OpenAI gets sued
OpenAI, the company behind the very popular ChatGPT tool, was hit with a class action lawsuit in California this week. The lawsuit alleges that OpenAI scraped data from the internet, including personal information.
- ChatGPT was only released to the public last November and has quickly become wildly popular
- Given the widespread use of large language models (LLMs) is very new, we are still trying to understand how this technology should be regulated
- The privacy of user data is an obvious starting point
- Sam Altman, the Founder and CEO of OpenAI, recently completed a 22-country tour to speak about ChatGPT and AI in general
- He is clearly trying to get ahead of the inevitable global regulations
Volatility hits multi-year lows
Often referred to as the “fear gauge”, the VIX, a measure of implied volatility, has hit a multi-year low. The last time the VIX was at these levels (~13) was Jan 2020, right before COVID-19 caused a ~35% correction in the stock market.
- The VIX measures the implied (or expected) volatility of the S&P 500 by taking into account the price of options (both puts and calls)
- The lower the VIX is, the lower the expected volatility of the stock market
- It is a signal of complacency, given market participants are willing to accept/pay less for protection
- It is all the more surprising given the recent banking crisis and rising geopolitical risks (potential civil war in Russia)
- This does not necessarily mean imminent volatility, however, it does mean any negative unexpected events will likely lead to steep selloff
Share of distressed companies rises
The Federal Reserve released a note analyzing the level of companies in financial distress during this tightening cycle (higher rates). They conclude that 37% of non-financial companies are experiencing financial distress, higher than any other tightening period since the 1970s. They believe this will create a large headwind to the economy with a hit to investment, employment, and aggregate activity. Their analysis also shows that the typical peak of distress happens 1-2 years after the tightening shock. This suggests 2023-2024 as the potential peak.
- The Federal Reserve uses an academic approach to come to their conclusion
- In reality, the trend is pretty clear, with commercial bankruptcy filings rising 105% year over year in May
- Companies with heavy debt loads, e.g., those that are private equity owned, are particularly susceptible
- Given rates rose dramatically in a short period and interest rates on debt usually adjust, many companies are finding their debt service much higher than when they took the debt on
- This will likely persist for the foreseeable future, especially if the market begins to accept higher rates for a longer period
- Expect more headlines of companies filing for bankruptcy in the coming quarters