Change Is In The Air

The Spring equinox arrived this week and you can’t help thinking of change. Well, at Gravitas, we are always monitoring CHANGE. But, this week could have prompted the thought that nothing changes. Banks are imploding again. The usual suspects Putin, Trump and Johnson break international and domestic laws with impunity but still keep their liberty. And, of course, if you’re a government in perma-crisis there’s always the old reliable, Rwanda, to keep Suella and the fans of fear happy. Or hysterical. We might not share those cackles but we can be upbeat. In fact, we can see big changes ahead. Back to the world of banking, I’m thinking something must change.

A week ago we wrote about Sillicon Valley Bank’s (SVB) warp-speed collapse and since then we’ve had Zurich end-of-life care for Swiss giant, Credit Suisse(CS). The end was administered mercifully quick by Swiss regulators and a UBS shotgun proposal but, in truth, death took 15 years as CS fell into every banking bomb crater possible. Its demise has been very different to that of SVB but there are two core truths in both banks’ downfalls.

  1. Banking franchises are critically dependent on confidence.
  2. Banking business models dependent on other people’s money are fundamentally unstable.


You might say ALL banks depend on other people’s money and then query whether we are suggesting all banks are unstable? The short answer is… yes. However, there is a heirarchy of stability in the banking system and the controversies in the resolutions of both banks’ collapses have been instructive. Think back to the rescue of SVB and you’ll note that the lingering controversy there is that the US Treasury protected ALL depositors whether they were insured or not. The bigger picture here for US authorities was to prevent a mass flight of deposits out of smaller banks. Indeed, JP Morgan reckon a trillion dollars has already moved but let’s assume the US Treasury will stem that bleed. But, hold the thought that providers of capital(depositors) earning a return (interest rate in exchange for risk) were effectively back-stopped by the US government. Now let’s take a look at the CS rescue and a Swiss steam-rollering of investors in $17 billion of specific debt instrument (bonds) called ‘AT1s’.

The controversy about wiping out investors in AT1s was that in the UBS takeover of Credit Suisse shareholders were paid $3 billion for their shares. That might feel like a wipeout compared to a market value of $90 billion in 2007 but in a normal wind-up of a company the shareholders would have received nada. The normal pecking order in a wind up is that secured debtors(loans, senior bonds) get paid first, then unsecured lenders(lesser bonds), followed by shareholders(equity). So, how did the shareholders skip the payout queue? It appears that the Swiss authorities wanted to keep international shareholders(Saudis, Qataris etc) sweet. Clearly, the not-normal differing treatments of capital providers in the SVB and CS collapses have introduced uncertainty to capital heirarchies. But, my sense is that there is an even bigger existential uncertainty for the banking world. Is the traditional banking business model bust?

In a world of super-fast communications(digital), ultra-mobile capital(deposits) and manipulation of information(social) the weapons to destroy that critical confidence bit in a banking business are all too obvious. It is also obvious in a super-fast digital world that banking deposits are almost too mobile and can, in times of fear, rapidly shift and move up the banking heirarchy to the global deposit giants like HSBC, JP Morgan and Bank of America. That’s a nightmare for traditional banking models who would lend/invest against the capital (deposits, investors) given to it. The quantum of potential timing mis-match between deposit withdrawals and asset sales has become too big. That requires a fundamental re-think on deposit taking. Should banks be utilities and paid for providing secure custody of customers’ money? And, as a corollary, should banks give up asset creation/investment in loans, property, mortgages etc? There is now a very real argument for change, and that investment and deposit-taking activities should be separated. I suspect we are moving in that safer direction rapidly and the next development is going to accelerate that move…

The world of Artificial Intelligence(AI) continues to move at warp-speed too. The ground-breaking text generative tool, Chat GPT3, has now been superceded by GPT-4 which is more powerful but safer, they say. It certainly is fascinating to know a mere photo of your fridge’s contents can generate an amazing array of potential recipes and menus using those very contents. Well, some fridges. However, this interaction between text and imagery opens up a few potential issues. Anyone see photos of Donald Trump being chased by law enforcement this week in the streets of Manhattan? Funny, yeah, but for a MAGA cult follower it could end up being a violent trigger. Deepfake imagery and false information are a dream for bad actors wanting to stir fear, conflict or division. Now think about banking confidence and social media flooded with AI generated information and imagery which sounds and looks all too real. Irrespective of the dangers, it feels like AI change is moving at an exponential speed illustrated by the following developments:

  • GPT-4 has already been integrated into the applications and services provided by Stripe, Duolingo, Khan Academy, Be My Eyes and Microsoft(Bing).
  • Google is carefully watching Microsoft’s attempt to win back browser/search traffic (with Bing) and has opened up its own “Bard” chatbot for public use.
  • Bill Gates is on Twitter this week with a striking message – “The development of AI is as fundamental as the creation of the microprocessor, the PC, the Internet, and the mobile phone. It will change the way people work, learn, travel, get healthcare, and communicate with each other.”
  • For those who have discovered the presentational joys of Canva over Powerpoint you’ll be happy to hear the Australian design platform has just announced a host of AI tools at its Create event this week.


That last development in design/creativity does raise some further existential questions about the future of Canva itself, copywriters, paralegals, marketing analysts etc. In other words, GPT-4+ could possibly replace them all. But perhaps the bigger question is what happens when AI creates AI which creates AI, and so on? Then we are almost into Star Wars: Attack of The Clones territory…. which brings us into space and the other big change we need to watch.

We have previously written – Investing In The Real Deal about the relative value of the mining sector (circa $2 trillion) compared to the global total equity market value of $120 trillion ahead of a monstrous $175 trillion cleantech spend by 2050. That prompted a thought that the world of atoms(real stuff in the ground for batteries) might be due some valuation catch up on the world of bits(digital technology). So, in an evolution of that theme we started to think about technology infrastructure relative to information technology. And space was the inspiration. Or, should I say SpaceX.

It looks like Elon Musk’s satellite and rocket business is about to raise some money from Saudi and Abu Dhabi investors at a reported valuation of up to $140 billion. Not long ago the SpaceX valuation was $100 billion, or approximately the same as Stripe’s. Of course, Stripe has been in the news with a $6 billion funding round, but at a very reduced $50 billion valuation. How times and valuations change. Furthermore, for private equity portfolio managers the relative outperformance of SpaceX over Stripe is a whopping 180%. That will focus minds, even those at the unfortunately timed Credit Suisse investment conference in Hong Kong this week. The conference actually went ahead but the title given to this conference? “Embracing Reality”. Dare we suggest the more stark reality to embrace is CHANGE…..

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