Competition to build the dominant model intensifies further

The competition to become the leading generative AI company is ramping up. There are currently five cutting-edge LLMs according to LMSYS:

•OpenAI’s GPT-4o

•Anthropic’s Claude 3.5

•Google’s Gemini 1.5

•Meta’s Llama 3.1

•xAI’s Grok-2

All five models have required billions of dollars in investment to get to this level of sophistication. Grok recently raised $6 billion based on a company valuation of $18 billion and is looking to raise an additional $5 billion, according to the Financial Times. Rival OpenAI is in talks to raise billions of dollars after a $13 billion commitment from Microsoft while Anthropic has attracted about $8 billion, including significant funding from Amazon and Google, according to news reports.

These large investments are not the end of the road for investments in LLMs but rather a shot across the bow. Notably, OpenAI’s Sam Altman has said there is a $7 trillion investment gap to overcome for generative AI to reach its potential. Although $7 trillion seems excessive to us, it is highly likely that LLMs will continue to attract billions in investment over the coming years.

It is no wonder then that Alphabet, Amazon, Meta and Microsoft have committed to invest close to $200 billion this year (up from $130 billion last year). This investment is mostly meant for the construction of data centres and the purchase of ultrafast chips, which are necessary to train and deploy LLMs.

As investments increase, so does overbuild risk

While these investments show that generative AI has serious potential, more investment also yields more financial exposure. Particularly because, as Mark Zuckerberg stated recently, it may be years before these investments generate returns. Should these investments result in overcapacity (i.e. an oversupply of computing power), then this bears significant risks for these companies.

On the flipside, big investments in computing power are good news for AI startups. Whereas big tech produces compute (the processing power and storage capacity needed to run applications, process data, and perform complex calculations) startups merely consume compute, as they do not have the resources to develop their own computing infrastructure. More capacity generally means a price decrease, and therefore an advantage for AI startups in countries where computing capacity is substantial.

Availability of computing power increases greatly

Another consequence of increased investment in AI is the increase in IT power. In 2023, the Americas had a live supply of 17.4 GigaWatt (GW), which is considerably more than that of APAC and EMEA. As investments in the US are higher than elsewhere in the world, this gap is likely to widen in the coming years.

However, this spectacular increase in computing power raises questions about the sustainability of AI in the long term. As mentioned, investments will remain high in the coming years and additional computing power will be constructed. Smaller models might offer a solution here, as will the greening of energy mixes. But it is necessary for the technology sector to show a credible pathway towards greening AI, otherwise additional regulation is likely.

Global live supply has increased dramatically

IT power that is operational in GW per geographic region

The US is likely to dominate the AI market, while Europe is falling behind

The US currently has the five best LLMs. In addition, the country’s investment volumes are larger than anywhere else, and the same goes for the availability of computing power. This means that the US will likely dominate the AI market for the foreseeable future.

As AI will result in productivity gains, the US is better positioned than Europe to reap those benefits. This likely means that the divergence in labour productivity between the US and Europe is likely to increase over the coming years as AI productivity gains will be realised. This gap has already been widening. US labour productivity grew faster than Europe’s, particularly between 2000 and 2010, and again from 2020 onwards. AI might thus exacerbate this development.

For European competitiveness and strategic autonomy, this is undesirable. To this end, Daniel Ek and Mark Zuckerberg have argued that unharmonised legislation is the reason why Europe has not been able to produce a lot of leading tech companies. If Europe can harmonise legislation then it is better placed to quickly gain from AI, as it has more open-source developers than the US, for example.

However, we believe that overlapping regulation is not the only important difference between the US and Europe.

First, the American labour market is less rigid. This means it is easier for American companies to reduce their workforce and less costly to invest in labour-saving technology.

Second, there is more private capital invested in nascent technologies in the US, which incentivises the development of those new technologies. In contrast, it is more difficult to invest across borders in the EU.

Third, the US government spends a lot more on AI through the CHIPS act ($280 billion over 10 years), whereas national European subsidy schemes are considerably smaller. These American policies also have drawbacks and risks, of course, but they do explain why the US is better positioned to profit from AI than Europe.

Difference in labour productivity between US and Europe has widened since 2000

Real GDP per hour worked, 2000 = 100

Source: OECD; ING calculations

Gaps between companies and countries likely to widen

In sum, the AI arms race affects companies and countries alike. In the coming months, it is likely that the gap in AI advancements is likely to widen between both countries and companies. For companies, it is not yet clear who will become the dominant LLM. For countries, however, the US has a commanding lead. Yet only time will tell who will win out.

States and local governments are poised to sell debt at the fastest clip in four years as borrowers aim to get ahead potential volatility from the US presidential election in November.

Municipal bond issuers like cities and school districts have already teed up $21 billion of debt sales over the next 30 days, the highest visible supply since October 2020, according to data compiled by Bloomberg. That index represents a fraction of what actually comes to market, given that deals are often announced with less than one-month’s notice.

“This is all in response to the election this year,” said Kyle Javes, head of municipal fixed income at Piper Sandler Cos. He said that borrowers remember the market disruption that followed prior presidential elections and are eager to avoid any major swings. “We have been advising all of our clients to make sure that they get their transactions in ahead of the election if they have needs to borrow,” he said.

The local governments join a surge in global debt sales with money managers eager to buy bonds before the Federal Reserve starts cutting rates, a process that can begin as early as this month. At least 81 high-grade bonds launched or completed within 48 hours this week while more speculative-grade firms launched over $17 billion of deals via the high-yield bond and leveraged loan markets on Tuesday. Issuers see a window where yields are relatively low now and before any election-related market volatility upends current levels.

“We’ve seen a lot of interest rate increases over the last couple of years and it’s been difficult,” said John J. McCarthy, Jr., treasurer of Wakefield, Massachusetts, a town north of Boston that is selling about $104 million of debt next week. “It appears the interest-rate environment is improving and we’re hoping to take advantage of that by going to the market.”

Munis sales broadly have surged to $327 billion so far this year, a 38% increase from the same period last year, data compiled by Bloomberg shows. In August, governments brought roughly $50 billion to market, the biggest month of issuance since October 2020, before voters took to the polls in the last presidential election.

“It’s convenient for us that we’re going to market now as opposed to closer to the election,” said Joe Mathews, chief financial officer of Hennepin County, Minnesota, which is selling $200 million of top-rated bonds on Sept. 10. He said that while timing of the sale is consistent with its budget cycle, getting ahead of the election provides more “predictability.”

For investors, the supply surge is creating a more attractive entry point. Tax-exempt, 10-year benchmark muni yields are trading at about 71% of comparable Treasuries, the most since November. That figure, known as the muni-Treasury ratio, is a key measure of relative value — meaning as it increases, munis look more attractive by comparison.

Sweta Singh, a portfolio manager at City Different Holdings LP, said that investors are “clamoring for new deals” before the pace of sales slows down in November. “You want to lock in that higher yield,” she said.

Source: Theedgemarkets

ECB to cut rates for second time

Will US CPI back case for 50-bps cut?

Pound eyes UK releases as BoE decision looms

Spotlight on Asia at start of week

Source: XM

Oxfam is expecting the world’s first trillionaire within a decade and poverty to end in 229 years! The wealth of the world’s five richest men has more than doubled from 2020 as 4.8 billion people became poorer.

The 2024 Oxfam Report titled Inequality Inc. warned, “We’re witnessing the beginnings of a decade of division” as billions cope with the “pandemic, inflation and war, while billionaires’ fortunes boom”.

“This inequality is no accident. The billionaire class is ensuring corporations deliver more wealth to them at the expense of everyone else”, notes Oxfam International executive director Amitabh Behar.

Driving inequality

Summarising the report, Peoples Dispatch’s Tanupriya Singh noted that the gaps between rich and poor and between wealthy nations and developing countries had grown again for the first time in the 21st century as the super-rich became much richer.

The Global North has 69% of all wealth worldwide and 74% of billionaire riches. Oxfam notes that contemporary wealth concentration began with colonialism and empire. Since then, “neo-colonial relationships with the Global South have persisted, perpetuating economic imbalances and rigging the economic rules in favour of rich nations”.

The report notes, “Economies across the Global South are locked into exporting primary commodities, from copper to coffee, for use by monopolistic industries in the Global North, perpetuating a colonial-style ‘extractivist’ model.”

Inequalities within rich nations have grown, with marginalised communities worse off, giving rise to rival ethno-populism and vicious identity politics.

Seventy per cent of the world’s largest corporations have a billionaire as a principal shareholder or chief executive. These firms are worth over US$10 trillion (RM43.46 trillion), which exceeds the total output of Latin America and Africa.

The incomes of the rich have grown much faster than for most others. Hence, the top 1% of shareholders own 43% of financial assets worldwide. They own half of the financial assets in Asia, 48% in the Middle East and 47% in Europe.

Between mid-2022 and mid-2023, 148 of the world’s largest corporations made US$1.8 trillion in profits. Meanwhile, 82% of 96 large corporations’ profits went to shareholders via stock buybacks and dividends.

Only 0.4% of the world’s largest companies have agreed to pay minimum wage to those contributing to their profits. Unsurprisingly, the poorer half of the world earned only 8.5% of world income in 2022.

This inequality is no accident. The billionaire class is ensuring corporations deliver more wealth to them at the expense of everyone else.”

The wages of almost 800 million workers have not kept up with inflation. In 2022 and 2023, they lost US$1.5 trillion, equivalent to an average of 25 days of lost wages per employee.

In addition to income inequality, the 2024 Oxfam Report notes that workers face mounting challenges due to stressful workplace conditions.

The gap between the incomes of the ultra-rich and workers is so huge that a female health worker or social worker would need 1,200 years to earn what a Fortune 100 company CEO makes annually!

Besides lower wages for women, unpaid care work subsidises the world economy by at least US$10.8 trillion yearly, thrice what Oxfam terms as the “tech industry”.

Monopoly power

Oxfam notes that monopoly power has worsened world inequality. Thus, a few corporations influence and even control national economies, governments, laws and policies in their own interests.

An International Monetary Fund (IMF) study found monopoly power responsible for 76% of the fall in the labour share of US manufacturing income.

Behar notes, “Monopolies harm innovation and crush workers and smaller businesses. The world hasn’t forgotten how pharma monopolies deprived millions of people of Covid-19 vaccines, creating a racist vaccine apartheid while minting a new club of billionaires.”

Between 1995 and 2015, 60 pharmaceutical companies merged into 10 Big Pharma giants. Although innovation is typically subsidised with public funds, pharmaceutical monopolies price-gouge with impunity.

Oxfam notes that the Ambani fortune in India comes from monopolies in many sectors enabled by the Modi regime. Mukesh Ambani’s son’s recent extravagant wedding celebrations flaunted extreme wealth concentration worldwide.

The 2021 Oxfam Report estimated that “an unskilled worker would need 10,000 years to earn what Ambani made in an hour during the pandemic and three years to earn what he made in a second”.

Unsurprisingly, the 2023 Oxfam Report noted, “India’s richest 1% own around 40% of the country’s wealth, while over 200 million people continue to live in poverty.”

Fiscal subordination

Corporations have increased their value through a “sustained and highly effective war on taxation … depriving the public of critical resources”.

As many corporations increased their profits, the average corporate tax rate dropped from 23% to 17% between 1975 and 2019. Meanwhile, around a trillion dollars went into tax havens in 2022 alone.

Of course, falling corporate tax rates are also due to “the broader neoliberal agenda promoted by corporations and their wealthy owners, often alongside Global North countries and international institutions such as the World Bank”.

Meanwhile, pressures for fiscal austerity have grown as government tax revenue has declined relatively for decades. High government indebtedness with corporate tax evasion and avoidance have exacerbated austerity policies.

Underfunded public services have adversely affected consumers and employees, especially health and social protection. Higher interest rates have worsened debt crises in developing nations.

With governments fiscally constrained from sustaining public services, privatisation advocates have become more influential, gaining greater control of public resources by various means.

Private corporations profit from discounted public asset sales, public-private partnerships and government contracts to deliver public policies and programmes.

“Major development agencies and institutions … have found common ground with investors by embracing approaches that ‘de-risk’ such arrangements by shifting financial risk from the private to the public sector,” states the 2024 Oxfam report.

Access to essential public services should be universal. Insisting on private profit-making considerations deprives marginalised communities of access, worsening inequalities.

Source: Theedgemarkets

Plans to scrap a preferential tax regime for wealthy foreigners living in the UK could cost the Treasury around £1 billion (US$1.3 billion or RM5.6 billion) a year in lost revenue and drive away global elites.

That’s according to a study by Oxford Economics, which found that many “non-doms” are planning to emigrate if Prime Minister Keir Starmer’s new Labour government presses ahead with its proposed reforms.

Non-doms are British residents who are not domiciled in the UK for tax purposes. As a result, they only pay tax on money brought into the country. Defenders of the regime claim it attracts wealthy entrepreneurs who create jobs and fund philanthropy. But their preferential status came under intense scrutiny during the cost-of-living crisis when millions of Britons were struggling to make ends meet.

In March, the then-Conservative government bowed to pressure by requiring wealthy foreigners to pay tax on overseas income after living in the UK for four years instead of the current 15. At the time, budget officials estimated the move would raise around £3 billion a year. Now Labour plans to tighten the screw by subjecting assets held overseas to British inheritance tax if a non-dom has lived in the UK for more than 10 years.

However, rather than raising money, Oxford Economics said the proposals could result in a £900 million a year fiscal loss for the exchequer as a “more burdensome” regime prompts a greater number of non-doms to leave the UK. The country could lose a third of the non-dom population by 2029-2030, it said.

“If mishandled, these changes could severely undermine the UK’s ability to attract and retain global talent and investment — and risks the government failing to fund its key public policy spending commitments as outlined in the manifesto,” said Leslie Macleod Miller, chief executive of Foreign Investors for Britain, a private wealth lobby.

Oxford Economics based its survey on 72 non-doms living in Britain and 42 specialist tax advisers representing over 900 non-dom clients.

It found that over 80% of non-doms said they’re likely to leave the UK due to the inheritance tax changes, while most of those using the remittance tax breaks said they wouldn’t have come to the country if the new restrictions had been in place at the time. Over two thirds of advisers reported new client numbers had halved since March. The new rules for both foreign income and inheritance tax are due to start in April 2025.

The number of non-doms dropped by almost half in the decade to 2022, partly the result of a 2017 change to the rules that stopped individuals using the benefit permanently. Still, those retaining the status pay almost £9 billion in British taxes a year, according to the latest official data.

In the best-case scenario, Oxford Economics estimated Britain’s non-dom population would be 7% lower in 2029-2030 than it would’ve been without policy changes. That could raise £1.3 in tax revenue in 2025-2026, with that number falling to £1.1 billion by 2029-2030.

Foreign Investors for Britain has come up with a set of policy recommendations for the government, including a Greek-style tiered-tax regime which sees non-doms paying fixed annual fees. The FIB is also calling for the government to include an inheritance tax break in this regime, for both personal assets and those held in trusts.

Source: Theedgemarkets