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Geoffrey Hinton accepted a Nobel Prize this week, recognizing the foundational work on artificial neural networks that earned him the nickname “godfather of AI.” In a speech Tuesday, Professor Hinton praised one student – alluding to OpenAI’s former Chief Scientist, Ilya Sutskever – for revolting against OpenAI’s CEO.

“I was particularly fortunate to have many very clever students – much cleverer than me – who actually made things work,” said Hinton. “They’ve gone on to do great things. I’m particularly proud of the fact that one of my students fired Sam Altman.”

Of course, Hinton is referring to OpenAI’s board voting to fire Altman in November 2023. Sutskever delivered the news to Altman via video call, but later said he regretted it. Hinton seems to have celebrated the firing of OpenAI’s CEO as a win for AI safety, which he often advocates for. However, the win was short-lived, as Altman now has more control over OpenAI than before, and he could soon get equity.

About two months ago, Shield AI co-founder Brandon Tseng and one of his employees were in an Uber weaving through Kyiv, Ukraine. They were headed to a meeting with military officials to sell them on their AI pilot systems and drones, when suddenly his employee showed him a warning on his phone. Russian bombs were incoming. Tseng met his potential demise with a shrug. “If it’s your time to go,” he said, “then it’s your time to go.”

If anything, Tseng, a former Navy SEAL, was itching for more action. Shield AI employees had previously been to much more dangerous areas in Ukraine, training troops on its software and drones. “I’m quite jealous of where they got to go,” Tseng said. “Just from an adventure standpoint.”

Tseng embodies that quiet macho-ness that pervades most defense tech founders. When I met him last month at the company’s Arlington office, he showed off a knife displayed in his office engraved with the SEAL slogan “Suffer in silence.” The white walls, whose tops glowed with fluorescent lights (to look like a spaceship, Tseng said), were covered with slogans like “Do what honor dictates” and “Earn your shield every day.” I pointed out they were pretty intense. “Are they?” Tseng replied.

In 2015, Tseng founded Shield AI alongside his brother, Ryan Tseng, a patent-awarded electrical engineer, with a clear mission: “We built the world’s best AI pilot,” he said. “I want to put a million AI pilots in customers’ hands.”

To that end, he and his brother have raised over $1 billion from investors like Riot Ventures and the U.S. Innovative Technology Fund. The company develops AI software to make air vehicles autonomous, although Tseng said they want Shield AI’s software in underwater and surface systems as well. It also has hardware products, like its drone V-BAT.

Shield AI is also part of a rare class of defense tech startups: one that’s actually landed decently sized government contracts, like its $198 million contract from the Coast Guard this year. As if trying to position themselves for an even bigger future, the founders chose a new office surrounded by three floors of Raytheon, one of the major defense contractors.

Ukraine: The lab for U.S. defense tech startups

September 16 was a sign of the changing times: Instead of making defense tech founders fly to the Capitol, put on their suits, and grovel to politicians, Washington, D.C., came to them.

Members of the U.S. House Armed Services Committee gathered with Palantir CTO Shyam Sankar, Brandon Tseng, and executives from Skydio, Applied Intuition, and Saildrone at UC Santa Cruz’s Silicon Valley campus. They discussed U.S. Department of Defense (DoD) acquisition reform and, inevitably, the role of U.S. technology in Ukraine. It was the first public hearing the committee has held outside of Washington, D.C., since 2006.

Ukraine has “been a great laboratory,” Tseng told the policymakers. “What I think the Ukrainians have discovered is that they’re not going to use anything that doesn’t work on the battlefield, period.”

Defense tech founders, like Anduril co-founder Palmer Luckey and Skydio co-founder Adam Bry, have all flocked to the embattled country to sell relatively new technology for a rapidly deteriorating battlefield. Unfortunately, not all U.S. tech is working. According to a Wall Street Journal report, drones from U.S. startups have almost universally failed to operate through electronic warfare in Ukraine, meaning the drones cease to work under Russia’s GPS blackout technology.

“Ukraine is at war and people are being killed. But … you want to take those lessons learned,” Tseng told me a week later, reflecting on the hearing. “You don’t want to have to relearn any of those lessons. The United States should not want to relearn any of those lessons.”

Naturally, he’s confident that Shield AI’s drones have fared better in Ukraine than others because, he says, they can operate without relying on GPS. “We are working to get more drones over there based on the successes that we’ve had,” he said, although he declined to name specifics of how many drones Shield AI has sent over.

Terminator-like AI killers? Or ‘Ender’s Game’?

Tseng’s corner office is bare besides a framed copy of the Constitution, hanging crooked on the wall. He listed it as one of his biggest inspirations. “It’s not because we’re perfect, but because we aspire to these values that I would claim are perfect values,” he said. “That’s what matters most. We’re always marching in that direction.”

He straightened out the frame before brushing through an abbreviated history of warfare. Deterrence, he said, tends to happen when a radical new technology emerges, like the atom bomb, or stealth technology and GPS. AI, he said, will usher in the new era of deterrence — assuming the DoD funds it properly. “Private companies are putting more money towards AI and autonomy than any aggregate amount in the defense budget,” he said.

The potential value of AI-related federal contracts ballooned to $4.6 billion in 2023 from $335 million in 2022, according to a report by the Brookings Institution. But that’s still a fraction of the over $70 billion that VCs invested in defense tech in roughly the same period, according to PitchBook.

Still, the biggest question of military AI use is not budget — it’s ethics. Founders and policymakers alike grapple with whether to allow completely autonomous weapons, meaning the AI itself decides when to kill. Lately, some founders’ rhetoric appears to be on the side of building such weapons.

A few days ago, for instance, Anduril’s Luckey claimed there was “a shadow campaign being waged in the United Nations right now by many of our adversaries” to trick Western countries into not aggressively pursuing AI. He implied that fully autonomous AI was no worse than land mines. He didn’t mention, however, that the U.S. is among over 160 nations that agreed to ban the use of anti-personnel land mines in the vast majority of places.

Tseng is firmly opposed to fully autonomous weapons. “I’ve had to make the moral decision about utilizing lethal force on the battlefield,” he said. “That is a human decision and it will always be a human decision. That is Shield AI’s standpoint. That is also the U.S. military’s standpoint.”

He’s right that the U.S. military does not currently purchase fully autonomous weapons, although it does not ban companies from developing them. What if the U.S. changed its standpoint? “I think it’s a crazy hypothetical,” he answered. “Congress doesn’t want that. No one wants that.”

So if he doesn’t foresee an army of Terminator-like killers, what does he envision? “A single person could command and control a million drones,” Tseng said. “There’s not a technological limitation on how much a single person could command effectively on the battlefield.”

It’s going to be akin to “Ender’s Game,” he said, referencing the 1985 sci-fi classic where a child military officer can release legions of space armies with the wave of a hand.

“Except instead of actual humans that he was commanding, it’ll be f—ing robots,” Tseng said.

Local manufacturer Arnest had previously snapped up Russian assets of Heineken

Unilever has sold its Russian business for €520mn following approval by authorities in Moscow to a local manufacturer known for snapping up western assets following a corporate exodus from the country.

London-listed Unilever confirmed on Thursday that it had reached an agreement to sell assets worth approximately €600mn to Russian manufacturer Arnest, including its business in Belarus. People close to the deal confirmed the amount.

“Over the past year, we have been carefully preparing the Unilever Russia business for a potential sale,” said chief executive Hein Schumacher. “This work has been very complex, and has involved separating IT platforms and supply chains, as well as migrating brands to Cyrillic.”

“The completion of the sale ends Unilever Russia’s presence in the country,” he added.

Since Moscow’s full-scale invasion of Ukraine resulted in a wave of corporate exits from Russia, Arnest, which is owned by Russian industrialist Alexei Sagal, has acquired the local assets of US can maker Ball Corp, Dutch brewer Heineken and Swedish cosmetics group Oriflame.

The deals have made Sagal one of the key beneficiaries of the largest redistribution of assets in Russia since the fall of the USSR, more than doubling Arnest’s income from sales to Rbs13.9bn ($143mn) last year, while basic profit has soared about 24 times.

Sagal has often acquired the assets at steep discounts. Heineken sold its business to Arnest for a symbolic €1, and at a loss of €300mn for the brewer.

Unilever’s Russian operations included four factories and accounted for approximately 1 per cent of the group’s turnover and net profit in 2023.

The consumer goods group had come under intense criticism from activists and consumers for remaining in Russia while others left on moral grounds following the invasion of Ukraine in 2022.

The FTSE 100 company was labelled as an “international sponsor of war” by the Ukrainian government, which published a list of companies it concluded were indirectly contributing to the war.

Unilever had previously given no indication it planned to exit the market. In February the company said it reviewed its position and concluded that “the containment actions we put in place at the beginning of the war minimise our economic contribution to the Russian state”.

Companies attempting to exit Russia have struggled to extract value from deals. The Kremlin imposes a mandatory 50 per cent discount on assets from “unfriendly” countries sold to Russian businesses and a minimum 15 per cent “exit tax”.

It is also increasingly difficult to find local buyers acceptable both to the western seller and to Russian authorities, and whose involvement does not fall foul of western sanctions.

Big tax cuts on top of high federal debt and less easy Fed policy could create perfect conditions for rising rates

The Federal Reserve three weeks ago slashed its short-term rate target by half a point and signaled more cuts to come. Yet in that time, investors have pushed the yield on the 10-year Treasury to 4%, the highest in two months.

Why would long rates rise while the Fed’s rates fall? The Fed sets interest rates for the immediate future. Investors are betting on the path of those rates for the next decade. And for two reasons, interest rates are likely to be higher, perhaps much higher, in the coming decade than in the prior one.

One of those reasons is relatively benign. Inflation and growth won’t be as low as before the pandemic. The second is much less benign. The federal debt is on an unsustainable path, which might become even more perilous after the election, especially if former President Donald Trump wins and Republicans take control of Congress.

More than a year ago the Fed pushed its rate target range to a 20-year high of 5.25% to 5.5% to make sure inflation didn’t stay stuck above its 2% target, even if that meant causing a recession. By September, inflation was closing in on 2%. The half-point cut signaled that the Fed’s priority was now protecting the labor market.

Then, last week’s September jobs report at a stroke changed the picture of the labor market from deterioration to robust health.

The Fed’s pivot, and the jobs data, drastically reduced investors’ expectations of a recession that would force the central bank to slash rates deeply in the next year. That alone would merit higher long-term rates.

Meanwhile, it’s possible economic growth will clock in at a surprisingly brisk 2.8% pace over the past four quarters. That would suggest that the economy has become less vulnerable to higher interest rates. In economists’ jargon, the “neutral rate,” which keeps inflation and unemployment stable, has apparently risen. As recently as December, Fed officials thought neutral was 2.5%. By September, they had raised that to 2.9%, and some officials had put it at 3.5% or higher.

By itself, a higher neutral is nothing to worry about (though maybe not if you’re trying to get a mortgage) because it signals a return to normalcy.

But in combination with the soaring federal debt, it could cause trouble. Since 2007, the federal debt has climbed from 35% of gross domestic product to 98%. Much of this was a result of the 2008-09 financial crisis and Covid-19. The borrowing didn’t put much upward pressure on bond yields because inflation and the neutral rate were so low. Low rates, in turn, made the debt relatively easy to support.

Yet in the past fiscal year, Washington borrowed $1.8 trillion. At 6.4% of GDP, that’s a record outside of war, recession or crises such as the pandemic. Interest expense is climbing steadily. The Congressional Budget Office projects that under current law, publicly held debt will hit 122% of GDP in 2034.

The effect on long-term rates has been largely invisible thus far. It might become more visible before long.

Both Vice President Kamala Harris, the Democratic candidate for president, and Trump, her Republican opponent, have proposed lavish spending and tax cuts that would add significantly to the debt.

The nonpartisan Committee for a Responsible Federal Budget has heroically added up all their promises and pay-fors. Its baseline estimate of the debt impact: $3.5 trillion for Harris, $7.5 trillion for Trump from 2026 through 2035.

“Neither has anything close to a plan to deal with the overall debt, but clearly the Trump agenda would be significantly worse than the Harris agenda,” said Maya MacGuineas, president of the CRFB.

There are wide uncertainty bands around both estimates. Trump, in particular, regularly drops new proposals with little detail, or explanation of how they will be paid for.

Yet it would be a mistake to dismiss Trump’s plans as unserious. They not only are more costly than Harris’s, they also are more likely to be enacted.

President Biden and Harris certainly had no compunction about running up debt for their spending priorities. Still, if Harris became president, Republicans are strongly favored to take back control of the Senate, where they would likely block most of her costly spending plans. (The party that wins the White House would likely win control of the House of Representatives.) Even within her own party, Harris doesn’t command the personal loyalty that Trump does with his.

“The likelihood of Harris getting what she wants is far less than the likelihood of Trump getting what he wants, because she will not have the impact on Democrats that he has on Republicans,” said Bob Corker, a former Republican senator from Tennessee.

Under Trump’s influence, the debt has steadily receded as priority for Republicans. He banished any talk of cutting Social Security or Medicare benefits, the deficit’s two biggest long-term drivers.

House Republicans planned to partly pay for their 2017 tax cut with a cash-flow tax that exempted exports, but Trump nixed the idea. The tax cut didn’t pay for itself, as Trump officials claimed it would; tax revenue was substantially less in 2018 and 2019 than CBO projected before the law passed.

Much of the 2017 tax cut expires at the end of 2025, teeing up a major new tax bill early in the next president’s term. Even if Trump doesn’t get all he wants—repealing taxes on Social Security benefits is a particular stretch—he could get a lot of it.

Investors might then start to pay attention. British bond yields surged in September 2022 over a government plan to slash taxes, later aborted, because at the time the Bank of England was also fighting inflation.

There’s no good way to predict the impact, if any, on U.S. interest rates. Research has found that bond yields rise by 0.01 to 0.06 percentage point for each 1% of GDP the debt rises, according to a review in a recent Fed paper. When those estimates are applied to the CRFB’s various scenarios for debt by 2036, that could imply anything from 0.25 to 2 percentage points.

Other factors also matter. Higher inflation would aggravate the deficit’s impact on interest rates; lower inflation, a demand for bonds by an aging population or panicked investors would soften it.

And yet U.S. debt is clearly entering uncharted territory. A recent study by the Penn Wharton Budget Model suggested that even though the U.S. controls its own currency, its debt would become unsustainable as it approaches 175% of GDP. We’re not there yet, but as CRFB’s postelection scenarios show, in the coming decade we could be getting close.

Said Corker: “For those who hope for even a modicum of fiscal responsibility, pray for divided Congress.”

Seven & i Holdings said net profit fell 35% from a year earlier for the six months ended August

TOKYO—Seven & i Holdings 3382 -0.43%decrease; red down pointing triangle slashed its profit outlook and announced plans to revamp its noncore businesses as the convenience-store giant faced a revised takeover bid from Canada’s Alimentation Couche-Tard ATD -0.82%decrease; red down pointing triangle.

The Japanese owner of 7-Eleven convenience stores said Thursday that net profit fell 35% from a year earlier to 52.24 billion yen, equivalent to $349.9 million, for the six months ended August, missing analysts’ consensus estimate.

The weak first-half result prompted Seven & i to cut its profit forecast for the current fiscal year ending February to ¥163.00 billion from ¥293.00 billion forecast previously.

In a bid to reorganize its business portfolio, Seven & i recorded a special loss of ¥45.88 billion related to the withdrawal of its online supermarket operation, the company said.

The Japanese company has been trying to improve profitability by focusing on its core convenience-store business and restructuring other segments. A successful effort could raise the bar for a potential acquisition by the Canadian owner of Circle K.

In early September, the 7-Eleven owner rejected the initial $39 billion buyout offer from Couche-Tard, saying the proposal underestimated the value of the company and failed to sufficiently address regulatory issues.

The Japanese company on Wednesday said it received a new proposal, without disclosing details.

Seven & i on Thursday said it plans to set up an intermediate holding company for its supermarket and other noncore businesses, including baby-goods chain Akachan Honpo.

Responding to pressure from some foreign shareholders, the company has already shed some businesses, such as unprofitable department-store operator Sogo & Seibu. Seven & i in April said it was considering listing the supermarket business.

On Thursday, the company said it will bring in strategic partners and realize an initial public offering “with certainty and speed.”

The latest results showed, however, that the convenience-store business is also struggling to grow.

Sluggish demand among middle- to low-income consumers in North America amid inflation and higher interest rates hurt its overseas sales, Seven & i said. First-half operating profit for its overseas convenience-store business fell to ¥73.33 billion from ¥112.83 billion a year ago.

A big market narrative with an eerie absence of sceptics

Is there a GLP-1 bubble?

AI gets a lot of attention. There have been thousands of think pieces on how it will transform society, and almost as many arguing that AI hype has driven tech stocks into bubble territory. Glucagon-like peptide-1 (GLP-1) obesity drugs get a lot of attention, too, for their impact on fashion, exercise and health. But almost no one seems to be wondering if there is a GLP bubble.

Eli Lilly and Novo Nordisk, which make the leading GLPs on the market, have wildly outperformed the S&P 500 for the past five years:

Eli Lilly has a price/earnings ratio almost as high as Nvidia’s:

Expectations for both companies are really high. Morningstar estimates the GLP-1 drug market will be worth $200bn by 2031, and analysts expect Eli Lilly and Novo Nordisk to take the lion’s share of it. Revenues are expected to nearly triple for Eli Lilly from now until 2031, largely driven by its GLP-1 blockbusters Zepbound and Mounjaro:

Novo Nordisk is on a similar trajectory, though Wall Street expects its GLP-1 revenues from Wegovy and Ozempic to start falling after 2029:

The free cash flow estimates for the two companies are even more astonishing, with both expected to pull in more than $35bn by 2031:

Are expectations set too high? There are several factors to consider.

Competition is fierce. Profitable drugs invite competitors with slightly different formulations or delivery methods. Here is a chart from Morningstar of aspiring GLP-1 market entrants. Novo Nordisk and Eli Lilly may both keep their edge for a while due to their own new products — Novo Nordisk already has an oral drug on the market, though it is not as popular as the injectables, and both companies are set to be first out of the gate on lower-dose oral GLP-1s. But Pfizer and Roche will follow soon after:

Then there are the patents. Novo is set to lose its US patent in 2032, while Eli Lilly is scheduled for 2036 (this partially explains its valuation premium over Novo Nordisk). But importantly for both, Novo Nordisk’s GLP-1 products lose their Chinese patents in 2026, potentially opening the US and European markets to trafficked generics.

The market will begin to discount the patent expirations years before they actually arrive. Shares in AstraZeneca traded sideways for years (at a single-digit price-to-earnings valuation) before the main patents on its blockbusters Nexium and Seroquel expired in the early teens. Pfizer launched its mega-blockbuster Lipitor in 1996. Its revenues peaked at almost $13bn in 2006 and were still about $10bn in 2010, the year before its US patent expired. But the stock had peaked by 2000 and traded at less than 10 times earnings from 2008 to 2011.

It is also worth noting, in the context of competition, that while Lipitor was by far the best-selling of the cholesterol-fighting statin drugs, it was the fifth one to launch. Just because Lilly and Novo were the first in GLPs does not mean they will maintain their lead.

Price will also be a question going forward. The GLP-1s face Medicare price negotiations in 2027, and the CBO’s report from this week suggests that Medicare and other insurers may demand significant price reductions.

There is also uncertainty about future volumes. Here is Karen Andersen at Morningstar, one of the few analysts to express scepticism about the buy case for Lilly and Novo:

Finally, weight-loss drugs have a rocky history. Some readers may remember the rise and fall of Fen-Phen, or how Sanofi’s much-hyped Acomplia was withdrawn in Europe and never won approval in the US. There have been rumblings about muscle loss and other issues with GLP-1 drugs. As the population of people being treated increases, new issues may emerge.

We don’t know if Lilly and Novo are overvalued. If other drug companies do not develop good alternatives in the next couple of years, no worrisome side effects emerge, most patients are happy to stay on the drugs for the long run, and pricing negotiations go well, the two companies should print money for years to come. What worries us is that no one in the market seems to be taking the bearish side of the GLP-1 trade. In markets, unanimity is dangerous.

All eyes are on the 0.1 percent of all luxury shoppers, those who splurged as much as 137,000 euros over the past 12 months in high-end goods and experiences.

MILAN — Luxury’s skyrocketing prices may have left aspirational consumers with window shopping as their sole comfort, but high- and ultra-high-net-worth individuals don’t seem to be skimping on their shopping sprees, undaunted by the dampened macroeconomic landscape.

Over the past 12 months, Europe, as well as Japan, has been swarming with UHNWIs eager to splurge on luxury products and, most importantly, experiences.

The latest “Luxury Insights” monitor compiled by tax-free shopping solutions provider Global Blue and luxury consultancy Agility Research, unveiled Tuesday here and called “The Era of Ultra Luxe Shoppers,” provides an identikit of this sought-after consumer cluster.

This includes individuals who spent 137,000 euros per capita in the September 2023 to August 2024 period, according to the report, based on the two companies’ combined data.

Spend on luxury goods and experiences, as well as premium and lifestyle brands’ products, has grown 26 percent for this demographic compared to 2019, the year picked for comparison to offset regional fluctuations in the aftermath of the COVID-19 pandemic and geopolitical instability.

Often secretive and hard to reach, the wealthiest — who represent 0.1 percent of tax-free shoppers, but account for 13 percent of tax-free shopping spend — are the holy grail for luxury companies aiming to secure loyal customers with deep pockets.

What’s more, the global population of millionaires is expected to grow by 38 percent by 2027, Agility Research estimated, with UHNWIs in key markets — including the U.S., India and the U.K. — forecast to see a significant jump in their net worth this year, according to the same analysis.

China remains the only country with a less rosy forecast, but nonetheless is the biggest contributor to the UHNWIs’ cluster, making up 25 percent of total tax-free spend in the period, back at 2019 levels.

The American and Gulf Cooperation Council’s wealthiest have increased their spends significantly in the period, jumping 3.7 times and 2.8 times, respectively, compared to 2019.

The fifth-largest economy, India’s fast-paced growth is shaping a new generation of wealthy individuals with strong spending power, as the study highlights. In the September 2023 to August 2024 period their tax-free spend hit 140,000 euros, a six-fold jump compared to 2019.

This was driven by their likening of luxury purchases to means of quality-of-life enhancement, self-expression and confidence boosters.

“India is possibly what China was 20 years ago,” said Mathieu Grac, Global Blue’s vice president of intelligence strategy. “In 10 years India will lead on spending for luxury products.”

The five top destinations for UHNWIs to spend their money include three Asian spots — Singapore, Osaka and Tokyo — the latter two showing how Japan is reclaiming its position as a top shopping hub due to the weak yen.

“The proximity of Japan to their own market is a reason for resorting to the country,” Grac said with regards to Chinese wealthy consumers spending more locally.

Not only that: Luxury-shaming in China, a phenomenon whereby the wealthiest choose not to flex their spending power for fear of being demonized, is pushing them to spend abroad, explained Amrita Banta, managing partner at Agility Research.

“You don’t want to be seen at these shops, that’s why a lot of money is being spent outside of the country. In fact, China is the single consolidated luxury market where the share of overseas purchases is bigger [than the domestic one],” and represents 56 percent of total spend, she said.

By country, France and Italy continue to lead the list of top destinations, followed by Japan.

“At the current pace of growth, soon Japan will be bigger than Italy for luxury shopping, ditto for France,” Grac said.

However, in the current global scenario marked by travel where leisure and business purposes are increasingly blurrier, smaller resort destinations are on the rise. Hot spots such as Mykonos, Greece; Courchevel, France; Saint Moritz; and Ibiza, Spain are the fastest growing locations by luxury spend shares.

“This is a population you get to look at globally,” Banta said.

The study estimates that each UHNWI generally taps into nine brands, splurging the most money — about 91,000 euros — on watches and jewelry typically from a single, favorite label, followed by leather goods from two brands and ready-to-wear from as many as five brands, with a per capita spend of 39,000 euros.

According to the research, however, only two out of the nine brands have identified their UHNWI customers and added them to their VIC, or very important clients, lists of the top 1 percent of their clientele.

There’s a lot of untapped potential, especially as UHNWIs are eager to be part of that roster — and for more than one reason.

“All of these people are luxury VICs but they are also being pampered by the private banks, top tier travel and top tier credit card [operators]. You’re talking about people who are very well pampered and exposed, but within that demography they also enjoy their VIC status, especially as it ensures priority access to events. They love experiences that money can’t buy,” Bants explained.

These may be customers that one doesn’t necessarily need to lure in-store, but certainly has to treat with best-in-class retail experiences to cement a relationship and fall within that cluster of nine go-to brands each UHNWI is reportedly loyal to.