The second quarter of 2023 brought some calm to the markets following the regional banking crisis of the first quarter. Markets also found a little respite from the United States (US) Federal Reserve’s (Fed’s) interest rate increases. As global inflation started subsiding the Fed could afford to pause their hiking cycle, albeit only once, in what is already the fastest rate-hike cycle in history. Global growth also surprised on the upside, or should we say, wasn’t as bad as predicted at the beginning of the year. These conditions made the markets ripe for another positive quarter. And did we get some rocket fuel? Indeed, we did!

When we started speaking to people about it, they would ask “what is this ‘hey eye  all about”? Although Chat-GPT was launched in February, it only really hit the markets during the second quarter and its artificial intelligence (AI) capabilities hit the headlines like a meteorite hitting earth – with the shockwaves spreading far and wide. Artificial intelligence and machine learning has been with us for quite some time, and by now, you’ve all experienced the efficiency and benefits of a navigation application or a search engine, like Waze and Google, that gets to know your tastes and preferences. What’s different about these large language models, like Chat-GPT, is that they understand normal spoken language very well and can respond to queries far better than single-line search engines. Their ‘magic’ lies in their ability to truly handle the spoken language very well. Translation…no problem. Voice to text…no problem. Creativity with language, be it letters, stories or poetry…no problem. But here comes the real kicker…normal language to programmable computer code…no problem! Suddenly the interface between homo sapiens and machines has been solved. Suddenly we can ALL just talk to our machines and yes, they can talk back. Technology has truly come alive! You now have the smartest, fastest electronic librarian of the internet, in your palm!

The spectrum of opinions about AI is broad and goes from on the one side merely viewing this ability to communicate as a stochastic parrot, to the other side that views it as the most transformative thing to hit the planet since the internet itself. It’s clear that many new business cases can and will be designed with this new capability in mind, and that many others will be transformed or killed. One thing that everybody is certain of, is that this technology will require more computing power. The value of chip-manufacturers shot through the roof and the leader Nvidia saw its price rise by 115% since February. This immediately also escalated the tech-war between the US and China as rapid tit-for-tat bans were implemented on several items and commodities. This is an escalation of the East-West divide I wrote about last quarter and is bound to spread to further items and regions.

At Citadel we approach AI from a holistic angle. It’s obvious that this technology can improve productivity at many levels of our value chain, allowing us to serve you, our clients even better, even faster. What it’s not, is the perfect bot that will replace human beings. Many facets of our business absolutely can’t be synthesised and codified. The relationships formed with clients, the deductions from research, or the risk management of portfolios can never be handed over to a machine or algorithm. We will however be applying this wondrous technology at many levels of our business to automate and streamline various processes. In the asset management unit we’ll also be looking for investment opportunities and risks as certain industries explode while others get cannibalised. The fact is, that AI is here to stay and should improve our lives tremendously if harnessed ethically.

The final half of 2023 should finally give us the answer about whether the world will descend into an economic recession or not. Either way, financial markets have a lot of adjustment to do as equity and bond markets do not currently reflect the same future. Right now, nobody, not even Jay Powell or Hey Eye, knows the outcome. But we are prepared!

I hope you enjoy this edition of Citation.