The Economy’s Weekly Recap

11/17/23 - 11/24/23

Raymond Lin

This Week’s Prominent Events

The OpenAI Saga

• ChatGPT’s and DALL. E’s parent corporation OpenAI experienced extreme turmoil this week. To understand it, one must understand OpenAI’s convoluted structure. 

• Originally, OpenAI was a nonprofit research lab intended to develop AI tools that would “benefit humanity as a whole, unconstrained by a need to generate financial return”. Later, OpenAI created its for-profit side, but the nonprofit’s board still controlled the for-profit side.

• The nonprofit side and the for-profit side had different visions for the company, with the nonprofit board being particularly concerned about ethics and the impact of the AI while the for-profit side was more focused on commercialization and market share. This conflict brewed for a while until it came to a head last Friday.

• On that day, the board fired OpenAI’s CEO Sam Altman for not being “consistently candid in his communications with the board”. Afterwards, Microsoft offered to hire Altman to run an AI research lab at Microsoft. Then, over 700 of OpenAI’s 770 workers said they would follow Altman to the Microsoft lab unless Altman was reinstated as CEO.

• Confronted with this, the board acquiesced and Altman has now returned as CEO. He has also negotiated a brand new board made of Bret Taylor, Larry Summers, and Adam D’Angelo, of whom only one is from the original board. 

• The purpose of this board is likely to vet and appoint new board members. It is likely that Microsoft  and Altman will both want a position on the board.

Nvidia’s Astounding Growth

• When the recent AI boom began, it was obvious that Nvidia, as a crucial producer of necessary chips, would benefit immensely. However, few at the time could have reasonably dreamed how much Nvidia has grown as a result.

• In Q3, Nvidia’ s revenue was $18.1 billion, with net income at $9.2 billion. This is an amazing 34% and 49% up from last quarter. Additionally, these figures are a mind-boggling 206% and 1,259% up from Q3 last year. 

• The data center business of Nvidia, which houses its AI chips, has been Nvidia’s crown jewel as it hit $14.5 billion, up 41% from Q2 and 279% from Q3 last year. 

• Despite all this fabulous news, Nvidia stock is actually down a few percentage points over the last few days. This is largely because Nvidia’s star-studded earnings were priced in and because Nvidia warned about how US export restrictions will likely negatively impact Nvidia’s sales in China, which make up about a quarter of data center revenue. 

• It is likely that the US government’s recent disruption of chip export worth billions of dollars to China hangs in investors’ minds, even if Nvidia says “These new export controls will not have a meaningful impact in the near term”.

Another Crypto Scandal

• Binance, the world’s biggest cryptocurrency exchange, has agreed to pay $4.3 billion to the US government and have its CEO Changpeng Zhao resign. 

• Binance reached this settlement after having allegedly allowed bad actors and dubious transactions to occur. Through this lack of action, Binance was alleged to have helped money laundering, child sex abuse, narcotics, terrorist financing.

• Just like FTX’s downfall, there were some cases of egregious evidence, such as…

  • Binance downplaying its role in sustaining fundraising for Hamas’ military wing

  • Binance Allowing dangerous users like those from Hamas or the Islamic state take their money out if they were VIPs

  • A compliance officer at Binance writing “we need a banner ‘is washing drug money too hard these days - come to binance we got cake for you.’”

• While Binance’s competitors, such as Coinbase or OKX, will likely benefit from this in the short term, crypto’s long term goal of integration into society has been marred by its largest exchanges either engaging in fraud or money laundering. 

Broadcom Completes $69 Billion Acquisition 

• After more than a year of regulatory scrutiny, Broadcom has finally completed its $69 Billion Acquisition of VMware. 

• The acquisition will lead to a larger and consolidated business focusing on semiconductor chips, technology infrastructure, and software. Additionally, there are aspirations to create private and hybrid cloud environments to run apps anywhere.

• Prior to the announcement earlier this week, there were some fears that the acquisition could be delayed. After all, the closing date has already been postponed 3 times. However, the Chinese government, possibly wanting to ease investors after a fairly nonchalant tone during its visit to the US, approved the deal on Tuesday, allowing the acquisition to be completed.

Bayer’s Troubles

• German pharmaceutical and agricultural giant Bayer has gone through quite a bit this week, such as share prices falling 19% and returning to a price that haven’t been seen since 2009. 

• Bayer has experienced this dramatic fall, which brought its valuation down to just $35 billion, due to two events this week. 

• Firstly, Bayer’s anti-blood clotting drug Asundexian, which was in large late-stage trials, has been aborted due to a lack of efficacy. It was hoped Asundexian would generate up to $5 billion of sales and replace Bayer’s Xarelto drug, which is a Bayer pharmaceutical best-seller that will lose its patent protection in 2026. This will not only mean decreased sales in the future, but it will also mean Bayer’s American expansion plans have been foiled as Asundexian was a cornerstone of the plan.

• Secondly, Bayer was ordered to pay $1.5 billion by a Missouri jury over Bayer’s allegedly carcinogenic and cancer giving herbicide Roundup. Additionally, Bayer will now face a second wave of lawsuits relating to Roundup, further compounding its poor position.

Future Events

AI’s Role In Weather Forecasting

• While one can easily expect the usage of AI in some industries, such as healthcare, retail, etc, it can be hard to understand that it will become practically ubiquitous in the future. Something that may assist the comprehension of AI’s soon-to-be scale is its usage in weather forecasting. 

• Google DeepMind’s model GraphCast was able to predict weather in a 10 day forecast more accurately and faster than traditional methodology. To be more specific, it beat the European Centre for Medium-Range Weather Forecasts (ECMWF) in over 90% of 1300 test areas. Additionally, it outperformed the ECMWF in 99% of weather variables in the troposphere, which is where most weather happens anyways.

• Besides being more accurate, GraphCast is also more efficient. It can run on a laptop and perform forecasts in under a minute, whereas traditional methods require a supercomputer and several hours. For example, while GraphCast predicted that Hurricane Lee would make landfall in Nova Scotia 9 days in advance, traditional methods only predicted it 6 days in advance. 

• GraphCast is so much more efficient and accurate because it utilizes historic data and has undergone extensive training. However, its usage of historic data and extensive training based on that may also be a big weakness. If weather patterns change, which is plausible thanks to climate change, GraphCast could struggle to accurately forecast. 

• So, until GraphCast becomes even better, traditional methods will still be used alongside it. Regardless, the usage of AI in weather forecasting is a demonstration of AI’s abilities and propensity to bring change.

Slowing EV Growth

• While EVs are the future and still a market with significant growth, they have recently slowed down. EV sales increased 49% through October, whereas they increased 69% during the same time last year. This is likely due to factors like the relatively high price of EVs and high interest rates limiting consumer spending. 

• As a result of this slowing growth, automakers have begun to temper investor expectations and actual investments. Tesla’s earnings call last month noted this fact and suggested investors lower expectations and expect difficulty continuing to grow rapidly. 

• This attitude can also be seen in Ford, which has postponed $12 billion in EV investments. This doesn’t mean it won’t be bolstering its production capabilities though. Rather, it means expansion will be more piecemeal and conservative to match consumer demand. 

• Recently, Ford also scaled back plans for a $3.5 billion battery plant by cutting production capacity by about 43% and decreasing expected employment from 2,500 jobs to 1,700 jobs.

ESG Investing’s Decline

• The idea behind ESG(environmental, social, and corporate) investing is initially quite appealing. By investing in companies with solid ESG factors, investors can support responsible and sustainable companies that, due to their good practices and reputation, should also yield strong returns. 

• Societal and climatic pressure combined with this idea of possible returns to lead to tens of billions entering ESG factor utilizing funds. However, in the last year, these funds have experienced an outflow of $14 billion dollars due to disappointing returns. Additionally, for the first time ever, the third quarter saw more ESG funds removed or liquidated than created. 

• Besides poor returns, ESG funds and investing may also be turning sour due to political opposition to ESG among conservatives, some of whom believe ESG is being needlessly pedaled. 

Weekly Question

How much has Microsoft invested into OpenAI?

• A: $6 billion

• B: $32 billion

• C: $13 billion

• D: $2 billion

Answer: C. Microsoft has sunk an enormous $13 billion into OpenAI, which has almost certainly paid off given share appreciation and their close business cooperation.