Market Pulse | TikTokophobia, Bumper profits at big US banks, and an old AI rivalry

Sidekick Money · Market Pulse: TikTokophobia, Bumper profits at big US banks, and an old AI rivalry…

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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.

In this week’s edition we have:‍‍

Bumper profits at big US banks
Is an old rivalry about to transform the AI landscape?
TikTokophobia is spreading fast.

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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. ‍

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1) Bumper profits at big US banks

In the US, the first quarter company earnings season kicked off last week. Some of the first to report were large banks like JPMorgan, Citigroup and Wells Fargo. Analysts have been anxiously waiting for signs about how the US regional banking crisis has affected the more systemically important larger banks.

They had nothing to worry about. Large US banks reported bumper profits in the first quarter, handily beating analyst expectations. The larger banks benefited materially from higher interest rates as the banks charged more for loans without raising the interest they pay depositors by as much. JPMorgan reported profits more than 50 percent higher than last year and also revised up their expectations for 2023 by almost 10 percent [1].

Before the collapse of SVB, big banks in the US had been steadily losing deposits. Customers were increasingly transferring money away from low interest rate deposits at large banks to higher yielding products such as money market funds. But, since the beginning of the crisis in smaller regional banks, the large banks have seen the trend in deposits turn around fast. Depositors are withdrawing money from riskier regional banks and putting it in what they consider to be safer, larger banks. JPMorgan deposits grew by $37bn in the first quarter and Citigroup had $30bn of new deposits in March alone.[2]

JPMorgan CEO, Jamie Dimon, said that there is an elevated risk of recession in the short term and as a result the bank has increased their rainy day reserves as they expect losses on loans to increase. Citibank did the same and said they still expect a US recession in the second half of 2023.

It's US regional banks' turn to start reporting earnings this week and it will be interesting to see how they weathered the storm of declining confidence and falling deposits.

2) A new kid on the block. X.AI

‘One of the biggest risks to the future of civilization is AI’. Elon Musk told attendees at a recent world government summit [3]. More recently he signed a letter, along with hundreds of the biggest names in tech, that states the recent advances in AI pose ‘profound risks to humanity’. The letter called for a six month moratorium to give the industry time to set much needed safety standards [4]. Now, in what appears to be a dramatic change of direction, Elon Musk announced he’s starting his own AI company.

But first, a bit of history. Elon Musk was one of the co-founders of OpenAI, alongside Sam Altman. Around 2018 Musk left the company citing a conflict of interest with Tesla [5]. But, it turns out that might not be the only reason he left. As reported in the Wall Street Journal, there are accounts of a power struggle between Sam Altman and Elon Musk, who tried to take over OpenAI and failed [6]. By this point, Elon Musk had already donated $100mn to OpenAI and had pledged to donate another $1bn over the coming years. But, according to sources, Elon Musk did not follow through with the pledged donations after he left the board [7].

As discussed in a previous Market Pulse, training large language models is expensive. Back in early 2019, in need of additional sources of funding, OpenAI announced it was starting a for-profit arm of the business. Shortly after, in July 2019, Microsoft announced they will invest $1bn into OpenAI.

Last week, Elon Musk announced he will start his own AI company, called X.AI. Elon Musk has already recruited a research team from other AI labs including Alphabet owned Deepmind. He has reportedly already bought thousands of GPUs from Nvidia which are used to train large language models [8].

We can only speculate about Musk’s intentions and the direction of the company, but given the other companies Musk is involved in, there could be some interesting possibilities. Could X.AI be trained using Twitter data? Could Tesla become a customer by incorporating an in-car virtual assistant driven by X.AI?

Elon Musk has been very outspoken about AI safety and the potentially existential risks of commercialisling advanced AI models without the right guardrails in place. It will be interesting to see how X.AI approaches what is quickly becoming a hotly debated issue.

3) TikTokophobia is spreading

The US has been in a de facto technological cold war with China for the last 5 years. And TikTok is now getting drawn into the fight.

TikTok is owned by a Chinese company, Bytedance, and western governments are worried the Chinese government is getting backdoor access to sensitive data on their citizens. Countries including the US, UK, Canada and Australia have already banned the app from government-issued devices. Cybersecurity concerns in the UK parliament has caused them to ban TikTok from all parliamentary devices and networks [9].

The UK regulator recently fined TikTok more than £10mn for breaching data protection laws. TikTok owner Bytedance failed to get consent from parents of children on its platform. The Information Commission in the UK estimates that TikTok allowed up to 1.4mn children under 13 onto its platform [10].

TikTok has more than 150mn monthly users in the US and momentum against the app is building. Last week, lawmakers in Montana approved legislation to ban TikTok in the state. The law makes it illegal for Bytedance to operate and for app stores to offer the app in the state. Violating the law carries a $10,000 fine. There are likely to be legal challenges to the law and it could eventually end up in the US Supreme Court [11].

Banning TikTok might be easier said than done but if it is banned in the US and elsewhere there will be numerous winners and losers. Winners could include rivals that offer similar products and potential losers include TikTok creators and smaller businesses that use TokTok for cheap advertising. US China relations could also be strained even more by a TikTok ban.