Weekly Update: Slowing Rate Hikes, Accelerating AI
Highlights from a SaaS VC on the week of 4/3
Happy Saturday!
In this edition of the Weekly Update, you’ll find:
Market Update
AI Update
Deal of the Week
Podcast Recommendation of the Week
Reading Recommendation of the Week
If you haven’t already, please make sure to subscribe below.
I. Market Update: Regime Change In Progress?
The second quarter began with a short, down week. The WCLD cloud index plunged 5% to $28.19. The NASDAQ declined 1%.
With the banking crisis in the rearview mirror, the markets can now resume their focus on recessionary signals and interest rates.
While the markets were closed on Friday, there was significant economic news. The key BLS jobs report showed that unemployment is a historically low 3.6%, yet the trend of job creation is slowing. The BLS data also showed that inflation is still high, but appears to be moderating:
This makes intuitive sense - the Fed’s aggressive rate hikes are finally translating into economic deceleration, which relieves inflationary pressure. Other major indices of economic activity this week also flashed signs of slowdown. The service sector:
expanded in March at a much slower pace than projected on considerably weaker new orders growth and softer business activity.
In manufacturing:
Economic activity in the manufacturing sector contracted in March for the fifth consecutive month following a 28-month period of growth, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.
What does all of this economic data mean? The risk of the economy “running hot” with untethered inflation has abated. We’re likely entering a new phase in the economic cycle, where expectations of rate hikes become expectations of rate cuts.
Even a hawk such as former Treasury Secretary Larry Summers recognizes we are at the end of the hiking cycle:
Another important signal is the steeply inverted yield curve for US Treasuries. Typically in a period of economic growth, long term yields are lower than short term ones. Yet the yield on a 2 year Treasury is 3.99%, while the 10 Year Treasury yield stands much lower at 3.41%. This reflects bond investors’ expectations of a decline in longer-term interest rates, which typically occurs in recessions.
Lower rates a-coming might be good news! All things equal, lower interest rates drive expansion of valuation multiples. Higher multiples would be welcome across public and private companies, wouldn’t they?
Unfortunately, all things aren’t equal. If the economy is weak, then growth and earnings will suffer, which will create an offsetting downward force on valuations. I’m not predicting a significant recession. But I do think that over the next few months, we’ll enter a period where the market narrative is more focused on risks created by economic weakness than risks created by economic over-heating.
In tech, I think we’ll see less worry about rate hikes and even more enthusiasm for AI.
II. AI News of the Week: Bloomberg, Slack, Google racing to keep up
Regardless of economic weakness, AI is good news for SaaS. Growth opportunities from AI will abound. This week, there were three particularly exciting AI news items:
Bloomberg launched BloombergGPT, a “50-billion parameter large language model, purpose-built from scratch for finance.” Demonstrating how large incumbents can benefit from AI, Bloomberg is poised to leverage its massive data advantage to build a category-leading AI model.
In partnership with OpenAI competitor Anthropic, Slack launched a chat-based AI model Salesforce, owner of Slack, is far behind the AI heavyweights and clearly needs tech partners to stay competitive.
CEO Sundar Pichai says Google will add chat-based AI features to its core search product. The golden goose is in play! This is a clear acknowledgement that they see ChatGPT as a potentially existential threat to their core search business.
Mr. Pichai’s latest comments indicate that Google plans to allow users to interact directly with the company’s large language models through its search engine. That move could upend the traditional link-based experience that has been the norm for more than two decades.
III. Deal of the Week: A $4.9b exit
Savvy Games Group made a major acquisition this week, buying LA-based mobile gaming juggernaut Scopely for $4.9b. It’s the 6th largest video gaming acquisition of all time.
Never heard of Savvy? Me neither. It’s part of a recently-announced Saudi initiative to invest in gaming industry:
As part of its strategy to diversify its economy away from oil, Saudi Arabia, through its Public Investment Fund, wants to become a big player in the $184 billion global gaming market. After focusing initially on the esports industry, which has been struggling, the fund’s subsidiary, Savvy Games Group, is now looking to develop, publish and acquire top-tier games and support a gaming industry in Riyadh.
IV. Podcast Rec of the Week: Barry Ritholtz on Panic With Friends
Some time around 2005, I became That Guy who told everyone at the office that the US was in a housing bubble. Over the next few years, I had a pretty good record on predicting the financial turmoil that culminated in the GFC. My views back then were largely based on reading a few contrarian bloggers, particularly Bill McBride and Barry Ritholtz.
Last week, Ritholtz did an entertaining interview on the markets. Ritholtz isn’t a short-term market timer, but his general view is that there’s nothing to panic about (not surprisingly, I agree). After the recent banking chaos, it’s reassuring that someone who anticipated much of the GFC is not overly worried about today’s market conditions.
V. Reading Rec of the Week: OpenAI’s Superstar Coder
The Information has an insightful article on OpenAI’s President Greg Brockman. Unlike most presidents of tech companies:
Brockman, 34, has no direct reports, freeing him of the usual drudgeries of management. Instead, he spends about 80% of his time coding, he told The Information in an interview.
Brockman grew up in North Dakota and has the distinction of leaving both Harvard (he transferred to MIT) and MIT (he dropped out to join Stripe as an early employee, and later became CTO).
The article points out that OpenAI has not pioneered any dramatic leaps in AI technology. But it has been remarkably effective in turning research into industry-leading product.
ChatGPT, which has captured the tech industry zeitgeist over the past several months. While the chatbot wasn’t based on any radical breakthroughs in AI research, its magic came from a single-minded focus on translating ivory-tower white papers into systems that can perform real-world tasks.
While CEO Sam Altman gets most of the media attention, Brockman arguably has been the most influential technical force at the company:
…Brockman, more than any other figure at OpenAI, has helped sharpen that focus by pushing technical staff of all stripes to work together on key initiatives, people who know him say.
As OpenAI continues its ascent, I expect we’ll hear a lot more about Brockman in the next few years.
Twitters fight with Substack didn’t make this weeks update?! Just kidding, really enjoyed this weeks update. Lots of really insightful links and takes.