The Lex Newsletter: conversations with AI friends

Dear reader,

Relying on approximations of information to produce coherent answers can lead to strange results. Microsoft’s lauded OpenAI chatbot-powered Bing is telling users that it loves them and wants to be alive. Generative artificial intelligence artwork such as a cat “Mona Lisa” is fun. But AI is an imperfect substitute for existing services.

Lex is no killjoy. We just believe in waiting for tech to prove its chops before we rely on it to drive our cars or parse our text. That is why we agree with Hargreaves Lansdown co-founder Peter Hargreaves that it is too soon for “augmented advice”. 

True, rising interest rates mean it isn’t too hard to hand out investment advice these days. But Hargreaves chief executive Chris Hill should not be spending money creating the company’s in-house bots. Let bigger tech companies with access to deeper pockets fund the research.

If Lex had a Lex-bot to write our articles it too would have disagreed with Berkshire Hathaway’s decision to slash its stake in Taiwan Semiconductor Manufacturing Company. The chip cycle may have another near-term downswing but we see TSMC as a good long-term investment. High operating margins, advanced chips, strong free cash flow and a lack of competition are all winning features. Bravely, we stand against Warren Buffett.

Back in 2019, Buffett also said that he was ready to make a very large investment in the UK, despite Brexit. Where is it? Brexit’s impact on London’s status as a global financial centre was expected by some to end with a bang. Instead, it has been a slow-moving leakage. News that Irish gambling group Flutter is considering a US listing led Lex to tot up recent defections, including BHP and Ferguson. We see an onslaught of marginal reductions to the status of the City.

Talk now, regulate later 

How long, do you think, before regulators train their sights on AI? Given the lack of comprehensive oversight in cryptocurrencies and fintech, it may be some time. This week, the UK government published draft proposals aimed at improving consumer protection for borrowers who take out buy now, pay later loans. That’s two years after an official report said urgent change was needed. Companies targeting the UK’s competitive near-£6bn market, including Klarna and Affirm, are already beefing up customer checks. Lex thinks the winners could be banks, which have detailed information on potential borrowers and can prove they have considered loan affordability.

Barclays results this week showed that the UK bank and credit cards unit was pulling ahead of the corporate and investment bank, with profit before tax up fivefold since 2020. Still, the share price fell. As interest rate growth slows, retail banking is not expected to keep up its gains.

For the loan providers that do not improve standards, reprimands are unlikely to be as soft as the ticking off that the UK’s Financial Conduct Authority gave Amigo Loans. Had it issued a fine, Amigo had no means of paying — shares are down from £1.4bn when it listed to £12mn. Retail investors would have been wiped out. Lex thinks that, in this case, the lack of financial penalties was the right move.

Magical thinking 

While Lex was still busy formulating a recommendation for shareholders, Walt Disney managed to throw off its proxy fight with Nelson Peltz. But Peltz has secured a deal from chief executive Bob Iger to create a succession plan and a commitment to prioritise profits over expensive content for streaming. That’s quite a change from 2021 when former chief Bob Chapek said that the company’s priority was “funding our new growth businesses” (ie streaming service Disney Plus) and that reinstating the dividend and doing share buybacks was “sort of in the distant future”.

One of the symbols of change is the return of Disney’s dividend. The company was never a particularly generous dividend stock. But yields below 2 per cent might have been OK during the era of quantitative easing and negative rates. Now they look trifling. Lex thinks Disney is going to have to wait to right its balance sheet if it has any hope of offering competitive payouts.

North of Disney’s Burbank headquarters, San Francisco-based Airbnb may see a more positive impact from the interest rate cycle change. The cost of building new hotels is rising, which could create more demand for rooms rented out on the company’s site. Last year set new records for Airbnb, which is recovering nicely after a brutal 2020. It just reported its first full year of profit and says the trend towards remote work is bumping up the number of long-term stays. Still, as Lex points out, the stock trades at 43 times expected earnings. That’s far higher than more profitable big tech names.

Remote working should, of course, have been perfect for WeWork’s model of rented office space. Unfortunately, full-year results show cash burn of $1bn, even after cost cuts. The race is on to raise revenue before liquidity runs out.

Something for the weekend?

For those of you who are interested in AI, I have a few recommendations. The first is a very good New Yorker piece on search engine AI by Ted Chiang. Second, an explanation of the eight research papers that set off the AI boom on tech news site The Information.

Closer to home, the British documentary photographer Martin Parr has provided fantastic photos for this FT Magazine article on the NHS. Like his famous shots of grey seaside holidays, they are beautiful for their ordinariness.

If you’ve followed the Disney/Peltz drama you might be interested in a podcast called The Town, an insider-y weekly discussion about Hollywood. I’ve also been listening to an excellent podcast from the BBC on the story of Shamima Begum, who left the UK to join Isis when she was 15. I was transfixed by her interviews with investigative journalist Josh Baker.

Finally, a shout-out to my favourite Lex headline of the week from this column on gas substitutes — Biomethane: rotten returns recede in positive what-whiff scenario.

Enjoy your weekend,

Elaine Moore
Deputy head of Lex