Pacing the Frontier: Global Capital, Bond Markets, and the AI Pivot

0:00The world is at a crossroads. We're talking about bond markets. We're talking about AI. We're talking about whether or not we are going from a world of abundant capital to a world of dearth of capital. And much more importantly, what that actually means for you, your pocket, your wallet, your mortgage rate, all those good things. That's all coming up on the podcast in a couple of minutes.

0:22David McWilliams: Just before we start. Your call has been forwarded to an automatic voice message system. A missed call doesn't feel like anything. No red flag, no notifications screaming at you. It just disappears into your call log. And nine times out of 10, that was someone ready to hand you money. That's why today's episode is brought to you by Quo, spelled Q-U-O, the business phone system built so you never miss a call. Here's what I like about it. All your calls, texts, and voicemails live in one place. So anyone on your team can pick up a conversation, see the full history, and respond fast. No more, wait, who talked to this customer last?

1:02And if you're worried about after-hours leads slipping through, Quo's optional built-in AI agent can answer questions and even book appointments while your team's offline. It's the number one rated business phone system on G2, and over 90 ,000 businesses already trust it to stay reachable. Money is on the line. Always say hello with Quo. Try Quo for free. Plus, get 20 % off your first six months when you go to quo.com slash tech. That's Q-U-O dot com slash tech. Thank you for calling the Bombas Comfort Line. Bombas make socks, slippers, tees, and underwear made with the highest quality materials.

1:37Press one for comfort, two for style, three for donation. You chose style. Bombas is styles for whatever you enjoy. You can run in Bombas, lounge in Bombas, dress them up, dress them down, but always give back in Bombas because with every item purchased, another is donated. Bombas, comfort worth calling for. Go to bombas.com slash audio and use code audio for 20 % off your first purchase. That's B-O-M-B-A-S dot com and use code audio. A very special message for our American, maybe even more particularly our New York listeners. I will be in New York on Friday the 9th of October. And I'm going to be sitting down for a very special evening in the Irish Art Center in Manhattan with CNN's Doni O'Sullivan.

2:20We're going to be chatting about the economy, politics, geopolitics, a bit of history, and knowing the pair of us, a few laughs, and more than a little bit of crack. Tickets are available at irishartscentre.org forward slash events. That's Friday the 9th of October, 7pm in Manhattan.

2:41David McWilliams: Hopefully I will see you there, and get in quick, because these tickets will go fast. To understand the economy, you have to understand human nature. This podcast is powered by Acast.

3:01How you doing there? It is podcast time. It is mid-September. I hope all is well in your life.

3:09David McWilliams: John is, as always, kind of gallivanting around. I don't really know what to make of him. I'm just trying to catch up with you, Mac. He's a globetrotter and he is in France. John and I are going to Le Hinch in County Clare for a bit of a session next weekend. If you are down in Le Hinch, you may well bump into us in a little place called Frawley's. That'll be rowdy, Mac. Yes, it'll be nice, nice and rowdy. You see, we have to wait till Donald leaves Clare for us to go down there, right? We have to clear out all the security. Clare isn't big enough for both of us. Claire is not big enough for the three of us, Donny J.

3:47Anyway, we're going to talk a little bit briefly about Donald J's very successful, it must be said, if you're looking at through the narrow gauge of things that didn't go wrong. If you're in the business of selling Irish whiskey, this was an absolute jackpot of session. But it also maybe stands to the argument we put up last week, this idea of what we're calling fairway diplomacy.

4:13David McWilliams: But in a way, golf is the ideal backdrop to deal with what I would call corporate diplomacy, where diplomacy is all about getting deals done. It's all about economics. It's all about commerce. It's all about the flow of money. It's all about the flow of capital. And it's all about what you would describe as ongoing prosperity between Ireland and America. And those links, as we said last week, are very, very deep. They're not just commercial. They're not just economic. They are actually very deep personal and cultural bonds. And I think, John, it's fair to say that the fairway was the ideal backdrop for dealing with Donald Trump.

4:54Absolutely. You could say the result of that was a fairway to heaven. Fairway to heaven. Oh, stop. Well, that's bad, isn't it? That's bad. And we also got Chucky R. Trump. He turned out to be a provo. Yes. Yeah, I thought that was hilarious. It just threw everything on its head, you know? Everyone switched sides straight away. It was an extraordinary display of populism because the Shinners were out protesting against him. Then suddenly he ends up articulating their policy. The Unionists were all MAGA because they thought he was more of a white nationalist and, in effect, a British nationalist and very Northern Irish-centric because, again, I think his mum's from Scotland or whatever.

5:40And, of course, he then turns that in his head, right? Then, of course, Ireland is worried about will he do a trade deal. He manages to talk to Shane Lowry, who has now become our key diplomatic advisor on all issues of the economy because he had a word with your man and said... No better man. He had a word with your man and said, get those tariffs off the whiskey. And I think in general, back to the fairway diplomacy, it went pretty well. But it's interesting, though, just based on the kind of the United Ireland comments he was making. But on the back of that, there's now, you know, the whole question of the breakup of the UK, which I thought was really interesting with the Welsh played Cumru and the SNP in Scotland now wondering, well, is it time for independence?

6:25The breakup. Yes. And Trump would love that kind of, you know, poking the bear, breaking things up because he's got a real thing about Britain. He has. And I'm going to talk about that in a minute because he has a thing about Andy Burnham. He's got a thing about the Labour Party in Britain. He's got a thing about the left in Britain. And, of course, he's using Ireland to just poke the British left, and particularly the Labour Party. But Claire Hanna, the SDLP MP, who's very, very clever, said the funniest thing. So she was asked, just on the spot, what did you think of Donald Trump's comment? She goes, he's not as orange as he looks.

7:05Oh, that's fantastic. It was a great one off the spot. Really, really fun. So fair play to Claire Hanna. Anyway, this podcast. So a little bit about, you know, I want to use Trump to leap into what's happening in the UK because I was in the UK over the weekend. I want to talk about UK bond markets, but I want to talk about global bond markets. And finally, I think, John, we're going to have a little smuggish board of a podcast. Little bits of this and little bits of that. A little potpourri. Lovely. A potpourri, a potpourri.

7:33David McWilliams: I want to also talk a little bit about the very clear change in the background noise around AI that is evident in the last week or two. Yes, yes, absolutely. So from having been absolutely evangelical about the change that AI is going to make positively to our world, a huge amount of the AI leaders themselves are now having second thoughts. A lot of them talking about slowing it down. I want to put that in the context of the overall thing, John, which is there is a massive scramble for capital going on in the world that is pitting governments against the AI requirement for capital. This is pushing up the cost of capital everywhere.

8:17David McWilliams: It's also pushing down the chances of success in all these massive IPOs that are coming out. You'll know that the big AI companies are trying to flog themselves. They're offloading their risk. they're offloading their risks so all of this is going on i also think dear listener that what we might be seeing is a significant shift in the way in which global capital markets and central banks are operating and by that i mean since covid covid changed the rules dramatically Now, why is that? Because what COVID did, it ushered in a time when central bankers said, look, don't worry, we will finance everything.

9:04David McWilliams: We will reduce the rate of interest. We will bring the rate of interest down to historically, unprecedentedly low levels. And ultimately, lots of things will be able to be financed. Now, that is five years ago, John, but these things go in long cycles. That's the interesting thing about economics. It never goes in a sort of a, I've always felt it ridiculous when people say the year ahead, you know. So I think, John, I think there is a significant change going on, maybe a deep structural change in the way capital markets are interacting with both the demand for capital, the supply of capital, and the way in which central banks behave.

9:46And what's triggering these thoughts are the fact that in the United States this week, there is a big hoo-ha over whether or not the Federal Reserve will increase interest rates. And the hoo-ha is all about, is the Federal Reserve sufficiently independent of Donald J. Trump to incur the wrath of the President by increasing interest rates ahead of the midterm elections? Yeah, because I wanted to ask you about that. I was reading there something about how Warsh, his new chairman of the Fed, and Trump himself are on a collision course, which was never Trump's plan. You know, Trump put him in there because he thought he was his guy.

10:27And he basically lower interest rates as and when Trump needed them lowered. So what's happening and what could happen there? What would be the upshot? So that is the drama. That's the theatre. That's the gossip. Well, we love that. That's the gossip, right?

10:42David McWilliams: But let's look at the underlying structural issues. I want to look at three bond markets. French bond market, the British bond market, and the American bond market. And the reason is that interest rates in those three key markets, those three big countries, have never been higher at the long end. So what you're looking at is three countries where the cost of financing themselves has risen quite dramatically. The most important one, of course, is the United States. But, you know, Britain and France are two important countries. Now, why is that? Because Britain is still an important financial hub.

11:22Yeah.

11:23David McWilliams: And France is important because it is within the Eurozone and it is potentially the delinquent within the Eurozone. I'll give you a mad statistic. French interest rates are now higher than Greek interest rates, meaning that financial market players think that France is a bigger risk now than Greece, a country that actually went bankrupt and defaulted only 10 years ago. So what is going on? How is it all related to this post-COVID idea? And what might it signify for the future? That's the first thing. So we'll talk about that first. Now, in the United States, long-term interest rates are now above 5%.

12:06Yes, and that's the first time in many, many years.

12:09David McWilliams: Many, many years, right? The 30-year rate, which is the longest interest rate that the American government financed itself at, is at 5.35%. And what's the implications of that then? Well, the implications are that the United States has doubled its overall debt in the last 10 years, from 20 trillion to 40 trillion. Now, I come back to COVID, which is important because COVID basically gave the signal to everybody that interest rates would be very, very low. And logically, what did people do? They borrowed enormously. And the people who borrowed most were the governments of developed countries. So what you got is as interest rates fell, governments borrowed a hell of a lot more.

12:52David McWilliams: The problem is that that borrowing hasn't really resulted in very effective and faster growth rates. So we are left with the situation in France, in Britain and in America, where the growth rate isn't sufficiently strong or fast to cover the increases in debt. And the growth rate is below the rate of interest. And is that because a lot of that borrowing was used for day-to-day expenses as opposed to capital investment and infrastructure? Completely. Yeah, I mean, you know, I mean, basically Joe Biden borrowed for the woke agenda and Trump borrowed to enrich his mates. But both of them borrowed, right?

13:40David McWilliams: So that's the thing. So three things increase long-term interest rates around the globe economically. One is the rate of inflation. Yeah. One is the credibility or not of the, they call the policy mix. Is the administration and its various institutions credible? And then the third one, of course, is the much more important one, which is the structural demand for funds around the world. So what is happening in the United States is because the war in Iran continues to rumble on, because the Straits of Hormuz are neither free or open or secure, the Brent crude is hitting$100 a barrel again. Yes. So how that's translating into America is diesel is now at$6 a gallon.

14:31David McWilliams: That's the highest it's ever been. That, of course, is the base price of the economy because energy, all economies need energy. So what Donald Trump has a problem with is the rate of inflation in the United States is so high that that militates against the United States Fed reducing interest rates. Because if the Fed is supposed to be a credible inflation killer, which is what its job is, It needs to keep the rate of interest high to slow down the economy in order to bear down on the rate of inflation over time. Now, that is what the theatre at the moment is between Warsh and Donny Jay, because the last thing Donny Jay wants is high rates of interest going into a midterm election.

15:20And, of course, all the shenanigans in Ireland, everything has to be seen against the background of how does he galvanise the Irish-American vote to vote for him in the midterms. You can do nothing better than talk about a united Ireland and give Ireland a nice deal on whisky and be seen playing golf in Ireland. These all play very well. These all play very well. It was a tick box exercise. Tick box exercise. All the main lines in, yeah. When he described the Irish as vicious bastards, because he was saying, you're vicious about whisky drinkers, tick. Golf players, tick. United Irelanders, tick.

16:01David McWilliams: You know, so that's basically it. But going into this election, Trump doesn't want interest rates high. Why? Because at a rate of interest of 5.35 on the long end, the mortgage rate in America is above 7%. And that is a killer for American wealth because so much of American wealth is bound up in their housing market. So that's what he doesn't want. So that's the theatre. But there's another much more profound thing going on. And that is the fact that in the past two years, the demand for capital, the demand for bonds, which used to always be the preserve of governments, has seen the governments being elbowed out by what are called the super scalers, John.

16:50The AI companies that are spending literally trillions of dollars on data centers.

17:00David McWilliams: In order to build those data centers and build them quickly, they need to get their hands on capital. So rather than raise money in the stock market exclusively, they are raising money in the bond market. and they are therefore elbowing out the governments who used to be almost the only major player in bond markets. So now investors are saying, well, should I lend to the American government or should I lend to OpenAI or Antropic or something that has the potential to turn the bonds into equities? And by that, I mean, has the potential to own a company that could be worth tens of trillions, right?

17:47David McWilliams: As opposed to governments that are plodding and slow and la la la. Can you just explain to me quickly, or if I missed something there, what is the difference between a company bond on the bond market and a government bond on the bond market? Very little, very little. But it's the same market though, is it? It's the same market and it's the same product. So what you're buying is you are buying a slice of the future returns of that company, the stream of income of that company. Sure. In the same way as you are buying a slice of the tax revenue of that country. So if you're buying, for example, an American government bond, what your calculations are, well, will the place go bust?

18:32David McWilliams: Does it have enough tax revenue? If it doesn't have enough tax revenue, will it raise taxes in order to have enough tax revenue? Will it spend too much on welfare? Will it spend too much in the military? Et cetera, et cetera, et cetera. So those sort of calculations are all about sovereign risk. And then you have corporate risk, which would be the company. And then the question is, right, what is the product of the company? Is the management of the company good? Do we think that in the future this will be a world-beating company? Et cetera, et cetera, et cetera. Same as a share then if you're buying shares.

19:06David McWilliams: Yeah, but the reason you would buy a bond rather than equity is bonds have seniority to equities. So that means if things go wrong, the bond will always be paid first. Oh, right. Okay. Equities tend to be an increasingly riskier asset. Yeah. Now, of course, what these guys are doing, what the big super scalers are doing, is they're issuing what are called convertible bonds. and they are bonds that convert to equity over a certain time. So what you're doing then is you're trying to give the greedy investor a sort of an equity upside with some sort of bond security. And what that would do, that would basically encourage somebody who believes in AI to buy these convertible products in order to actually get a bit of what they call the upside, the equity upside.

20:02David McWilliams: That is when the shares of that company are sold and they go through the roof, if that is what happens. So all of this is going on in the background at a time when one, central bankers are no longer traumatized by COVID. Number two, at a time when central bankers are no longer worried about deflation, but worried about inflation. Number three, at a time where consequently the rates of interest, the cost of capital are rising. And number four, and finally, John, you have another shift in the market, which is the traditional buyers of American government bonds or any bonds, or China, the Gulf states, and any countries with large current account surpluses like Norway.

20:49Yeah. Those countries have increasingly turned their back on the American bond market

20:55David McWilliams: because China needs to finance things at home. So it doesn't need and doesn't want to be exposed to America. And it's also in a low-level Cold War with the United States. So everything China, America has to be seen through the prism of a low-level war of attrition for global supremacy. And that is ongoing. And that is not going to change. with respect to the Gulf states, because the Gulf states have increased dramatically their welfare spending. And because they want to shift, for example, the likes of Dubai and the likes of Qatar, they want to shift from oil dependency to tourism and other industries.

21:38David McWilliams: So if you go to Dubai, that's their big thing, is we're going to be non-oil dependent in 40 years' time or whatever. That means they have to spend enormous amounts of money to create the infrastructure to build those new industries. So they are diverting their surplus money back home. And then finally, even the Norwegians said last week that they wouldn't hold American government assets for the rate of interest that they paid them. They would hold American government assets for the liquidity that it provides them because everyone owns these American bonds and that therefore is a liquidity management tool rather than a yield management tool.

22:17David McWilliams: So all that's going on. But as that pushes up the rate of long-term interest rates in America, and I know, dear listener, this is a little bit financed today. We're getting a little bit of finance, but bear with us. Well, it's good. It's good. I need to understand this. Well, this is hard shite, right? But it's good stuff, right? But as that rate of interest in America rises, because America is and has always been seen, as remember I said before, The risk-free rate. Yeah. Because America sets the floor in effect for global interest rates. It pushes up all other interest rates. Or at least there's upward pressure.

22:55David McWilliams: Because people will say, well, if the Americans are giving me 5%, surely the Brits should be giving me 6%. Yeah. And that leads us to the United Kingdom, where I was at the weekend. Now, of course, I wasn't in the United Kingdom. I was in London. Everybody who listens to the show who knows London knows that these are two totally different cultures. Yes, they are. You have London and you have the rest of the United Kingdom. But Andy Burnham, the new prime minister, is talking a great game. So his idea is touchy-feely. Let's, you know, we've said a new chapter. We're going to have a new Britain.

23:33All that sort of stuff, right? Yeah. However, however, there is,

23:38David McWilliams: and we've talked about it before, there's this underlying problem with the United Kingdom, which is the fact that the growth rate, John, is anemic at est, right? Now, the United Kingdom, bizarrely, hasn't really recovered from the 2008 financial crisis. I'll give you a figure. If the GDP per capita trend was the same before 2008 as after 2008, GDP per capita in the United Kingdom will be 30 % higher today than it is. So something happened in the UK. Yeah, so something happened in the UK after the global financial crisis to knock the UK off its growth trajectory. And what was that? Well, I think it was because the UK was very heavily financialized in the sense that it was very heavily leveraged.

24:34David McWilliams: So in the UK, banks collapsed and went bust. There was a profound impact on the UK's economy, which had been based on housing wealth, generating real wealth, generating lots of tax revenue in the south. That tax revenue in the south would throw off enough tax revenue to pay for the north and would keep the budget deficit under control. Once that disappeared, the UK didn't have a second little string to its bow. The same thing happened in Ireland, but for listeners to realise the difference between these two countries, and Ireland was very heavily financialised, the same wealth effect, housing, yeah, yeah, but we had the American multinationals, and they came in in the last 10 years to plug the gap in the tax system, which is why Ireland has a budget surplus, not a budget deficit.

25:30David McWilliams: So that's one of the major dilemmas in the UK, right? Also, the UK has not balanced its budget since the last century. Right. Which is amazing. Public spending in the United Kingdom is 45 % of GDP. It's about its highest level for about five decades. What should it be? Like for a healthy economy? Well, it probably should be in the 30s. Right. Because once you get into the 40s, it means you have to start raising taxes. to cover that. It means welfare is a significant part of the budget, etc. And it also becomes endemic, you know, that it becomes embedded in the system. Yes. So what you have a lot, what you have a lot is the UK situation is precarious.

26:18David McWilliams: And I'm not sure if Andy Burnham and the guy Healy, who is his new chancellor, who probably only had about a day or two to figure out the job because he just got the job, had figured out... Steep learning curve, that. Yeah, had figured out just quite how precarious the situation is. Andy Burnham is a tax and spend old labour guy. He wants to spend his way out of dilemmas. Yeah. The bond market is very, very sensitive to that. And as a result, there's this tug of war between the bond market, the bond vigilantes, we've told them, and the cabinet number 10. Andy Burnham said last year he didn't want to be in hock to the bond market.

27:03He thought that was ridiculous. But the fact that he even said it

27:07David McWilliams: focused people's attention on this dilemma. So the UK is kind of caught in this strange place and it doesn't want to raise taxes because taxes have already been raised quite dramatically by Keir Starmer over the last while. And of course, it doesn't want to cut spending because it's a Labour government. so it's kind of stuck in a sort of a dilemma. And as a result of that, interest rates are going up, up, up, up. Again, you have then finally, John, you've got France. Yes, yeah, yeah. So the French situation is made all the more dramatic by the fact that France is now in election mode. Yeah, yeah.

27:45David McWilliams: You have Le Pen on the one hand promising everything and you have the extreme left, Mélenchon, promising everything, so much so that he said last week he thinks that the ECB should buy all French government debt and cancel the whole stuff. Now, of course, it can't do that. But that spooks everybody who owns French government debt because they're like, really? We're not going to get paid? So what is happening in France is once France goes into a general election, you will have absolutely no incentive for anyone to do anything except promise the sun, moon and stars to the electorate. And as a result of that, the budget deficit will get worse.

28:28David McWilliams: I'll give you one figure. In 2020, the French annual servicing of their budget deficit was 29 billion euros a year. 2020. In 2027, it's going to be 65 billion euros a year. Wow. Oh, Jesus. That's a leap and a half. Yeah, and the dilemma for France, John, is that French unemployment hasn't fallen below 7 % since the 1970s. In the second quarter of this year, it's still at 8.3%. So they've got this low productivity problem. They have an aging problem, and they've low workforce participation rate. So a lot of French people are taking early retirement. many professionals, engineers many young clever French people are leaving the country.

29:18David McWilliams: It's quite interesting you hear Frenchmen spoken all over London there are massive massive migrants to London and of course this brain drain is reducing the tax revenue and imposing a fiscal burden and the state spends roughly about 1 billion euros a year on the education of French kids and they are leaving in droves. Yeah. And therefore, the growth rate of France has been about below 1 % for quite some time. And of course, as you can't grow, there's no way you can pay your debts. Yeah. And also, you know, the people I've been talking to in France as well is that they are actually quite traumatized by the summer they've just had of fires and droughts and the huge loss of crops and the viticulture, the whole lot.

30:13They're all a bit traumatised. They're feeling a bit delicate, I think. Yeah. And the way the Spaniards hockeyed them in the semi-final of the World Cup. Yeah, that didn't help either, actually.

30:23David McWilliams: Playing tiki-taki. No, but I mean, so France, and the reason, of course, Europeans worry about France is that France is an anchor tenant. Germany is an anchor tenant. France is an anchor tenant. Countries like Ireland are not anchor tenants. We are simply retail outlets. We're pop-up shops. Yeah, we're pop-up shops. Exactly. We are. We are. We're yellow pack pound shops. We're the vape shop. Yeah, yeah. Yeah, we are. Yes, we are the vape. We are the Turkish barber of the European high street shop. That's what we are, right? Can I ask you one other thing before we move on from that? And that is Japan and the yen and Besson's strategy to plough lots of money into the yen and buy up the currency.

31:10That hasn't worked. And it's kind of backfiring on him. So what happens now?

31:15David McWilliams: Well, yeah, I mean, look, you know, central bank intervention never works unless it's coordinated. And he was trying to be too clever by half. and he was trying to deploy European money to prop up the yen in order to prevent Japanese investors selling American treasuries to prop up the yen. Because his big dilemma and his big fear is that 5.3 % American interest rate. He doesn't want that changing. So, John, all of this change, these what I would call strains in global finance, which are creating theatre and drama and headlines and news, are actually something quite fundamental, which is I think the world is shifting from an abundance of capital to a dearth of capital.

32:16David McWilliams: And as that happens, what you're really hearing is also a change in what I would call the background noise from AI, because AI is the single biggest source. So even the last few days, things have changed completely. Yeah, absolutely. Well, Mac, let's pick up on that after a bit of this.

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34:21so Mark at the moment like it just seems to be all change we were talking about the shifts in global finance and in the bond market and all that kind of stuff but the kind of third big shift and third part of this puzzle is AI and what's going on in AI and the shift in attitude as they build up for the big IPOs. What's your take on that? What can we learn from that? Well, I think it's not just the big IPOs.

34:51David McWilliams: What I found quite interesting at Kilkenomics, we have a number of really interesting AI sessions with some AI evangelists, some AI skeptics, etc. And the interest and the appetite for those shows is phenomenal. I think we could put on four or five shows at Kilkenomics. Yeah, because people are desperate to know what's going on and where the whole thing is going. It's hard to gauge. In the last week or two, something has changed in AI. Everybody is now talking about AI or writing about it or getting AI to write about it. I'm pretending it's you, right? And there was an ex-anthropic insider told CNN how he thought that AI was going to kill humanity by 2030.

35:31Yeah, there's more than 10 % chance, he said. Yeah, yeah, yeah. But what is really interesting is what I'm hearing now from the AI leaders themselves.

35:42David McWilliams: They're talking about hitting pause. They've come up with a great expression, John, which is it's time to pace the frontier. Oof, yeah. That was a Claude phrase, I bet. That's great. But the head of Anthropic, a guy called Dario Amodi. Yeah. And here's a quote from him. He said, we must slow the pace at which we improve the capabilities of AI models. He said, AI could find a cure for cancer, but this could also unleash cyber attacks and bioterrorism. So slow everything down. He said, we need third party embedded evaluators at the frontier of all AI companies. We need companies within democratic countries to, and he says, establish common safety standards.

36:29David McWilliams: and we also need to coordinate with authoritarian governments, meaning China, to the extent that this is possible. So suddenly, John, overnight, everybody seems to agree. Sam Altman, who is a Mojiz... Something must have happened. I mean, the conspiracy theories, guys, are going to be going, something was revealed that they all changed pretty much at once. Like, I know that some of the AI experiments have gone a little awry with AI jumping out of the sandbox and hacking companies and all that kind of stuff. So there are certainly red flags, but I wonder if something else happened. I'm not too sure what it is, but Altman said, so he's Modi's arch rival, Mr.

37:13David McWilliams: OpenAI. He is also committed to pausing. And he's also saying, this is the interesting, he might postpone his company's IPO until next year, which is always a bad sign. Elon Musk, your friend, who hates Altman with a passion, has said Dario is right. And Demis Hassabis, the guy I met a couple of months ago, of DeepMind, also said we have to slow down. Now, why are they all hitting the pause button or pacing the frontier, John? Pacing the frontier, I love it. It's a bit like walking your land, you know, where you walk the land. You pace the frontier. So part of it, now, of course, it's like this idea of what is the probability of killing the human race in 10 years' time?

37:59That should be enough to pause and pace the frontier, one would think, right? Right.

38:04David McWilliams: But I think a lot of it's also got to do with the fact that they are all now absolutely hungry for more and more capital. and the last thing they want to be doing is going out when you're trying to raise money and you say, well, what's the pitch for your company? And you'd say, partial obliteration of the human race. It's not really a great salesman. Oh, I'll buy that if I were you. Oh, there's money in that. There's money in that and a total evisceration of the human mind. So I think what we're seeing, John, is, and I will probably end here, is this fusion of a real fear that what we are creating with AI are actual aliens, except they're not coming from outer space.

38:59That these highly intelligent robots with an ability to communicate with each other, to talk to each other, could unleash bioterrorism.

39:12David McWilliams: Not just cyber attacks closing down the internet, Not just cyber attacks closing down all military installations, all systems in effect, all governmental, all non-governmental systems, but also this idea that they could create a bioterrorist attack, a sort of pandemic to beat all pandemics, to kill the little fragile human beings that created them. This is our Frankenstein story, John. Absolutely. It's like the Matrix. You create the monster and the monster then destroys you. And that, I think, is happening. But I also believe, fascinatingly, it is also driving a wedge between the AI evangelists, of which there are still some.

39:59We mentioned Marc Andreessen the other day. We mentioned David Sachs, who's Trump's AI advisor, was Trump's AI advisor. They're all still digging their heels in and saying, AI techno-optimism is the way forward, but even the AI guys themselves are saying, wait a second, we might have to pace the frontier. Well, when they start saying it, then you've got to sit up and take note.

40:26David McWilliams: Well, you have, because what has been the background noise for the last three years has been, this is going to be great, it's going to be fab, it's going to be wonderful, it's going to eliminate all the drudge jobs, remember all that sort of stuff? Yeah, yeah. And everyone's going to be happy ever after. And that is saying, well, hold on a second. The capability of these robots is so off the scale. I think what is actually going on is one is the pressure financially. But two is I think it's becoming evident. And this, I think, is what really freaks people out. is the sort of mind-blowing suggestions that is coming to light of what anthropic and AI's, open AI's models are being asked to do, right?

41:17David McWilliams: By humans. Yeah. And what they're capable of doing in pursuit of any objective. I think this is the real reason that they're all hitting the pause, right? Because once you start asking these machines to create new viruses, to create cyber attacks, to create new bioweapons, all of these sort of things, I think that the deep insiders in the AI community are realising, wow, this is a Frankenstein moment. Yeah, yeah. And this is not just about getting rid of basic jobs. This is about redefining what it is to be a human. And your friend Donny J said, all it needs is a president of America who understands AI and they have that in spades.

42:07Smart president, they have that in spades.

42:09David McWilliams: But John, don't forget, there is one major, major financial piece of cynicism that could be going on here, right? Oh yeah, go on. Up until recently, when the super scalers were able to finance everything and there was no pressure in the bond market, there was no competition with the American state, There was no sense that they couldn't finance everything they wanted to finance. They were absolutely wedded to the idea of being unregulated. We don't need to pace the frontier, John. We don't need to pause. There were anti-regulation on every level, actually, and slagging off Europe as the kind of over-regulators, the nanny states.

42:49All that sort of stuff.

42:50David McWilliams: So why might they be looking for regulation now over and above a damascene conversion to the morality of AI, which I don't believe? I think it could be the following, John, that if they get themselves regulated in the United States, if they involve the American state in the process of AI, they suddenly become semi-state. they suddenly become adjuncts of the American state. They suddenly become socialist companies that the American state might be responsible for. Now, in the long term, if you're looking for money, or you're looking for bailouts, or you're looking for soft loans, or you're looking for protection, well, that would be a very, very handy place to be.

43:42So don't, dear listener,

43:46David McWilliams: disabuse the notion that there is a connection between the slight worry they have on getting their IPOs done, which is why Altman said he might even push it out the next year, and their sudden need for protection from the American state as they flip morally to the side of, well, we could all be killed in the next 10 years. It's a socialist future for AI. That's what I see. Follow the money, John. That's all I say. Follow the money, whether it's AI or any other endeavour. Just keep that in the back of your head. Yes. But we are going to go to Frawley's in Le Hinch to drown our sorrows this weekend.

44:28Yes, we are. All right, listen, I'll see you in person at the other side of a bar in about a couple of days' time. Fantastic. All right, Johnny Boy, we'll see you then.

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