeted ads. Google will almost certainly be able to sell this data to advertisers at a steep premium.
And you know what… there may be something of a benevolent motive here too.
If we think about all the trouble Google goes through to collect data on consumers – building a robust profile takes years. That being the case, Google has a vested interest in people living longer. It’s morbid, but if somebody dies, all the data Google collected on them becomes worthless. The company effectively loses advertising revenue with each death.
So perhaps Google is also genuinely interested in advancing bleeding edge healthcare technology as well. The company may truly want to help extend human life. If it invests in companies that can add years onto the human lifespan, it literally will increase Google’s long term advertising revenues. With a long enough time horizon, it aligns perfectly with Google’s business strategy.
Either way, Chroma Medicine is an exciting up and comer backed by some of the most successful biotech focused venture capital firms. This is one for us to watch.
Ford just made a surprising announcement. It’s launching a new autonomous driving subsidiary. They call it Latitude.
If we remember, Ford announced it was shutting down self-driving tech company Argo AI back in October. That was Ford’s autonomous driving subsidiary.
But Ford did not own Argo AI outright. Interestingly, both Volkswagen and Lyft were investors in Argo AI as well.
It must have been painful for all three companies to write down $2.6 billion of investment in Argo AI and take the loss. And Ford made it clear that it would look to partner with other companies on self-driving tech going forward.
Fast forward five months, and Ford is now launching its own self-driving subsidiary. Talk about an about-face.
Latitude aims to create “hands-free, eyes off the road” autonomous driving tech. The primary goal of this approach is to minimize the time wasted while stuck in traffic.
More specifically, Latitude plans to develop Level 3 autonomous driving tech. That’s where cars can manage themselves entirely on highways, but not on more complex roads.
This is a practical strategy. It’s certainly much simpler than chasing Level 5 autonomy, which requires cars to drive themselves at all times… even on backroads.
And here’s where it gets especially interesting…
Most of the Latitude team originally worked at Argo AI. It’s the same people that Ford just shut down five months ago. This certainly raises some questions.
Remember, Volkswagen and Lyft both invested in Argo AI as well. So, what happened to the intellectual property? Did Ford leave them out in the cold?
It certainly appears that Ford’s move was a competitive one. It’s possible the iconic car maker shut down Argo AI just to cut Volkswagen and Lyft out of the picture.
We can’t know that for sure. But such a cutthroat move would not surprise me. That kind of thing happens all the time in the corporate world.
Either way, I’m glad to see Ford getting back into self-driving technology with an approach that makes a lot more sense for the company. I believe this will be the route that most automotive companies will take over the next five years.
Companies like Tesla, Waymo, and Cruise will stand out as pursuing level 4/5 autonomy.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
