Andy Kessler

WSJ: Sherlock Diverts the Fire Hose

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https://www.wsj.com/articles/sherlock-diverts-the-fire-hosesherlock-diverts-the-fire-hose-technology-social-media-notifications-twitter-6f4c49f5

We all drink from a fire hose of information, an unfiltered stream that blasts facts and photos and figments of truth, bloating and overloading us. Phones buzz with updates. Breaking news. Snarky tweets that demand a peek. Kardashian sibling fashion faux pas. Amazon deals, Instagram hamming, TikTok twerks and daily BeReals—these torrential rains strain brains.

When Elon Musk bought Twitter, President Biden remarked, “There’s no editors. How do we expect kids to be able to understand what is at stake?” Great question. And the fire hose refuses to be turned off. But there is a way to slow the flow, at least to a manageable trickle. Ask Sherlock Holmes.

Trusty assistant Dr. Watson expressed astonishment that Holmes was “ignorant of the Copernican Theory and of the composition of the Solar System.” Holmes replied, “Now that I do know it I shall do my best to forget it.” He explained further, “I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out.”

We all remember the stupidest things. Holmes’s advice is to forget. But what to keep? “Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order.” Here are some tips:

• Filter. Search engines and social media bypass newspaper and TV editors. This helps free us from bias and censorship, but we’re all editors now, perusing the water blast to find what’s important. The trick is to filter almost everything—start with Meghan and Harry. If it isn’t in your wheelhouse or meaningful for your friendships, career or personal development, let that fire hose soak someone else.

• Favor the right topics. A college friend moved to Oregon to study the effects of Mount St. Helens’s volcanic eruption on nearby forestry. I presumed the simple answer was “not good.”

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WSJ: AI Simply Needs a Kill Switch

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https://www.wsj.com/articles/ai-simply-needs-a-kill-switch-regulations-biden-commerce-innovation-musk-pause-spacex-767ae62a

The best lesson for artificial intelligence may be Thursday’s “rapid unscheduled disassembly” of SpaceX’s Starship rocket, aborted four minutes after launch. With ChatGPT prompting speculation about mankind’s destruction, you should know that techies have obsessed seemingly forever over what’s known as the Paper Clip Theory—the idea that if you told an artificial-intelligence system to maximize the production of paper clips, it would fill the whole world with paper clips. Another version of the theory, Strawberry Fields Forever, has AI using every piece of available dirt to grow strawberries. Scary, right? So are “Halloween” movies.

Not to be outdone, decision theorist (huh?) Eliezer Yudkowsky recently wrote in Time magazine that the “most likely result of building a superhumanly smart AI” is that “literally everyone on Earth will die.” Literally everyone! That’s ludicrous, as is most clickbait these days. Sam Altman, CEO of ChatGPT creator OpenAI, told podcaster Lex Fridman, “There is some chance of that.” C’mon now.

Apparently, Pandora’s box has opened and is spewing its evils, which ignores all the good uses of large language models that will transform software coding, the workplace, education and more. Sadly, our geniuses in government appear to be the remaining few who still read Time magazine. So bring on the regulators to shut the box heroically.

Earlier this month, the Commerce Department initiated the process of regulating artificial intelligence, with Assistant Secretary Alan Davidson suggesting, “We know that we need to put some guardrails in place to make sure that they are being used responsibly.” Bad idea. Guardrails are for children bowling at birthday parties. AI is in its infancy, and we don’t yet know how it will change industries and society. Don’t freeze it now.

If the U.S. regulates AI, research will just move somewhere that doesn’t regulate it, maybe the Bahamas, where the unkempt coders of the future could keep cranking away. Or worse, China. Google CEO Sundar Pichai told CBS’s “60 Minutes” that he wants global AI regulation. Elon Musk and a group of AI experts wrote an open letter calling for an immediate six-month pause of “giant AI experiments.” Isn’t it interesting that those who need to catch up are pushing for a pause?

We don’t need onerous new regulations. There are already laws on the books…

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WSJ: A Wrench Thrown Into Capitalism

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https://www.wsj.com/articles/a-wrench-thrown-into-capitalism-philanthropy-investment-technology-musk-attention-innovation-climate-5b319142

I’m pretty sure we’ve hit peak absurdity. I recently read about a climate author “investigating how shade can be a powerful civic resource to protect us from climate change.” Shade! This from the announcement of a new “climate cohort” at a well-regarded philanthropy. It reveals a flaw in capitalism.

Not a single scientist can be found in the climate cohort—why bother?—but instead authors, educators, designers, a poet and, hmmm, a chef. There is a “data ecologist,” but that almost sounds made up. Reading further, apparently the lack of shade is racist and a product of inequality. Of course it is.

Hey look, the wealthy can do what they like with their money—often paradoxically amassed by delivering productivity-enhancing products. I’ve noted before that there are only four things you can do with your money: spend it, pay taxes, invest it or give it away. The flaw in capitalism is that only one of these helps the world in the long term.

In the short term, spending is great for the economy, but it’s hard to blow a billion dollars at Costco or buy 3,000 Lamborghinis. Paying taxes funnels money to unproductive government spending and should be kept to a minimum. Even investing has turned absurd: An Oklahoma City brand designer prompted ChatGPT: “You have $100, and your goal is to turn that into as much money as possible in the shortest time possible, without doing anything illegal.” ChatGPT instructed him to launch “Green Gadget Guru” and promote “eco-friendly gadgets and sustainable living.” Climate is lucrative!

Anyway, of the four, philanthropy is the most misunderstood. Yes, many philanthropies do great stuff, especially on a local level. And it sure feels good for the giver. We all get that warm fuzzy feeling—a psychic reward—when we donate to causes. Help your fellow human. Fund schools. Gild the opera. But does that giving do any lasting good? Sadly, only sometimes.

Andrew Carnegie funded libraries.

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WSJ: Turn Off the Fed Bubble Machine

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https://www.wsj.com/articles/turn-off-the-fed-bubble-machine-inflation-federal-funds-interest-rates-stimulus-regulation-keynes-supply-a90c462

“The Lawrence Welk Show,” which ran from 1951 to 1982, was known for its schmaltzy “champagne music” and a TV screen full of bubbles to open most shows. The interest-rate-slashing Federal Reserve has been running the bubble machine ever since. Now, with inflation feeling like it’s rolling over as the economy slows, it’s time to shut the machine down.

Since the fall of 2008, with a brief respite in 2019, the real federal-funds rate has been negative, meaning interest rates have been below inflation (and still are) and the Fed has been accommodative. Accommodating what? Well, in the false hope of boosting aggregate demand and fighting deflation, they’ve accommodated bubbles, bubbles everywhere.

Deflation is only a ghost, often mistaken for prices dropping naturally and to our benefit. Productivity, doing more with less, lowers prices. Think of chips, iPhones and $538 for a 75-inch 4K smart TV at Walmart. Why fight it?

Ask the Fed. Faced with this productive trend, it keeps trying to stimulate aggregate demand by dropping interest rates or buying bonds. Instead the central bank ends up inflating prices for various assets and unproductive things that don’t naturally drop in price, like housing, healthcare and education. This sets up the next bubble and downturn and bank bailouts which the Fed fights with even more interest rate cuts, churning the crank on the Welkian machine. Stop doing this!

Don’t worry, central bankers would reassure, they keep a sharp eye on consumer inflation indexes. But even former Fed Chairman Alan Greenspan admitted they’re flawed, noting in 2019, “We have a problem with measuring inflation.” Even through mid-2021, inflation numbers looked subdued, but didn’t the Fed notice the asset inflation that rate cuts were causing elsewhere?

Stocks were flying. Even the junkiest bonds had low yields.

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WSJ: Does AI Dream of Electric Sheep?

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https://www.wsj.com/articles/does-ai-dream-of-electric-sheep-neural-networks-chatgpt-sleep-memory-overfitting-research-5ab42f1b

I had a weird dream last night. I’m sure you’ve said that many times. But why? From Sigmund Freud to Carl Jung to Calvin Hall, dreams have been researched ad nauseam and there’s still no good answer to what shapes them. Unconscious desires? Keeping neurons active? Memory consolidation? Psychosexual wish fulfillment? No one knows. Even Freud supposedly noted, “Sometimes a cigar is just a cigar.”

But clues are starting to emerge from artificial intelligence and its use of brain-mimicking neural networks. In 1968, Philip K. Dick published the novel “Do Androids Dream of Electric Sheep?”—on which the 1982 movie “Blade Runner” was based. Turns out the answer is yes.

First, a quick and oversimplified primer on neural networks. They contain digital layers of interconnected nodes, modeled on the human brain’s neurons and synapse connections, which are great at finding patterns. Based on numerical weightings in each node after scanning millions of photos, a layer might conclude that a roundish object with eyes, nose and mouth is a face. Then that data moves onto the next layer, which looks for patterns in those patterns. Perhaps it determines whether it’s a cat’s or dog’s face. Then another layer finds patterns of patterns of patterns until, for example, it can identify the dog’s breed as a Siberian Husky. And so on.

Theorized in 1943, trainable neural networks have been around since 1958, when psychologist Frank Rosenblatt demonstrated the Perceptron machine at the Cornell Aeronautical Laboratory. But only in the past decade has AI scaled to the masses and gained the ability to understand your voice or recognize faces in photos.

What changed? Faster processors and cheaper memory certainly helped, but neural networks in the past often got stuck by “overfitting” data to a conclusion, such as determining that everything with feline-shaped eyes is a cat. Or concluding that dinosaurs built Stonehenge. We do that too when we knock on wood or wear our lucky socks because our team won last time we did. Computers can be superstitious like us.

In 1970 Finnish student Seppo Linnainmaa proposed “back-propagation”—again oversimplifying here—sending errors backward through neural-network layers to generalize the weightings and better find patterns.

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WSJ: The Economy Gets Wrung Out

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https://www.wsj.com/articles/the-economy-gets-wrung-out-earnings-layoffs-credit-fed-svb-bailout-merger-crypto-recession-5b957cb

So now what? You don’t just lose Silicon Valley Bank, Signature Bank (used by fake heiress Anna Delvey) and Credit Suisse in a week without repercussions. We saw hundreds of billions in stock-market value and tons of debt vaporized. Yes, all U.S. bank deposits are now supposed to be fully insured. And yes, the Federal Reserve has rolled out a new Bank Term Funding Program that offers banks one-year loans against underwater Treasurys and mortgage-backed securities at par value. Wow. Last week the Federal Reserve announced a currency-swap line, basically to help foreign banks. But is that even enough?

More failures and quickie mergers are inevitable—banks are some $2 trillion underwater with their bond portfolios. First Republic Bank’s stock has fallen 90% in three weeks as depositors pulled their money. Like SVB, First Republic goosed returns by chasing yield. Unfortunately, it doesn’t have many of the bonds that the Fed’s Bank Term Funding Program will loan against, hence the $30 billion in “deposits”—almost charity—from 11 large banks.

I suspect someone will buy First Republic soon, similar to United Bank of Switzerland (UBS) buying Credit Suisse for a bar of Toblerone. The deal was helped by $17 billion in contingent convertible bonds, or Cocos, which went puff, wiped out in value. Plus, the Swiss National Bank will cover nearly $10 billion in losses and provide almost $110 billion in liquidity. But UBS inherits Credit Suisse’s First Boston curse. Everyone on Wall Street recalls the scandals that plagued First Boston: “Bid ’Em Up Bruce” Wasserstein, the 1989 Ohio Mattress “burning bed” deal, IPO kickback charges, and most recently Archegos and Greensill.

Last week I heard some crypto hypesters have been telling startups to put some of their future payroll into crypto for safekeeping in case of more bank failures—which probably is why bitcoin popped 40%. That might end up being expensive insurance. And circular reasoning, considering the stablecoin USDC had $3.3 billion deposited at SVB.

Even if there are no more bank failures, credit is tight and getting tighter. Last week saw February home prices down 0.2% year over year, the first drop in 11 years. By the way, the mortgage-debt market is $8 trillion. And $1.5 trillion in commercial real estate debt is due over the next three years. Work from home means future office vacancies, a ticking bomb. It’s starting: In late February, Pimco and its Columbia Property Trust defaulted on $1.7 billion in loans on seven buildings. Brookfield stopped paying $784 million in loans on two Los Angeles buildings. As all New Yorkers know, there’s never just one or two cockroaches.

It’s increasingly improbable that we escape a recession.

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WSJ: From Zero to Hero

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https://www.wsj.com/articles/from-zero-to-hero-biden-inflation-fed-fdic-svb-deposit-insurance-bailout-interest-rates-oil-gas-willow-643b9f2d

Isn’t it bizarre that so many people who cause problems then turn around and become heroes fixing the same problems they created?

Between the Biden administration’s $1.9 trillion American Rescue Plan and the green-laden $738 billion Inflation Reduction Act and paying people not to work, Bidenflation is roaring. It peaked last summer at 8.5% but is still running at 6%. In December President Biden, the newly self-declared inflation warrior, said, “My goal is simple: get prices under control without choking off economic growth.” And there it is: The Biden administration is trying to slay an inflation dragon that it created.

To help fight this inflation, the Federal Reserve has raised the federal-funds rate from near zero to 4.5% to 4.75% since January 2022. This has caught a lot of banks, such as Silicon Valley Bank, holding portfolios of underwater bonds and mortgage-backed securities. Treasury Secretary Janet Yellen, in her previous role as Federal Reserve chair, kept rates too low for too long.

Now to save banks, Ms. Yellen says the Treasury, along with the Federal Deposit Insurance Corp. and the Fed, will act “in a manner that fully protects all depositors,” which means those not insured above $250,000. Catch that? She helped cause inflation and now is a hero for saving depositors. The press release notes, “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” Uh huh. Pay no attention to those losses behind the curtain, which “will be recovered by a special assessment on banks.” Maybe no one will notice.

This D.C. trio of heroes are effectively guaranteeing all bank deposits, which by the way total $17.7 trillion even though the Fed’s balance sheet is only $8.4 trillion. Hmmm. This creates a classic moral hazard, encouraging bankers to let risk rip—no need for a chief risk officer—and then maximize profits because the federales will step in later. The only thing this guarantees is future bailouts.

Fed Chairman Jerome Powell is also playing this “saving us from his own mistakes” game. He has kept rates below the consumer-price index level for most of his five-year tenure.

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WSJ: Who Killed Silicon Valley Bank?

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https://www.wsj.com/articles/who-killed-silicon-valley-bank-interest-rates-treasury-federal-reserve-ipo-loan-long-term-bond-capital-securities-startup-jpmorgan-bear-stearns-lehman-brothers-b9ca2347

That giant slurping sound on Friday was Silicon Valley Bank imploding. America’s 16th-largest bank had some $175 billion in deposits and disappeared by breakfast. It wouldn’t have happened if not for management mistakes. This was a 21st-century bank run—customers tried to withdraw about $42 billion, a quarter of all deposits. But what triggered the collapse?

Let’s go back. In January 2020, SVB had $55 billion in customer deposits on its balance sheet. By the end of 2022, that number exploded to $186 billion. Yes, SVB was a victim of its own success. These deposits were often from initial public offerings and SPAC deals—SVB banked almost half of all IPO proceeds in the last two years. Most startups had relationships with the bank.

That’s a lot of money to put to work. Some was lent out, but with soaring stock prices and near-zero interest rates, no one needed to take on excessive debt. There was no way SVB was going to initiate $131 billion in new loans. So the bank put some of this new capital into higher-yielding long-term government bonds and $80 billion into 10-year mortgage-backed securities paying 1.5% instead of short-term Treasurys paying 0.25%.

This was mistake No. 1. SVB reached for yield, just as Bear Stearns and Lehman Brothers did in the 2000s. With few loans, these investments were the bank’s profit center. SVB got caught with its pants down as interest rates went up.

Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging.

The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up.

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WSJ: How ChatGPT’s AI Will Become Useful

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https://www.wsj.com/articles/ais-not-useful-yet-but-it-will-be-chatgpt-artificial-intelligence-robots-microsoft-bing-chatbot-elder-care-tyrell-corporation-self-driving-tesla-technology-a1a27df0

In the rudimentary days of videogames, I met the team that created the first multiplayer Formula 1 Grand Prix racing game. They had to alter the original code because they discovered almost every player at the start of the first race would turn his car around on the track and crash into the incoming traffic. I started to laugh, because that’s what I did too. Gives new meaning to the Facebook motto: Move fast and break things.

That’s exactly what’s going on with the newfangled generative AI chatbots. Everyone’s trying to break them and show their limitations and downsides. It’s human nature. A New York Times reporter was “thoroughly creeped out” after using Microsoft Bing’s chatbot. Sounds as if someone needs reassignment to the society pages. In 2016 Microsoft had to shut down its experimental chatbot, Tay, after users turned it into what some called a “neo-Nazi sexbot.”

Coders can’t test for everything, so they need thousands or millions banging away to find their flaws. Free testers. In the coming months, you’re going to hear a lot more about RLHF, reinforced learning from human feedback. Machine-learning systems scan large quantities of data on the internet but then learn by chatting with actual humans in a feedback loop to hone their skills.

Unfortunately, some people are ruder than others. This is what destroyed Tay. So ChatGPT currently limits its human feedback training to paid contractors. That will eventually change. Windows wasn’t ready until version 3.0; generative AI will get there too.

For now Microsoft’s solution is to limit users to six questions a session for the Bing chatbot, effectively giving each session an expiration date. This sounds eerily similar to the Tyrell Corporation’s Nexus-6 replicants from the 1982 movie “Blade Runner.” If I remember, that didn’t end well.

Every time something new comes out, lots of people try to break it or foolishly try to find the edge, like jumping into the back seat of a self-driving Tesla.

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WSJ: The FTC Can’t See the Future

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https://www.wsj.com/articles/the-ftc-cant-see-the-future-activision-microsoft-lina-khan-antitrust-xbox-gaming-consoles-video-games-11675628406

In December, Federal Trade Commission Chair Lina Khan told the WSJ CEO Council, “competition is critical to have an economy that’s thriving, to ensuring that we have robust innovation.” That’s idle chatter. Actions speak louder than words. Look at her agency’s innovation-killing actions: “FTC seeks to block” Meta’s acquisition of virtual reality app Within. Or Microsoft’s acquisition of videogame maker Activision. Ms. Khan is playing checkers while others are playing chess.

In the early 1990s I raised money for Activision at a $100 million valuation. Last January, Microsoft offered $69 billion for the company—we’ve come a long way. Gaming companies used to sell cartridges for videogame consoles like Nintendo and Sega or floppy disks for personal computers. Over time this changed to CD-ROMs for new consoles like Sony’s PlayStation and Microsoft’s Xbox. Then came handhelds. And now mobile phones. The FTC, seemingly prodded by Sony, is worried that Microsoft will “harm competition in high-performance gaming consoles.”

That’s laughable. It’s like protecting floppy disks. While Microsoft has promised to make some games available on competing consoles, including Sony’s PlayStation for the next 10 years, I doubt anyone will be selling new consoles a decade from now as everything moves to the cloud. Why? Because while 75% of today’s televisions are Smart TVs, soon TVs will have graphics engines as powerful as today’s videogame consoles. Then it’s game over.

As usual, the FTC is still fighting the last war. The next war is over online worlds, the so-called metaverse. This makes even more bizarre the FTC’s attempt, which was recently denied by a district court judge, to block Meta from buying fitness app maker Within. As if Jazzercise or “Sweatin’ to the Oldies” is innovation. The metaverse already exists and videogames are, pun intended, its killer app so far.

Don’t care about videogames? OK, but the future of commerce and education will live in online worlds. Microsoft will bring Azure’s cloud expertise, HoloLens’ headset, and even ChatGPT’s conversational artificial intelligence to Activision’s 3-D worlds. Chatbot avatars might replace salesmen and teachers one day.

Microsoft would make a formidable competitor to Meta. So would Apple…

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