Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.

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In today’s post: the cost of debt at PE-backed companies has gone up so much it's become a meaningfully ironic inflationary input; DeepMind's soccerbots learned complex maneuvers on their own, as general-purpose, learning robots are just around the corner; AI-powered robots and drones for military purposes are also on the horizon; insurance companies face a conundrum on GLP-1 drugs; turbulence; and, much more below.

Stuff about Innovation and Technology
Soccerbots
Some adorable little soccer-playing robots caught my attention in what was an otherwise embarrassing showing of Google’s lagging AI commercialization on last Sunday’s 60 Minutes. The soccerbots are an effort from Google’s DeepMind AI division to create self-learning robots. Working alongside computer simulations, the bots taught themselves complicated moves, like the back-pass, without any prompting or foreknowledge. I expect major leaps forward in AI as we embody LLMs and other models into general-purpose robotic form factors of all types, including drones. As I wrote in AI Awareness:
Neuroscientist Antonio Damasio characterizes human existence in terms of a drive toward homeostasis. He sees this quest for comfort as the fundamental life force (detailed in his book The Strange Order of Things). Essentially, the nervous system is a connected tool to make the living organism (e.g., a human) feel in balance. If we need calories (or detect that free calories are available), we feel hungry and eat. If we are cold, we seek shelter. Damasio further believes feelings emanate from the drive toward homeostasis and are a way for the brain to interpret good or bad states and act on them. He speculates we can derive all of human consciousness and culture from our thoughts, feelings, and actions regarding our relationship with homeostasis…Thus, homeostasis seems intertwined with feelings, consciousness, and a physical body able to monitor (and react to) our internal state and the world around us. Therefore, the critical junction of combining a LLM with a physical form capable of monitoring its systemic and real-world inputs (e.g., temperature, pressure, proprioception, energy reserves) – and react to these sensory data in a way that seeks to maintain its own, human-equivalent homeostatic targets – seems like the logical next step in the trajectory of AI. And, we may already be rapidly progressing down that road. Microsoft’s Autonomous Systems and Robotics division announced their intentions to put OpenAI technology into robots (blog post and video). This integration could ultimately lead to a paradigm shift in AI where we go from programming a specialized robot/tool to do a specific task with specific inputs, such as autonomous driving, to a situation where you could just ask ChatGPT to go learn how to drive a car. However, merging AI with a physical form demands an exceedingly careful approach for successfully progressing such tools in the real world, particularly with respect to protecting human safety (a couple weeks ago, I shuddered at the idea of integrating ChatGPT into the new Boston Dynamics humanoid!).

Because AI robots will learn tasks on the job rather than having to be pre-programmed, they will not only mimic human behavior, but also improve upon many rote routines, discovering more efficient methods. Robots moving boxes, doing dangerous mining work, rescuing people from collapsed buildings, or drones optimizing burger delivery – these are all fairly obvious and beneficial uses that spring to mind. However, there will be emergent behaviors and use cases that ring darker. The noted neuroscientist and AI expert (and chief scientist of the Allen Institute for Brain Science) Christof Koch spoke to IEEE about the military applications just around the corner: 
We’re the dominant species on the planet, for better or worse, because we are the most intelligent and the most aggressive. Now we are building creatures that are clearly getting better and better at mimicking one of our unique hallmarks—intelligence. Of course, some people, the military, independent state actors, terrorist groups, they will want to marry that advanced intelligent machine technology to warfighting capability. It’s going to happen sooner or later. And then you have machines that might be semiautonomous or even fully autonomous and that are very intelligent and also very aggressive. And that’s not something that we want to do without very, very careful thinking about it...Think about a car, like a Tesla. Fast forward another ten years. You can put the capability of something like a GPT into a drone. Look what the drone attacks are doing right now. The Iranian drones that the Russians are buying and launching into Ukraine. Now imagine, that those drones can tap into the cloud and gain superior, intelligent abilities.

The key property that I believe will make embodied AI even more powerful and unpredictable than cloud-based AI is the idea of emergence. Again, from AI Awareness:
Emergent behavior is something new that occurs in a complex system of interacting agents that wouldn’t have happened (or been predicted) based on the agents’ isolated actions. Certainly, chatbots are an emergent phenomenon from LLMs, but I am not sure today’s chatbots themselves demonstrate emergence…People are certainly finding emergent use cases for chatbots. When LLMs become embodied in the real world, however, we should expect to see emergent phenomena from the robots themselves. For this reason in particular, the scarcity of caution today is concerning. 

GLP-1 Disruption?
Health insurance companies face a Catch-22 with GLP-1 obesity drugs, once again highlighting the misaligned incentives between US health insurance providers and their clients. Although the drugs might cost thousands of dollars a month, that’s modest in comparison to the massive healthcare cost burden that obesity can have for many patients. By subsidizing the cost of GLP-1 drugs and enabling a wider swath of people to receive treatment and greatly improve their health, insurance companies would essentially shrink their future addressable market. They can raise rates to cover the costs of drugs near term, but, ultimately, they will make less money over time if people are healthier (as insurance rates should shrink along with the size of the healthcare industry). And, many insurers like UnitedHealthcare also make money on the sale of obesity drugs (and are positioned to influence their pricing/supply) because they also own pharmacy benefit managers (PBMs), which seems like an obvious breach of all that is decent in the world. Insurance companies aren’t the only ones who stand to lose out if the GLP-1 drugs prove safe and effective long term. The overall weight-loss industry is a $76B annual market, according to the WSJ. You can feel the tension that diet/lifestyle-based weight-loss organizations, from WeightWatchers to the high-end health spa Canyon Ranch, face as their entire existence is being called into question. For example, according to the WSJ, the medical director of Canyon Ranch “is hoping the craze over new drugs for weight loss subsides. He has prescribed the drugs to some guests who had diabetes and were overweight and for whom it made sense but is reluctant to do so for others who haven’t exhausted other avenues for weight loss. While being overweight puts people at higher risk for chronic disease, he notes that there are other aspects of a person’s health to consider, as well. ‘I’m always hoping that there are places like us that are the voice of reason’”. As I noted in The Impact of Eating Less a few months back, the upstream implications of curtailed calorie intake could be quite fascinating. In the meantime, if these new drugs do end up in broad use, I expect the snacking and fast food industries will ramp up marketing, caloric density, and the preposterousness of tempting fare, like fried chicken sandwiches on donut buns or pretzel chimney cakes, in their ongoing bid to trick our brain into prompting us to inhale excess calories. It will indeed be a war waged between sugar, salt, fat, and GLP-1s.

Miscellaneous Stuff
Hang On to Your In-Flight Cocktail!
Following last week’s discussion of tornadogensis and the complex impact from climate change, another unexpected outcome from changing wind-shear patterns is in-flight turbulence. “Clear-air” turbulence is caused by wind shear at higher altitudes. Wind shear in the jet stream is up 15% since 1979, but it’s predicted to more than double over the next 30 to 60 years. Matthew McConaughey recently recounted the harrowing experience of seeing his red wine suspended in midair during a sudden 4,000-foot drop.

Swimming With the AI Current
Singer Peter Gabriel refreshingly prefers to work with AI rather than against it. Here is an excerpt from a recent letter he penned explaining his collaboration with Stability AI: “There are amazing creative possibilities opening up with AI that are really exciting and transformative. I felt the same sort of buzz when computers came into music giving us samplers and rhythm machines, which, in turn, opened up new worlds of music making. When the future has shown itself so clearly and is flowing as fast as a river after a storm, it seems wiser to swim with the current. AI is here. Let’s learn what we can and how we might adapt and evolve it to better serve everyone.”

Stuff About Demographics, the Economy, and Investing
The Circle of Debt
Fueled by artificially low rates, private equity acquired a record $32B of food brands in 2021, much of which was funded by floating-rate loans. In many cases, the interest owed on these loans has tripled over the last two years. Because leverage is so high across the economy, the Fed raising rates 500 bps has caused interest expense to be a chief inflationary input, prompting companies to raise prices to pay their debts. Thus, higher rates are actually driving inflation in some cases. This is one of the paradoxes of increasing rates in a highly-levered system, and why interest rates over the long term can only trend in one direction. From Rate Rant: 
To formulate a more logical approach to treating inflation (or achieving any other economic goals), it is important to understand the interplay between debt and interest rates in a highly leveraged economy, something so basic that I find most people overlook it. First, you need to start with the self-evident premise that one person’s debt is another person’s asset: someone who loans you money carries that loan on their books as an asset under the assumption you will pay the money back, with interest. The massive increase in debt, fueled by artificially low pandemic rates, became assets on the balance sheets of people, companies, and governments in various forms. By raising rates abruptly, the value of those assets dropped, creating a duration problem whereby banks have lent money out for longer than they should have (to take advantage of the higher rates), thus hampering their ability to meet today’s redemptions by depositors who also want to achieve higher yielding returns on their cash. Further, if rising rates contract the economy, it can compromise the ability of borrowers to repay loans. Continuing to raise rates only increases the risk of existential cracks forming across the global economy. This is such a basic chain of events that it is puzzling that it eludes so many people in power...As such, the long-term trajectory of lower rates remains probable, if not existential. Higher rates coupled with expanding debt cripples the assets of the economy, thus there are fewer reasons to worry about the inflation bogeyman than there are to worry about the collapse of asset values on which the economy is built. 
Private equity is inflating not just food but other industries as well, thanks to their usual play of raising prices after acquisition to fund debt. Bloomberg reported that PE-acquired physician practices typically increase services billed to insurance companies by 20%. Back in 2019, I pointed out the irony of pensions investing in private equity, which then acquire companies, which then raise the cost of living for the pensioners.

✌️-Brad

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