AI as an asset class

A very early career memory of mine came in late 1999 when the UBS investment bank took the team of analysts covering the staid Paper & Packaging team and re-directed them to become the ‘dot.com’ team. This I reckon came about six months before the peak of the ‘dot.com’ bubble and, I am now wondering if investment banks are channeling resources into AI banking teams (surely AI can do the work!). If so, it would be proof of the idea that AI is everywhere, from the Mythos breakthrough we wrote about a few weeks ago to, with good timing the thoughtful note, Magnifica Humanitas, from Pope Leo XIV on how AI should be deployed.

Nowhere is the sense that AI is everywhere more true than in finance. According to Pitchbook, 45% of all American unicorns (venture-backed companies with a valuation above USD 1bn) are AI-driven, not bad for a technology that, to public eyes, barely existed three years ago. In more detail, two earlier venture-backed successes, Bytedance (i.e. TikTok) and Uber had been established for 80 months when they launched their first products. OpenAI and Anthropic have done so after 30 months, and each is now worth close to USD 1 trn. Equally, illustrating the link between investor exuberance and AI, the FT recently estimated that two-thirds of the value of SpaceX is attributable to investments made in the company in the six months since December 2025.

When this trio of AI firms lists on the stock market, revised index inclusion rules will add their weight to the already substantial 44% representation of technology stocks in the major indices. To that end, AI is no longer a market theme or fad, but is becoming an asset class in its own right.

One of the factors that distinguishes a genuine asset class from a market theme or fad is the presence of a transformative technology, with a lasting economic impact. In the context of an otherwise pedestrian US economy, AI capital expenditure is the dominant growth driver and in the last year, expenditure on data centres in the US hit USD 1 trillion.

A comprehensive study from Stanford’s Forecasting Research Institute (March 2026) compared GDP forecasts from different types of forecasters – economists in the private sector, academics, AI experts and the general public. Unsurprisingly, those closest to the AI industry tended to have the highest GDP forecasts, while academics were more grounded. On balance though, there is a consensus view that AI will lift the trend rate of growth in the US.

There are also increasingly varied ways to invest in AI. An AI-centric portfolio can now span private equity, venture capital, infrastructure (clean energy for data centres), real estate (data centres), currencies such as the Korean won, corporate bonds (Amazon, Meta, Oracle and Alphabet have issued nearly USD 150bn in bonds this year) and private credit. Indeed, AI-related private credit investments are expected to grow by over USD 1.5 trn in the next two years. While there is already a rich mix of AI-centric asset classes, the correlations between them remain high, limiting the diversification benefit.

In addition to investment banks committing resource to AI-driven deals, another hint that AI is an emerging asset class is that it has its own distinctive mode of corporate governance – strong-willed founders who monopolise voting rights, enormous pay packets and neutered boards. This concentration of control is likely to prove one of the structural vulnerabilities of the AI complex as scrutiny from regulators and institutional investors intensifies.

Given the scale of AI’s footprint across markets, one of the essential tasks for investors will be to identify assets uncorrelated with AI (e.g. luxury goods, food), as well as hedges on AI assets. And, as the suspected AI bubble grows in value, investment managers will have to find ways of protecting portfolios against sharp reversals in AI valuations.

The investment dimension of the AI boom carries particular urgency. Given the risk that AI (as per Mythos) creates potentially existential security and economic risks, and could disrupt labour markets, there is a strategic need for pension funds and sovereign wealth funds to have exposure to the economic benefits of AI. As it stands, the risk is that billions of people will have their lives and livelihoods changed by AI, but the benefits accrue to only a narrow group of investors and executives. In that regard, the advent of AI as an asset class gives individuals, countries and investment funds a means of participating in the upside of the AI boom.

The one formidable obstacle investors will have to navigate is the sense that we are in the thick of an AI bubble. Already long-run valuation measures – such as the ratio of market price to long-run earnings (the ‘Shiller P/E’), or the ratio of the value of the US stock market to GDP – are testing all-time highs, at levels not seen since 1929 and 2000. In this way, AI is truly everywhere, in our savings, investments and pensions, and that will be a risk.

To return to my first point on the switching of analyst roles. A couple of brokerages have, according to the Wall Street Journal’s China correspondent, dropped coverage of Chinese consumer stocks because of the weak outlook for spending. It might be the next trend to watch.

Have a great week ahead, Mike

Predator or Prey?

On Wednesday I had dinner in Jack’s Brasserie, in Bern, an iconic restaurant not far from two of the institutions that have overseen the rise in power and wealth of Switzerland, its national (central) bank and parliament. My visit to Jack’s was triggered by the fact that I had just finished Giuliano da Empoli’s latest book ‘Hour of the Predator’, and Jack’s was the location of a ‘Lunch with the FT’ between da Empoli and Simon Kuper. Often the FT’s Lunch series throws up sterile exchanges, but this was a good one, and Simon managed to convey the ambience of Jack’s, so I had to go along.

Da Empoli has spent his life in public policy, as a writer on politics, and adviser to former Italian prime minister Matteo Renzi (he occasionally advised another centrist, Emmanuel Macron). He became famous with his book ‘The Wizard of the Kremlin’ (now a film where Jude Law does a passable impersonation of Vladimir Putin), but it is his latest book ‘The Hour of the Predator’ that I find highly pertinent.

Da Empoli originally published his works in French, and has benefited from the short form novels or longish essays that are popular in France and that should really be more widespread in the English-speaking world. One of his talents are pen portraits, notably of politicians he has encountered – from Mohammed Bin Salman, now ruler of Saudi Arabia, Nayib Bukele of El Salvador and Joe Biden.

Da Empoli’s ‘Predators’ thesis is highly relevant to Europeans. It is yet another framing of the idea of the unravelling of globalization, and the chaotic start of a new world order. In this context, ‘Predators’ are autocratic, populist politicians and hyper wealthy technology entrepreneurs who act in sudden, brutal ways, use technology and social media for control, operate outside the established norms and rules, and make a virtue of doing so on the basis that it is a necessary cost of remaking the system and allegedly handing power back to the people.

In this context, ‘Predators’ are autocratic, populist politicians and hyper wealthy technology entrepreneurs. They act in sudden, brutal ways, using technology and social media for control and operating outside the established norms and rules. They justify this on the basis that it is a necessary cost of remaking the system and allegedly handing power back to the people.

Readers will have a good idea of who the ‘Predators’ are. They have succeeded in accelerating the pace in politics and geopolitics (for example in the first three months of this year we have had attacks on Venezuela, Iran, a threat to attack Greenland and a stealthy suppression of Cuba).

The smashing of the established way of doing things and the undercutting of the institutions that have enabled globalization(from NATO to the UN) are part of the ‘Predator’ tradecraft. As a result, economic policy volatility is at an all-time high and financial markets face contradictory signals, with bond yields, energy prices and technology stocks all at record highs.

The action and drama associated with the ‘Predators’ is seductive, but the question we need to ask is whether they are builders and visionaries, or merely agents of chaos, and vandals? The Department of Government Efficiency (DOGE) experiment, for instance, suggests the latter. The degradation of corporate governance in the US, is another case in point. The danger is that the public, either as investors in some of the landmark IPO’s, or as taxpayers, are left holding the bill. My instinct is that most Americans will soon want their laws and institutions back, and stability restored.

Predators need prey, and many of the ‘Predators’ appear to unite in disdain against Europe. For them, the likes of Renzi and Macron typify the over-educated, lawyerly, social liberalism of Europe. Early in the rise of the ‘Predators’, they took control of the geopolitical narrative, painting Europe as a slow moving, regulatory beast. Indeed, Europe is guilty of moving sluggishly, and electorates are impatient about a range of issues. Neither has it found the urgency and capital to match the rise of America’s technology sector.

For its part however, Europe needs to realize that the rules of the game have changed, such that there are now few rules (Macron, inspired by Da Empoli, has voiced this view), and for instance needs to adopt a more aggressive stance against Russian interference across the continent, and to permit the radical overhaul of industry and finance across Europe. Sadly, it appears to do the opposite.

Finally, there is no country in greater need of the ‘Hour of the Predators’ view than Ireland. More than any other country in Europe, public and political stances cling to the sense that the institutions and norms of the globalized era are still operational. It would be better if they were but that is sadly not the case. The debate on security and defence is a case in point. All other small, advanced countries – from Singapore to Switzerland – are bracing themselves and equipping for a nastier world. Ireland is not and may soon find it is the prey.

Have a great week ahead, Mike

Lost at Sea

As a child I was fascinated and terrified by tales of the Bermuda Triangle, an area between Florida, Puerto Rico and Bermuda where ships and planes disappeared without warning, allegedly. Legend had it that a mysterious magnetic field around the Sargasso Sea drew vessels to perdition, or that even darker forces were behind the disappearance of the crew of the Mary Celeste.

Without stretching the analogy too far, my feeling is that financial markets have entered a logical Bermuda Triangle, or even Trilemma. Data, models, rules and indicators go in, but come out logically impaired. In particular, there is an unreal sense from at least three asset classes that are at historically extreme levels, each apparently contradicting the other. They cannot all be right.

In one corner, the US has, for the first time since 2007, issued long-term debt (30 years maturity) at a yield of 5%. Then, US stock market valuations are at an all-time high since 1929 and, as we stressed in last week’s note, semiconductor stocks are in a speculative frenzy. In another corner of the triangle, oil prices are pushing the highs of the last two decades.

This trio of market signals leaves investing logic in a grey zone — a Bermuda Triangle-like make-believe world. This stretched logic suggests that the prosperity and productivity of AI-related capital expenditure will rescue the world from both high inflation and a debt crisis, and will also prove powerful enough to compensate for the effects of a momentary energy crisis. I am not sure.

The confluence of these three indicators is interesting because each one points to a long-term trend that investors and policymakers cannot ignore, but equally, each one rests on a short-run vulnerability.

Rising bond yields in Europe, the UK, Japan and the US are an early warning of a debt crisis, or debt purgatory, to come. In the very short term, they signal that inflation is creeping higher whilst a number of policymakers — notably on the Fed’s FOMC — appear complacent about this development.

Equities are trading at record high levels and valuations, mostly because earnings and business cycles are strong. But a very small number of stocks has pushed the market higher, caused in part by the fact that sectors like semiconductors are heavily financialised. What I mean by this is that the deployment of exchange-traded funds and options has surcharged the prices of semiconductor stocks, and likely driven them well above long-term fundamental valuations.

In my view, Intel’s ability to treble in value since the end of March (from USD 41 to USD 129 last week) has less to do with the fundamentals of the company, and more to do with speculation. In support of this, a recent Goldman Sachs note shows that retail investors now account for around 20% of US stock market trading.

Energy prices remind us that in a multipolar world, commodities — or rather their supply and refinement — acquire a premium, and that a number of countries will have to address shortcomings in industrial supply chains. For example, last week Willie Walsh, the former airline chief executive, warned that the UK has scant jet fuel refining capacity. As such, energy infrastructure will be an area for future investment.

In the short term, however, supply pressure may be more acute: oil inventories are being drawn sharply lower. Unless there is a full and speedy resolution to the Iran War, estimates from JP Morgan point to world oil inventories dropping to 6.8 billion barrels by September — just enough to keep refineries operating worldwide.

So, like the Sargasso Sea, market compasses are spinning in different directions, and it is difficult to discern a clear narrative. The confusion arises from the changing geopolitical nature of the world, the fast shift in industrial structure away from ‘bits’ and towards ‘atoms’, shortages of refined oil and compute, and the intense financialisation of specialised sub-industries such as semiconductors and commodities.

Given the disagreement between markets, the obvious question is: which one is right? A ‘two-handed’ economist might argue that the stock, commodity and bond markets are all correct, but on different time frames.

In my experience, the bond market is the most consequential, because when it worries, it imposes a cost on other markets and on political actors. The overused but apt quote from President Clinton’s adviser James Carville in the mid-1990s captures it well: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

So, the ‘market triangle’ or trilemma is resolved by bonds showing their displeasure at high oil and inflation, slowing the economy and walloping the over-bought sections of the stock market.

From a policy angle, bond markets are highlighting the urgent need for policymakers to calm inflation — through rate rises from central banks, and an early test for incoming Fed Chair Kevin Warsh — for governments to reduce debt, and for greater policy clarity in countries like the UK. The silver lining is that credit markets are so far well behaved, signalling that the healthy business cycle should allow for these policy actions to be made now, before it is too late.

Have a great week ahead, Mike

Goodbye Governance

A long time ago, when I completed my postgraduate studies, I shelved my thesis (on the relationship between corporate governance and company performance) away in a dusty library, thinking that, like many academic works, it would have no relevance in the world of business. Yet, soon after, as the tide went out on the dot.com bubble, a series of major corporate governance scandals surfaced (Enron being the most prominent).

Hopefully my sense of timing is better with experience, and I have started to think of the corporate governance/performance link again. There are a few recent triggers. The value of Intel, having languished in the doldrums for decades, has recovered toward the levels seen in 2000. Taiwan and South Korea, as we noted last week, have become two of the largest stock markets in the world. A range of valuation measures for the US market and indicators of retail participation in the market, are at 2000 nosebleed levels. It also seems that technology companies are growing on steroids, Samsung has become a USD 1 trillion firm last week and Nvidia is now worth USD 5 trillion.

The really new development is the advent of mega-cap startups like Anthropic and SpaceX, both of which have raised capital at valuations close to USD 1 trillion. Trotting behind them, according to the May edition of the Pitchbook Unicorn Tracker (a unicorn is a private company with a value of USD 1bn or greater), are 1,680 unicorns. There were 44 when the term was coined in 2013. Today’s unicorns are worth close to USD 9 trillion (the top 3 companies are worth USD 2.5 trn). About 40% of the total unicorn value is made up of AI firms, which suggests that they are very young indeed. In the history of economics and business, this is an entirely new phenomenon. For it to have happened, several things have changed since the dot.com bubble.

The first is that public and private markets have grown impressively. Not only are US public markets the largest that they have been relative to GDP, but private capital (private equity, venture capital, etc.) is now becoming a sizeable source of financing internationally. As it does, different forms of investor are emerging within it – private credit is the one that currently gets attention, but many growth capital investors have helped to push unicorn valuations to extremes for fear of missing out on hot deals. For example, the median value of late-stage venture deals in AI firms is now USD 5bn, a USD 4bn premium on non-AI firms.

An interesting new element in capital structure is that new, fast growing firms count governments as shareholders, as well as the ranks of former officials and those in the political ecosystem (France’s Mistral is a case in point). Further, the large technology firms have also become active venture investors, and in many recent earnings reports the item ‘other income’ popped up, showing how the likes of Microsoft are already reaping the benefits of their investments.

Two other significant changes are worth flagging. The advent of social media and, more recently, AI-driven commerce means that successful companies can grow very quickly. Large established firms like Apple, Microsoft and JP Morgan have taken decades to grow but are being ‘caught’ by young companies with relatively small workforces, and the effect is disruptive — largely, though not always, positively so. This is much less the case in Europe, which also lacks the small but critical cohort of individuals who know how to build and scale new firms rapidly.

The emergence of a new business model is well-timed for the evolving world order. Recall that the Joint Stock Company Act of 1844 helped to spur the expansion of the British empire in the 19th century, the arrival of the ‘global business model’ (Theodore Levitt’s 1983 essay ‘The Globalization of Markets’ captured this development) was the modus operandi through which America transmitted globalisation around the world (or as one economist put it multinationals were the ‘B-52’s of globalization’).

However, to my original statement, the arrival of new, fast-growing, private companies (many of which are pre-IPO firms), comes at a time when corporate governance in the US is at a low ebb, in terms of the alignment of executive pay with outcomes, active boards, shareholder vigilance, and oversight by institutions like the SEC and Department of Justice.

Further, new, young companies bring their own governance foibles. Many are led by individuals with strong personalities, a necessary quality in startups, many would argue, but an undesirable one from a governance point of view, especially where technologies like AI demand ethical guardrails in their deployment.

Further, many fast growing firms have complicated capital structures and voting rights. In the past, slower-moving capital market cycles and better regulation might have weeded these out, but have instead become the norm. Incorporation in regulatory ‘paradises’ (more businesses are set up in Texas for instance), the prohibition of shareholder class actions, non-profit structures and heavy share-based compensation have become the norm. This matters because more retail investors can access ‘soon to be private’ companies, in addition to subscribing for IPO’s.

Above all, many of these firms have as yet little to show in terms of profits and in the context of stratospheric valuations, the risk of a bubble is high. Once the AI capital expenditure boom slows, the tide will go out —as Warren Buffett famously observed, and many will lose their capital, and will wonder if they should have paid more attention to corporate governance. If they do, I have an old study to share with them.

Have a great week ahead

Mike

League of Nations, II

One implication of the recent surge in the price of semiconductor firms is that the stock markets of Taiwan and South Korea are now larger than that of the UK (which in 1900 made up 25% of the world stock market capitalization). It is expected that the two East Asian countries will soon have more billionaires than Britain, many of whom have apparently been scattered to the winds by the Labour government.

Though a country’s stock market is a highly imperfect indicator of a country’s economic standing, it does offer good clues as to evolving industrial structure. Bond yield and currencies help to complete the picture, and the runaway UK 10-year Gilt yield (now above 5%) doesn’t tell a happy story either. Then, on GDP, the country whose rise impresses me is Poland, which has not suffered a recession in the past thirty years (COVID excepted). Its GDP has increased sevenfold since 1990, and by 2030 it is expected to surpass the UK in terms of GDP (based on purchasing power parity). Remarkably, Poland is also shaping up to be a geopolitical power as well.

The loosening of the globalized world order, and the advent of many new risks and challenges – from the impact of AI on economies, to climate damage to war – has the potential to knock some nations back, and present opportunities to others.

As such, we can expect that the rise and fall of stock markets and economies tells us a lot about the rise and fall of nation states. In a world where the established world order is shattered (OPEC is the latest long running institution to fall apart), the rise and fall of countries is accelerating, and has become more vivid. In 2020, in the context of how different countries and states were responding to the COVID crisis, we wrote of the idea of the ‘League of Nations’, and have emphasized the theme ever since.

There are many existing league tables of country performance – happiest nation, most innovative country and most competitive, to name a few. Those league tables tend to be dominated by small, advanced economies. Regular readers will know that one of my favourite long run economic themes is the success of the small, advanced economy model, notably so for the way in which these nations can adapt to changes in the broader world. The UAE is a case in point.

In previous notes I have also made the parallel between football and politics, and this is still valid. A few weeks ago I mentioned that in the last ten years the UK has had more ministers for housing (a whopping 14) than Chelsea FC has had managers (12). Chelsea have recently parted with their latest manager Liam Rosenior, and it might well be that a cabinet reshuffle or change of prime minister leads to Matthew Pennycook moving on from his job as UK housing minister.

Like football, the manager of a country is important. For decades, Singapore and the Emirati states have made a virtue of strong, visionary leadership, Greece’s Kyriakos Mitsotakis and more recently Mark Carney in Canada are associated with turning their nations away from troubled waters.

In today’s League of Nations, the winning formula is changing, and shifting towards all things ‘sovereign’ and ‘atom-like’. For example, last week Canada announced the creation of a sovereign wealth fund to help the buildout of critical infrastructure, and it also laid claim to be the host of the new multilateral defence bank (Chris Collins and I wrote about this in a recent note for Barrons). Further, as I mentioned last week’s note (‘Mythical’), successful countries will need to cultivate their own AI stack, and the merger of Cohere and Aleph Alpha is a sign of things to come (their main shareholder is German but the firm will effectively be Canadian from now).

Then, with a step change in the industrial structure of the developed economies of the world underway, from services and ‘bits’ (software, crypto) to ‘atoms’ (energy, infrastructure, defence, AI and quantum), those countries with the universities, capital base and innovation ecosystems, will thrive. America is the standout example, but the Nordic countries and the economic zones that surround the Alps (particularly Switzerland) are good examples.

One consideration regarding the stature of nations is age and pedigree. One of the elements that makes small, advanced countries successful is that their laws, democracies and institutions have been in place for some time, and therefore offer clarity and consistency to businesses for example. At the same time, as economies get older they can become sclerotic, acquire layers of regulation and fail to engage in the creative destruction necessary to keep economic growth at healthy levels. Whilst this is simply an observation, I have a hunch that like aging athletes, older, large economies (US, Japan, UK, France) resort to a ‘boost’ in order to keep their economies going, which may explain why they are excessively indebted.

A final word in praise of older economies and societies, which relates to the cultures, behaviours and ‘family silver’ they accumulate over time. King Charles III’s various speeches in Washington last week demonstrated the value of heritage, and he might just have saved Britain from relegation to the lower leagues.

Have a great week ahead,

Mike

Mythical

One of the characteristics of a chaotic world order, that is on one hand bedazzled by a new technology and on the other, deeply troubled by multiple wars and economic stress, is the disagreement of different markets about the state of the world. For example, the US stock market has recently hit new highs, but at the same time, many parts of the commodity complex portend an energy crisis (in Asia and Europe mostly) and a food crisis (in Asia and Africa).

Often these disagreements occur when sets of investors are laser focused on very specific asset classes, and perhaps do not talk to each other as much as they should. For a long time, this was a perennial problem between the equity and credit departments of investment banks. In periods of stress, credit analysts often had a much more negative view on individual companies than their equity analyst counterparts. I recall that during market crises (dot.com and global financial crisis), some banks brought credit and equity analysts together, so that the balance sheet and profit and loss statement could speak to each other, as it were.

This initiative came to mind last week when I read that in one part of the impressive, new JPMorgan headquarters in Manhattan market strategists were busy upgrading the bank’s 2026 forecast for the S&P 500 index to 7600 while very likely in another part of the JPMorgan building, lawyers, bankers, chief technology officers are scrambling to figure out the implications of Anthropic’s latest model Mythos for the banking system. Many of you will have read that upon the launch of the model, the Treasury Secretary summoned executives from the largest American banks to ponder how Mythos, if used the wrong way, could collapse the financial system.

Mythos is impressive, but also very scary to put it simply. In tests it has easily outperformed other Anthropic models and outperformed to the very upper limit of cybersecurity related tsests, detecting thousands of cyber vulnerabilities in software it tested. The problem is that the unconstrained Mythos can do the exact opposite, exploit bugs in software, and execute deadly attacks on IT systems.

Because of this Anthropic has limited the release of Mythos to twelve companies (‘Project Glasswing’), and the aim of this initiative is to find and repair deficiencies in software. The risk of course is that other platforms or states manage to develop models as powerful as Mythos (some Chinese models are said to be only seven months behind) and apply these to nefarious ends. Indeed, there are reports that three major Chinese AI firms have set up 24,000 accounts on Claude in order to try to hijack its capabilities.

The fact that the Treasury, and other bodies like the Bank of England, are scurrying to determine Mythos’ threat to financial systems is of great concern, and the advance of this model is now a national security issue across most developed nations. The risk of a large, near-autonomous attack on software infrastructure, financial systems and public institutions is now very real, and makes Robert Harris’ 2011 book ‘The Fear Index’ highly prescient (it’s one for the beach this summer).

The advent of Mythos also strikes a chord with a chart in a recent research paper from the Dallas Federal Reserve that illustrates the potential for AI to affect long-term economic growth. Economists normally deploy three types of forecasts – a baseline that tracks historic growth rates, an optimistic version a little above it, and a corresponding pessimistic one. In this paper, however, the optimistic scenario goes vertically upwards and the pessimistic one goes vertically downwards, capturing the potential of AI either to revolutionise the economy or to destroy humanity. In a later chapter I explore the economic and financial effects of AI in more depth, and how it may trigger or exacerbate a debt crisis.

More importantly, it brings into focus the idea of sovereign AI, the idea that governments control and need to control AI models and their data, energy and funding supply chains. Anthropic’s recent popularity is partly based on its independence from the US administration, but it is nonetheless in the American camp. China is catching up fast (DeepSeek is taking on new investors) but, apart from Mistral, Europe is lagging.

There are several things’ governments can and must do, and I am thinking of democracies like the UK, Japan, Canada and the EU. The first is state capitalism (a full description of which is outlined in a recent note from David Skilling), and this can involve sovereign wealth funds taking bigger stakes in AI model builders, the build out and reform of energy systems, and the further concentration of poles of AI excellence. Europe has been too slow here so far, and in my experience confuses the initiative towards state capitalism with a disinterest in incentivising private investment.

A further initiative will be the enhancement of national cyber security institutes in the context of greater collaboration between aligned nations and a rethinking of how critical infrastructure works, is powered and where its multiple vulnerabilities lie. The terrifying risk is that AI is developing so quickly that a small group of malicious individuals, aided by a small army of cyberagents, could disable a small country like Belgium.

When ChatGPT came to light in 2023, the key figures in the industry issued two letters (‘The Pause Letter’ in March 2023, and ‘The Extinction Letter’ in May 2023) that warned of the capabilities of AI and of its potential misuse. The letters were greeted with some scepticism, and in the giddy rush of AI stocks were quickly forgotten. It turns out that the founders may have been on to something.

Have a great week ahead,

Mike

La Conquête

A few years ago I was walking through the Gare de Lyon in Paris when I was brought to a halt by the sight of an elegant woman strolling through the concourse. She was followed by a black Labrador, a porter, and then a smaller gentleman trundling behind. The lady in question was actress Julie Gayet, wife of Francois Hollande, the former President of France (the gentleman). One of Hollande’s most famous acts as President was to sneak out of the Elysee on a scooter for what the British tabloid press might call ‘trysts’ with Julie.

A distinguishing factor of French politics compared to Anglophone countries like the UK, Australia and Ireland (it used also be the case in the US) is that a politician’s private life is private, and not for public consumption.

In keeping with this spirit, in 1899, President Félix Faure allegedly died in the arms of his mistress. More recently, presidents like Giscard and Jacques Chirac married well, but had plenty of ‘adventures’. Indeed, the film about Bernadette Chirac ‘Bernadette’, starring Catherine Deneuve is quite good in this regard. Speaking of which, another film to recommend is ‘La Conquete’, the story of the disintegration of Nicolas Sarkozy’s first marriage whilst he rose to power. Sarkozy has done more than most to banalise French politics, but his relationship with Carla Bruni has also introduced a popular sense of glamour into public life.

My reflections on the love lives of French presidents are motivated by two things. Francois Hollande has this week declared himself ‘ready’ to enter the battle for the 2027 presidency. With much attention on the right, there is space on the left of French politics for a serious candidate, and Hollande sees an opportunity, though he may well be beaten to it by Dominique de Villepin (famous foreign minister and then prime minister under Chirac who led France’s policy on the 2003 war – there is a good film on this ‘Quai d’Orsay, starring Julie Gayet).

The other event was the ‘coming out’ of Jordan Bardella and Maria Carolina de Bourbon des Deux-Siciles as a public couple, thanks to Paris-Match. In the likely event that Marine Le Pen cannot contest the 2027 presidency, Bardella will be the Rassemblement’s candidate, and according to polls the frontrunner in the contest.

If elected, he will have little in common with previous presidents, apart from the fact that he is male. He is different in a few respects.

The first is that he is a manufactured candidate, in the sense that from a very early age he has been groomed and cultivated by the Le Pen clan, provided with speaking coaches and marketing strategists. To that end, many suspect that the ParisMatch report is just another marketing stunt to burnish his profile, it appears too sterile and planned, and there is nothing worse than a French politician who is not genuinely passionate.

The second more serious accusation is that Bardella has done little of consequence in his professional life and is effectively untested as a leader and driver of policy. In this regard, he has more in common with other young politicians across Europe, whose only claim to credibility is their addiction to TikTok posts. To date many of his public appearances are carefully choreographed, but in the long run into an electoral campaign, Bardella will have to think and speak on his feet, which may be his key weakness.

A related, and underestimated criticism is that Bardella has not demonstrated his intellect, and has not passed through France’s Grandes Écoles – as have the likes of Hollande, Edouard Philippe, Macron and Chirac, who apparently topped his class. This rite of passage is important in the context of the way the French state operates – it is a pyramidical elite, made up of generally very capable people, who act and think alike. In order to make this system work, the person at the top needs to think like, and have the intellectual respect of those below.

Under that scenario, a young, inexperienced Bardella, without the crutch of an experienced policy team, would struggle, and it is becoming clear that the French establishment is girding itself for a Bardella presidency by placing centrist type policymakers in key institutional posts.

There is a scenario where, if he was victorious, the establishment might hand him two poisoned chalices, a crisis over immigration and potentially, a financial crisis. France is in my view the most financially vulnerable country in Europe, given the state of its finances and the fact that parliament has done nothing to resolve this. In that regard, a Bardella presidency could trigger financial chaos in France, that might eventually force reform of pensions and social security (Bardella would be a lame duck by then).

Thus, Bardella does not fit the profile of the typical French president, and as the presidential contest gathers steam his limitations may become more obvious. According to polls, the one centrist politician who can come close to beating him is Édouard Philippe, former prime minister and author of the excellent ‘Dans L’Ombre’. If anything he needs to learn from this work of political fiction, and go a little ‘MAGA’.

Have a great week ahead

Mike

Murder She Thought

A recurring theme in this letter is the ‘Rise of the Machines’, the ways in which artificial intelligence (AI) and robots will become a growing part of manufacturing and service industries, not to mention our socio-political lives. Amidst the dominance of geopolitics as the driving force in the international political economy, every week brings a new leap forward in the capability of machines, from the rise of ClawBots and Moltbook, to advances in chip technology.

The latest, startling advance is Anthropic’s Mythos tool, whose ability to repair and reinforce software code against vulnerabilities has left software specialists flabbergasted, but whose potential is so great (and the model has strayed off the moral path in training) that the US Treasury has convened banks to fathom how a model like Mythos might, in extremis, attack banking software.

For the moment, Mythos is in relatively safe hands, but the potential for misuse of new technologies was underlined in an excellent report by the CEPA (Centre for European Policy Analysis) entitled ’War Without End’ that outlined the multi-varied aspects of Russia’s violent interference across Europe. Many of these attacks are cunning and vicious, and in many cases use social media and increasingly, AI.

Indeed, the link between AI and crime was highlighted in a novel way by ~~but~~ the release of a BBC project that used the work (published and private) of Agatha Christie to build a AI generated writing masterclass in the style and voice of Christie (whilst I am on the topic I heartily recommend the ‘SheDunnit’ podcast).

With crime on my mind, and my inner ‘Moriarty’ awakened, I traipsed across Surrey for an offsite organized by the excellent Dawes Centre for Future Crime at University College London. Appropriately in an age where criminal masterminds use technology one of the Dawes Centre team, Vaseem Khan, has authored ‘Quantum of Menace’, a spin-off book from Ian Fleming’s James Bond oeuvre where technology quartermaster ‘Q’ is the hero.

One of the key strands of the Centre’s research is to identify how emerging technologies and megatrends, from climate change to robotics, may provoke new forms of crime and correspondingly, what countermeasures might be put in place. This time, we delved into the potential for neurotechnology to act as a conduit for crime, specifically in the ways BCIs (brain control interfaces) technology, where brain waves can be used to control external devices, and potentially, vice versa, could be used in criminal acts.

~~BCI’s~~ BCIs are still experimental, though increasingly applied in healthcare (for sleep issues and in traumas), and in some research projects, the combined use of AI and BCI devices has succeeded in using brainwaves to ‘transcribe’ written messages. Elon Musk’s Neuralink project is just one very ambitious indicator of where this technological field is headed. The implication is that we might ‘think’ instructions to a machine, or each other, but also that machines can access and potentially manipulate our brainwaves.

While BCI technology is still developmental, we need only look at how the many devices we use – phones, air pods, wrist monitors and headphones – and consider how in years to come, external devices could be used to link to our brainwaves.

From an ethical and privacy point of view, brainwaves are even more precious than our health data. Imagine if someone knew our innermost thoughts and fantasies or could control and shape these. In that context, the regulatory debate around the use of BCIs and neurotechnology is already underway but, that will not diminish the temptation for some people to use these devices in nefarious ways – to manipulate humans to do bad things, to alter witnesses memories of a crime, for social control, as a military technology, as a portal for fraud, cognitive enhancement, the suppression or exaggeration of emotions, as a tool to commit a murder and as an addictive stimulus, to name a few dark paths.

If we consider how consumer technology, social media, has come to dominate our lives and impact economies, sociability (and possibly fertility rates), public life and even diplomacy, it is worth taking the emergence of neuro-technologies very seriously, for their positive (healthcare) effects as well as negative. It is a truly new form of interaction. To a large extent, humans interact with AI, robots and machines as discrete entities, where to a large extent, humans have ultimate control (Mythos might disagree).

The new development is that neuro-technologies offer a pathway to our minds for machines.

Have a great week ahead,

Mike

Battle for Budapest

In the days before what is now known as the Iran War, and amidst the horrific suppression of its citizens by the Iranian state, a Dutch diplomat, having arrived at Tehran airport, was stopped and asked to disclose the contents of his luggage. He refused, citing diplomatic immunity, and left Iran, leaving his luggage behind. A subsequent inspection of the luggage in the presence of another Dutch diplomat, allegedly revealed three Starlink modems and a number of satellite phones.

It is not at all clear whether the devices were for ‘personal use’ or for the benefit of Iranian dissidents, but the incident reminded me of the efforts of George Soros to export hundreds of photocopiers into communist Eastern Europe in the late 1980’s and early 1990’s, so that dissident texts could be copied and circulated.

This was the very tip of the iceberg of Soros’ funding of the pro-democracy movement in Eastern Europe, and at one point it was said that he gave more in aid than all the Western governments together. In particular Soros, who studied under the philosopher Karl Popper (author of ‘The Open Society and its Enemies’), was committed to creating an ‘open society’ in Hungary, the country of his birth, and established the Central European University (CEU) in Budapest in 1991.

Around the mid 1990’s I recall Bill Newton-Smith, a philosopher and Fellow at Balliol College and associate of Soros leaving England to help run the CEU. As he left Oxford, a young student activist called Viktor Orbán had come the other way (in 1990 I think), to begin a research fellowship on the topic of civil society in Europe, sponsored by the Soros Foundation.

Orbán didn’t last long at Oxford, returned home to become a member of parliament and the leader of the main liberal party Fidesz. Orbán has been a central figure in Hungarian politics since then, but in the late 2000’s, underwent a political and moral transformation. At a conference in Prague some years ago, I spoke with a few entrepreneurs who had been early associates of Orbán’s, and who had suspicions as to the motivation behind his change of tack.

This change pivoted on his relationship with Soros, who Orbán has transformed into a figure of hate for the far-right internationally. Equally, Orbán flipped his view on Russia. He had been highly critical of Russia’s 2008 invasion of Georgia, but soon after, following a visit to St Petersburg to meet Vladimir Putin, Orbán started to change his stance on Russia.

For much of the past sixteen years, Orbán has commanded a large amount of popular support, though his actions and attitude in going against the grain of the EU have cost Hungary – in the last fifteen years, Hungarian GDP growth has lagged that of Poland by 0.8% per annum, tens of billions in EU aid has been withheld, and corruption has become institutionalised under Orbán. Budapest has become a staging post for the Russian security services and teachers, women, judges, amongst others have suffered in ways they would not expect in a normal European country.

In this context, the general election in Hungary (April 12^th) could become a critical turning point, and is highly important for the EU. At a broad level, polls point to a victory for Peter Magyar of the Tisza Party, with the majority of the opposition parties in Hungarian politics having swung behind him. However, in the context of extensive gerrymandering, a propensity for ethnic voting groups (Hungarians living abroad and Roma in Hungary) to tilt toward Orbán, and the capture of state institutions and budgets, the outcome is highly uncertain.

Not only is Orbán an ally of Moscow (Orban’s team has been accused of leaking confidential EU discussions to Russian officials, and Orbán holds frequent meetings with the Russian foreign minister), but he has become the darling of the international MAGA movement. Orbán’s campaign been endorsed by Benjamin Netanyahu and Donald Trump, Marco Rubio visited Budapest in mid-February and vice president JD Vance will travel there on April 7^th, just before the election.

There are already allegations of impropriety and vote rigging against Orbán, in what will be a hotly contested election, and deep suspicion of social media influence by Russia, not to mention the support of the White House.

EU leaders fear a close election or that Orbán, having lost the vote, will use his remaining days to change laws and appointments to key institutions. The example of Poland is being mentioned, where on taking power Donald Tusk faced years of difficulty in removing hard-right opponents from media and other institutions.

As such, the EU will have to invest enormous time, energy and capital in remaking Hungary. The short-term gain for the EU will be the absence of the Hungarian veto on European foreign policy stances, notably so in the case of Ukraine.

Should Orbán win, or continue to contest a close vote, a more existential issue faces the EU that will centre around a gathering debate on how to further sanction and potentially expel an EU member that is steadfastly recalcitrant.

Lurking behind the election, is a deeper foreign policy issue for Europe, in the context of several major wars and the disintegration of NATO, the need to combat more fiercely interference in the democratic processes of EU member states.

Have a great week ahead,

Mike

Do No Harm

An unusual but non surprising cameo in the response of the UK to the burgeoning energy crisis that is resulting from the Iran War, was the inclusion of Bank of England Governor Andrew Bailey in last Tuesday’s emergency COBRA (Cabinet Office Briefing Room) meeting. The prospect that inflation and a cost-of-living crisis could further derail the fledgling economic recovery in the UK, has struck fear into politicians (the OECD reckons that the UK will be the worst hit country), though monetary policy purists won’t like the appearance that the independence of the ‘Old Lady’ (the Bank not Bailey!) is compromised.

What is more interesting is that this is yet another datapoint in a trend where finance, war and politics are becoming interwoven. In peacetime, central banks were the only game in town, the monetary battleships of the 2010’s, keeping the peace in bond markets and tilting currency moves in their country’s favour.

That was not always the case, books like Liaquat Ahmed’s excellent ‘Lords of Finance’, show the key role that central banks played in maintaining the stability of war time economies.

Now, the world order that is unravelling before our eyes is more like that of the 1910’s than the 2010’s, and a particular concern for central bankers is the extent to which economies have become frictioned.

By this, I mean the extra costs and inefficiencies that are bubbling up because of the end of globalization (a period associated with intense commoditization of prices and low inflation), a pandemic of supply chain disruption, and great power competition for ‘rare’ things (from rare earths to rare places like Greenland to rare technologies like quantum computing).

In general, these frictions will tend to bump up the rate of inflation. A famous example is the way in which the side effects of the war on Ukraine combined with short-sighted energy policy in Europe to produce a prolonged rise in inflation from 2021 to 2022.

From the point of view of central bankers, inured to a decade of stubbornly low inflation, this was a surprise, and prominent members of the central banking community were badly caught out by their view that this burst of inflation was ‘transitory’. Their difficulty is that the economic context of the 2010’s was characterised by demand weakness whereas the main policy problem of the 2020’s is supply constraint.

We now live in an economy of ‘atoms’ (energy, commodities, deeptech), where historically huge amounts of investment capital expenditure is/are being deployed amidst supply constraints to build a new (AI) economic infrastructure. About half of this will be financed by different forms of credit. Within this model, the debate on the productivity benefits of AI, which has produced a wide range of estimates of the potential impact of AI on the economy, illustrates what a demanding environment it is for central bankers to read.

The potential energy shock from the Iran war complicates matters even more and raises the prospect of a policy error. Echoing the schoolboy mistake by Jean-Claude Trichet to raise interest rates in 2006 when a spike in the dollar helped trigger a spike in oil prices, current ECB President Christine Lagarde has stated that the ECB was ‘ready to raise rates’. This may be a pre-emptive move to push markets to do the ECB’s job, and to warn companies and unions off raising prices. If not, Lagarde and other central bankers should do no harm. A rate rise from the ECB will do nothing to re-open the Strait of Hormuz (good note on the disruptive effects from the Kiel Institute), nor to rebuild refining capacity in the Gulf states.

The dilemma for central bankers is in distinguishing between an energy centric rise in prices and an eventual generalised rise in inflation expectations.

In my view the economic consequences of the Iran War can be short lived, but as long as it endures, amounts to a tax on consumers, a hit to risk appetite and a blow to confidence in US financial assets. Furthermore, the many costs of the war (see our note of two weeks ago, ‘It will be over by Christmas’) include a rise in the debt burden that countries like the US and UK will suffer, and an elevated level of uncertainty as the world’s former policeman turns bully.

It could be worse for central bankers, they could be politicians, who now must contend with another cost-of-living crisis, with little money left in the fiscal jar.

Have a great week ahead, Mike