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Logo and text, J.P.Morgan, Please read important information at the end.

Text, What was I made for: Large Language Models in the Real World. September 2023, Michael Cembalest, Chairman of Market and Investment Strategy. Investment and insurance products are: Not F.D.I.C. insured, Not insured in any federal government agency, Not a deposit or other obligation of, or guaranteed by, JPMorgan Chase Bank, N.A. or any of its affiliates, Subject to investment risks, including possible loss of the principal amount invested. Logo, J.P.Morgan. Image, A robot looks out onto a city at dusk. Speaker video in picture-in-picture on the upper right corner.

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Hello, everybody. Welcome to the September Eye on the Market video audio podcast. This one's entitled "What was I made for, large language models in the real world." I wanted to focus on this topic again because of how large AI is as a catalyst for what's going on in the equity markets. But first, I just wanted to review economics and markets for a minute.

Not that much has changed since our August piece called "The Rasputin effect."

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Text, Rasputin effect. While leading indicators point to weaker US growth in by Q1, the expected decline is modest as potential recessions go. Tighter Fed policy is partially offset by: large fiscal deficits, US industrial policy (incentive-driven spending on infrastructure, energy and semiconductors), strong corporate and household balance sheets, private sector actions to lock in low borrowing rates before 2022, tight housing and labor markets.

(SPEECH)

Leading indicators are definitely pointing to weaker growth by the first quarter, but the expected decline is pretty modest as potential recessions go. Tighter credit conditions are certainly going to have an impact, but all the 17 or 18 leading indicators that we watch, none of them looks really terrible. They all just look kind of modestly bad and a little bit weaker.

The reason why things don't look worse after 500 basis points of Fed tightening is that the Fed policy is being offset by a few things. First of all, very large fiscal deficits, almost as large as they were in 2009. We're having the beginning of a US industrial policy, which is essentially incentive-driven spending by the private sector on infrastructure, energy, and semiconductors. That's starting to kick in. Household and corporate balance sheets were pretty strong coming into this year. Delinquency rates outside subprime auto are still very low.

And the private sector took actions to lock in low borrowing rates before 2022. Apparently the only entities that didn't get the memo that rates were unsustainably low were a handful of some of the regional banks that you're all familiar with, who extended their asset duration at the wrong time. And housing markets and labor markets are pretty tight. So the normal transmission of higher interest rates and higher Fed policy to crater housing and labor markets isn't transmitting quite the same way. So all of these things are, at least at the current time, kind of keeping a severe recession at bay.

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Spare capacity engineered by OPEC is at one of its highest levels outside recessions. A graph with the heading, Estimated OPEC spare capacity, Million barrels per day. Key: tan line, Bloomberg, blue line, J.P.Morgan, red line, Bridgewater. The x-axis goes from 2000 to past 2021. The y-axis goes from 0 to 12. There is a grey vertical bar above 2001-2002, a thicker one over 2009, and a thin one before 2021. Jagged lines across have spikes near the bars. J.P.Morgan trends lowest, with the other two alternating higher.

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I do want to talk a little bit here about oil prices. The OPEC spare capacity is pretty high. It's not as high as it gets during recessions, as you can see here in this chart, but it's pretty high. For a nonrecessionary period, OPEC has engineered quite a bit of spare capacity. Now, that can change quickly, but right now spare capacity is pretty tight. And you have to combine that with two more things. First,

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Publicly traded energy companies are spending a small share of cash flow on future oil & gas projects despite stable global fossil fuel consumption. A graph with the heading, Fossil fuel consumption vs energy capital spending, Energy capital spending as % of operating cash flow. The x-axis goes from 2006 to past 2022. The y-axis on the left goes from 0.2x to 1.2x and on the right from 0 to 550 Exajoules. A blue jagged line rises and falls, then begins to rise again. A leftward blue arrow has the text, S&P Global 1200 Energy companies, capital spending intensity. A tan line slopes upward near the top with a dip before 2022, and a rightward tan line has the text, Global fossil fuel use.

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the publicly traded energy companies are spending a very small share of cash flow. We have a chart in the Eye on the Market that shows the percentage of energy company cash flow that they're spending on new projects, specifically oil and gas-related projects.

And that's a very low share. And we juxtapose that against global fossil fuel use. And you can see the industry is starting to cut back on future projects for all the reasons you might imagine, even though we really haven't seen much of a decline yet in global oil and gas consumption. And then on top of that, you've got the Strategic Petroleum Reserve at the US at the lowest level it's been in many decades. So tighter OPEC conditions, less oil and gas investment, and a depleted Strategic Petroleum Reserve, that combines to kind of goose up oil and gas prices. And then we'll have to see what Russia has in store for the world. They've already announced some restrictions on diesel exports.

Higher energy prices tend to feed into inflation within a few months. And so one of the things that you're seeing is the markets were pricing in some Fed cuts next year. That's now gone. Now, I did want to focus most of this discussion on the generative AI catalyst because we have a chart in the Eye on the Market this time that shows the ETF for the generative AI stocks is up around 60% this year, while the market excluding those stocks is up around 5%. So this has definitely been the year of generative AI.

And

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The Generative AI catalyst. A bar chart with the heading, YTD return of XYZ AI ETF vs S&P 500, Percent, YTD return. The y-axis goes from 0% to 70%, The x-axis has three bars. A blue bar labeled XYZ AI ETF goes to almost 70%, a tan bar labeled S&P 500 goes to just above 20%, and a tan bar labeled S&P 500 (example XYZ AI ETF constituents) goes up to almost 10%.

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I wanted to take a look at how it's being used well and where it's failing and then perform my own specific test on GPT-4 specifically because I thought it was an interesting exercise.

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Are comparisons to electrification of farms, the interstate highway system and the internet justified? A graph with the heading It's a fad, fad, fad, fad world. Google search interest over time (100 = peak interest). The x-axis goes from 2014 to 2024. The y-axis goes from 0 to 100. Many colored lines that peak in different years. Key: blue, Large language model, red, Crypto, tan, Blockchain, Black, Metaverse, yellow, Non-fungible token, and green, Cannabis investing.

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And the reason I want to do that is juxtapose these two things. Number one, people are out there comparing large language models to electrification of farms, the interstate highway system, and the internet itself. And those are some pretty remarkable milestones.

While at the same time, we've just lived through a period-- whether it was cannabis investing, non-fungible tokens, metaverse, blockchain, crypto, hydrogen-- where a lot of things were kind of touted to be something that they turned out not to be. And so now we're getting a surge in interest in the large language models, and I think the reality is somewhere in between the nonsense of the metaverse and crypto and the seismic changes introduced by the interstate highway system and electrification of farming.

So let's take a closer look.

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Quote, "Create an image of two people looking nervously at a robot sitting at the table with them. The robot should be labeled Strategy Team Trainee." (unquote). Three versions of output images: Bing, Starry AI, and Dall-E. The first two don't have the robot label. The third has a board on a table with a robot at the end of the table and a woman on either side. The board has a pile of craft materials and says STMAT, TRATGY.

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I started out just doing something lighthearted but still meaningful, which is there are these multimodal AI image generation models. And I used three different ones. You can see here Bing, Starry AI, and Dall-E, which is GPT's version. And I asked it to create an image of two people sitting at the table looking nervously at a robot with them, and that the robot should have a label on it that says "strategy trainee," "strategy team trainee," like working for me.

None of them did it right. And some of them-- the mistakes are interesting. So starting on the left, first of all, there's three people, not two, and one of the people looks like they're in a horror film, which is pretty scary. And lots of people have extra hands and legs and fingers and things like that. The second one from Starry AI got a little bit closer. You have somebody looking nervously at a robot, but there's only one person instead of two. And both the first two ignored the whole thing about the strategy team label entirely.

And then you have this Bergmanesque and also fairly terrifying offering from Dall-E on the right splattering some letters on the table, not on the robot, and not really spelling anything. But still, the interpretive proficiency is good in certain ways. So I thought this mixture of good, bad, and bizarre was a good way of starting this discussion.

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Text, Something I'm made for. Management consulting: 12% more tasks completed, 25% faster, 40% improvement in quality. Depends on what you think of management consultants. GitHub's AI programming tool Co-pilot: writing 45% of their code, may rise to 80%. Statistical exams: ChatGPT scored 104 points out of a possible 116. Professional writing: Access to LLMs raised productivity: time required for each task declined and output quality improved. Chat GPT benefited low-ability workers more. Customer support agents: LLMs improved productivity by about 15%, improved customer sentiment and employee retention, helped lowest skilled workers the most. LLM successes in medical research: AI tool that summarized doctor-patient interactions improved skin condition diagnoses, and was able to identify 2/3 of 70 notoriously difficult-to-diagnose medical cases based on descriptions of symptoms. Warning: you're not going to like all the use cases. LLMs generate fake content, fake news web pages, fake product reviews, fake eBooks and fishing emails. Some of it seems designed solely to profit from Google's automated advertising process.

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And some of you will pick up on the theme of this and the pop culture references I'm using. But when you think about a large language model and something it's made for, here are some examples that are currently working. It's helping management consultants in terms of speed and quality and task completion. Whether you're impressed with that or not depends upon what you think of management consultants. People using Copilot, which is a programming tool, are having a lot of success with it. It's doing a great job on statistics. It's helping people that do professional writing. It's helping customer support agents be more productive. It's improving their employee retention.

And a lot of these things tend to help the lower-skilled workers the most. It's even having some successes in medical research. The one that I thought was interesting where somebody fed in some of the 17 most notoriously difficult to diagnose medical cases just based on the descriptions of the symptoms people were having, and it got 2/3 of the diagnoses correct.

Now, you're not going to like all these large language model use cases. People are using them to generate digital mountains of fake content, fake news sites, fake product reviews on Amazon, fake ebooks, phishing emails-- I've spelled phishing wrong because I like fishing so much. I should have spelled it with a P-H. And a lot of this stuff seems designed to profit from Google, or essentially fool Google's automated advertising process into paying it for people looking at junk content that they don't really know is AI generated. In any case, these are the things that it's doing well and where the use cases are expanding.

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Text, This is not quite as impressive as it looks, since these are multiple choice exams whose answers GPT has probably already seen. May simply reflect GPT 4 having 10 times more parameters than GPT 3.5. A bar graph with the heading, GPT-4 improvements vs GPT-3.5, GPT percentile vs human test takers. Bars are labeled with various academic subject areas and each has different amounts of green and/or blue. Green is GPT-4 and blue is GPT-3.5. Text to right, We already know that large language models are good at memorization. The more important question: can they integrate new information and evaluate something it hasn't seen before?

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I saw this chart from OpenAI, but I wasn't as impressed as I think OpenAI wanted me to be. And it's a chart that shows how GPT-4 is doing versus GPT-3.5 taking all sorts of standardized tests. And as you can see here, there's math tests and chemistry exams, bar exams, biology exams, history exams, SATs, GREs, things like that.

And there's something-- I think a lot of you are probably pretty aware of this right now, but there's something called data contamination, which is if you train these models on information sets that include the questions and the answers to all these exams, all we're really analyzing is whether or not GPT-- or any of the other ones, whether it's Bard or Bing or Anthropic or any of the rest of them-- are good at memorization. But we know that large language models are good at memorization, so I'm not really sure exactly what's being proven here other than the impact of having 10 times more parameters in GPT-4 than GPT-3.5 makes it better at memorization.

I think the more important question is, you don't hire a lawyer so that he can sit down and answer bar exam questions all day. You hire a lawyer when you need somebody to integrate new information and evaluate things maybe they haven't seen before. And when you look at those kinds of tasks, the large language models aren't doing quite as well.

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It's not what I'm made for. Law. GPT-4 got a C in Constitutional Law and a C minus in Criminal Law. (Quote) "GPT-4 produced smoothly written answers that failed to spot many important issues, much like a bright student who had neither attended class nor thought deeply about the material" (unquote). Actuaries. GPT-4 failed an actuarial exam, registering a 19.75 out of a possible 52.50 score. Economics: GPT-4 scored just 4 out of a possible 90 on a college sophomore economics exam. Taxes. GPT-4 performed (quote) terribly" (unquote) graduate level tax and trust & estate exams.

Math teaching. GPT-4 botched Pythagoras' theorem, instructed users that if you know the hypotenuse of a right triangle, that's enough info to determine the length of both sides; and got stuck in a (quote) "death loop" (unquote) of nonsense when provided with mathematically impossible dimensions of a triangle. Journalism. Online editors cite a growing amount of AI-generated content that is so far beneath their standards that they consider it a (quote) "new kind of spam" (unquote). They reject all AI-written submissions since they have perfect spelling and grammar but lack a coherent story, and are useless to them. Big Bench. The most comprehensive LLM assessment that we've seen is (quote) "BIG-bench" (unquote). This project, encompassing 204 tasks compiled by 400+ researchers, still finds substantial underperformance of LLMs compared to the average human, and well below highly performing humans.

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And we have a page in here called "It's not what I'm made for."

When GPT-4 has been asked to take law exams, it does pretty poorly. And I like the description from the University of Minnesota professors who did this, where they said, "GPT-4 produced smoothly written answers that failed to spot many important issues, much like a bright student who didn't attend class and hadn't thought deeply about the material." So now you can get a better feel for what we're dealing with here. It's like rote repetition rather than real reasoning and thought.

GPT-4 did terribly on an actuarial exam, a college sophomore economics exam, graduate-level tax and trust and estates exams. It botched Pythagoras's theorem when being asked to be a math teacher. It got stuck in a death loop of nonsense when somebody provided it with mathematically impossible dimensions of a triangle that it should have been able to figure out.

And the journal had this article where they're writing about how online editors and newspaper editors are being given so many crappy AI-written submissions that have good spelling and grammar but lack a coherent story, they're just outright rejecting anything that they can get the sense that there was any AI used to generate it at all. And the most comprehensive assessment of large language models that I've seen is something called BIG-bench, which is a project that over 400 researchers around the country are working on. There's 204 tasks involved. And the latest that it was updated was July of 2023, of this year, and they still found substantial underperformance of large language models compared to the average human, much less a highly performing human.

Anyway, Manuela Veloso is from Carnegie Mellon, and she runs JPMorgan's AI research group. And they're doing a lot of really interesting applications of large language models. She walked me through some of them. And I was very impressed. They do seem like they're productivity savers-- information checking, information gathering, charting tools, making sure the documents are filled out properly, all of which are mostly designed to reduce errors and omissions. And that's potentially a very powerful and profitable application of a large language model.

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Is this what I'm made for? 71 questions that my analysts and I worked on over the last two years for the Eye on Market. I graded GPT-4's speed, accuracy and depth vs the traditional web searches, conference calls (text obscured) files and excel analyses we relied upon over the past two years to obtain the answers. We enabled GPT-4 features to upload data files which we prepared for it, and enabled several plug-ins that allow web browsing of PDFs and excel files when necessary (when testing different plug-ins, we used the best answer provided). (In bold) As a result, the end of GPT-4's training in 2021 was not a constraint on its ability to answer our questions. Grading was affected by the consistency of GPT-4's response (lower grades for less consistency). Wrong answers more heavily penalized than no answer given extra work needed to find and fix them.

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For me, it's a little different. So here's what I did. I took 71 questions from the Eye on the Market over the last two years that my analysts and I worked on, and I asked ChatGPT-4 to take a shot at it. And I graded GPT-4 based on its speed, accuracy, and depth versus the work that we had done ourselves to get the answers. So in other words, we're not grading it whether it can do anything. We're grading it compared to the process that we used that didn't yield any hallucinations or errors or things like that.

And we enabled the GPT-4 features to upload data files when it couldn't find it on its own needed data files. We enabled the plugins that allow it to browse PDFs and Excel files when necessary. So as a result, a lot of you have read that GPT-4's training data for its parameters ended in 2021. That's not a constraint because we added all the plugins to give it all of the data and all of the web access it would need to answer any of our questions.

And so here are the results. It was a mixed bag and a very bimodal distribution of grades.

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The results. Two tables. On the left, Chat GPT-4 grading. On the right, Chat GPT-4 GPA by Subject.

(SPEECH)

It got a lot of A's. Out of 71 questions, it got 26 A's and 25 A-minuses. That sounds great.

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On the table, A. minuses are listed as 5.

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The problem is it also got 13 D's and 6 F's. So it was very much of a bimodal distribution. The GPA worked out to about 2.5, which is between a C-minus and a B-plus.

And you might say, well, what did it get wrong? And here are some examples of what it did. It would hallucinate numbers and then absolutely refuse to provide a source for where it found them, which is very frustrating. It would outline the correct steps to solve a problem and then execute the steps incorrectly when doing it. It misread data files that we provided to it. It didn't notice when there was data in a spreadsheet and there were subtotals that you should exclude subtotals from when you're summing a column. It messed up some energy conversions.

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Text, It used the wrong constants for certain energy conversions, and conflated (quote) energy generation capacity (unquote) with (quote) energy consumption (unquote).

(SPEECH)

And it also asserted certain facts that are easily contradicted by other readily available information.

So that was my experience with it.

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Wrapping up. Information spoken.

(SPEECH)

And I guess the bottom line is, just to wrap up, I think GPT-4 is going to have a big impact in Manuela's world, for example, since the tasks that she's designing for it conform more to what these things are made for, which is error checking and memorization, most often using trained corporate data and not just trained internet data. The part that I struggle with the most is how am I supposed to incorporate a tool where, even if it can get some answers to complex questions right, I have to check every single answer because since it sometimes it gets things wrong, I have to check every answer?

And by the time I've done that, where's the productivity gain of using the tool in the first place? So anyway, I'm just going to use it for the simpler questions where it performs well. I think that's what it's made for. And at just $20 a month for GPT-4, I got what I paid for. So that's this month's Eye on the Market. We've got a piece coming up that's a deep dive on New York City and its recovery compared to other major Metropolitan areas that I think a lot of our clients will be interested in.

And of course, we're going to continue to monitor what's going on with the Fed and consumer spending, energy prices, and an economic slowdown later this year. Thanks for listening, and I'll see you everybody next time.

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For J.P. Morgan Wealth Management Clients: Purpose of this material: This material is for informational purposes only. The views, opinions, estimates and strategies expressed herein constitutes Michael Cembalest's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. J.P. Morgan is committed to making our products and services accessible to meet the financial services needs of all our clients. If you are a person with a disability and need additional support, please contact your J.P. Morgan representative or email us at accessibility dot support @ j p morgan dot com for assistance.

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