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The BIS gets it wrong on AI/LLM and feminism & reproduction

The BIS has a Bulletin out on the usefulness of AI and large language models. They’re not terribly impressed.

When posed with a logical puzzle that demands reasoning about the knowledge of others and about counterfactuals, large language models (LLMs) display a distinctive and revealing pattern of failure. 
The LLM performs flawlessly when presented with the original wording of the puzzle available on the internet but performs poorly when incidental details are changed, suggestive of a lack of true understanding of the underlying logic. 
Our findings do not detract from the considerable progress in central bank applications of machine learning to data management, macro analysis and regulation/supervision. They do, however, suggest that caution should be exercised in deploying LLMs in contexts that demand rigorous reasoning in economic analysis.

Demographics, Global Economy, Politics and societyclaus vistesenJanuary 14, 2024feminism, AI, BIS, ChatGPT, OpenAI, the Nation, Moira Donegan

What to do with high-flying tech at the start of 2024?

I am coming into 2024 in a decent position. My MinVar equity portfolio, designed to extract the best from both worlds in the perennial battle between growth and value, has done largely what it is supposed to do. It has offered positive, but below-beta, returns with below-beta volatility, the latter which means that your humble blogging investment analyst has been able to sleep calmly at night. In bonds, I moved my exposure onto the front early in 2023 in line with the yield curve inversion. At this point I see no reason to change that strategy. Why buy negative carry in duration when you don’t have to? There will be a time to take a strong bet on duration, but I can’t really see that point until either the front-end has collapsed under the weight of global central bank easing, or unless the curve rinses everyone by bear-steepening sufficiently to restore a positive roll and carry in the long bond. In other words, I don’t see any reason to buy duration as long as the curve is still deeply inverted.

Policy talk is cheap & we need more power

Monetary policymakers have been scrambling in the past week to push back against the dramatic shift in market expectations for rate cuts next year. This is true for Fed officials—despite the clear dovish pivot in the December meeting—and particularly so for the ECB, where Ms. Lagarde and her colleagues have been hard at work to disabuse investors of the notion that the central bank will start cutting rates in the first half of next year. Are central banks right to lean into the prevailing market winds here? It’s all in the eye of the beholder. The chart below plots futures-implied policy rates for the Fed and ECB through 2027. The focus at the moment is on 2024, where markets see 150bp and 120bp worth of cuts from the Fed and ECB, respectively. That sounds like a lot, but then again, inflation is now falling rapidly. The question we need to ask is whether markets will be fed information over the next few months that will drive a shift in pricing. I am not sure, and if they aren’t, talk from policymakers will be cheap.

The great (bear) steepening

Everyone is talking about the sell-off in bonds these days. Yields on the US 10-year benchmark is up nearly 150bp since April, within touching distance of 5%, and 30-year yields are now just over 5%, up from 3.7% in April. With the two-year yield up just 100bp over the same period, the curve has bear steepened by 50bp, and is now looking to un-invert due principally to a sell-off in long bonds, contrary to widespread expectations of bull-steepening via a rally in the front end. The 2s10s is still inverted by around 17p , but the 2s30s is now—as far as I can see from the close on Friday the 20th of October—just about positive. No wonder that the long bond is on everyone’s mind. Sustained bear-steepening during inversions are rare sights in G7 bond markets, so when they are spotted in the wild, they tend to grab the attention and imagination of investors and analysts. But what does it mean? Put on the spot, I’d say that bond market volatility is underpriced.

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