March 2025 Archive - Mad Hedge Fund Trader

The Algorithmic Abyss: How AI Deregulation Threatens to Plunge Financial Markets into Chaos

Washington D.C. - A seismic shift is underway in the landscape of financial regulation, as burgeoning calls for the deregulation of artificial intelligence (AI) within the sector gain momentum. While proponents tout the potential for innovation and efficiency, a growing chorus of experts warns that unchecked AI deployment could unleash unprecedented volatility and systemic risk upon global financial markets.

The debate, which has intensified following recent policy shifts, centers on the balance between fostering technological advancement and safeguarding the stability of the financial system. Critics argue that the rapid evolution of AI, coupled with insufficient regulatory oversight, creates a fertile ground for market manipulation, algorithmic flash crashes, and a potential erosion of market integrity.

The Deregulation Drive:

The push for AI deregulation is fueled by several factors. Firstly, the financial industry's embrace of AI has accelerated dramatically, with algorithms now playing a crucial role in everything from high-frequency trading to risk assessment and portfolio management. Advocates claim that stringent regulations stifle innovation and hinder the United States' ability to compete in the global AI race.

Secondly, a prevailing sentiment within certain political circles emphasizes minimizing government intervention in the market, viewing regulation as an impediment to economic growth. This ideology, combined with powerful lobbying efforts from tech and financial firms, has created a political climate conducive to deregulation.

"We must unleash the transformative power of AI to drive economic prosperity," argues a prominent industry lobbyist, speaking on condition of anonymity. "Excessive regulation will only serve to hamstring our financial institutions and cede our competitive advantage to nations with more permissive regulatory environments."

However, this perspective is met with fierce opposition from regulators, academics, and consumer advocacy groups, who express deep concerns about the potential consequences of unfettered AI deployment.

The Shadow of Algorithmic Risk:

One of the most pressing concerns revolves around the inherent complexity and opacity of AI algorithms. "These systems are often black boxes," explains Dr. Eleanor Vance, a leading expert in financial risk management. "We don't always fully understand how they arrive at their decisions, which makes it incredibly difficult to anticipate or mitigate potential risks."

This lack of transparency poses a significant challenge for regulators, who are tasked with ensuring market fairness and stability. The potential for algorithmic bias, where AI systems perpetuate or amplify existing inequalities, further complicates the regulatory landscape.

Furthermore, the interconnectedness of AI systems within the financial ecosystem creates the potential for cascading failures. A single algorithmic error or malicious attack could trigger a chain reaction, leading to widespread market disruption and systemic risk.

"We've already seen instances of algorithmic flash crashes, where automated trading systems triggered rapid and dramatic price swings," warns a senior regulatory official. "Without proper safeguards, these events could become far more frequent and severe."

Concerns of Market Manipulation:

The potential for AI-powered market manipulation is another major source of concern. Sophisticated algorithms could be used to exploit market vulnerabilities, engage in predatory trading practices, or spread misinformation to manipulate asset prices.

"Imagine an AI system designed to detect and exploit subtle patterns in market data, allowing it to front-run trades or manipulate prices with unprecedented precision," says a cybersecurity expert specializing in financial systems. "The potential for abuse is immense."

The proliferation of deepfakes and AI-generated misinformation further exacerbates these concerns. Malicious actors could use these technologies to spread false rumors or manipulate market sentiment, creating artificial volatility and profiting from the resulting chaos.

The Regulatory Void:

The current regulatory framework is ill-equipped to address the unique challenges posed by AI. Existing regulations, designed for traditional financial instruments and trading practices, are often inadequate for overseeing complex algorithmic systems.

"We're facing a regulatory gap," admits a financial regulator. "The pace of technological innovation has outstripped our ability to develop effective oversight mechanisms."

The development of new regulatory frameworks is further complicated by the lack of consensus on best practices and ethical guidelines for AI deployment in finance. International cooperation is also crucial, as financial markets are increasingly interconnected, and regulatory arbitrage could lead to a race to the bottom.

The Social and Economic Implications:

The potential consequences of AI-driven market instability extend far beyond the financial sector. A major market crash could trigger a global economic recession, leading to widespread job losses, social unrest, and a loss of public trust in the financial system.

Furthermore, the increasing reliance on AI in financial decision-making raises concerns about algorithmic bias and discrimination. AI systems could perpetuate existing inequalities, denying access to credit or investment opportunities to marginalized communities.

"We need to consider the social and ethical implications of AI deployment in finance," emphasizes a social justice advocate. "These systems should be designed to promote fairness and equity, not to exacerbate existing disparities."

The Call for Responsible Innovation:

Despite the risks, many experts believe that AI has the potential to revolutionize the financial industry, improving efficiency, reducing costs, and expanding access to financial services. However, they stress the need for responsible innovation, guided by robust regulatory oversight and ethical principles.

"We need to strike a balance between fostering innovation and mitigating risk," argues a financial technology expert. "This requires a collaborative effort between regulators, industry leaders, and academic researchers."

Key recommendations include:

Enhanced transparency: Requiring financial institutions to disclose the algorithms used in their trading and risk management systems.
Robust risk management frameworks: Developing new regulatory standards for algorithmic trading and AI-driven financial decision-making.
Ethical guidelines: Establishing clear ethical principles for AI deployment in finance, addressing issues such as bias, discrimination, and accountability.
International cooperation: Harmonizing regulatory standards and best practices across jurisdictions.
Continuous monitoring and evaluation: Establishing mechanisms for ongoing monitoring and evaluation of AI systems to identify and mitigate potential risks.

The Future of Finance:

The future of finance hinges on our ability to navigate the complex challenges posed by AI. A failure to establish robust regulatory safeguards could lead to a period of unprecedented market volatility and systemic risk, with potentially devastating consequences for the global economy.

However, if we can embrace responsible innovation, guided by ethical principles and robust oversight, AI has the potential to transform the financial industry for the better, creating a more efficient, inclusive, and resilient financial system.

The coming years will be critical in determining whether we can harness the power of AI for the benefit of society, or whether we succumb to the algorithmic abyss.

March 26, 2025

Tech Letter

Mad Hedge Technology Letter
March 26, 2025
Fiat Lux

Featured Trade:

(TECH FIRMS COULD BE OVERSPENDING)

(BABA), (MSFT)

Tech Firms Could Be Overspending

Tech Letter

I get it that there is a massive AI craze sweeping the tech industry and that these are the shovels to the potential gold rush in which could induce a revenue waterfall.

There have been many promises and like the fate of many promises – they aren’t kept.

Personally, I have not been convinced yet that this AI revolution will turn into some transformative movement.

Then there is the issue of whether humans will just revolt against AI once they begin to understand we are essentially training software to replace human interaction.

Talking to software engineers, the avalanche of firings in Silicon Valley has woken up their cohort.

Coders thought for a long time they were immune from firings and the gift that kept giving would continue unabated.

Now, software engineers are being terminated at record levels, and management has decided to pour money into building AI data centers.

Even China is getting in on the act.

Alibaba (BABA) itself — which in February declared it was going all-in on AI — plans to invest more than 380 billion yuan ($52 billion) over the next three years. Server farms are springing up from India to Malaysia.

Critics have also pointed out the persistent dearth of practical, real-world applications for AI.

Alibaba is mounting a comeback in 2025 thanks in part to the recent popularity of its Qwen-based AI platform, which it envisions boosting Alibaba’s core commerce business as well as cloud services.

American tech companies have already spent close to half a trillion dollars on AI data centers and there hasn’t been much revenue follow-through parallel to it.

Co-founder of Alibaba Joseph C. Tsai has said that American companies are overspending on AI data centers and less money can be spent than what is necessary to get the same result.

He said, “I’m still astounded by the type of numbers that are being thrown around in the United States about investing into AI.”

The latest news comes from Microsoft (MSFT).

They have quit new data center projects in the US and Europe that had been set to consume 2 gigawatts of electricity.

Microsoft’s retrenchment in the last six months included lease cancellations and deferrals.

Microsoft has said it will spend about $80 billion building out AI data centers this year, and that the pace of growth should begin to slow after that.

If investors don’t see anything meaningful in revenue possibilities soon, people will start to think this is beginning to feel like the Chinese ghost city problem.

China is usually not the type to overspend, and watching their development of AI for a fraction of the price is fascinating.

What does this all mean?

After a brutal correction in tech stocks in February, it could mean another leg down for tech stocks.

If it proves to be true in the short-term, tech stocks won’t deserve the premium they are fetching if they are in fact overspending on AI data centers.

Then throw into the blender that the government is fighting about trade, and there is a severe limit on what we can do in the short-term.

March 26, 2025

Diary, Newsletter, Summary

Global Market Comments
March 26, 2025
Fiat Lux

Featured Trade:

(WHY THE “UNDERGROUND” ECONOMY IS GROWING SO FAST)

Why The "Underground" Economy is Growing So Fast

Diary, Homepage Posts, Newsletter, Research

There is no doubt that the “underground” economy is growing.

No, I’m not talking about violent crime, drug dealing, or prostitution.

Those are all largely driven by demographics, which right now are at a low ebb.

I’m referring to the portion of the economy that the government can’t see and therefore is not counted in its daily data releases.

This is a big problem.

Most investors rely on economic data to dictate their trading strategies.

When the data is strong, they aggressively buy stocks, assuming that a healthy economy will boost corporate profits.

When data is weak, we get the flip side, and investors bail on equities. They also sell commodities, precious metals, and oil, and plow their spare cash into the bond market.

We are now halfway through a decade that has delivered unrelentingly low annual GDP growth, around the 2% to 2.5% level.

We all know the reasons. Retiring baby boomers, some 85 million of them, are a huge drag on the system, as they save and don’t spend.

Generation X-ers do spend, but there are only 58 million of them. And many Millennials are still living in their parents’ basements—broke and unable to land paying jobs in this ultra-cost-conscious world.

But what if these numbers were wrong? What if the Feds were missing a big part of the picture?

I believe this is, in fact, what is happening.

I think the economy is now evolving so fast, thanks to the simultaneous hyper-acceleration of multiple new technologies that the government is unable to keep up.

Further complicating matters is the fact that many new Internet services are FREE, and therefore are invisible to government statisticians.

They are, in effect, reading from a playbook that is decades or more old.

What if the economy was really growing at a 3% to 4% pace, but we just didn’t know it?

I’ll give you a good example.

The government’s Consumer Price Index is a basket of hundreds of different prices for the things we buy. But the Index rarely changes, while we do.

The figure the Index uses for Internet connections hasn’t changed in 20 years.

Gee, do you think that the price of broadband has risen in a decade, with the 1,000-fold increase in speeds?

In the early 2000s, you could barely watch a snippet of video on YouTube without your computer freezing up.

Now, I can live stream a two-hour movie in High Definition on my Comcast Xfinity 1 terabyte per second business line. And many people now watch movies on their iPhones. I see them in rush-hour traffic and on planes.

I’ll give you another example of the burgeoning black economy: Me.

My business shows up nowhere in the government economic data because it is entirely online. No bricks and mortar here!

Yet, I employ 15 people, provide services to thousands of individuals, institutions, and governments in 140 countries, and take in millions of dollars in revenues in the process.

I pay a lot of American taxes, too.

How many more MEs are out there? I would bet millions.

If the government were understating the strength of the economy, what would the stock market look like?

It would keep going up every year like clockwork, as ever-rising profits feed into stronger share prices.

But multiples would never get very high (now at 20 times earnings) because no one believed in the rally, since the visible economic data was so weak.

That would leave them constantly underweight equities in a bull market.

Stocks would miraculously and eternally climb a wall of worry, as they did until February.

On the other hand, bonds would remain strong as well, and interest rates low, because so many individuals and corporations were plowing excess, unexpected profits into fixed-income securities.

Structural deflation would also give them a big tailwind.

If any of this sounds familiar, please raise your hand.

I have been analyzing economic data for a half-century, so I am used to government statistics being incorrect.

It was a particular problem in emerging economies, like Japan and China, which were just getting a handle on what comprised their economies for the first time.

But to make this claim about the United States government, which has been counting things for 240 years, is a bit like saying the emperor has no clothes.

Sure, there has always been a lag between the government numbers and reality.

In the old days, they used horses to collect data, and during the Great Depression, numbers were kept on 3” X 5” index cards filled out with fountain pens.

But today, the disconnect is greater than it ever has been, by a large margin, thanks to technology.

Is this unbelievable?

Yes, but you better get used to the unbelievable.

There May Be More Here Than Meets the Eye

March 26, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

"This is an epic bond bubble that we may have just seen the end of, not only here, but in Europe too," said Peter Boockvar, chief investment officer at Bleakly Financial Group.

March 25, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 20, 2025
Fiat Lux

Featured Trade:

(WHEN SILENCE IS GOLDEN)

(ALNY), (PFE)

When Silence Is Golden

Biotech Letter

I was halfway through my morning coffee when my trader buddy in New York called me at some ungodly pre-market hour. He's one of those Wall Street guys who never sleeps and hasn't taken a real vacation since the Reagan administration.

"So what's your take on Alnylam?" he barked, not bothering with pleasantries. "Stock's been trading sideways for months between $230-$300. I'm getting impatient."

I took another sip of my Kona blend, remembering why I left the trading floor years ago. "Let me guess – you're looking at your Bloomberg terminal right now instead of enjoying the sunrise?"

"Cut the Zen master crap, John. What's the play here?"

The reality is that Alnylam Pharmaceuticals (ALNY) just snagged FDA approval for Amvuttra in ATTR-CM, opening the door to potential revenue north of $6 billion. But my friend, like most traders, was looking for the angle that wasn't already priced in.

"You know," I said, "when I was a combat pilot, we had a saying: 'It's not the missile everyone sees coming that gets you.' The approval announced on March 20th was expected, sure. But the label is better than most anticipated – approved for both hereditary and wild-type ATTR-CM. It's the first drug green-lighted for both polyneuropathy and cardiomyopathy, with the latter being more common and potentially more lucrative."

The label includes language about reducing "cardiovascular mortality, cardiovascular hospitalizations, and urgent heart failure visits" – with that last bit about urgent heart failure visits exclusive to Amvuttra. Seems small, but in pharmaceutical marketing, these distinctions matter.

"So should I buy the stock or not?" he pressed, always impatient.

"Here's what the Wall Street research notes won't tell you," I continued. "The HELIOS-B clinical study was a home run. Amvuttra will eventually muscle its way into front-line treatment, but initially, expect it to grab the 30% of ATTR-CM patients who deteriorate on Pfizer's (PFE) tafamidis or BridgeBio's (BBIO) acoramidis. Those are the 'stabilizers,' while Amvuttra is a 'silencer' – and in this case, silence is golden."

I could hear him typing furiously. "What about patient switchovers from stabilizers?" he asked.

"Doctors hate changing treatments that work, even if something better comes along. It's like trying to convince an old trader to use an app instead of calling his broker – not happening unless there's overwhelming evidence. But there's another angle – Amvuttra requires only four injections yearly versus daily pills. Plus, it's covered under Medicare Part B with zero copays, while the others fall under Part D. When patients realize they can save thousands in out-of-pocket costs, watch what happens."

Management is sticking with their hefty list price of $476,000 per year, though the real-world price after rebates and discounts will be lower. Given the clinical data and market dynamics, I'm convinced this indication alone is worth $6+ billion to Alnylam, with an upside to $7-8 billion if their newest compound, nucresiran, maintains efficacy with twice-yearly dosing.

"Fine, but is this a one-hit wonder or do they have more in the pipeline?" he pressed.

"Their R&D engine is firing on all cylinders. They've expanded beyond the liver to target neurodegenerative and ocular diseases, with plans to cover all major tissue types by 2030. Their batting average is impressive – three self-commercialized drugs, one partnered drug on the market, and another likely approval coming soon via Sanofi (SNY). That's the kind of success rate that makes venture capitalists weak in the knees."

I won't sugarcoat it though – currently, about 75% of their revenue comes from the TTR franchise, with Givlaari and Oxlumo making up the rest. Diversification is coming, but it's not an overnight process.

Keep your eye on zilebesiran, their antihypertensive being developed with Roche (RHHBY). Early results look promising, with KARDIA-3 results due later this year. It won't move the revenue needle immediately, but could eventually contribute significantly.

There's also mivelsiran for cerebral amyloid angiopathy and Alzheimer's – still in Phase II but potentially worth billions if successful. Not to mention early-stage programs targeting Huntington's, bleeding disorders, diabetes, obesity, and AMD. The pipeline is loaded like a billionaire's stock portfolio.

"Bottom line it for me, John. I've got a morning call in five minutes."

"Management's guiding for 30% product sales growth in 2025, mostly from Amvuttra in ATTR-CM. Their forecasts tend to be conservative but achievable – not the pie-in-the-sky numbers you get from pre-revenue biotechs promising to cure cancer with fairy dust."

In my model, the TTR franchise contributes about $202 per share to my $312 fair value estimate. Zilebesiran adds roughly $35, with an upside beyond $50 if clinical data continues to impress.

Admittedly, a 10% upside isn't the sexiest call for a biotech stock. But after watching thousands of companies come and go during my decades on Wall Street, I've learned to appreciate the rare combination of proven technology, commercial products, and pipeline depth that Alnylam offers.

"So you're saying buy?" he asked, clearly rushing now.

"I'm saying Alnylam isn't the stock you brag about at cocktail parties, but it might just be the one that pays for your kid's college education. Speaking of which, when was the last time you saw your children?"

He hung up without answering. Some things never change on Wall Street.

March 25, 2025

Diary, Newsletter, Summary

Global Market Comments
March 25, 2025
Fiat Lux

Featured Trade:

(THE ULTRA BULL CASE FOR GOLD)
(GLD), (UGL), (GOLD), (NEM)

The Ultra Bull Case for Gold

Diary, Homepage Posts, Newsletter

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).

They claim the move in the yellow metal we are seeing is only the beginning of a 30-fold rise in prices similar to what we saw from 1972 to 1979, when it leaped from $33 to $950.

To match the 1936 peak value, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, the precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long-term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own one-year $5,000 prediction positively wimp-like by comparison.

The seven-year spike up in prices we saw in 1979, which found me in a very long line in Johannesburg, South Africa to unload my own Krugerrands, was triggered by a number of one-off events that will never be repeated.

Some 40 years’ worth of demand was unleashed all at once when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation later peaked at around 20%.

Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world's largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster, threatening gold supplies. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast.

But then again, I could be wrong.

If you took all the gold in the world and melted it into a cube, it would only have 63 feet on a side. That includes all the yellow metal accumulated by the ancient Pharos of Egypt, mined by the Spanish in Latin America, and discovered by 49ers during the California gold rush. I‘m not counting all the gold sitting at the bottom of the ocean, sunk by storms and privateers.

Suffice it to say, there isn’t much of element 79 on the periodic chart (AU) around. Its value is in its scarcity.

The geopolitical outlook has also changed in favor of gold. China, Russia, and Iran have become large-scale accumulators to bypass international sanctions. Gold is also a depleting asset. Barrick Gold (GOLD) isn’t opening new mines at 15,000 feet in the Andes Mountains because they like the clear air.

The cost of gold mining equipment is also rising at four times the inflation rate. You know those tires on those huge Caterpillar 797 trucks? They cost $200,000 each, and there is a one-year waiting list.

All this makes the barbarous relic a strong “BUY” for me.

Do You Have any Retreads?