Transcript Provided by Kensho

Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. 2023, what a year it's been. We spent the year predicting an imminent recession that never quite managed to show up or continued in Ukraine and started up in Gaza. Crypto remained an irredeemable scan, yet bitcoin is up again this month.

It was a year, everyone agreed that India had arrived. It was a year when war and sanctions and production quotas couldn't quite lift up the price of oil. On the plus side, it wasn't an election year in the U.S. So let's be thankful for these small blessings. Here at The Essential Podcast, we spent the year reading and talking to authors and experts, which is, if you think about it, just an absurdly fun thing to be paid to do.

Today, we're going to review some of our favorite moments of the year. That's right. It's a clip show, and we're going to start it off with Chris Miller of Chip War who taught us that the source of economic power in the globe is changing. You have been quoted saying, “Microchips are the new oil”. How so?

Chris Miller: Well, if you think of the types of goods that modern economies require, oil we're certainly used to putting up the center of our analysis, thanks to books like The Prize, which showed the way that economies and militaries and political systems rise and fall based on their access to oil and their struggle for access to oil.

And today, semiconductors are playing a similar role in shaping trade flows or in structuring how countries interact with each other. And like with oil, there's unique concentrations in the industry that give outsized influence or power to single countries.

So we're used to, for example, talking about Saudi Arabia's role in oil markets and tracing the remarks of Saudi oil ministers to understand the impact of oil prices, which we then intuitively know will shape inflation and economies in the other side of the world, but we haven't really, I don't think, fully reckoned with the way that the chip industry is similarly concentrated with Taiwan, for example, producing 90% of the world's most advanced processor chips. That's actually more concentration than you see even in the oil industry and the economic and political impact to that, I think, are really profound.

Nathan Hunt: Gené Teare of Crunchbase joined the podcast to share how the technology industry started to lose value this year after the massive surge of the early 2020s. How much are we actually seeing like a downturn? And how much should we consider, say, 2020, 2021, beginning of 2022, a period where things were really inflated where there was a lot of money going into VC, there was a lot of money going into technology start-ups? Is it that we've really fallen off or we've just fallen off an exceptional high?

Gené Teare: When I look at it, I think both things are true. I think everyone these days is beginning to say, well, 2021 and a little bit 2020 was sort of a market blip where what we saw is venture doubled from -- we had around $330 billion invested globally in 2020, and that was seed, venture and private equity into venture-backed. So it's sort of the whole ecosystem of these high-growth tech start-ups raised north of $300 billion. 2021 was $600 billion. So that just doubled within a year.

So clearly, and everyone thought, “Okay, this is the new reality. These companies are disrupting industries. So many companies are going public. This is a new reality.” And then very quickly in 2022, as we said, with the market coming down, there was a reset and a rethink. So I think on the one hand, you can say that was a blip. That was crazy. It was -- everyone got sort of -- there was all the start-up because of the pandemic and all the shift to online services. And so in some ways, that made a lot of sense, but it was a blip and we're going back to a new normal.

I think the challenge in thinking of it that way is that in this big run up, one of the things that we've begun to look at in the dataset is what is the impact for the whole industry because you've had many, many investors raised very, very large funds across the board as well as many seed investors being funded across the board. So what happens to all those investors when they're facing a more grim market.

We find in our data, there are thousands of start-ups that raised significant funding in the 2021 and into 2022 because 2022 was still strong. What happens to that sort of unprecedented number of start-ups that are now out there have tried to extend their runway who are now going to try and raise funding. And also, what happens to the Unicorn Board where we track, we have more than 1,400 companies.

If you go back to before 2021, it was about half that number of companies around 700-or-so companies on the Unicom Board. What happens to all of those companies that have these very high valuations that have raised large amounts of money? Where do they go in this new market?

And so I think you can look at it as is it is this blip. We're not coming back to that. I think everyone is very clear that, that's -- we're not going to see that for a good while. But what happens to the whole ecosystem in the aftermath of that rising boat. And I think that's what we're facing. And we've seen it already in the public markets where I've looked at all the companies that went public in 2021. There was a fourfold increase of venture-backed companies in the U.S. that went public over $1 billion.

And the majority of those companies, I think, more than around -- more than 60% are down below their IPO price of 65% to 70%. So not even the market hypes, but just their IPO price. So there is a fallout, I guess, is what I'm saying, from this market hype. There are consequences that come out of that.

Nathan Hunt: This was also a year in which I got to schadenfreude my FOMO about not investing in cryptocurrencies as author Zeke Faux told us about the state of the crypto space. Throughout the book, everyone you talk to appears to be running a scam one kind or another. So I think it would have been impossible to pull out this individual scan from all of the other scams that you were encountering.

Zeke Faux: It's kind of weird to think about, but at the time when crypto was going great, you had like the people who love crypto, and they didn't want to hear anything bad about it. And nothing would change their opinion as shown by Tether. You could point to all these red flags and it only made crypto guys love Tether more.

And then you had probably the majority of people were skeptical of crypto. And if you ask them about any crypto thing, they'd probably say, “Probably a scale.” So it almost felt investigation-proof. And I felt like if I -- as an investigative reporter, if I wanted to publish something about company in crypto to show that they were up to no good, I really had to bring the goods. It was not -- it would not be enough to just identify a couple of red flags. I thought you would really have to have proof of exactly what was going on.

And with the book, I was really happy to -- I mean, there's -- you mentioned Cambodia, that was some of -- I did my best to bring this like serious reporting to show what crypto is really -- what impact it's really having in the real world.

But also, I think that through satire and through letting these crypto guys talk about their very silly business plans, that is actually both fun to read and also maybe more damning than a traditional piece of investigative reporting on like some crypto coin because the message really is that there's nothing behind the curtain. Like each one of these could be farther for some big investigation. And there's just not enough time to thoroughly investigate each of them as you were saying.

Nathan Hunt: There were some bright spots. 2023 will probably be remembered as the year the public discovered the power of generative AI. Kensho CEO, Bhavesh Dayalji, joined the podcast to discuss this promising technology. So Bhavesh, I thought once upon a time, I understood what modern AI was doing, there was this sort of pattern recognition process where there was a data set that the AI was trained on -- it was a well-labeled data set, you would identify cats versus dogs in images, then you would look at the responses you got, do a little back propagation to sort of correct for the AI engine.

And at the end, you would get this effective recognition of here's a cat, here's a dog. Generative AI feels different. I don't know what they're training this on. I don't even know if that old model I have of neural networks actually applies to what is happening now. So can you talk a little bit about the mechanism here?

Bhavesh Dayalji: Yes. So I mean, it does apply. But really, what's changed is this new type of modeling, large language modeling, which really refers to a type of AI algorithm that's been trained on vast amounts of text data to generate natural language. And that's what this is. And so remember, I talked about the idea of computes got better, chips have got better. You've got the GPUs from NVIDIA now that are being talked about, loudly, you've got other semiconductor industries getting involved here.

What that effectively means is we can create this new type of AI algorithm that can do so much more than we thought before, like so the idea that we can throw the whole Internet, which is basically how a lot of these largest large language models have been created where you're taking everything that's created on the Internet, very minimal training involved like we've done historically in our offerings, S&P Global and that Kensho, but more broadly throw it as much as you can and now you get these emerging capabilities that start to produce given the amount of data that you've thrown at it.

And don't forget the large language models in themselves, there's no real understanding of it. What it effectively is, is a prediction engine, right? Like so what it's really doing is predicting what the next word would be, given all of the vast training data that's been fed into it in a very unorganized way.

But that comes with challenges. That comes with the challenges of the hallucinations that you've heard about, the inaccuracies of the large language model being very confident of its answer. But actually, it's gobbledygook or incorrect. And I think what I'm fascinated now about is the amount of researchers and the industry at large working on that accuracy problem, working on that refining problem. And I think that's the right approach.

And so I think it's easy to be negative about the issues with hallucinations and everything that's happened. But this is innovation. And innovation happens with experiments and refining it and making sure that it's actually adding value to society and all of the workflows that we're trying to accelerate.

Nathan Hunt: And Matt Harris of Bain Capital considered AI to be a bright spot in the fintech landscape. Matt, let's dig into one of those sticky technologies, which you have written about, talked about a lot in the past, which is generative AI. In a recent blog post, you made analogy between generative AI and Attila the Hun. So let's play this one out. If Attila is generative AI, who is Rome? And just to throw some military history at you, is battle of the Catalaunian Plains possible between whoever is Attila and whoever is Rome?

Matt Harris: Well, in this example, generative AI, of course, is Attila the Hun. And sadly, regional and local banks are the Western Roman Empire. The analogy here rests on not just generative AI, but 2 other technologies, all 3 of which are kind of coming to maturity, some level of maturity at the same time. And the 3 technologies are open banking, faster payment rails and generative AI, all 3 of which have been worked on for decades, but are newly commercially relevant.

What that means is super-powered customers of banks. Banking is one of those industries where unfortunately, most customers are getting a raw deal. The fundamental fact of it is, if every customer of the average bank knew exactly what else was on offer to them and had a frictionless way of availing themselves of those offers, 80% to 90% to 100% of the customers would leave. That's just the nature of banking. It's historically been filled with friction.

And that's been the only reason that banks have been able to do things like create "deposit"" franchises, which is something people brag about, but I find quite curious. What it means basically when Wells Fargo says they have a deposit franchise is prevailing interest rates right now, 400 to 450 basis points in the economy.

So any one of our customers could go get that. But we only have to pay them 80 basis points. Isn't that fantastic, the degree to which we're taking advantage of our customers and their ignorance or the friction that exists between them and the deal they should be getting.

Nathan Hunt: Matt, I want to stop you there because I literally pull the quote from one of your blog posts. I loved it so much, “One of the most obnoxious terms in banking today is deposit franchise.” I just thought it was a great quote.

Matt Harris: I'm glad you liked it. I'm hoping it goes out of favor. Well, I predict it goes out of favor either because people recognize how obnoxious it is or because deposit franchise ceases to exist as a concept, because as we observe, it's just much easier to move money out of banks. And we have this shock, which is all of a sudden, there's a reason to move money out of banks, not just, of course, the concern about bank weakness, but also the offers elsewhere in terms of interest rate availability.

So we've had this disruptive shock in terms of higher rates that comes at a time when it's easier than ever to programmatically move your money through open banking and faster to move your money because of real-time payments and FedNow, which launches this month.

And then the kicker, the real Attila, the real thing that's going to shake things up is generative AI, which introduces not just the possibility, but the inevitability of autonomous agents this next chapter of AI, where it's not just the ability to read and write, the ability for you to prompt it to write a birthday card for your wife in the style of Shelley.

But the ability to do things like consider my financial situation at my bank, consider the options available to me at all times and take action on my behalf when there are higher deposit rates available and lower lending rates available and any sense that there may be a fee coming and avoid those fees, capture those rates and reduce my lending rate. You could refi me once a day, if you want. I don't have to even -- I'll get an e-mail telling me that I got refied, not just in mortgage but in all of my liabilities.

So that ability for every customer, consumer or business to constantly be optimizing their own cost of debt, their own returns on deposits and minimizing fees to 0, that takes the average bank income statement and – which is NIM and reduces fee income and -- and so that's a scary dynamic that will play itself out over 5, 10, 15 years.

But the analogy to the Atilla example is it's not actually that Attila is going to come in and kill these regional banks. It's not that people are going to sign up, leave their banks for some generative AI-based banking solution. What Atilla did as it relates to the actual Western Roman Empire, as you seem to know quite well, is Attila the Hun just spooked to the barbarians.

It certainly -- and Atilla did not stride into Rome himself or with his troops, but rather the Visigoths and other "barbarian tribes” who've been living in basic piece with Rome had this new threat on their eastern flank that caused them to stampede into Rome.

And so indirectly, Attila the Hun ended the Roman Empire. And indirectly, generative AI is going to create a stampede of bank customers seeking higher yields on their deposits and lower cost of capital on their loans and the reduction of fees to 0. And that's a scary result for most financial institutions.

Nathan Hunt: Of course, even an exciting innovation like generative AI may not address the biggest challenges our world is facing. Thomas Ramge joined at the podcast to talk about the need to reinvent innovation. Can you tell me a bit about the hierarchy of innovation and how it balances or complements utilitarianism?

Thomas Ramge: Well, indeed, we sort of created a new lens how to look at what kind of innovation do we actually need these days. And in fact, the starting point of our book is to say that, well, possibly, it only feels like we are living in very innovative times with all that Silicon Valley speak of, everything is moving faster with the future and so forth, but have sort of lost a good scope on what kind of innovation do we really need.

And you're right, the simple thought of Bentham, Malthus utilitarianism just maximize the happiness of the highest number of people is a bit too simplistic. But if you combine it with a lens where you ask the questions, what kind of innovation do we need and then combine it with a Maslow pyramid of human needs, you come to the point where you think, well, all right, the kind of innovation we had in the last decade doesn't, in many senses, pay off really at the bottom of the pyramid.

So you reframe the question of what kind of innovations we need from, well, we need the next budget. We need, I don't know, to shop even faster, get fast-moving consumer goods within 10 minutes into apartment towards how can we substantially address the big health questions for which we don't have answers yet. Just let me start to start with dementia, see how much progress we've made with cancer, some, but of course, not fair enough. And then move on to how do we fight poverty for 800 million people worldwide to still live in extreme poverty. And possibly then look at energy. I mean, by far, having enough green energy we need in order to stop climate change.

So you're right, Bentham is a bit too simple and controversial in many senses anyways, but to stop sort of accepting that a lot, what is sold as innovation is Sham Innovation that doesn't really improve things for many people that has lost of sight what innovation means that, at least in some sense or technological innovations, using technology to faster progress, then I think we have to start a new conversation. And our book is -- the aim to rethink innovation in different terms than we often do. Starting with the question, do we really live in such an innovative times as we often think.

Nathan Hunt: Unless you think we're being unrealistic about the ability or the willingness of corporations to build a better world, author Will Magnuson told us about corporations under the Roman Republic. To that point, William, I'd like to continue talking from your conclusions because I feel like they do a great job of illuminating all of these fascinating case studies that are the first 8 chapters of the book.

So you offer these -- I'm going to call them handy guidelines for corporations to follow if they want to promote the common good. The first one is, I hope, on controversial, which is don't overthrow the Republic. So let's not talk about Facebook, which some people might want to talk about. Let's talk about the ancient Rome. How does the story of corporations in ancient Rome demonstrate the importance of respecting the integrity of the Republic?

William Magnuson: Yes. Well, this is something that really goes back to one of my initial interests in research and corporations. I have a background, I studied Latin in high school in college. I lived in Italy and worked as a journalist after college. And so being able to report on and examine and research the history of Roman corporations, it was very rewarding. One of my favorite stories from ancient Rome and the idea of the enterprise, the ancient enterprise, is the story about the second Punic War. So this was taken place around 215 BC. It was a war between the Roman Republic and Carthage. These are the 2 great Mediterranean powers of the day.

Around 215 BC, the Roman Republic was on the defense, right? So Hannibal, the Carthaginian general had broken into Italy, right, he crossed over the Alps with his elephants and his infantry and his calvary and he kept defeating the Roman army in the field.

And so students of ancient history are familiar with the way in which the Roman Republic recovered from those defeats. Basically, they adopted a strategy that is known as the Fabian strategy that effectively avoided big set battles and instead engaged in guerilla warfare that kept Hannibal in the field and eventually led to his defeat.

But one of the stories that is less familiar to students of ancient history is the role of ancient enterprise and capitalists and allowing their own republic to recover. So there's the story that Livy writes about, where Roman general named Publius Cornelius Scipio writes to the Roman Senate. And he says, "I am out of funds, I'm out of equipment. I'm going to lose this war if you don't send me supplies.” But the Roman Senate is entirely out of funds. The treasury is empty, and so they don't have any options.

So what do they do? They make a plea to the people of Rome, and they say, if anyone comes forward and is able to supply the armies of Scipio out of their own funds, we will reimburse you when the Senate treasury is full again. In response to this plea, Livy writes a group of 3 companies, or societateas in the original Latin, come forward, and they volunteer to provide funds and supplies and equipment and weapons to the army of Rome. The only thing that they ask for in return is that they be exempted from military service and also that if their equipment or cargoes are lost at sea, that they'd be reimbursed for those losses.

Now the fact that they did not ask for reimbursement for any cargo lost by road suggests that the Roman roads really were as great as we -- they have been heralded to be. But Livy writes that they came forward. They volunteered to provide all these supplies out of their own pockets and their own funds and the fact they did. “They were magnanimously contracted for and provided,” Livy says. As a result, Scipio's army gets the weapons and the supplies and the money it needs. He goes on the offensive and he defeats Carthage along with the assistance of Scipio's army in Carthage.

So I think what this gets at is not just, right, this dramatic story about war and the Roman Republic, but it also gets at the power of Roman enterprise, right? The very fact that a group of 3 companies could come forward and supply weapons and supply -- and supplies and equipment to an army and turn the course of the war suggests that these were very powerful institutions, that they had wealth, supplies, shipment mechanisms, sailors. These are massive enterprises. And indeed, over the next 2 centuries, they would become an essential part of the fabric of Roman life.

And so that's one of the stories that I think really sticks out, is the role in which the Senate and these private enterprises cooperated. They thought they -- as Livy refers to that as they were being motivated by love of country, right? The initial Roman corporation was motivated by love of country. And that was, I think, one of the most telling stories from that period.

Nathan Hunt: And Marxian economist, Clara Mattei, provided a contrary viewpoint.

Clara Mattei: So this is the first thing is that I think that when we understand how capitalism works, it doesn't really make sense to say good or bad. What makes sense to say is who is benefiting and who is losing, right? We can't talk in the aggregate. And this is the point. Austerity is intelligent and good policy for those at the top because it increases the possibility of capital accumulation and thus profit making, expectation for profit go up.

And it's bad for the majority because it will decrease the income and -- but ultimately, it will make it such that people will need to stop trying to think of any other alternative because it's very difficult to protest the market once you depend on the market for survival, and this is exactly what austerity does. For example, privatization increase our dependence on the market if before, we could have some entitlement to certain rights because of being citizens, for example, education, once it's privatized, of course, then we need to buy it, and this means that we need to go work for a wage.

Nathan Hunt: Finally, Leah Boustan and Ram Abramitzky joined the podcast to debunk some of the myths that surround the immigrant experience, which is a perspective that has proven tragically necessary in the current political environment. Let's dive into another immigration myth. And that's sort of it's the rags to riches math, which was prior generations of immigrants were more industrious and they achieved success faster than today's immigrants. What did the data show you on that?

Leah Boustan: I think another factor as to why this myth has really persisted for the past is that immigrants did eventually move up. It just didn't happen in the first generation. It happened as we have found in our data in the second generation for the children of immigrants.

So if you go back 100 years and you're talking great-grandfather and grandfather, that sort of blends in your mind about when exactly your family was able to make it into the middle class. But what we've been able to document is that children of immigrants are actually remarkably successful in the past and today.

So today, we haven't just given immigrants enough time. We need to have a more generational view and not take a temperature on immigrant success after 5 or 10 years in the country, but actually wait for that family to have kids, and those kids to be educated in U.S. schools and then move into the U.S. labor market to get a better sense of total immigrant success and really is a generational success rather than a single career.

Nathan Hunt: So that's it. There were some interviews we didn't manage to cover, Stephen D. King, Tom Philpott, Talal Rafi and Edward Chancellor all brought much needed insight and intelligence to the podcast this year. We are in their debt for joining us.

We will end 2023 by thanking you for listening and wishing you all a very boring and uneventful 2024. We should all be so lucky. The Essential Podcast is produced by Patrick Moroney. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction. From the majestic heights, a 55 Water Street in Manhattan, I am Nathan Hunt. Thank you for listening.

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