Author: phoffman@channelchek.com

ChatGPT Shortcomings Include Hallucinations, Bias, and Privacy Breaches

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Full Disclosure of Limitations May Be the Quick Fix to AI Limitations

The Federal Trade Commission has launched an investigation of ChatGPT maker OpenAI for potential violations of consumer protection laws. The FTC sent the company a 20-page demand for information in the week of July 10, 2023. The move comes as European regulators have begun to take action, and Congress is working on legislation to regulate the artificial intelligence industry.

The FTC has asked OpenAI to provide details of all complaints the company has received from users regarding “false, misleading, disparaging, or harmful” statements put out by OpenAI, and whether OpenAI engaged in unfair or deceptive practices relating to risks of harm to consumers, including reputational harm. The agency has asked detailed questions about how OpenAI obtains its data, how it trains its models, the processes it uses for human feedback, risk assessment and mitigation, and its mechanisms for privacy protection.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Anjana Susarla, Professor of Information Systems, Michigan State University.

As a researcher of social media and AI, I recognize the immensely transformative potential of generative AI models, but I believe that these systems pose risks. In particular, in the context of consumer protection, these models can produce errors, exhibit biases and violate personal data privacy.

Hidden Power

At the heart of chatbots such as ChatGPT and image generation tools such as DALL-E lies the power of generative AI models that can create realistic content from text, images, audio and video inputs. These tools can be accessed through a browser or a smartphone app.

Since these AI models have no predefined use, they can be fine-tuned for a wide range of applications in a variety of domains ranging from finance to biology. The models, trained on vast quantities of data, can be adapted for different tasks with little to no coding and sometimes as easily as by describing a task in simple language.

Given that AI models such as GPT-3 and GPT-4 were developed by private organizations using proprietary data sets, the public doesn’t know the nature of the data used to train them. The opacity of training data and the complexity of the model architecture – GPT-3 was trained on over 175 billion variables or “parameters” – make it difficult for anyone to audit these models. Consequently, it’s difficult to prove that the way they are built or trained causes harm.

Hallucinations

In language model AIs, a hallucination is a confident response that is inaccurate and seemingly not justified by a model’s training data. Even some generative AI models that were designed to be less prone to hallucinations have amplified them.

There is a danger that generative AI models can produce incorrect or misleading information that can end up being damaging to users. A study investigating ChatGPT’s ability to generate factually correct scientific writing in the medical field found that ChatGPT ended up either generating citations to nonexistent papers or reporting nonexistent results. My collaborators and I found similar patterns in our investigations.

Such hallucinations can cause real damage when the models are used without adequate supervision. For example, ChatGPT falsely claimed that a professor it named had been accused of sexual harassment. And a radio host has filed a defamation lawsuit against OpenAI regarding ChatGPT falsely claiming that there was a legal complaint against him for embezzlement.

Bias and Discrimination

Without adequate safeguards or protections, generative AI models trained on vast quantities of data collected from the internet can end up replicating existing societal biases. For example, organizations that use generative AI models to design recruiting campaigns could end up unintentionally discriminating against some groups of people.

When a journalist asked DALL-E 2 to generate images of “a technology journalist writing an article about a new AI system that can create remarkable and strange images,” it generated only pictures of men. An AI portrait app exhibited several sociocultural biases, for example by lightening the skin color of an actress.

Data Privacy

Another major concern, especially pertinent to the FTC investigation, is the risk of privacy breaches where the AI may end up revealing sensitive or confidential information. A hacker could gain access to sensitive information about people whose data was used to train an AI model.

Researchers have cautioned about risks from manipulations called prompt injection attacks, which can trick generative AI into giving out information that it shouldn’t. “Indirect prompt injection” attacks could trick AI models with steps such as sending someone a calendar invitation with instructions for their digital assistant to export the recipient’s data and send it to the hacker.

Some Solutions

The European Commission has published ethical guidelines for trustworthy AI that include an assessment checklist for six different aspects of AI systems: human agency and oversight; technical robustness and safety; privacy and data governance; transparency, diversity, nondiscrimination and fairness; societal and environmental well-being; and accountability.

Better documentation of AI developers’ processes can help in highlighting potential harms. For example, researchers of algorithmic fairness have proposed model cards, which are similar to nutritional labels for food. Data statements and datasheets, which characterize data sets used to train AI models, would serve a similar role.

Amazon Web Services, for instance, introduced AI service cards that describe the uses and limitations of some models it provides. The cards describe the models’ capabilities, training data and intended uses.

The FTC’s inquiry hints that this type of disclosure may be a direction that U.S. regulators take. Also, if the FTC finds OpenAI has violated consumer protection laws, it could fine the company or put it under a consent decree.

Shrinkflation and Skimpflation Are Eating Our Lunch

Posted on by phoffman@channelchek.com
Image Credit: Brett Jordan (Flickr)

Why Economic Data Doesn’t Reconcile With Personal Experience

Does grocery shopping and eating out cost the same as it did in 2019? Government statistics on personal consumption and expenditures would seem to indicate they do. Most of us know that we are paying noticeably more to eat than we did a few years ago. Below is an article explaining the flaws in government data and the nuances that hide actual experience from this set of numbers. It is written by Dr. Jonathan Newman, he is a Fellow at the Mises Institute, his research focuses on inflation and business cycles, and the history of economic thought.  – Paul Hoffman, Managing Editor, Channelchek.

Economist Jeremy Horpedahl dismissed the silly claim by anticapitalists that capitalism must engineer food scarcity for the sake of profits. He presented a graph of Bureau of Labor Statistics (BLS) data demonstrating a substantial decrease in household food expenditure as a percentage of income—from 44 percent in 1901 to a mere 9 percent in 2021. This is something to celebrate and certainly can be attributed to the abundance of market economies.

But when Jordan Peterson asked, “And what’s happened the last two years?” I went digging. First, I confirmed Horpedahl’s observation: the amount we spend on food as a proportion of our budget has fallen dramatically. Second, I saw what Peterson hinted at: a significant spike in food spending when covid and the associated mess of government interventions hit (figure 1).

Figure 1: Food and personal consumption expenditures, 1959–2023

Source: US Bureau of Economic Analysis, FRED.

Interestingly, the spike looks like a blip. Someone oblivious to the events of the past few years might see this chart and say, “Yeah, something strange happened in 2020, but it looks like everything is back to normal.” I’m certain that this doesn’t align with anyone’s experience, however. Even today, no one would say that restaurant visits and grocery store trips cost the same as they did in 2019.

What changed in 2020? Why does this graph not feel right? Assuming the Bureau of Economic Analysis data isn’t totally off (and it is important to be skeptical of government data), why would a January 2023 report on consumer inflation sentiment conclude that “there is a disconnect between the inflation data reported by the government and what consumers say they now pay for necessities”?

The difference lies in the qualitative aspects of our experience as consumers. Spending proportions may have returned to their trend, but that isn’t the whole story. “Shrinkflation” and “skimpflation” have taken their toll on the quantity and quality of the food we enjoy—or maybe the food we tolerate is more apt.

Businesses know that charging higher prices is unpopular, especially when many consumers are convinced that greed is driving price inflation. So businesses resort to reducing the amount of food in the package, diluting the product but keeping the same amount, or otherwise cutting corners in ways that consumers may not immediately notice.

Thankfully, websites such as mouseprint.org document some of these cases:

Sara Lee blueberry bagels reduced from 1 lb., 4.0 oz. per bag to 1 lb., 0.7 oz.

Bounty “double rolls” reduced from 98 sheets to 90 (how is it still a “double roll”?)

Gain laundry detergent containers reduced from 92 fl. oz. to 88 fl. oz. without any obvious difference in the size of the container

Dawn dish soap bottles reduced from 19.4 fl. oz. to 18.0 fl. oz.

Green Giant frozen broccoli and cheese sauce packages reduced from 10.0 oz. to 8.0 oz. with no change in the advertised number of servings per package

In some instances of skimpflation, the volume or weight of a product remains the same, but the proportions change. For example, Hungry-Man Double Chicken Bowls (a frozen dinner of fried chicken and macaroni and cheese) maintained a net weight of 15.0 oz., but the protein content dropped from 39 grams to 33 grams.

And while firms are reducing the quantity and quality of the food they sell, consumers are also choosing to purchase less food and even lower-quality food. The January 2023 report on consumer inflation sentiment shows that 69.4 percent of respondents “reduced quantity, quality or both in their grocery purchases due to price increases over the last 12 months.”

We have also seen a widespread and long-lasting change in customer service at restaurants. Many restaurants switched to providing only takeout for months or years. Even though the dine-in option has been reintroduced at some restaurants, the service hasn’t quite been the same, with QR-code menus, shorter hours, less staff, and terse demeanors.

It’s not surprising that the massive government interventions, including creating trillions of new dollars, would have countless effects—some that show up in various statistics but many that do not. For example, if we look back at the period of German hyperinflation, we see surprisingly boring data on food spending proportions (figure 2).

Figure 2: Household expenditures in Germany, 1920–22

Source: Data from Carl-Ludwig Holtfrerich, The German Inflation, 1914–1923: Causes and Effects in International Perspective, trans. Theo Balderston (New York: Walter de Gruyter, 1986), cited in Gerald D. Feldman, The Great Disorder: Politics, Economics, and Society in the German Inflation 1914–1924 (New York: Oxford University Press, 1997), p. 549.

Historian Gerald D. Feldman commented on the German household expenditure data in a way that sounds familiar: “As one study after another pointed out, however, the full impact of these changes had to be understood in qualitative terms.” There was “reduced quality and quantity of the food consumed” and “poorer quality clothing,” among other qualitative changes.

Government statistics are unable to capture these subtleties. This should be obvious—your personal experience as a consumer is more than just the price you pay for a certain weight of food. We aren’t merely machines; we don’t describe our lives in miles per gallon or kilowatt hours.

This is why Ludwig von Mises attacked the conceited aggregates and indexes purported to measure various aspects of consumers’ lives: “The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred.”

He concludes: “A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.”

Original Source

https://mises.org/wire/shrinkflation-and-skimpflation-are-eating-our-lunch

Study Finds Substantial Benefits Using ChatGPT to Boost Worker Productivity  

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For Some White Collar Writing Tasks Chatbots Increased Productivity by 40%

Amid a huge amount of hype around generative AI, a new study from researchers at MIT sheds light on the technology’s impact on work, finding that it increased productivity for workers assigned tasks like writing cover letters, delicate emails, and cost-benefit analyses.

The tasks in the study weren’t quite replicas of real work: They didn’t require precise factual accuracy or context about things like a company’s goals or a customer’s preferences. Still, a number of the study’s participants said the assignments were similar to things they’d written in their real jobs — and the benefits were substantial. Access to the assistive chatbot ChatGPT decreased the time it took workers to complete the tasks by 40 percent, and output quality, as measured by independent evaluators, rose by 18 percent.

The researchers hope the study, which appears in open-access form in the journal Science, helps people understand the impact that AI tools like ChatGPT can have on the workforce.

“What we can say for sure is generative AI is going to have a big effect on white collar work,” says Shakked Noy, a PhD student in MIT’s Department of Economics, who co-authored the paper with fellow PhD student Whitney Zhang ’21. “I think what our study shows is that this kind of technology has important applications in white collar work. It’s a useful technology. But it’s still too early to tell if it will be good or bad, or how exactly it’s going to cause society to adjust.”

Simulating Work for Chatbots

For centuries, people have worried that new technological advancements would lead to mass automation and job loss. But new technologies also create new jobs, and when they increase worker productivity, they can have a net positive effect on the economy.

“Productivity is front of mind for economists when thinking of new technological developments,” Noy says. “The classical view in economics is that the most important thing that technological advancement does is raise productivity, in the sense of letting us produce economic output more efficiently.”

To study generative AI’s effect on worker productivity, the researchers gave 453 college-educated marketers, grant writers, consultants, data analysts, human resource professionals, and managers two writing tasks specific to their occupation. The 20- to 30-minute tasks included writing cover letters for grant applications, emails about organizational restructuring, and plans for analyses helping a company decide which customers to send push notifications to based on given customer data. Experienced professionals in the same occupations as each participant evaluated each submission as if they were encountering it in a work setting. Evaluators did not know which submissions were created with the help of ChatGPT.

Half of participants were given access to the chatbot ChatGPT-3.5, developed by the company OpenAI, for the second assignment. Those users finished tasks 11 minutes faster than the control group, while their average quality evaluations increased by 18 percent.

The data also showed that performance inequality between workers decreased, meaning workers who received a lower grade in the first task benefitted more from using ChatGPT for the second task.

The researchers say the tasks were broadly representative of assignments such professionals see in their real jobs, but they noted a number of limitations. Because they were using anonymous participants, the researchers couldn’t require contextual knowledge about a specific company or customer. They also had to give explicit instructions for each assignment, whereas real-world tasks may be more open-ended. Additionally, the researchers didn’t think it was feasible to hire fact-checkers to evaluate the accuracy of the outputs. Accuracy is a major problem for today’s generative AI technologies.

The researchers said those limitations could lessen ChatGPT’s productivity-boosting potential in the real world. Still, they believe the results show the technology’s promise — an idea supported by another of the study’s findings: Workers exposed to ChatGPT during the experiment were twice as likely to report using it in their real job two weeks after the experiment.

“The experiment demonstrates that it does bring significant speed benefits, even if those speed benefits are lesser in the real world because you need to spend time fact-checking and writing the prompts,” Noy says.

Taking the Macro View

The study offered a close-up look at the impact that tools like ChatGPT can have on certain writing tasks. But extrapolating that impact out to understand generative AI’s effect on the economy is more difficult. That’s what the researchers hope to work on next.

“There are so many other factors that are going to affect wages, employment, and shifts across sectors that would require pieces of evidence that aren’t in our paper,” Zhang says. “But the magnitude of time saved and quality increases are very large in our paper, so it does seem like this is pretty revolutionary, at least for certain types of work.”

Both researchers agree that, even if it’s accepted that ChatGPT will increase many workers’ productivity, much work remains to be done to figure out how society should respond to generative AI’s proliferation.

“The policy needed to adjust to these technologies can be very different depending on what future research finds,” Zhang says. “If we think this will boost wages for lower-paid workers, that’s a very different implication than if it’s going to increase wage inequality by boosting the wages of already high earners. I think there’s a lot of downstream economic and political effects that are important to pin down.”

The study was supported by an Emergent Ventures grant, the Mercatus Center, George Mason University, a George and Obie Shultz Fund grant, the MIT Department of Economics, and a National Science Foundation Graduate Research Fellowship Grant.

Reprinted with permission from MIT News ( http://news.mit.edu/ )

Why, When, and How to Rebalance Your Portfolio 

Posted on by phoffman@channelchek.com

There are More Reasons to Balance Your Investments than to Let Them Ride

Performance differences of varied allocations in an investment portfolio over time will disrupt the original balance. It doesn’t take long for the portfolio to be overweighted in some sectors and underweighted in others. This can add unintended risk not included in the original plan. One tried and true method of resetting the risk to its original setting, is regular portfolio rebalancing. Below, we’ll highlight why investors rebalance their portfolios, how to know how often is prudent, and the importance of reviewing and maybe revising allocations during the rebalancing process.

Why Do Investors Rebalance Their Portfolios?

Rebalancing helps to retain the characteristics of a decided upon asset allocation. This enforces the mix in sot not veering too far from an allocation that takes into consideration the expected risk adjusted return characteristics of the portfolio, and supports the individuals investment policy statement (IPS)

Asset allocation refers to the distribution of investments across different asset classes, such as stocks, bonds, crypto, real estate and cash. A well thought out portfolio may also consider market capitalization of the securities in the stock portion of their investments as these too have different performance characteristics.

Over time, market movements cause the value of the portfolio assets to fluctuate, as one segment grows faster, or loses value faster than other assets. This unbalances the original asset allocation. Because this is portfolios lose their balance, investors will mark their calendars to, at set intervals, rebalance their portfolios to bring it back in line with the intended allocation.

Bringing a portfolio back to the original decided upon helps with two main important goals.

Risk Management: Different asset classes carry varying levels of risk. By rebalancing, investors can ensure that their portfolios remain aligned with their risk tolerance. For instance, if stocks have performed exceptionally well, their increased value could lead to a higher proportion in the portfolio. Rebalancing allows investors to sell some stocks and allocate the proceeds to other assets to manage risk effectively. Over time this can have the effect of selling off securities as they become overvalued, and buying others when they are undervalued.

Long-Term Strategy: Regular rebalancing forces investors to maintain their long-term investment strategy. It prevents the portfolio from becoming overly skewed towards one asset class, which could result in excessive exposure to specific market conditions. Regularly rebalancing ensures that the investment strategy remains intact, even during periods of market volatility.

How Often Should Investors Rebalance Their Portfolios

The frequency of portfolio rebalancing depends on individual preferences, investment goals, and market conditions. While there’s no one-size-fits-all approach, common rebalancing strategies include:

Time-Based: Investors can rebalance their portfolios on a predetermined schedule, such as quarterly, semi-annually, or annually. This approach ensures regular monitoring and adjustment of the portfolio.

Threshold-Based: Investors can set predetermined thresholds for asset allocation. When the allocation deviates beyond these thresholds, rebalancing is triggered. For example, if the target allocation for large-cap stocks is 30% and it exceed 35%, the entire portfolio would be rebalanced to the original desired mix.

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Reviewing Allocation Changes when Rebalancing

Isn’t selling your winners and increasing your losers a bad strategy? When rebalancing a portfolio, investors should review and carefully consider allocation changes. This is risky because the purpose of rebalancing and doing it at set trigger points is to make sure emotion doesn’t prevent the investor from thinking that a particular allocation will rise, fall, or move sideways forever. If one is reviewing changes to the allocation, they should start with their stated investment objectives and assess the performance and expectations of each asset class against the objectives.

Key points to consider include:

Diversification: Rebalancing presents an opportunity to reassess the diversification of the portfolio. Ensure that investments are spread across multiple sectors, regions, or asset types to mitigate risks associated with concentration.

Investment Objectives: Investors should review whether their investment objectives have changed over time. If so, they may need to adjust their target asset allocation accordingly. If the portfolio is retirement money, as one approaches retirement, conventional wisdom suggests they should reduce assets that expose them to the most uncertain returns.

Market Conditions: Assess the performance and outlook of different market-caps, industries, and overall asset classes. For example, if rates are expected to rise, reducing the weighting in dividend stocks could be a historically-supported wise decision. Allocate resources to areas that demonstrate growth potential while considering expected risk factors.

Take Away

Time-tested wisdom says investors should, at regular intervals or triggers, rebalance their investment portfolio. This helps them take some profits and invest in securities that haven’t yet risen, or perhaps have gotten cheaper.

By rebalancing, investors can manage risk, align their portfolios with their investment goals, and prevent overexposure to assets that have already had their big run and may be ready to retrace their rise. The frequency of rebalancing should be based on individual circumstances and preferences, while careful review and consideration of allocation changes are crucial for optimal portfolio management. Regularly monitoring and adjusting portfolios through rebalancing can help

Paul Hoffman

Managing Editor, Channelchek

Goldman’s Chief Economist More Optimistic

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Jan Hatzius Thinks the U.S. Will Avoid a Recession

The July hike in rates will be their last, according to a new forecast by Goldman Sachs’ chief economist, Jan Hatzius. In an analyst note dated July 17, Mr. Hatzius reduced his forecast for a recession over the next 12 months to only 20% from an already lower tha peers 25%, citing inflation that has dropped precipitously over the past year.

“We are cutting our probability that a US recession will start in the next 12 months further, from 25% to 20%,” Hatzius wrote. “The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”

The forecast follows the previous weeks CPI and PPI reports that show both had decelerating price increases from previous periods, with consumer prices up just 3% from a year ago.  The report pointed to a faster-than-expected decline in core inflation, which showed to a 4.8% increase from a year earlier. Core inflation readings don’t include food or energy prices that may be up or down based on factors unrelated to economic strength or weakness.  

With inflation on the run, economists don’t expect the Fed to stop short of finishing the job. On July 25-26 next week the Federal Reserve is widely expected to adjust rates up another quarter-percentage point. Goldman’s Hatzius wrote he expects this will be the final increase in the Fed’s tightening cycle.

“We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth — especially when adjusted for the resumption of student debt payments in October — and a drag from reduced bank lending,” he wrote.

Monetary policymakers have raised interest rates sharply over the past year, approving 10 straight rate hikes in the span of one year to lower inflation that was as high as 9%. In a little over a year, the base overnight bank lending rate was pushed up from near zero to near 5.25%, the fastest pace of tightening since the 1980s. If Hatzius and many other economists are correct, Officials are expected to approve an 11th rate hike at the conclusion of their two-day meeting next week, the FOMC did not raise rates at the June meeting, choosing to assess the economy for a longer period before deciding.

Increased interest rates elevates costs on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 7% from half that level a couple of years back. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also spiked. This helps slow demand, less demand is less inflationary.

The labor market has remained strong despite the Fed’s assault on business conditions. Taken all together Goldman Sachs is more bullish on a soft landing for the US economy.

“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” he wrote. For context the average recession expectation has been 15% since WWII. Hatzius’ adjusted forecast is still above the average of 15%, but well below the median forecast on Wall Street, of 54%. 

According to the note, encouraging CPI data is not a trend set to fizzle out, as fundamental signals highlight further disinflation to come, “Used car prices are sliding on the back of higher auto production and inventories, rent inflation still has a long way to fall before it catches up with the message from median asking rents, and the labor market has continued to rebalance with an ongoing downtrend in job openings, quits, reported labor shortages, and nominal wage growth,” wrote Goldman’s Hatzius.

Take Away

No economist has a crystal ball, but when Goldman Sachs issues a note, the markets pay attention. In its note this week it reports expectations that the odds of a recession in the next year have fallen to just 20%, citing encouraging economic data, including, employment, consumer sentiment and slowing inflation. Goldman’s senior economist expects just one remaining interest rate hike in the Federal Reserve’s tightening cycle, and that is expected in July.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.goldmansachs.com/about-us/people-and-leadership/leadership/management-committee/jan-hatzius.html

https://www.bloomberg.com/news/articles/2023-07-17/goldman-s-hatzius-cuts-odds-of-us-recession-in-next-year-to-20?srnd=premium#xj4y7vzkg

https://www.foxbusiness.com/economy/goldman-sachs-trims-us-recession-odds-next-year

Professional Investment Managers Do This, Are You?

Posted on by phoffman@channelchek.com

The Basics of Creating an Investment Plan

One investment tool used by professionals far more often than self-directed investors could prove beneficial to individual retail investors to prevent their portfolio from chasing stocks that may have already had their run, or holding for too long, or even selling just as the company is about to rise. And it’s created by the investors themselves, at times with the help of a wealth advisor. A written Investment Policy Statement (IPS) even at the most basic level, can go a long way to commit to building a portfolio to fit one’s purpose and in ways true to that purpose.

What is an IPS?

An Investment Policy Statement (IPS) is a detailed framework that outlines an individual’s approach to investing to achieve their financial goals. Put another way, it’s a compass that helps investors keep their bearings and make sober decisions about their investments based on their risk tolerance, time horizon, financial objectives, and other relevant factors.

What’s Included in an IPS?

Financial Goals: Clearly define short-term and long-term financial objectives, such as saving for retirement, buying a home, funding education, or starting a business is the best starting point.

Risk Tolerance: Everyone wants the best of both worlds, but risk can work against you. Assessing one’s risk appetite or willingness to tolerate market volatility and potential losses should be an honest conversation with oneself. It should then be defined and adhered to when determining the proportion of investments exposed to higher-risk versus lower-risk assets.

Asset Allocation: Asset allocation can help the investor balance risk using non-correlated assets so the positions don’t all tend to move together, up and especially down. Determining the optimal mix of asset classes like stocks, bonds, real estate, gold, or cash based on risk tolerance, time horizon, and financial goals is just the beginning. A person with long-term goals may wish to review the history of small-cap stocks to large-cap stocks and allocate more of their stocks to the more historically volatile, but better performing small-caps. Similarly, someone with a short time horizon may determine a larger allocation of bonds suits their financial goals best, and then perhaps choose shorter duration or higher quality bonds.

Diversification: Spreading investments across different asset classes, industries, geographies, and investment vehicles to reduce risk and enhance portfolio stability. Diversification minimizes the impact of adverse events on the overall investment performance.

Investment Selection: Identify specific investments, such as individual stocks, exchange-traded funds (ETFs), or bonds, that align with the chosen asset allocation and meet the criteria for risk, return, and other preferences. Resources available to individuals today, including from retail brokers and online research and data from sources like Channelchek can provide insights into risk and reward.

Monitor and Review: The IP document should define how often you’ll assess the investment portfolio’s performance, making adjustments as needed while staying true to your stated financial goal. Staying informed about changes in market conditions and investment opportunities along the way will help the review.

Benefits and Importance of IPS for Individuals

Clarity and Focus: An IPS takes the fuzziness out of investing in a world with so many options. It helps individuals define and articulate their financial goals and align their investment decisions with those objectives. It may not be a precise roadmap, but it can serve as a compass helping to reduce costly impulsive or emotional investment decisions.

Risk Management: By assessing risk tolerance and designing an appropriate asset allocation, an IPS helps individuals manage risk effectively and avoid overexposure to any single investment or asset class. Risk management can include rebalancing your portfolio, selling a bond if it drops below a certain investment grade, and making sure any stock you purchase trades with ample volume for better execution and timing.

Consistency and Discipline: An IPS encourages individuals to maintain a long-term perspective and stay committed to their investment strategy, even during periods of market volatility or short-term fluctuations.

Maximizing Returns: An IPS may even help remind you that you have too much money sitting in low yielding bank accounts. Through diversification and thoughtful investment selection, an IPS aims to optimize investment returns while minimizing unnecessary risks that don’t match your goals.

Adaptability: An IPS is not a static document. It should be periodically reviewed and adjusted to accommodate changes in personal circumstances, market conditions, and financial goals.

Downside Risk of an IPS

The problem with the idea of creating an IPS is that so few take the time to actually write one. It requires thinking through your goals, and determining what expected returns are in different asset classes, and then breking those down further for security selection. While this may seem like a lot of work, if it improves the outcome toward meeting a goal, or provides confidence one will meet the goal, it is worth the investment in time.

If it seems overwhelming, don’t get lost in too many details to start, just include the basics. The following may help take the mystery out of what a basic Investment Policy Statement can look like:

Financial Goals:

Short-term goal: Save $35,000 for a down payment on a house within the next three years.

Long-term goal: Build a retirement nest egg of $1 million over the next 30 years.

Risk Tolerance:

Moderate risk tolerance: Willing to accept some market volatility in pursuit of higher returns.

Asset Allocation:

Equities (stocks): 60% of the portfolio for long-term growth potential.

Fixed Income (bonds): 30% of the portfolio for stability and income generation.

Cash and Cash Equivalents: 10% of the portfolio for liquidity and emergency funds.

Diversification:

Within equities: Include 60% index large-cap funds, 20% large-cap individual stocks (no more than 5% of portfolio each). Include 20% small-cap stocks, 10% in a small cap index fund and 10% in individual stocks diversified across different sectors (technology, healthcare, finance, etc.). All equities U.S. based companies.  

Within fixed income: Ladder maturities evenly out to seven years maturity. Include bonds rated BB or above, no municipal bonds.  

Monitoring and Review:

Regularly review the portfolio’s performance and make adjustments as needed. Seek to rebalance quarterly beginning September 15, 2023.

Stay informed about market trends, economic indicators, and any changes in the individual investments. Subscribe to trsuted news sources like no-cost Channelchek daily emails.

Reassess the investment strategy periodically to ensure it remains aligned with financial goals and changing circumstances.

Please note that this example is generalized and should not be considered personalized investment advice.

Take Away

Overall, a written investment policy can provide individuals with a structured approach to investing, increase their chances of achieving their financial objectives, and help them navigate the complexities of the investment landscape more effectively.

Paul Hoffman

Managing Editor, Channelchek

Gold Could Get Much Stronger from BRICS Plans

Posted on by phoffman@channelchek.com

The BRICS Currency Project Picks Up Speed

On Friday, July 7, 2023, news broke in the financial market media that the “BRICS” (that is, Brazil, Russia, India, China, and South Africa) will implement their plan to create a new international currency for trading and financial transactions, and that this new currency will be “gold-backed”. Most recently, on June 2, 2023, the foreign ministers of the BRICS – as well as representatives from more than 12 countries – met in Cape Town, South Africa (interestingly at the “Cape of Good Hope”). Among other things, it was emphasized that they wanted to create an international trading currency. Undoubtedly, this is an undertaking that could have consequences of epic proportions.

After all, the BRICS countries represent about 3.2 billion people, approximately 40 percent of the world’s population, with a combined economic output nearly the size of the economy of the United States of America. And there are also many other countries (such as Saudi Arabia, United Arab Emirates, Egypt, Iran, Algeria, Argentina, and Kazakhstan) that might want to join the BRICS club.

The goal of the BRICS countries is to reduce their economic and political dependence on the US dollar, challenging “US dollar imperialism”. To this end, they want to create a new international currency for commercial and financial transactions, replacing the US dollar as the means of transaction unit.

The reason is obvious. The US administration has on many occasions used the greenback as a “geopolitical weapon” and engaged in a kind of “financial warfare”: Washington sanctions enemy countries by denying them access to the US dollar capital market, but above all, it shuts them off from the international US dollar-centric payment system.

The freezing of Russia’s currency reserves (the equivalent of almost 600 billion US dollars is currently at stake) has set off alarm bells in many non-Western countries. It has reminded a number of them that holding US dollars comes with a political risk. This, in turn, has prompted many to restructure their international foreign reserves: holding fewer US dollars, switching to other (smaller) currencies, but above all, buying more gold.

But how might the BRCIS manage to swim away from the US dollar? While no details are available yet about how the new BRICS currency might be structured, it should not stop us from speculating about what lies ahead.

The BRICS could establish a new bank (the “BRICS-Bank”), funded by gold deposits from BRICS central banks. The physically deposited gold holdings would be shown on the asset side of the BRICS bank’s balance sheet – and could be denominated, for example, “BRICS-Gold”, where 1 BRICS-Gold represents 1 gram of physical gold.

The BRICS-Bank can then grant loans denominated in BRICS-Gold (for example, to exporters from BRICS countries and/or to importers of goods from abroad). To fund the loans, the BRICS-Bank makes a credit contract with the holders of BRICS-Gold: The holders of BRICS-Gold agree to transfer their deposit to the BRICS-Bank for, say, one month, or one or two years, against receiving an interest rate. What is more, the BRICS-Bank, and it can also accept further gold deposits from international investors, who can hold (interest-bearing) BRICS-Gold deposits this way.

BRICS-Gold could henceforth be used by the BRICS countries and their trading partners as international money, as an international unit of account in global trade and financial transactions. Incidentally, the new de facto gold currency would not even have to be physically minted but could be and remain an accounting-only unit while being redeemable on demand.

The exporters from the BRICS countries and the other member countries would, however, have to be willing to sell their goods against BRICS-Gold instead of US dollars and other Western fiat currencies, and the importers from the Western countries would have to be willing and able to pay their bills in BRICS gold.

How do you get BRICS-Gold? Those demanding BRICS-Gold must either get a BRICS-Gold loan from the BRICS-Bank or purchase gold in the market and deposit it with the BRICS-Bank or a designated custodian, and the gold deposit is then credited to his account in the form of BRICS-Gold.

For example, in payment transactions, the goods importer’s BRICS-Gold deposits (held, for example, at the BRICS-Bank) are credited to the account of the exporter of goods (also held at the BRICS-Bank or at a correspondent bank or gold custodian).

However, the transition, the use of BRICS-Gold as an international trade and transaction currency, would most likely have far-reaching consequences:

(1.) It would presumably lead to a (sharp) increase in the demand for gold compared to current levels, with not only gold prices measured in US dollars, euros, etc. but also in the currencies of the BRICS countries increasing (substantially).

(2.) Such an increase in the gold price would devalue the purchasing power of the official currencies – not only the US dollar but also the BRICS currencies – against the yellow metal. Also, the prices of goods in terms of the official fiat currencies would most likely skyrocket, debasing the purchasing power of presumably all existing fiat currencies.

(3.) The BRICS countries would build up gold reserves to the extent that they run, or will run, trade surpluses. They would presumably be the winners of the “currency switch”, while the countries with trade deficits (first and foremost, the US) would lose out.

BRICS official gold holdings, in billion US dollars, Q1 2023

 Source: Refinitiv; The BRICS’ gold reserves amounted to 5452.7 tons in the first quarter of 2023 (market value currently around 350 billion US Dollars).

These few considerations already show how disrupting the topic of “creating a new gold-backed international trading currency” could be: The BRICS could well trigger landslide-like changes in the global economic and financial structure. Still, it will be interesting to see how the BRICS countries intend to proceed at their August 22-24 meeting in Johannesburg, South Africa.

About the Author:

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

The Ripple XRP Case Creates Many Questions

Posted on by phoffman@channelchek.com

Who Will Regulate Crypto if not the SEC?

The cryptocurrency developer Ripple Labs just won a legal victory against the U.S. Securities and Exchange Commission (SEC) that should provoke cheers from the entire industry, at least those that prefer that digital currency not be treated as a security. If crypto is not viewed as a security, the jurisdiction which the SEC has been pushing hard to cement, may fall apart. This ruling may eventually lead to any future legal framework for digital tokens being designed by the U.S. Congress.

Background

Ripple is a technology company that uses cryptocurrency and blockchain technology to offer financial solutions. Ripple and XRP are two distinct entities. Ripple is a fintech company that builds global payment systems, while XRP is an independent digital asset that can be used by anyone for a variety of reasons.

In 2020, Ripple was charged by the SEC on the grounds that the company illegally raised $1.38 billion in unregistered securities offerings. In a ruling on July 13 of this year, it was decided by a Federal court that Ripple Labs did not violate securities law by selling its XRP tokens on its exchange.  This is being seen as the first major setback for the SEC in a decade of enforcement against the cryptocurrency industry. Other crypto firms accused of illegally operating digital asset exchanges can now explore ways to take advantage of the ruling.

This is an important decision that may alter the expected path of the entire industry. The SEC and the cryptocurrency industry which includes exchanges, crypto-mining, and the tokens themselves, have been at odds, with increasing heat on the industry, mainly by the SEC. Gary Gensler, who chairs the SEC, has described the crypto market as a “Wild West” riddled with fraud. He claims that most crypto tokens are securities. The regulator has been cracking down on crypto exchanges, including the top U.S. exchange Coinbase. If crypto is considered a security, it will fall under the commission’s oversight.

What this Means for the Crypto Industry

Crypto firms have long disputed the SEC’s jurisdiction but until last week had no supporting precedence from a court. This win provides much needed ammunition for the industry to reassert its claims.  

U.S. District Judge Analisa Torres in New York ruled that sales on public cryptocurrency exchanges were not offers of securities because purchasers did not have a reasonable expectation of profit that depended on anything Ripple did. This profit expectation was used as a key in determining if XRP was a security at the time.

Crypto supporters are viewing the decision as a watershed and the judge’s reasoning as a new line of defense for the others being targeted by the SEC, such as Coinbase, Binance, and Bittrex.

SEC APPEAL?

It remains to be seen whether the SEC will challenge the ruling in the 2nd U.S. Court of Appeals which could cause judges to delay hearing other pending and new cases that other crypto assets sold on exchanges are not securities.

Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company “wouldn’t shy away from an appeal, because the judge was right on her core findings,” adding: “I believe any appellate court looking at this would amplify and endorse those rulings, which would certainly be welcome.”

An appeal is somewhat risky for the SEC. If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic in the Ripple ruling, other cases like the SEC vs. Coinbase case would leave the SEC without much of an argument. This could permanently eliminate any claim the Commission has to regulation over the industry.

With the district court having taken a sledgehammer to the main claim the SEC had to oversight,  the industry may find itself subject to a legislative agreement. Especially with an SEC deprived of the argument that their legal cases were sound, there’s nothing to stop an acceleration of efforts to find a bipartisan agreement on a regulatory framework for crypto assets by the legislative branch.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.coindesk.com/policy/2023/07/14/what-ripples-partial-xrp-win-means-for-other-crypto-firms-fighting-sec/

https://www.reuters.com/technology/crypto-firms-facing-us-sec-charges-find-hope-ripple-ruling-experts-say-2023-07-17/

https://www.fnlondon.com/articles/why-the-ripple-ruling-wont-spell-the-end-of-the-secs-crypto-crackdown-20230717?mod=hp_LATEST&adobe_mc=MCMID%3D04828691964107368544310185344499067435%7CMCORGID%3DCB68E4BA55144CAA0A4C98A5%2540AdobeOrg%7CTS%3D1689601964

The Week Ahead –  With Few Economic Stats, Earnings Reports Will Take on Added Importance

Posted on by phoffman@channelchek.com

The Trading Week is Light on Data and Heavy On Quarterly Earnings Reports

After last week’s lower-than-expected CPI and PPI inflation readings, the markets are far less certain what the FOMC will decide at their policy meeting July 25-26. Clarity is not going to come from addresses by any Fed Presidents as they enter a blackout period where they are forbidden to speak on the subject between July 15 and July 27. One report that the markets will be focused on during the week involves unemployment, which, if up, may cause the markets to rally – remember we are still in a period where bad economic news causes a positive stock market reaction.

Investors looking for direction may find it in the earnings reports as major banks, metals producers, and closely followed tech companies will be releasing their quarterly earnings reports.

Monday 7/17

•             8:30 AM ET, The New York State Manufacturing Index is expected to drop to negative 7 for June after unexpectedly climbing 38 points to +6.6 in May 2023, from a four-month low of -31.8 in May.

Tuesday 7/18

•             8:30 AM ET, The consensus for Retail Sales for June is up 0.4% after unexpectedly rising 0.3% month-over-month in May, following a 0.4% increase in April, which beat forecasts of a 0.1% decline. It’s clear the ability to forecast has been economic numbers, especially consumer activity has been difficult.

•             8:55 AM ET, The Johnson Redbook Index is forecast to show a year-over-year, same week, increase of 1.1%, for the week ending July 15. This would follow a 1.6% increase the prior reading. The Redbook is a sample of large US general merchandise retailers representing about 9,000 stores. By dollar value, the Index represents over 80% of the equivalent ‘official’ retail sales series collected and published by the US Department of Commerce.

•             9:15 AM ET, Industrial Production is expected to have risen by 0.1% in June, after declining by 0.2% from a month earlier in May.

•             9:15 AM ET, Manufacturing Production is expected to be flat month over month for June after rising 0.1% in May.

•             9:15 AM ET, Capacity Utilization is expected to have remained in a non-inflationary low 79.5% rate during June. When industries are bumping up against capacity, costs will increase as operations become less efficient because less effective resources are called on to produce, thus increasing the cost of each unit of production.

•             10:00 AM ET, Federal Reserve Vice Chair for Supervision Michael S. Barr will be speaking on fair lending practices at the National Fair Housing Alliance National Conference. The Fed is in a blackout period this week, so it is expected that there will be no discussion of monetary policy.

Wednesday 7/19

•             8:30 AM ET, Building permits consensus forecast for June is for 1.505 million after May’s strong 1.486 million.

•             8:30 AM ET, Housing Starts month over month for May increased by 21.7%, the forecast is for a decline of 10.2% for June.

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 7/20

•             8:30 AM ET, Initial Jobless Claims are expected to have increased the week ended July 15 to 245,000 from 237,000 the prior week. Employment data ahead of the July 25-26 FOMC meeting, in the absence of any fresh inflation data until the 28th has the potential to move markets.

•             10:00 AM ET, Existing home sales in the US, which include completed transactions of single-family homes, townhomes, condominiums, and co-ops, is expected to decline by 1.2% month over month for June. This would follow a small increase of 0,2% the previous reading.

Friday 7/21

•             No major economic releases scheduled.

What Else

The FOMC meeting is Tuesday and Wednesday during the last full week in July. The Fed can do one of three things, lower rates, raise rates, keep rates unchanged. Like all good multiple choice questions, one of these answers can be eliminated. On Thursday of last week (July 13), Federal Reserve Board Gov. Christopher Waller said he was not swayed by June’s benign consumer inflation data and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year. “I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said this in an address to The Money Marketeers on NYU, a bond market club with some of the most powerful fixed income professionals as members. If the Fed is data dependent and there is little new data since the last inflation readings, Waller’s position is not likely to change.

Paul Hoffman

Managing Editor, Channelchek

New SEC Rules Could be Costly for Investors

Posted on by phoffman@channelchek.com

Do New SEC Rules Bubble Wrap Money Market Funds?

What if you bought a new home in what has historically been a trouble-free neighborhood? You are not one to take big risks with your family or belongings so you also pay extra for what are expected to be the best locks, install a security camera, motion detector lights, and build a state-of-the-art fence behind which sits your German shepherd named Patton. The first week after you move in, a town representative comes by and tells you that they are worried about your safety, so you and everyone else in town must also spend a little money each month on an alarm system they approve of. To you, even this small amount of money is a waste as Patton is generally always on the job, you have ample protection in other ways, and the extra money is better spent on dog food. 

This is what many investors feel the SEC has just done by changing the already extremely low-risk rules for money market funds this week. These investors believe they already had ample safety in the “cash” allocation and may have already given up return in order to secure that safety. So the forced added layer of protection to MM funds, which have in over five decades only seen two funds in the asset class inch down in value, is an example of a regulator forcing them to pay for the protection they don’t need.   

Money Market Fund Background

Money market funds are governed by the SEC under rule 2a-7 of the Investment Company Act of 1940. These rules are very specific in defining the underlying assets in the fund. The most common use of MM funds, and the restrictions governing the holdings, is to provide a very liquid alternative that can be viewed as cash among your other investments. Fund families at times use their MM funds as a funnel or gateway investment from which they hope to have investors venture beyond to other higher fee offerings.

Money market funds, typically purchased through a broker, are not insured, but the extremely high credit quality of underlying securities required by the SEC, along with the very short average maturity required by the SEC, along with the amount each fund is required by the SEC to hold in overnight investments, has provided investors with a very low-risk harbor for balances that may be used as savings, or as a parking place while waiting for more aggressive investment opportunities.

Unlike other mutual funds, where investors buy shares and over time the share price changes, money market funds shares are valued at $1.00. When the underlying investments accrue or pay interest, the non-fee portion of income is credited to account holders as a share dividend, always valued at $1.00. In this way it is designed to feel like a bank savings account. This minimal risk, savers to the tune of trillions of dollars, endure in exchange for higher returns than available in a bank passbook account, and the convenience of transferring money to purchase other investments.

What is the risk of a 2a-7 money market fund breaking the buck? You can count on two fingers. Since the first money market fund came to market in 1971, it has briefly occurred in two funds, and no investors lost money.  

The first time a MM fund broke the buck was in 1994, a fund named Community Bankers U.S. Government Money Market Fund saw it’s NAV plummet from $1.00 to $0.96. This was after financial engineers at top Wall Street investment banks created derivative instruments that were far from liquid, and stopped accruing interest if markets didn’t perform as expected. Imagine being the first MM fund manager in history to drop below $1.00 because you disregarded prudence.   

The second time was in 2008. The Reserve Primary Fund held Lehman Brothers commercial paper (very short-term notes). On September 16th of that year the fund company announced it had suffered losses in the fund to the extent that assets fell below $1.00 per share to $0.97.

The U.S. Treasury Department guaranteed the $1.00 share price in 2008 to prevent a run on MM funds. And in both occurrences, fund companies, in order to restore faith in their other products, made sure money fund holders were whole by redeeming shares when requested at $1.00.

SEC New Rules for Money Funds Beginning October 2023

In 2010 The SEC created new rules to enhance transparency, liquidity, and bolster the credit quality of MM funds. Despite having only experienced two brief brushes with breaking the buck.

The new rules for 2a-7 SEC-regulated money funds (any fund with “money” in the title is regulated under 2a-7) included that daily maturities must equal at least 10% of the fund. And further, each week at least 30% of the fund notes need to mature. The weighted average maturity of all holdings in any non-government MM fund can not extend longer than 60 days, down from 90 days. The rules essentially were a safe cash alternative and made it super safe, and along the way, they rduced average return to the investors.

A reminder, there has not been an incident since the new rules, but there was some concern in 2020 as the financial system took measures in response to the novel coronavirus.

On July 12, 2023 the SEC announced it has decided that investors in MM funds need to be protected even better. Or perhaps it is better protecting the fund industry by adding extra safety measures that they all have to play by, giving none a real competitive advantage, and increasing their competitiveness against FDIC insure bank money funds. Either way, it is sure to lower, once again, the interest rates paid on the average MM fund. Considering interest rate compounding and the time value of money, investors this coming October will begin “paying” more for protections than they are probably worth.

The SEC explained its reasons for the added protection.“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”

The SEC finalized the most recent amendments to Rule 2a-7 on July 12, 2023. The amendments are designed to improve the resilience and transparency of money market funds by:

  • Requiring money market funds to impose a mandatory liquidity fee of 2% when daily net redemptions exceed 5% of total assets.
  • Increasing the minimum daily liquid asset requirement from 10% to 15% of total assets
  • Increasing the minimum weekly liquid asset requirement from 30% to 35% of total asset
  • Giving money market fund boards the discretion to impose a liquidity fee if daily net redemptions exceed 2.5% of total assets.

Beginning in October 1, 2023, money market funds will also disclose more information about their liquidity risk, including the daily and weekly liquid asset requirements, the amount of liquidity fees imposed, and the reasons for imposing liquidity fees.

What Could the Impact Be?

In economics, everything has an impact. To address redemption costs and liquidity concerns, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions exceeding 5 percent of net assets, unless the fund’s liquidity costs are de minimis. This alone could cause investors to try to be first to the door if trouble is perceived thereby increasing the number of runs on these low-risk funds. The shorter average maturity, and higher percentage of holdings held maturing in one day and seven days will also reduce earnings in a normal sloping yield curve environment.

In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. This could be perceived as the funds management punishing investors for expecting a MM fund to provide liquidity on demand. It could also have the impact of funds taking more chances, as the fund manager knows that if a sudden withdrawal spree occurs and a large percentage of their holdings have gone down in value, they can charge customers for wanting their money. 

Take Away

When it comes to investing, risk versus return is a top consideration. Many investors know this and are concerned that regulatory bodies try to protect investors from the downside of risk. By doing this they shield investors from the benefits of risk. It can be argued that some IPOs may not be suitable for every investor, but should ultra-safe money market funds be further shored up at an ongoing cost in return, to reduce the unlikely day when they may lose 3 cents a share? Write to me and let me know what you think.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/rules/proposed/2021/ic-34441-fact-sheet.pdf

https://www.investor.gov/introduction-investing/investing-basics/glossary/money-market-fund

Harnessing the Power of Microglia

Posted on by phoffman@channelchek.com

Immune Cells in the Brain May Reduce Damage During Seizures and Promote Recovery

Seizures are like sudden electrical storms in the brain. Seizure disorders like epilepsy affect over 65 million people worldwide and can have profound effects on a person’s quality of life, cognitive function and overall well-being. Prolonged seizures called status epilepticus can cause lasting brain damage.

Specialized immune cells in the brain called microglia are activated during seizures to help clean up the damage. Researchers don’t fully understand exactly how these cells are involved in seizures. Some studies have found that microglia promote seizures, while other studies show the opposite.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Synphane Gibbs-Shelton, Ph.D. Candidate in Pharmacology, University of Virginia.

I am a scientist who studies the roles that microglia play in seizures. My colleagues and I at the Eyo Lab at the University of Virginia wanted to investigate the possible protective function microglia serve during seizures and how they affect recovery.

We induced seizures in mice using three different methods – chemical, hyperthermic and electrical – and temporarily removed their microglia. In all three cases, we found that seizures worsened when these cells were absent. Mice without microglia also experienced significant weight loss and decrease in mobility compared with mice with microglia.

Our findings highlight the importance of microglia in safeguarding the brain during seizures and promoting recovery; but they also raise important questions about how these cells provide a protective rather than detrimental effect.

While removing all microglia allowed us to better understand their overall effects on seizures, it meant we were unable to fully assess their contributions in specific brain regions and how they interact with other cells. This is because removing microglia also affects the function of other brain cells. Future studies that more selectively modify microglia or alter their function in a controlled way could help researchers gain a more nuanced understanding of the role these cells play in seizures.

This video shows microglia moving in cell culture.

Researchers also don’t fully understand what specific molecules and signals microglia use to protect the brain during seizures. How well our findings apply to seizure disorders like epilepsy is also unclear. These knowledge gaps highlight the complexity of seizure disorders and the need for continued study.

Identifying strategies to harness the beneficial functions of microglia can help researchers develop better treatments that prevent long-term brain damage and enhance the quality of life of people with seizure disorders.

How the US and the UK Intend to Improve Capital Markets

Posted on by phoffman@channelchek.com

Why Issuer-Sponsored Research Has Become a Priority in the UK (and US)

Why are the United Kingdom, The United States, and other countries providing an atmosphere that helps promote company-sponsored research?

Last year the SEC issued a report that was required by Congress on issues affecting the investment research of small companies. Last week the UK accepted, in its entirety, a recommendation on issuer-sponsored research. Both countries recognize the needs of investors, issuers, and the overall economy. Investors and issuers ought to be particularly interested in these changes and how they’ll improve the financial system.

Investment Research

Research is like the grease in the capital markets that keeps money from being stuck. It can be categorized into three types: sell-side research, buy-side research, and independent research.

Sell-side research is provided by full-service broker-dealers for clients to consume.

Buy-side research is created by institutional money managers for in-house use to help them make investment decisions on the money they manage.

Independent research is provided by firms that are neither broker-dealers nor institutional money managers, this service is paid for by investors or at no cost to investors as the company that has issued the security has sponsored the analysis.

Analysts often specialize in a specific industry and will regularly provide research on companies within that industry. This research includes written reports that discuss market developments, financial projections, target prices, and overall ratings or recommendations (such as buy, hold, or sell). The specific content and terminology used in research reports will vary.

These research reports can be published at any time, especially in response to important corporate events like earnings releases. While sell-side and buy-side research may have limited distribution, independent research is more widely available to money management firms and individual investors.

Research helps investors gain clarity about a company and its prospects. It can provide interpretations of significant events related to the company, such as media coverage or predictions from other analysts. Individual investors can also benefit from research reports by using them as part of their overall investment decision-making process.

In addition to producing written research reports, research providers may also assist issuers by arranging meetings or conference calls between investors and the senior management of companies. These roadshows help allow better understanding and communication between investors and the companies they may be interested in.

Overall, research is essential in the capital markets, it provides valuable information and insights that help investors make informed decisions about their investments. It helps reduce uncertainty and allows investors to assess the potential risks and rewards associated with different investment opportunities.

Analysts can also introduce or express their opinions about specific of covered companies using other forums such as video interviews, print media, or investor/issuer conferences. Additionally, sell-side analysts who work for broker-dealers that offer investment banking services may, within regulatory guidelines, be involved in investment banking transactions.

Benefits to Issuer

Research helps investors by discovering and delivering important information about companies. Well-rounded investors consider research an important part of the information they use to make investment decisions, including staying up to date on analyst forecasts for the company and industry, management forecasts, earnings announcements, and SEC filings. This fosters improved liquidity, which benefits price discovery and execution on demand.

According to the Congressionally mandated SEC report titled Staff Report on the Issues Affecting the Provision of and Reliance Upon Investment Research Into Small Issuers, research coverage of a company positively affects the liquidity of its stocks. When a company loses analyst coverage, its stock liquidity can decrease. This decrease in liquidity is more pronounced for smaller companies with fewer analysts covering them. Research coverage also helps investors recognize and pay attention to companies, which affects their value. Investor attention can be gained by engaging research and analysis firms to initiate coverage to gain investor attention.

Excerpt from the Securities and Exchange Committee Report, February 2022, (page 11):

“Studies have shown that research coverage of an issuer is positively related to its stock liquidity and that a reduction in research coverage of an issuer may reduce its stock liquidity. For instance, one study found that issuers that lose analyst coverage for at least one year suffer a ‘significant deterioration in bid-ask spreads, trading volumes, and institutional presence.’

Other studies have found that the reason for this deterioration is that decreases in analyst coverage increases information asymmetry, which can cause issuers to switch to financing that is less sensitive to information asymmetry, including decreasing their use of equity and long-term debt, or cause issuers to decrease their total investment (e.g., capital, research and development and acquisition expenditures) and financing. This decline in liquidity was shown in one study to be more significantly pronounced for smaller issuers, issuers with relatively less analyst coverage, and issuers with a bigger increase in information asymmetry resulting from the loss of an analyst.”

According to the SEC report, research analysts also serve as a comfortable third-party mechanism by monitoring a company’s management. Their scrutiny increases transparency and makes it harder for managers to engage in self-dealing activities. Analysts monitor financial statements, ask questions during earnings announcement conference calls, and distribute information to investors, helping detect any misconduct by management.

When a company loses analyst coverage, according to an SEC review, markets anticipate an increase in agency costs, such as the misuse of cash reserves by managers. The number of analysts covering a company is related to the compensation of chief executive officers and the likelihood of value-destructive corporate acquisitions. Decreased analyst monitoring is also associated with increased earnings management by companies.

The UK Goes All In

On July 10, 2023, the UK formally announced they are on a mission to improve capital markets. A large segment of the new, self-imposed mandate includes the consensus that investment research is an important part of the UK public capital markets and that the availability and quality of expert analyst research is significant in attracting (and retaining) issuers and investors. The Chancellor of the Exchequer is adopting seven action items aimed at “protecting and developing the UK as a centre of excellence for investment research.”

Source: UK Investment Research Review , July 10, 2023 (page 5)

The report states that introducing a research platform to help generate research would help improve research coverage and would help promote a greater interest in smaller cap companies where there is currently a scarcity of research coverage.

The plan is to allow additional optionality for paying for investment research. And would address some of the unintended consequences of the MiFID II unbundling requirements, this aims to increase choices regarding payment for research to permit asset managers to pay for research on a bundled basis and to ensure that UK investment managers remain able to procure research from elsewhere, particularly from the US.

Retail investors have always been at a disadvantage, the UK mission supports greater access to investment research for retail investors, helping to level the playing field.

In developing a research platform open to all, the UK wishes to involve academic institutions and explore situations to strengthen the collaboration between universities and the capital markets ecosystem.  

By providing rules, boundaries, and guidelines, the UK believes it can support issuer-sponsored research by implementing a code of conduct.

The Uk wishes to clarify aspects of the UK regulatory regime for investment analysis or better define it to help simplify access to investment research.

And the last on the UK’s “To Do” list is to review the rules relating to investment research in the context of IPOs with the following points to consider:

  • Changing the FCA Conduct of Business Rules, introduced in 2018, designed to encourage unconnected research analysts to produce research in connection with IPOs. These rules have not had the desired effect of increasing IPO coverage by unconnected analysts but have consequentially extended the UK IPO timetable, putting the UK at a competitive disadvantage.
  • Making IPO-connected analyst research available on a basis similar to the prospectus so that all investors can access the same information.
  • Lower the current restrictions on analysts meeting potential IPO candidates prior to an investment bank being mandated on the IPO are also seen as putting the UK at a disadvantage to other listing venues.

Take Away

Investor access to investment research is important to the capital markets system as it helps money to flow much more easily where needed. Offerings that are better understood and have an additional layer of third-party oversight can attract more needed capital. This reality has been echoed by the SEC and the UK regulatory bodies.

Third-party investment analysis particularly helps smaller companies that may be less understood, as studies show, research coverage improves liquidity among small cap stocks. Investors, particularly retail, benefit from unbiased research and are more likely to make decisions on companies they believe they have a firm understanding of.

All in all, the UK and US authorities understand research provides valuable benefits to investors and the market as a whole. It enhances stock liquidity, increases investor recognition of companies, and serves as an external governance mechanism by monitoring and deterring managerial misconduct.

To have free access to small and microcap company research from the veteran equity analysts at Noble Capital Markets, sign-up here. If you are responsible for the investor relations of a company that may benefit from well-respected coverage, please contact Channelchek here for more information on company-sponsored research.  

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.cfainstitute.org/-/media/documents/code/other-codes-standards/analyst-issuer-guidelines.ashx

https://www.sec.gov/files/staff-report-investment-research-small-issuers.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1168719/UK_INVESTMENT_RESEARCH_REVIEW_-_RACHEL_KENT_10.7.23.pdf

https://www.lexology.com/library/detail.aspx?g=d36aa9a5-d058-4ddc-93d1-ef430dbe3fe7

Will Defining Current Laws to Fit AI, Artificially Stifle its Growth

Posted on by phoffman@channelchek.com

The Legal Problems AI Now Creates Should Pave the Way to a Robust Industry

Is artificial intelligence, or more specifically OpenAI a risk to public safety? Can ChatGPT be ruining reputations with false statements? The Federal Trade Commission (FTC) sent a 20-page demand for records this week to OpenAI to answer questions and address risks related to its AI models. The agency is investigating whether the company engaged in unfair or deceptive practices that resulted in “reputational harm” to consumers. The results could set the stage defining the place artificial intelligence will occupy in the US.

Background

The FTC investigation into OpenAI began on March 2023. It resulted from a complaint from the Center for AI and Digital Policy (CAIDP). The complaint alleged that OpenAI’s ChatGPT-4 product violated Section 5 of the FTC Act. Section 5 prohibits unfair and deceptive trade practices. More specifically, CAIDP argues that ChatGPT-4 is biased, deceptive, and a risk to public safety.

The complaint cited a number of concerns about ChatGPT-4, including:

  • The model’s potential to generate harmful or offensive content.
  • The model’s tendency to make up facts that are not true.
  • The model’s lack of transparency and accountability.

The CAIDP also argued that OpenAI had not done enough to mitigate these risks. The complaint called on the FTC to investigate OpenAI and to take action to ensure that ChatGPT-4 is not used in a harmful way. The FTC has not yet made any public statements about the investigation. OpenAI has not commented publicly on the investigation.

It is not clear what action, if any, the FTC can or will take.

Negligence?

With few exceptions, companies are responsible for the harm done by their products when used correctly. One of the questions the FTC asked has to do with steps OpenAI has taken to address the potential for its products to “generate statements about real individuals that are false, misleading, or disparaging.” The outcome of this investigation, including any regulation could set the tone and define where responsibility lies regarding artificial intelligence.

As the race to develop more powerful AI services accelerates, regulatory scrutiny of the technology that could upend the way societies and businesses operate is growing. What is difficult is computer use generally isn’t isolated to a country, the internet extends far beyond borders. Global regulators are aiming to apply existing rules covering subjects from copyright and data privacy to the issues of data fed into models and the content they produce.

Legal Minefield

In a related story out this week, Comedian Sarah Silverman and two authors are suing Meta and OpenAI, alleging the companies’ AI language models were trained on copyrighted materials from their books without their knowledge or consent.

The copyright lawsuits against the ChatGPT parent and the Facebook parent were filed in a San Francisco federal court on Friday. Both suits are seeking class action status. Silverman, the author of “The Bedwetter,” is joined in her legal filing by authors Christopher Golden and Richard Kadrey.

Unlike the FTC complaint, the authors’ copyright suits may set a precedent on intelligence aggregation. The sudden birth of AI tools that have the ability to generate written work in response to user prompts was “taught” using real life work. The large language models at work behind the scenes of these tools are trained on immense quantities of online data. The training practice has raised accusations that these models may be pulling from copyrighted works without permission – most worrisome, these works could ultimately be served to train tools that upend the livelihoods of creatives.

Take Away

Investing in a promising new technology often means exposing oneself to a not yet settled legal framework. As the technology progresses, the early birds investing in relatively young and small companies may find they hold the next mega-cap company. Or, regulation may limit, to the point of stifling, the kind of growth experienced by Amazon and Apple a few short decades ago.

If AI follows the path of other technologies, well-defined boundaries, and regulations will give companies the confidence they need to invest capital in the technology’s future, and investors will be more confident in providing that capital.

The playing field is being created while the game is being played. Perhaps if the FTC has a list of 20 questions for OpenAI in ten years, it will just type them into ChatGPT and get a response in 20 seconds.

Paul Hoffman

Managing Editor, Channelchek

https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-report-warns-about-using-artificial-intelligence-combat-online-problems

https://www.reuters.com/technology/us-ftc-opens-investigation-into-openai-washington-post-2023-07-13/