☀️☕️ Generative AI: Chat 86B?

📝 Focus

• Chat 86B?

📊 In the Markets

• Powell’s higher for longer

• Netflix and Pop

📖 MoneyFitt Explains

🎓️ Connecting Fed Funds and Treasury Yields (not the same!)

📚 What We’re Reading

📝 Focus

Chat 86B?

Generative AI (and possible artificial general intelligence, AGI) pioneer OpenAI is looking to allow employees to sell some of their shares to investors in a tender at an $86 billion valuation, a huge increase from its $29 billion valuation just six months ago. But this transaction (as far as we know) raises no new money FOR OpenAI.

Clearly taking advantage of investor frenzy over the game-changing technology since ChatGPT burst onto the scene just 11 months ago, this would make OpenAI one of the world's most highly-valued private firms (behind ByteDance and SpaceX but larger than Shein and Stripe.)

Employees are granted Profit Participation Units (PPUs) which vest over four years at a rate of 25% per year with a 2-year lockup. In a tender offer, investors buy shares directly from employees. But the relationship or convertibility between PPUs and shares remains, for now, unclear (especially with OpenAI currently unprofitable.)

OpenAI says it doesn't plan on going public or being sold, so providing this liquidity helps OpenAI compete for engineering talent with rivals like Google and Amazon.

..... ▷ Originally founded by a group of Silicon Valley's leading lights, such as Elon Musk (since departed) as a non-profit with a mission to promote "friendly AI" to "advance AI safely for humanity" OpenAI has an unusual “capped-profit” investment structure, in which investors in the company can make a profit, but only up to 100x their original investment. (It doesn’t seem to cap the profitability of the company.)

Any excess is supposed to be redistributed to the original pre-2019 non-profit organisation, OpenAI Nonprofit, or to society at large, to balance the need for funding (including for its quest to develop AGI) and its stated commitment to safety and social good… but it is opaque quite how that mechanism would work in practice.

Some critics have questioned the transparency and accountability of the hybrid for-profit / non-profit structure put in place in 2019, as well as its alignment with the original mission of OpenAI.

..... ▷ OpenAI's CEO and co-founder, Sam Altman, doesn't have a direct stake in the company, just a small, “immaterial” position via Y Combinator, his famous startup accelerator.

Altman has argued that he is wealthy enough, based on his investments in some of Silicon Valley’s most successful start-ups, such as payments company Stripe.

So we asked ChatGPT what to make of it:

..... ▷ When a CEO or a company founder claims to be wealthy enough not to own any shares in their own company, it can be seen as a red flag or a point of concern. Here are a few reasons why this might raise questions:

1. Alignment of Interests: Typically, CEOs and founders having a significant stake in their own company aligns their interests with those of other shareholders. When they have little or no stake, it may raise doubts about their commitment to the company's long-term success.

2. Motivation and Responsibility: Owning shares in the company can provide a CEO with motivation to make decisions that benefit shareholders. Without this personal stake, their motivations might be questioned.

3. Risk and Confidence: If a CEO isn't confident in the future success of their own company, it can raise concerns about the health and prospects of the business. It's unusual for someone not to have any financial interest in the company they lead.

4. Transparency: Lack of ownership or having only a nominal stake may lack transparency and raise questions about corporate governance and compensation structures.

However, there can be exceptions, especially in cases where CEOs are already extremely wealthy, have diversified investments, or if their primary motivation is philanthropy. It's important to consider the specific circumstances and the overall governance structure of the company before making a judgment. Shareholder agreements, equity compensation, and the company's performance should also be considered.

📊 In the Markets

Asia-Pacific markets watched the previous day’s trading as US stocks and bonds in horror and sold off, with South Korea, Hong Kong and mainland Chinese markets dropping over 2% each.

In HK, the worst hit were the EV players after Tesla’s weak showing and reports that other automakers were slowing EV production on weak demand. That’s not supposed to happen in a price war! Makers BYD, Xpeng and Nio were clobbered 8-9% while BYD, Li Auto and Geely fell 3-5%.

European markets fell for a third day in a row Thursday as investors worried over the impact of the unfolding Middle East crisis, soft earnings and mixed economic data in turn. The pan-European Stoxx 600 closed at its lowest since March 15. In France, autos led losses with Renault shares collapsing 7% after sales rose 14% but came in lower than analyst forecasts that were too high.

Meanwhile, in Italy, the yield on the 10-year BTPs (Italian sovereign bonds) rose to hit 5.035%, its highest since November 2012. (Equivalent German bunds, which are also denominated in Euros, yield 2.958%, while UK gilts -in GBP- yield 4.726%.)

Adding to the gloom in Europe was data coming in from the US that initial filings for unemployment benefits dipped last week, indicating that the labour market remains tight and a potential factor in persistent inflation.

London, on the other hand, celebrated the storms of Black Monday 1987 with an “incident” where it entirely halted trading in non-blue chip stocks. The London Stock Exchange Group (LSEG)'s own shares traded just fine, though, and closed up 1.88%.

But over on Wall Street, stocks opened up on the strong US jobs data and Netflix earnings (below) but quickly flipped as bond yields kept on pounding higher, with the benchmark 10-year Treasury yield touching 4.996%, a level not seen since July 2007.

Though Federal Reserve Chair Jerome Powell hinted that the rates would not be hiked in November, he did say signs that growth remained above-trend or the labour market was too strong could lead to more monetary tightening, which is consistent with the rather reactive (“data dependent”) strategy of the Powell Fed.

Powell’s higher for longer

Following Federal Reserve Chair Jay Powell's comments that rising market interest rates could make action by the central bank itself less necessary, Treasury yields slightly retreated after hitting recent highs, suggesting the market does not expect a quarter-point rate increase at the Fed's November meeting.

The message from Fed Chair Powell was consistent with the FOMC minutes and comments from his colleagues in recent weeks.

But he acknowledged the need for caution due to the economy’s unexpected strength while emphasising emerging risks.

..... ▷ Powell, like several of his colleagues in recent weeks, said that the bond market (at the longer-dated end) is assisting the central bank in its efforts to tighten financial conditions.

Rising yields throughout September signalled investor belief in sustained inflation risks and robust economic growth.

The immediate concern is whether rising long-term bond yields will cool the economy enough to combat inflation, which remains a concern.

..... ▷ Powell said that it could require still tougher borrowing conditions to control inflation but also noted that though there is evidence the labour market is cooling, the effects of the Fed's previous actions had not yet fully impacted demand.

..... ▷ Unemployment has stayed more or less around the current 3.8% since the Fed started hiking interest rates in March of 2022, below the level most Fed economists feel is noninflationary.

At the same time, the economy has generally been above the economy's underlying potential growth rate of about 1.8%. Taken together, risks remain that inflation takes off again, hence Powell’s cautious tone, effectively cementing the “higher for longer” narrative.

Netflix and Pop

Sometimes, after-hours trading can be spectacular, but trading the next day ends up little changed from the previous close.

Not so for Netflix on Wednesday, which surged 12% on better than expected results, with more new subscribers and a price hike after the bell on Wednesday.

..... ▷ NFLX opened instantly up 16% and didn’t budge till the close on Thursday as Wall Street’s Finest grappled with the idea that maybe they shouldn’t have been selling it down almost every day for the last month.

..... ▷ Traders added the value of one entire Warner Bros. Discovery or three Paramounts to Netflix on Thursday, bringing it to $178bn in market cap (share price X number of shares.)

..... ▷ Shares in the rest of the streaming sector not getting pulled up as well is a telling sign of how industry leadership in the real world seems to be playing out.

Share in the listed parents of Disney+, HBO Max (Warner Bros Discovery), Paramount+ and Peacock (Comcast/NBCUniversal) were all either flat or down.