AI and “Project Prophesy”

Jim Rickards Takes on AI [The Daily Reckoning] December 26, 2023 [WEBSITE]( | [UNSUBSCRIBE]( AI and “Project Prophesy” Portsmouth, New Hampshire [Jim Rickards] JIM RICKARDS Dear Reader, Artificial Intelligence (AI) is dominating market publicity today. But it’s nothing new. Important theoretical papers were published in the 1950s by Alan Turing, who was the co-inventor of one of the first computers, and the individual credited with leading the team that cracked the German Enigma code in World War II. Progress was made in developing AI systems in the 1960s and 1970s, but it soon ran into roadblocks having to do with processing power. The theory had outrun the hardware and this impeded progress. The result was an “AI Winter” that put a hold on progress through the 1980s. I engaged in my first technical discussion of AI with a senior scientist of A. D. Little, a consulting firm, in 1979 just before the AI Winter began. I don’t want to get technical here. But Project Prophesy, which I worked on at the CIA from 2004 to 2007 was pure AI. Our team developed a machine that would scan stock markets looking for unusual trading that might indicate a coming terrorist attack. We narrowed over 6,000 listed stocks down to around 400 stocks that represented likely terrorist targets such as Disney World, Carnival Cruise lines, and American Airlines. In 2006, I was invited to deliver an address on complexity theory and capital markets to the APL Colloquium at the Applied Physics Laboratory near Washington DC. Top Secret The methodology I presented there resulted in the exact architecture used in AI today albeit with much greater processing power behind it. In 2009, I delivered an invited talk at the Risk Symposium in Santa Fe hosted by the Los Alamos National Laboratory. While there, I traveled to the actual laboratory (about 40 miles away through the desert). I was then invited into a Top-Secret discussion on how Los Alamos is using artificial intelligence to simulate nuclear explosions without actually detonating a nuclear device (prohibited by the nuclear test ban treaty). I can’t disclose more because the discussions were classified, but the techniques were not unlike what I presented at the Applied Physics Laboratory and my more recent work on predictive analytics in capital markets. In 2012, I met with Vint Cerf, widely regarded as one of the Fathers of the Internet. He has been Chief Internet spokesperson for Google since 2005. We were in a vault in CIA headquarters as part of a team applying AI to terrorist finance including ISIS at the time. We hit it off and had a great conversation. We agreed on some interesting approaches to disrupting terrorist finance nodes that were using crypto currencies. In recent years, I have designed numerous neural networks for use in predicting prices of stocks, notes, currencies, commodities and more with about a six month horizon. I use that work today in my investment recommendations. My work in AI goes back decades and covers matters from nuclear war and peace, counterterrorism, and financial collapse. [*** EARLY ACCESS LINK ***]( For the first time in our company’s history, we’re launching a member-only trading room… And as a The Daily Reckoning subscriber, we want to give you early access. This venture is very special and completely different from anything you’ve seen in our industry. It’s a community. It’s mentorship. It’s a place where you can get analysis EVERY DAY the market is open… And it has the best track record in our company, possibly our entire industry (the total model portfolio has grown 254% since May). All you need to do is fill out an assessment in order to prove you have what it takes. [Click Here To Learn More]( Good News for Bad Guys Malign actors can use the speed and comprehensiveness of GPT to produce fake images and content. They can then push that content into social media and mainstream channels to cause market rallies and crashes. In other words, for market manipulators, inside traders and geopolitical adversaries, GPT is one of the best tools ever invented. Here’s a recent case in point… Earlier this year, a story appeared on Zero Hedge, Facebook, Twitter and several other media channels showing a large building on fire near the Pentagon along with speculation that a terrorist attack might be underway. Stocks immediately began to sell off. Within minutes, it was realized that the building fire photo was fake (based on some windows that had an irregular instead of uniform appearance). And indeed, the entire story was fake. The image of the building with billowing smoke was generated by AI. Investors should get used to this type of AI-induced panic that can manipulate markets. The AI/GPT technology is already in the hands of bad actors and they won’t stop using it just because this one fake was detected quickly. Computer vs. Computer Most stock trading is done by computers primed to look for keywords in breaking news. This was a case of computers selling stock based on what another computer was reporting with the use of a fake photo and fake news. It's computer versus computer using AI/GPT as advanced weaponry. Here’s why that’s so potentially dangerous… Today, stock markets and other markets such as bonds and currencies can best be described as “automated automation.” What do I mean? There are two stages in stock investing. The first is coming up with a preferred allocation among stocks, cash, bonds, etc. This stage also includes deciding how much to put in index products or exchange-traded funds (ETFs, which are a kind of mini-index) and how much active management to use. The second stage involves the actual buy and sell decisions — when to get out, when to get in and when to go to the sidelines with safe-haven assets such as Treasury notes or gold. What investors may not realize is the extent to which both of these decisions are now left entirely to computers. I’m not talking about automated trade matching where I’m a buyer and you’re a seller and a computer matches our orders and executes the trade. That kind of trading has been around since the 1990s. I’m talking about computers making the portfolio allocation and buy/sell decisions in the first place, based on algorithms, with no human involvement at all. This is now the norm. [Claim a copy of the most dangerous book in America right now.]( This is the only book I’ve ever read that brings to life the horrifying fallout of a massive international currency war. A war that’s playing out as we speak. In fact, this book is so hair-raisingly accurate… I’m offering to send you a copy for free today as a way to help prepare you for what could happen next. But with only 500 copies in stock, once we are out, they could be gone for good. [Click Here To See What To Do]( The Demise of Active Investing Over 80% of stock trading is now automated in the form of either index funds (over 60%) or quantitative models (under 20%). This means that “active investing,” where you pick the allocation and the timing, is down to less than 20% of the market. Although even active investors receive automated execution. In all, the amount of human “market making” in the traditional sense is down to about 5% of total trading. This trend is the result of two intellectual fallacies. The first is the idea that “You can’t beat the market.” This drives investors to index funds that match the market. The truth is you can beat the market with good models, but it’s not easy. The second fallacy is that the future will resemble the past over a long horizon, so “traditional” allocations of, say, 60% stocks, 30% bonds and 10% cash (with fewer stocks as you get older) will serve you well. But Wall Street doesn’t tell you that a 50% or greater stock market crash — as happened in 1929, 2000 and 2008 — just before your retirement date will wipe you out. But this is an even greater threat that’s rarely considered… Shouting Fire in a Crowded Theater In a bull market, this type of passive investing amplifies the upside as indexers pile into hot stocks like, for example, Nvidia, Google and Apple have been recently. But a small sell-off can turn into a stampede as passive investors head for the exits all at once without regard to the fundamentals of a particular stock. It’s like shouting “Fire!” in a crowded theater. AI could issue the false alarm that sends investors scrambling for the exits. Index funds would stampede out of stocks. Passive investors would look for active investors to “step up” and buy. The problem is there wouldn’t be any active investors left, or at least not enough to make a difference. There would be no active investors left to risk capital by trying to catch a falling knife. Stocks would go straight down with no bid. The market crash would be like a runaway train with no brakes. It all comes back to complexity, and the market is an example of a complex system. One formal property of complex systems is that the size of the worst event that can happen is an exponential function of the system scale. This means that when a complex system’s scale is doubled, the systemic risk does not double; it may increase by a factor of 10 or more. The emergence of AI-generated “fake news” can amplify these market movements. As the technology improves, which it inevitably will, it’ll become increasingly difficult to distinguish reality from fiction. Stories like the fire near the Pentagon will become much harder to debunk. Investors need to understand these technological developments before their portfolio holdings are badly damaged. One thing we can be sure of is that the threat is not going away. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. I’ve worked inside the intelligence community… briefed Congress on financial disasters… and even helped the CIA build a top secret A.I. program. Now I’m issuing an [urgent new briefing.]( It’s about [a strange and powerful new A.I. project I’ve been briefed on…]( A project that could have a big impact on your life in the very near future. I’ve gone on camera to explain what’s going on — and what you need to do about it. This is important. [Go here now and check it out.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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