Digest: Elon Musk Joins the AI Arms Race

Plus, This $8.6 Trillion Asset Manager Says Stocks Will Become Crypto Tokens.

Welcome to the Sunday digest… my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week… Elon Musk is joining the AI arms race. 

Until recently, Musk was calling for a pause in “out of control” artificial intelligence, even warning us that AI could cause “civilization destruction.”     

But now it seems the ever-capricious Tesla founder has changed his mind (shocker!).  

This week, Musk announced the launch of his own AI company called xAI. It’s goal? To “understand the true nature of the universe.”   

Musk often sets these sorts of grand, sweeping objectives when launching a new company. The stated goal of SpaceX, for instance, is “to enable humans to live on other planets,” though in actuality, it’s a profitable multi-use space launch system for astronauts and satellites.  

Will Musk’s new AI venture achieve a similar level of practical success as SpaceX? 

I wouldn’t bet on it. As regular readers will be aware, I’m not Elon’s biggest fan. He’s 90% hype, 10% business acumen, and his insatiable desire for attention seems increasingly self-destructive… both for himself and his businesses.  

So, I don’t put much faith into his new AI venture. The fact is he’s likely too far behind the curve to have a major impact in this space. 

This technology may seem to have appeared out of nowhere with the rise of ChatGPT, but the reality is that organizations backed by Google, Microsoft, and other major corporations have been building these systems for years. And they continue to make significant progress… 

In fact, just a few days ago, Google expanded the availability of its Bard AI chatbot to more countries and territories, including Europe and Brazil.  

Bard, which is a direct response to ChatGPT, can now even read its responses aloud in 40 languages. Plus, the company is hard at work on a more advanced AI language model named Gemini.  

So, while Elon is just getting started with xAI, the real AI arms race has been underway for some time…  

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Next up, BlackRock’s CEO is a big believer in tokenization… 

Tokenization is the process of taking an asset—like a stock or a bond or a piece of real estate—and converting it into a crypto token that trades on a blockchain (the secure digital ledger technology behind bitcoin and all other cryptos).  
 
Selling assets as crypto tokens offers numerous advantages over traditional trading systems. 

Using a crypto blockchain to trade assets is cheaper, since it would remove middlemen. Blockchains are permanent and unhackable, so they are more secure than current trading platforms. And when you tokenize an asset, you can sell pieces of it, just as you can sell fractions of a bitcoin. This opens up new options in stock and real estate trading.  

I’ve been saying for more than a year that these advantages would compel Wall Street to tokenize stocks and bonds…  

Now, guess who agrees with me? Larry Fink, CEO of BlackRock, which manages $8.6 trillion in assets. As Fink notes, “If you have a pure blockchain, and you have knowledge of who the buyers and sellers are, we don’t need custodians anymore.”  

Custodians are the middlemen like brokers… the ones who skim off every trade you make. They’ll become obsolete.  

Fink’s comment came from an interview centered around BlackRock’s recent Bitcoin ETF application. But he didn’t stop at the idea that middleman will be under assault by crypto, adding “We’re a believer in digitization of products… We do believe that if we can create more tokenization of assets and securities, that’s what bitcoin is, it could revolutionize finance.” 

I can’t recall more bullish crypto comments from someone at the head of a traditional finance giant.  

Larry Fink and BlackRock understand the future of finance lies on the blockchain. Soon, all sorts of real-world assets, from real estate, to collectibles, to wine, whiskey, cars, and really anything of value, will be tokenized. 

The tokenization of stocks and bonds is just the start.  

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Finally this week, a loan-loss disaster looms for top U.S. banks.  

Analysts are predicting that six of America’s financial institutions—including Citigroup, Wells Fargo, and Goldman Sachs—will have to write off $5 billion due to defaulted loans just in the second quarter of this year.  

Interest rate hikes have been slamming the banking industry of late… leading to higher defaults on things like credit cards, and less demand for new residential and commercial real estate loans. Several major U.S. banks, including Silicon Valley Bank and First Republic, collapsed earlier this year due to an inability to manage higher rates. 

Amid this environment, major lenders are now building up billions in reserves to prepare for further loan losses. This, in turn, is leading to wider worries about the economy.  

Last month, JPMorgan CEO Jamie Dimon warned of an economic “hurricane,” while Morgan Stanley CEO James Gorman has said there’s a 50% chance of a recession. 

Looking at mainstream media headlines, you’d be forgiven for thinking that it’s all smooth sailing with our economy. But the reality is that some of the richest and most influential businesses on the planet face powerful headwinds…  

As I often like to point out, an economic/banking crisis takes time to play out… often 18 months to two years. The fact that the biggest banks in the U.S. are building their reserves and warning of “hurricanes” tells us that this crisis is far from over. 

That means we too should prepare by owning healthy exposure to gold and other safe-haven assets.  

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.