Market Pulse
Thursday, November 9, 2023
Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our stories this week:
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Cyril (CIO), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
If you’ve ever tried to value an insurance company, you’ll know that this is a complicated business.
Auto insurers make their money by charging drivers premiums for coverage, determined by factors like driving history and vehicle type. They invest these premiums to generate extra income. The challenge is to handle claims smartly—ensuring that what they pay out for accidents and operational costs doesn't surpass what they've collected in premiums. It's a delicate balance of risk, maths, and ensuring the numbers add up to a profitable bottom line.
Autonomous and electric vehicles add an intriguing twist to the equation. According to research from Thatcham Research, EV claims are typically 25 per cent higher than combustion equivalents and take 14 per cent longer for repairs [1]. As a result, insurers have rapidly boosted prices for electric vehicle cover in the past year, much more than for fossil fuel cars, making the former less attractive to consumers.
Autonomous vehicles, on the other hand, may provide a silver lining. The insurance giant Swiss RE did a study comparing human drivers with Waymo autonomous vehicles in the same zip codes. It found that in over 3.8 million miles driven without a human being behind the steering wheel in rider-only (RO) mode, the Waymo Driver incurred zero bodily injury claims compared to the human driver baseline of 1.11 claims per million miles (cpmm). The Waymo Driver also significantly reduced property damage claims to 0.78 cpmm compared to the human driver baseline of 3.26 cpmm [2].
With an estimated cost of £170,000 per autonomous car [3] and the potential for high expenses in parts replacement, the initial costs may still lead to inflated premiums in the short term, but the reduced number of accident claims should compensate for some of these.
In the long term, as cars become automated, the risk landscape may shift from individual drivers to manufacturers, potentially leading to a transition from personal motor insurance to product liability coverage.
With new cars constituting around 10% of road traffic, transitioning to a fully autonomous fleet may take time. However, insurers tapping into the wealth of data and creating policies that adapt to these changing risks will undoubtedly emerge as the frontrunners in this journey.
2024 is quickly shaping up to be a pivotal year for investors. Firstly, we have inflation and interest rates, the two i’s that have been top of mind among central bankers and investors alike. Secondly, we have the US presidential election fast approaching, and so far, it looks like we might be in for a hard-fought political rematch (and a bumpy ride).
Investor attention has been focused on inflation, and many have been trying to answer an important question: ‘How high will interest rates go and what comes after’. It seems like we might be edging closer to an answer.
Central banks around the world have increasingly opted to hold rates steady at recent meetings. The US Fed has now kept interest rates on hold for two consecutive meetings[5]. Fueling expectations of a pause and potentially even interest rate cuts in 2024 is weakening economic fundamentals. US labour market data, out last Friday, suggests the labour market is cooling down, with unemployment unexpectedly increasing to 3.9%[6]. With the evidence of a slowdown piling up, investors are increasingly expecting rate cuts from major central banks in 2024[7].
The US presidential election is the second, and potentially much more important, issue in 2024. The last election in 2020 was a tightly contested match between current President Biden and then President Trump. But since then, President Biden’s popularity has been falling[8]. A recent poll by the New York Times suggested that Donald Trump is the favourite to win in 5 of the 6 key swing states[9]. If Donald Trump wins the presidential election, he will be the first former president to reclaim the White House since 1892[10].
2024 could be a choppy year for investors as they try to navigate a seismic shift in global monetary policy and the currents of political change. Next year could very well set the tone for the financial markets and economic policies for years to come.
Several months back, we penned a short piece on X.ai, the latest venture by Elon Musk[11]. With an aim that seems audacious even for Musk's standards, X.ai aspires to unravel the intricacies of the universe itself[12]. The real goal, we believe, was simply to build a competitor to ChatGPT as quickly as possible.
Last week, we witnessed the debut of their first creation, a large language model dubbed 'Grok'. The team at X.ai, with an arsenal of over 10,000 GPUs, trained Grok in a mere two months. Despite the relatively short training period, Musk says that Grok outpaces models such as Meta's Llama 2 and is comparable to ChatGPT 3.5[13].
The relative ease and speed with which a high-calibre large language model like Grok can be trained indicates that the large language model (LLM) industry might have surprisingly low entry barriers for companies with deep pockets.
To carve out a unique niche for its chatbot, X.ai has implemented two distinguishing features. Firstly, Grok has been imbued with a distinct personality, drawing on the 'Hitchhiker's Guide to the Galaxy’. The result is a witty model with a propensity to add humour and sarcasm to its responses. Secondly, and this is the feature that has us raising our eyebrows, they've provided Grok with real-time access to X (formerly known as Twitter)[14].
Musk says this real-time data integration is a pivotal edge over other models that typically rely on outdated information. However, we view this claim with a healthy dose of scepticism. Elon Musk significantly reduced headcount at X and the content moderation department was no exception. This could mean Grok might spew inappropriate content to anyone willing to pay the $16 subscription for X premium+.
Trying to differentiate AI models by training them on unique and proprietary data could help raise what appears to be low barriers to entry in the industry. We’re just not convinced unmoderated social media is the right dataset for the job. We’ll be paying close attention to Grok and we’re sure regulators won’t be far behind.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
[2] https://arxiv.org/ftp/arxiv/papers/2309/2309.01206.pdf
[8] https://www.reuters.com/graphics/USA-BIDEN/POLL/nmopagnqapa/
[9] https://www.ft.com/content/40d7e543-dc96-47f8-b673-4ce4bbc60f26
[12] https://www.theverge.com/2023/7/12/23792553/elon-musk-xai-artificial-intelligence-company
[14] https://www.ft.com/content/093cda92-91d8-49ff-8475-4f66ccff137b
