Deflation, Argentina and OpenAI – What does it all mean?

Blain’s Morning Porridge – 20^th November 2023: Deflation, Argentina and OpenAI – what does it all mean?

“It helps to laugh….”

Would you rather lose your job to stagflation, recession or deflation? Argentina’s voters have gone for the populist option – good luck! OpenAI – I guess the genie is out the bottle.

Lots to unpack from over the weekend.

Where is the US and Global Economy headed? A number of market outlooks raise the risks of a post inflation “deflationary-bust” in the US. Is that a good thing or bad thing? Consumers able to increase their discretionary spending as prices fall, cheaper rates fuelling higher home prices while continuing repayments in Auto and Credit Card debt?

Or will consumers simply delay spending plans, waiting for prices to fall further – thus a race to the bottom where the winners are the companies that can best hold off declining demand and lower margins? Businesses will likely see deflation as a reason to hold back on investment and growth plans – plans to “right-size” through redundancies will rise. When the recessionary choice lies between Stagflation or Deflation, I suspect most economic actors will be hoping for the later, even though it may be a devil or the deep blue sea kind of choice.

Argentina

What are the implications for Argentina and the rest of the globe from the election of Far-Right Libertarian “Anarcho Capitalist” Javier Milei as next president? He’s a classic populist: winning because traditional politicians and policies are so mistrusted by the Argentinian electorate and completely out of ideas. The success of Populism requires the electorate to identify as victims, previous politicians to be painted as villains, and the offer of something better. Milei has been described as Trump on Steriods – conspiracy theories, slashing state spending and the dollarisation of the economy are the basics of his programme.

Dollarisation might have sounded attractive to voters who have seen the value of the Peso in their Pocket repeatedly devalued by electoral politics. But linking a nation to another nation’s currency – does not make the economy equivalent overnight. It will require a long and painful transition – time few populists have before their policies are exposed to reality. Experience shows the wrong country using the wrong currency seldom works.

It’s likely to make a country already in pain suffer even more. Austerity is nailed on for Argentina. Does dollarisation then mean a new, better and stronger Argentina will ultimately emerge?

Last week I was struck by the degree of confidence Greeks now have in their economy after a decade of austerity suffering. The economy is still massively smaller than pre the 2008 GFC and 2012 debt crisis. Their current confidence is due to many factors, but at the top of the list is “Political Competency” – which has seen a whole mindset change in Greece, and second, the economic lifeline and support from the EU that’s sustained the nation. Critically, the EU (which is the “financially sovereign nation” running the Euro) is fully invested in Greece’s success.

Argentina’s record on political competency is … questionable. Dollarisation may ultimately work, but the economic adjustment will lead to penury for the majority, increased corruption, rising inequality as those with dollars acquire a disproportionate slice of the economy, and a repeating cycle of political crisis stemming from the abandonment of financial sovereignty. That’s likely to trigger a roller-coaster of right-left populist opportunism – almost certainly resulting in the next “look-at-me-I’m-your-economic-saviour” politician proposing a New Peso while promising an economic miracle.

One critical factor missing in Argentina is the lack of financial sovereign guidance. Unlike the EU’s absolute support for Greece (to avoid the optics of a politically catastrophic Grexit), the USA is hardly invested in the success of Argentina. If the dollarisation of the economy throws up opportunity – US businesses may invest, but most will stay shy of the nation for its unstable business environment. A US under a new Trump administration from 2025 is likely to singularly disinterested – unless it’s perceived as a threat to regional which is more likely to happen if the next populist swing is to the left.

OpenAI

It will take months for someone to script and produce the film. The good news is you don’t have to wait. Silicon Valley – a very serious docudrama outlining the story of Pied Piper, the billion dollar unicorn that did “stuff” is out there on Sky. Or you could watch Dropout about Theranos.

Both these parables of greed and failure lack the sheer scale and confusion of events over the past few days around OpenAI. Who sacked whom and hired who? It would seem a far more complex story than just AI tech lords falling out with each other over a choice between protecting the earth or getting rich. Read through the commentary, and nearly every top individual in the Tech Ecoystem is associated with it in some way – there are grubby paws all over the story. It’s a story of fundamental corporate governance failure, greed, avarice and control.

The problem is… these are the people we are pinning our hopes for economic growth and salvation upon. That’s a concern. Personally, I would love to believe, as many conspiracists do, that Elon Musk engineered the whole thing so he scoop and pick up the pieces to sort out the horrible mess that is his self-driving car programme.. I doubt it – he would have been too busy trying to figure why the Starship Test no 2 ended up in failure.

This morning there is a new name in the Open AI frame – Emmet Shear, formerly of Amazon’s Twitch (Nope – no idea either.) Shear does a nice line in 3-day beard shadow while his personality came with the natty bow-tie some publicist gave him to wear. He is the new CEO of OpenAI.

Sam Altman and Greg Brockman are going to Microsoft – quell surprise. Who will join him there? I suspect temp CEO Mira Murati and lots of staff will jump at the opportunity. It’s great drama! How much money will Altman get to launch NotOpenAI v2.1 from MS? Great quote from FT; “Shear was strongly recommended by a bunch of Silicon Valley folks. He understood the misson, he understood he might have a rough patch on his hands because employees are super unhappy”. Yeah, super unhappy because they are now unlikely to see their employee shares sold, valuing the firm at $86 bln!

The root problem in AI – I am reliably informed – is there are probably only 100-150 odd techies who have the understanding, expertise and downright nerdiness to write and train the large language models at the heart of Generative Artificial Intelligence and take us to Artificial General Intelligence. (Again.. no idea). When these techies don’t get along, and start bickering about whether the save the world and keep it safe from AI (the OpenAI board led by Chief Scientist Ilya Sutskever) versus “how rich can we get” (Altman and lots of hedge fund investors), then things got difficult.

And whatever happens Sutskever and his board have lost. OpenAI had a “sort-of” monopoly on AI, giving some hope it could be controlled by its not-for-profit structure. That is now blown. AI startups around the world will hire whoever they can from the trainwreck it now is. The cork is out the bottle.

Toys, prams… you get the drift. It’s a lot of drama, but we really do need to understand what’ occurring, as it will set how the market’s sentiment to the next new, new thing in tech develops. I’m increasingly unconvinced – having watched Big Tech promise all kinds of miracles, I can’t help but wonder how much of it is real.. and imagined. And how many good ideas will be lost as the hedge funds try to stop talent moving by muzzling with money?

Five Things To Read This Morning

WSJ                     Sam Altman to Join Microsoft Following OpenAI Ouster

FT                       What will the Fed Minutes say about the path of US rates?

FT                       AT1 rush shows bank investors have short memories

BBerg                  Argentina Takes Leap Into Unknown With Javier Milei

Torygraph            “I am your retribution”: what Trump 2.0 means for world

Out of time, and back to the day job

Bill Blain

Market Strategist and Author of the Morning Porridge