Monday Digest
Posted 27 November 2023
Overview: activity (and growth) slows down as December beckons
The US-centric nature of global markets means Thanksgiving week tends to be quiet. Things should pick up this week, but markets will likely be decreasingly busy over the next four weeks. However a decline in trading activity doesn’t necessarily mean quiet markets, particularly if a group of investors decides to move things around. If they want to buy, we can end up with a ‘Santa rally’, but if they are stressed and need to raise cash levels, we can get a nasty sell-off, such as in 2018. It can be driven by investors’ perceptions risks and opportunities shaping up for the next year, but more often December’s moves are about protecting the past year’s returns.
In the run up to year end, November remains a positive month in capital markets, although equities had a neutral week and longer bond prices fell back. Right now there are few signs of market stress. Price volatility has declined across the board, and option volatilities (a measure of expected volatility) have come down to low levels. The risk of owning market-traded assets has declined and that slow process tends to lead to a gentle rise in risk asset prices. But, as we mentioned last week, there is a potential problem with an environment where rising low-risk bond prices (and falling bond yields) are the only driver of higher risk asset prices. Falling bond yields are mostly associated with some sense of a slowing economy and it appears that, on balance, the global economy may indeed have eased back. The good news is that although growth may be slowing somewhat, this phase may prove to be better balanced.
The AI governance dilemma
OpenAI shocked the world by firing superstar CEO Sam Altman for not being “consistently candid in his communications”. But just days later, Altman was back in charge at OpenAI and the board that had sacked him was gone. Some have cast the story as one of a daring geek entrepreneur coming up against overly cautious non-scientists, others have highlighted the “Terminator” films’ aspect. It’s all of these things but the widest ramifications concern how individual companies are not the place to balance public interest and profits.
OpenAI began as a non-profit organisation in 2015 and, initially at least, its stated sole aim was to develop artificial intelligence (AI) “safely” for the benefit of humanity. However, the costs of developing and running cutting-edge technologies were so substantial it needed much more investment. That required extensive private capital that ultimately demanded commercialisation – and Altman was the ideal person for the job, having overseen a Silicon Valley tech incubator for years. Regardless of whether Altman’s sacking was ultimately down to those clashing incentives, there was certainly plenty of tension between revenue and promoting safe artificial intelligence (AI).
OpenAI’s conflicting priorities were obvious and make it seem like a one-off. But they have become more common thanks to understandable wish to have the perceived need for socially conscious corporates, most commonly expressed as ESG investing. OpenAI has shown the dilemma in a case of “reductio ad absurdum”.
The extremity of this case has further implications. One does not have to be a doomsayer to realise the risks of the unfettered proliferation of a technology that one insider described to us thus: “this isn’t just better technology – we’ve made a new kind of nuclear weapon”. If the potential consequences to society are so big, it will not be possible for competing private groups to self-regulate or govern in the public interest.
Even with clearer and tighter regulation, we can’t be sure of a socially acceptable outcome when first-mover advantage means untold riches and near-untouchability, and when this might be achieved in months, not years. Centralised research bodies are currently promised by various governments, and are sorely needed.
Can radical Milei bring stability to Argentina?
Economist, TV personality and self-proclaimed “anarcho-capitalist” Javier Milei won Argentina’s run-off election by a surprisingly large margin last week, beating centre-left Sergio Massa – the current economy minister – by 56% to 44%. Milei believes in unfettered market freedom and advocates substantial cuts to public spending. More radical ideas floated on the campaign trail have included loosening gun control and allowing a private market for human organs. His fierce criticisms have extended beyond the Argentine political establishment to foreign governments, and he has promised to cut all ties with China and Brazil – Argentina’s two largest trading partners. His populist leanings and maverick personality have earned him comparisons to Trump and Bolsonaro, but his message has always been more market oriented and less protectionist than either. The president-elect was defiant after the result: “the model of decadence has come to an end, there’s no going back”.
Where Argentina is going to is another matter. Milei promises swift and dramatic reforms to the economy, but he lacks legislative support after his party fell well short of a congressional majority in October’s elections. His toughest task will be quelling 143% annual inflation, while dealing with extremely high public debt and practically zero fiscal leeway. His election has been cast as a ‘roll of the dice’ by Argentines fed up with years of punishing inflation and worsening living standards, but many are predicting a difficult transition.
One of Milei’s most consequential proposals is to scrap the Argentine peso, replace it with the US dollar and close the country’s central bank (at least as a printer of money). This is designed to limit price rises and anchor people’s inflation expectations by running the economy on a more trustworthy currency. Full dollarisation has never been tried for an economy as large as Argentina though – the continent’s second biggest and a member of the G20. Economists are almost unanimous that dollarisation, if possible, would require further devaluation of the peso, but if such devaluation came suddenly, it would likely be seen as a betrayal by Milei voters. The other option is to return to the International Monetary Fund (IMF) (or possibly the US directly) with hands out. But, if the IMF were to agree, it would amount to a doubling of Argentina’s already substantial debt pile. On its part, the IMF has expressed serious reservations about the feasibility of dollarisation.
The unfortunate truth Argentines might well discover is that, while reforms are needed and dollarisation may indeed be possible, a populist firebrand might not be the person to deliver them. It is early days, but Milei’s campaign gave little reason to think that his regime would bring stability, and he might struggle to get the results he promises.