Changing Paradigms

Overview

The world is changing rapidly and the implications are massive. This installment attempts to identify some of these changes and map the relevance to risk managers and institutional investors.

Computing

Nvidia is introducing the H200, a 70-pound chip costing $250K and 18x more performant than its 2021 A100 chip on tasks run using Chat GPT-3. Furthermore, Nvidia expects that over the next five years, it will be able to increase the speed of its chips by 1 million times.¹

Implications: From our perspective, this is a game changer with massive implications. For starters, this development facilitates the spreading of computing-intensive artificial intelligence (AI) to a variety of fields.

AI is likely to massively enhance any area which requires judgement and over time, is likely to remake a variety of industries. On the positive side, the tech firms associated with the area have already benefitted. On the negative side, many of the merchant data centers  (i.e., those not tied to large data users such as AWS and Google), might find the need for space to be reduced.

Drones

The Ukraine War has illustrated the potency of drones in alerting and countering enemy attacks. We have seen relatively inexpensive drones destroy massively expensive ships, tanks, and personnel. Furthermore, the cost of such systems is relatively low and appears to be getting cheaper.

Implications: From a military planning perspective, this is a game-changer with most major military assets appearing to be more of a liability than an asset. During World War II, the Tirpitz and Yamamoto were initially viewed as unbeatable. However, as the war progressed, it became evident that both were highly vulnerable to attack by aircraft and essentially spent the balance of the war in hiding. With the advancement of missile technology and drones, perhaps aircraft carriers and other large vessels will face a similar fate.

Due to ubiquitous surveillance drones, any movement can trigger a drone attack, rendering the entire battlefield a type of minefield. The developments continue unabated with hand-held signal blocking equipment and more durable drones. Our suspicion is that space-based weapons are likely to become a focal point.

Self-Driving

It is only a matter of time before self-driving vehicles become the norm. Just as programs have proven to be better Chess and Go players than humans, the same is expected in a variety of areas where humans operate vehicles and machinery: construction, forestry, farm equipment, trucking, personal driving, airplanes, search and rescue, etc. It will take time for adoption, but with the advancements in artificial intelligence, computing power and communications, adoption is likely to be faster and more ubiquitous than many now believe.

Implications: This is a game changer for many. Our view is that the “Conestoga Conundrum” will be in play whereby the prior industry leaders will be left behind in favor of newer firms which are better able to understand and deploy the technology. (Conestoga was the lead manufacturer of wagons in the early 1800s, but never made it to the horseless carriage stage.)

Bots

With advancements in computing, communications, and analytics, a variety of tasks relegated to humans will be done cheaper, better, and faster by “machines”.

Implications: The implications are probably as great as the industrial revolution which enabled England, which was relatively small geographically, to become a global power. We should probably do an industry-by-industry analysis in a future installment, but it is enough to introduce the topic here.

Foreign Policy

With changing world conditions, foreign policy has also changed. These developments can be independent of administration.

A. Global Waterways - For starters, the U.S. is less active in protecting global waterways as evidenced by events in the Gulf of Aden. In the past, the U.S. would have acted more forcefully with the taking of any vessel, severely punishing any who tried. Perhaps because the U.S. is less dependent on foreign energy or perhaps because it is reverting to a more isolationist approach, it is nonetheless, less active.

B. Territory – Russia is supposedly attacking Ukraine to close two of the several gaps invaders have used to penetrate Russia. Additionally, Putin viewed the collapse of the USSR as one of the fiascos of the past 200 years. In the meantime, China continues to eye Taiwan, which although relatively small, is enormously productive with the global leadership of TMSC and the various supporting industries. However, as we are learning from Ukraine, if China takes Taiwan, much of what makes it appealing might vanish. Many physical assets will be destroyed in an invasion and the dynamic culture which yielded them will not last.

Perhaps over time there will be a shift whereby land is less important than the activity on that land. Singapore might be the model for this line of thinking.

A similar shift has been happening for centuries whereby land in the urban areas is far more valuable than even the most productive farmland. However, land as a proportion of overall wealth is likely to decrease as new asset types increase in value and communication across distances and language barriers becomes easier.

C. Kissinger’s Nightmare – Diplomat Henry Kissinger advised many presidents to keep Russia and China separated as together, they are far more powerful. The conundrum in Ukraine and elsewhere are underscoring this wisdom. Russia, with China’s help, appears to be blunting many of the sanctions and in some cases, more directly aiding Russia.