Reflections on Market Uncertainty

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Today We're entering a new age for investors The age of the trillion dollar company withithout profits On june twelfth, this year, SpaceX went public and the largest IPO in history, pricing initially at roughly one point eight trillion dollars and quickly trading above two trillion dollars. Overnight, it joined the tiny club of companies valued alongside Apple, Microsoft, Nvidia, and Amazon But those companies have something in common that SpaceX does not. Profits Apple and Microsoft each generate hundreds of billions of dollars in annual revenue and enormous earnings. SpaceX, on the other hand reported less than nineteen billion dollars in twenty twenty five revenue and a five billion dollars net loss And SpaceX might soon have company OpenAI and Anthropic are both moving toward public listings, each with valuations approaching one trillion dollars Anthropic is not even trying to produce a sustained profit this year or next. and OpenAI reportedly does not expect to be profitable until the end of the decade The striking fact is not just that investors are paying up for growth. They've always done that The striking thing is that public markets are soon being asked to absorb several trillion dollar companies whose valuations are built less on profits on the expectation that artificial intelligence will define the next era of capitalism a couple reactions, I think that you could plausibly have to this news. One is Holy shit, this makes absolute no sense. Investors are insane. We're in a bubble. It's all gonna pop, stuff your mattress And I'm not going to tell you that that take is obviously wrong It's not obbviously wrong But I'm also interested in what these trillion dollar IPOs represent I see as a new age in American technology The tech giants of the twenty ten s, Facebook and Uber, Airbnb, they were asset light AI is asset heavy. SpaceX's AI unit burned through eight billion dollars in the first three months of this year alone OpenAI reportedly lost tens of billions of dollars last year Overall, the so called hyperscalers, the big tech companies like Microsoft and Alphabet that are spending hundreds of billions of dollars a year, they are devouring. pouring concrete and building data centers with electricity bills that could power small towns And this turn within technology from light tech to heavy tech I think might be one of the most important transitions in American economics markets and investing Today's returned guests are Michael Batniick and Ben Carlson, of Ritholt's Wealth and the hosts of the podcast Animal spirits. We talk about the new age of asset heavy tech and the dawn of the trillion dollar Zero profit company I'm Derek Thompson This is plain English. Ben Carlson, Michael Badnick, welcome back to the show Happy to be be here So as I said in the open, I'm really interested in a couple of trends in tech and markets right now. And they really all revolve around this one phenomenon, which is that SpaceX Anthropic and open AI. all IPOing in one year means that we're going to get three trillion dollar IPOs with a combined profit well below zero. And I think this is just a A sign that we're in a brave new world that requires some explaining. So let's start with SpaceX. The company IPOs at just over two trillion dollars valuation, already down about twenty five percent from the peak. This is a firm with no profits, enormous costs, great satellite business attached to a money burning AI business Michael What are investors buying? when they buy sppaceX. I'm going to answer a different question and excited to be back here, Darry. All right, forget about what are they buying? I think everybody understands the Starlink system is phenomenal. It's a game changer. Forget about the thirty two trillion dollars Tama, whatever they spoke about with like the AI opportunity I think for the point of view of the investor base What's really important is the two trillion dollar market cap Holy cow. I miss my opportunity to invest in SpaceX at a three hundred billion dollars market cap, right? Whver Facebook came public, like we miss all of that growth because companies are stay private for way longer. And now I'm being as an index investor You are jamming twoo trillion dollars of a company with a with a very u withith a lightning rod of a leader that I potentially do not care for And I am now his exit liquidity, okay So the story is simple, complex, and nuanced you, the index fund investor are not swallowing two trillion dollars worth of Elon Musk The NSC one hundred is fast tracking inclusion into the index But what they are doing, and when I say fast strike, usually there is a seasoning period where a company will have to show something like four quarters of something crazy called a profit before they can get included into the index The NSA the NASAC is saying, listen, we are the innovation Exchange of the world, how can we not fast track and include SpaceX The question becomes How much And there's this thing called the free flloat adjusted market cap Wh they'll not just put two trillion dollars and they willll say, okay, how much stock actually exists for the public to buy? In the case of SpaceX, Elon Musk owns forty something percent of the company. That will never be included in the market capab So it's not to downplay and say that the seventy five billion dollars worth of proceeds that are being raised ' not a lot because it is a lot, but you are not It's not like So SpaceX can be the fifth largest company in the world by market cap And it could be, if and when it's included in the S and P five hundred, whatever that may be It could be the hundred eightih biggest stock And I think The part that people got upset about this is they came to market They issued three percent. So they raised three percent of the company was what they issued. Normally when a company's IPO, it's thirty percent And so the thing that is, I think, grindy people's gears, forget like past the two trillion dollarars number, it's, hey wait a minute They know that there is such a gigantic amount of demand for the stock and they are artificially limiting the supply because they want the demand to so far outstrip supply becausecause in the lock upp schedule, whichich how many shares can insiders sell over time? there are hurdles such that if the share price is, say twenty percent above or thirty percent above for consecutive days, then they can sell more stock to the public. They can get unlocked faster. And I know I just said a lot, that's probably confusing to a lot of people, but it's a big story, but the headline numbers miss a lot of the nuance underneath it No, one way that I recapitulate that is to say that look, most times when people when companies go public, they go public by issuing thirty percent of the available stock. In the case of SpaceX, they didn't let out thirty percent of the stock, they let out three percent of the stock. And so there was a pressure created by that scarcity to drive up the value of those shares. And when the value of those shares is driven up to a certain number, I don't know what it is today, one hundred seventy five, one hundred eighty, well that calculates that ces to a two trillion dollar valuation, but by only releasing a small amount of a stock that they know has enormous demand because Elon Musk is one of the most famous people in the world. That was one way that they knew they could get this two trillion dollars valuation. Now over the long run, I think peopleeople, traders, hedge funds, institutional investors should probably think, right like what is This piece of paper worth. what is this share in SpaceX worth? Do we think it is worth a share of a two trillion dollars company? or when we look at the fundamentals here, are we looking at something that makes more sense is a one trillion, eight hundred billion dollars company? So Ben, know I want your SpaceX thoughts as well. And we already talked about the famous page eleven or reference, the famous page eleven of the S one document, which is the one that got everybody's attention claimed that SpaceX had a quantifiable total addressable market of twenty eight trillion dollars that consisted of three hundred seventy billion dollars in space related stuff, what most people think of with SpaceX being a rocket company, one point six trillion in starlinkth, satellite, communications, and twenty six point five trillionars in AI. So I do think it's important to slow down here and say most people when they think about SpaceX think of SpaceX as a rocket company. But when you look at whatace define SpaceX TAam as, they're saying, ninety five, ninety nine percent of the value is the future of AI business U Ben, is this is this best understood as just an Elon meme stock? or are you bullish on some aspects of the company's earnings perspective here I think I'm more bullish on tech leaders' ability to sell the future to people. And I think this kind of goes back to Jeff Bezos in a lot of ways He was the first one who said, listen Don't worry about right now, worry about the future. We're going to grow into this valuation. And it took a while for investors to get used that. You remember in the dot com bubble, Amazon filmed ninety four percent at the end of the dot com bubble. And people weren't quite there yet. But for years and years, people kept going, why is Amazon's valuation so high? What is it going to grow into? And finally, the cash flow startort of coming and grew into it. And I think Elon Musk has taken that to another level Tesla, right? Everyone who's a fundamental analyst for Tesla for years has said this thing is a joke. He keeps issuing equity. and when companies issue equity Current investors get diluted. so the value of the company should go down to you Your earnings per share is being spread among a wider set of people And he's been able to sell the fact that no no, no, this equity will help me grow the company. And that's what he's trying to do with SpaceX as well is say, listen, don't worry about right now. We're worrying about the future. And so if you're a fundamental analyst And you looked at the numbers, you'd go, this is absolutely insane Look at just look at the numbers. They made what nineteen billion dollars and they're going to be a two trillion dollars company. It makes zero sense until you start going, well, what about Data centers in space And what about trips to Mars? And that's where he sold enough people. Because if you look at it, you talk about the IPO, thirty percent of the demand from the IPO came from retail investors who obviously love what this guy does. And usually it's, I don't know, five to ten percent for IPOs So he has talked enough people and he's such a good showman and salesman. Obviously, you know, he's landing rockets too. It's not like there's no notothing going on But I'm more bullish on his ability to continue to get investors to buy into his vision of the future. Yeah, I mean, Michael, I am interested in your general theory of Musk valuation effects because you as Ben just said, it's not just SpaceX. I think Tesla's price to sales ratio that I just looked up is fourteen. The automotive industry average is zero point seven That means that Tesla's valuation as a company is approximately twenty times higher than you would expect from one of its competitors just based on its sales alone. You've already indicated, I think, in your previous answer, at least two different ways that Musk achieves this valuation effect. One is this ability to tell stories, this ability to inspire enough people to buy shares in as companies. And another, I think this is important is, especially in the case of SpaceX just a few weeks ago understanding that he has built a certain demand for owning shares of SpaceX Issuing a pittance, a small number of shares, creates a kind of demand to supply ratio that drives up so much pressure own some of the stock that it ends up cashing out in a company worth two point trillion dollars. But I am interested in your general theory of how Musk is able to do this. Ag, not just with Tesla, trillion dollar car company worth twenty times more than its competitors on a sales basis, but also SpaceX, two trillion dollars company with zero profits A few things. I just wantan to say one thing about the lockup. I don't know that the current way that business is conducted is the best way Typically, you have a one hundred and eighty day lockup to which shares predictably in the like on average, shares of these these companies fall into the lockup as supply is coming on the market, which is very well telegraphed to everybody literally it's on the calendar and then shares find the bottom and do whatever they go on to do. So I kind of like that they're thinking outside of the box, being creative. I don't know that I love that it's only three percent, which is very that was not an accident, okay The question that you ask about Elon's ability, unique ability, and I would say genuinely a one of one ability to do this is he's a world class entrepreneur, operator, money raiser, deliverer of he's made a lot of people a lot of money. And it's not just a retail investor, because Palanter has done something similar. Alex Carp has garered a lot of attention of perhaps the next Elon, guuess what? Shares of Palenter are down fifty percent right now. And it's not to say that Tesla hasn't experienced its fair share of crashers. It certainly has. But he has a unique ability to continue to issue equity. There were times in twenty, twenty, twenty twenty one Tesla was raising money and the stock would go up ten percent because it was like, see Look how much demand there is for Elon shares. That has to be bullish. So he is a one of one. I think that there are some readroughs into the rest of the market and the narratives that we're telling ourselves, but I genuinely think he is a one of one. There's nobody else in the world that could do what he does I wantanna move the conversation from SpaceX to the other two IPOs that are expected later this year, which is open AI andanthropic. Both of them racing toward what are expected to be trillion dollar public offerings instead of staying private and dodging quarterly earnings, which is what most valuable private companies have been doing for the last ten, fifteen, twenty five years. I see this personally as a pretty major inflection point, and I don't necessarily know what the meaning of that inflection point is. and that's why I wanted to talk to you about it. So a couple of thoughts here. One thought is that Tech used to be asset light Like the companies that defined what we thought of as technology in the twenty ten s, meta, Uber These were asset light companies, but the companies that we think of as the frontier of tech today in AI and certainly in space They are desperate for cash because they are CapEx heavy businesses that have to spend a lot on chips or infrastructure or steel and rocket technology itself. And because they're desperate for liquidity, they are going public faster than their slightly older tech brethren would have. And that's an interesting inflection point to watch tech going from being this asset light Software forward business to being more of a asset heavy business. I think that's interesting. The other thought that I have is like, this is freaking insane. Like this is crazy. like four trillion dollars Of collective valuation between three companies that will in twenty twenty six, in all likelihood be probably, I don't know, negative fifty billion, negative sixty billionars in terms of net earnings. That's a crazy thing to happen in one year. So then without allowing the prosecutor to lead the witness too much, I just wonder where your head is at here, just understanding that is There are market historians that I think that are going to look back at twenty twenty six, whether there's a crash or no crash and say, wow, that was the year of the three IPOs worth four trillion dollars, which for the first time created a trillion other businesses, three of them with zero profits. what does it mean to you? I mean, think about how fast these companies have grown up too. This has all happened in the span of four years, essentially. These are anthroopic is potentially the fastest growing company in history in terms of revenue. you're right, it hasn't translated into earnings yet. I think the ability for them to do a perfect baton handoff F from all this CapEx and you're right, going from high margin businesses very efficient to all right, we're going from intangible to tangible Like we've done a full reversal That's why all the companies in like the seventies and eighties, the valuations they had to be so much lower because the margins were so much lower, right? So it makes sense that companies are more highly valued today But we're seeing this trade offff from all these companies. And there was a chart that went around this week from Numura that was totally viral about taking the big hyperscale was Amazon, Oracle, Microsoft, Google, and Ma in showing that they Free cash flow has gone from seven hundred fifty billion dollars to essentially projected to be zero almost by the end of this year. because they're spending So we're get in a second. Can you slow down and just explain to people what that actually means? That free cash flow among the hypers scalers has basically gone from hundreds of billions of dollars toward projected zero in late twenty six, early twenty seven Well, these companies have just been cash flow producing machines. They need fewer employees. They have really high margins, right? And they've had this cash flow to just continue to that's how they provided such high value to their shareholders. And they've said, wait a minute, for this AI buildout We're going to use all this cash flow And we're going to build out all these data centers, right? Be there's so much demand for compute and there's so much demand for these LMs and businesses want to use it. And so they' said, we're just going to take this cash flow and reinest it into our business, which is honestly something that people for years have been crying about like stop CEOs to stop buying back their own stock and actually invest it in the economy. Well, these companies have done this to a degree we've never seen before in history They're actually reinvesting in their business at a scale that's unprecedented. which is is very risky, but also kind of interesting when you think about them what they're trying to do. This is such a bouncing act. They're trying to thread the needle here. And what we've seen is that the ones who are benefiting from it are not the companies who are doing this It's other companies in the memory semiconductor space, right? likeike Microsoft and all these companies, their shares have been crashing And so it's interesting to see that them spending this money hasn't been rewarded yet They're not getting an ROI on it and their stock share price is hurting to the benefit of other stocks. It's not just that they're not being rewarded. I think they're being actively punished. I think Michael if you look at the S and P five hundred without the magnificent seven, so the S andP, you know four hundred ninety three, it's up sixcent, seven, eight percent this year. But if you just look at the Mag seven, which had been driving the majority of earnings and stock market gains in the previous eighteen months, they're down sixcent or seven percent Year to date. What do you make of this inflection point with regard to the MAag seven, which clearly has something to do with what Ben just mentioned, which is that the free cash flow of these extraordinary businesses of alphabet and Microsoft, just forty percent profit margins, all the cash in the world, and they are spending through, through, through, all the way down toward zero to build out the AI infrastructure that they hope will be their next big business. What do we make of this Microsoft, which is the biggest software company in the world. It's a lot of other things. that is a gigantic cloud business, but it is the biggest software company in the world isn't a full on crash dark The stock is down thirty five percent But what's happening that is so interesting. is it is happening while the stock market is basically at an all time high If you comparered apples to Ales and you say, o, you divide the price of Microsoft by the price of S andP five hundred and you look at it on a relative basis, Microsoft The ratio of Microsoft to the S and P five hundred is back where it was in twenty nineteen Their performance has been the same since twenty nineteen and Microsoft kicked the crap out of the S andP. So all of the gains have been ripped away because of the transition that you're mentioning. So whatre what we're seeing now is The twenty seven days spread I know that's a random stat. But over the last twenty seven days, the S and P four hundred ninety three have outperformed the Mag seven by eighteen percent That's a gigantic number. an eighteen percent spread And again, the S and P five hundred is basically at an all time higher. When you've seen similar levels of dispersion since twenty eighteen, the SCP five hundred was in a full on Be market which makes sense because we were so reliant on the Mag seven to carry the games. So there's one more thing that I want to say about the IPO market. And this ties into it's a bold market story. That's what we're talking about here because Elon getting all of the attention for being the first trillionaire There's a lot of people that are very upset and I understand where the sentiment is coming from. I am a capitalist and I think Elon's wealth creation, even though I'm not in Elon stand, I think wealth creation is incredible. I am also like a social safety net person is a good thing, too. So I'm not saying that people that don't have means or deserve whatever. But I think that capitalism works really well, okay I think wealth creation is a good thing In terms of the current IPO landscape, this is very, very important You have to normalize. There has to be a denominator So we're talking about comparing today versus the dot com bubble. when you have all these IPOs that would go up three hundred percent in a day, that's not what's happening today. Yes, the scale is a lot larger. You're talking about three trillion dollars plus companies. But if you look at the aggregate IPO proceeds, so actually, how much money was raised as a percentage of the starty market cap This looks nothing like the dot com bubble. Now it'll change a little bit as anthropic and open AI come out, but it's like a tenth to size. If you just compare the aggregate IPO proceeds, so in SpaceXcase seventy five billion as a percent of the starting market cap, it looks nothing like ninety nine c. Obviously in other ways it does, but I think you have to talk about the denominator You referenced previous bubble crashes. We were absly getting the possibility that AI is a bubble and about one and a half to two questions, then I think there's a way in which we told the story. that if someone hasn't been following the stock market in the last six to eighteen months. They'd think. If you're telling me that the S and P five hundred is up big hyperscalers that are building out AI. A lot of them are down like Ma and Microsoft, more than twenty percent. sounds to me AI is getting its butt kicked right now in the markets. And that's not entirely true Because through twenty twenty five story in AI from an investor standpoint was really compute compute compute. You had NVIidia going crazy, the hyperscalers going crazy, Cloud CappeEx All of that was flying. That's when Microsoft and the rest of the hyperscalers were leading all the SP five hundred gains But now what you're seeing is those trades are moving into other sectors within the AI ecosystem into memory and energy and cooling. The chipmaker micron stock tripled between March and June. And so I wonder if you can help us tell a story here keepeeps the following balls in the air On the one hand A lot of the hyperscalers are getting kicked in the teeth. On the other hand, there's a lot of other stocks that you could think of as AI stocks that value is flowing toward which suggest that what we're seeing is not so clearly the demolition of the entire AI story. How do we make sense of this? I think today is a perfect example of what's going on. And so There was a story today in Bloomberg where Apple announced that they were raising the prices of everything. iPads, Mac, desktops, right? laptops And it said the reason is because there's a short of memory chips and storage, right? There's not enough compute to go around. So Apple fell five percent. prettyretty big fall for one of the biggest companies in the world. Micron today, a company that does that. they produce the memory chips They're up sixteen percent So you're seeing this trade off. between these big, huge hyperscalers. And in the last year, Micron is up almost one thousand percent. In one year, Sandisk A company that is the same business is up more than four thousand percent. Let me repeat that, four thousand percent stock price gain in one year where as Michael said, Microsoft is down by a third. Oracle is down by a third. Meta is down by twenty five percent. So you're seeing a trade offff from you're seeing a divergence in the winners and losers now And it's like these companies are sowing the seeds of their own demise. They've almost They've almost gone in and disrupted their own businesses. Now the hope is, hey, listen, Of course this CapEx is falling now It's going to come back. you know, this is a twenty twenty eight, twenty twenty nine, twenty thirty story They've all said, we the bigger risk for us was not going hard enough on this We weren't just gonna to sit back and let someone else take corner this market. If one of us is going to jump off the bridge, we're going to hold hands and allll do it at the same time. But you're seeing this change in leadership. that we haven't seen in many, many years because people have been so worried about, hey, it's only these Mag seven companies that are powering the stock market higher And that's just not the case. now the stock market is in a totally different place in terms of its leadership now I understand the story that There was an era where the hybrerscalers were up And now Hyperscalers are hurt And because memory is scarce, memory stocks are ripping. But at some point, like Who's buying All those chips Who's buying the memory It's the hyperscalers. It's the big boys at some point Can the memory stocks keep surging if the hyperscalers keep dropping Ah, well, this is a great question Another difference between the dot comom bubble and today is that a lot of the buildout, a lot of the funding, it's not just retail speculation. It is the hyperscalers, the absolute most profitable companies that the planet has ever seen are funding this buildout. And there is no sign Despite Microsoft's thirty five percent pullback, there is absolutely zero sign that they're pulling back anytime soon. So Ben mentioned Micron, they're up sixteen percent today, not just because of Apple is raising prices, but because they reported earnings last night. And they reported forty one point five billion dollars in revenue That is up seventy four percent quarter over quarter It is up three hundred and forty six percent year over year. and guess what? It is a very, very profitable business. So in April, all we're winding the clock back to April of twenty twenty six. I asked one of my guys, hey Show me what microns twelve month earnings per share has done over the last over the last twelve months And it went from nine dollars a share in March of twenty twenty five. to eighty five dollars a share. in April of twenty twenty six, sir, when I asked it for it Today, it is one hundred and thirty two dollars a share Investors like growth, okay And we've never seen growth like this. So since the beginning of January, twenty twenty five Micron's earnings are up one thousand four hundred and forty percent And investors are slapping a discount on that because the stock is only, and I'm obviously teasing, the stock is up one thousand three hundred eighty percent So In general, finance one hundred one a stock follows or leads, I should say, generally U the earnings it's a business. That's what we' investing. It's not num on the screen. We're this is a business And the business of Micron The performance of the underlying fundamentals has matched the share price. Now it's not to say that people aren't speculating their asses off they are, but it's rational. And one of the things that Micron said was, we now expect supply demand conditions for both DRAM and NAND to remain tight beyond calendar twenty twenty seven. So This is the question, Derek. You can drive a truck between these two things being true Hey this is obvious bubble He wait a min How much of the world is actually on the AI train right now? Is it two percent? Is it three percent? So it's very hard to square those two circles of Wait a minute. it's so early But micon is up fourteen hundred percent And that is where investors are going to twist themselves into a pretzel trying to figure out where this thing goes Here's I wanted to do now We've thrown around the B word a few times I want to make The best AI bubble case as I can see it And then I want you to evvaluate it, maybe tear it down. And Michael, because you're champing at the bit, we'll let you get the get the first swing at the pinata and then you can follow Um These companies The big boys, the hyper scalers are spending six hundred, seven hundred billion dollars a year with no end in sight And the valuations of Microsoft and alphabet and meta predicated O a certain operating margin that assumes that eventually what we'll need is one trillion dollars a year. in d duplicated external AI revenue. quQite soon We were not there yet. The latest bottom up estimate from Azim Azar's exponential view put real duplicated AI spending at about one hundred seventy five billion annualized this year. So we need to roughly quintple the AI industry to a point where the hyperscalers can expect to make from their investment Inome maintains the operating margins that currently justify their business and their valuations The bar is enormous. The bar is enormous for growth. As fast as Anthropic has grown, the bar is enormous still for growth And there are at least three things that I can see pushing in the wrong direction Number one Free cash flow falling at the hyerscalers means they're going to have to dip into debt They make a lot of money. They've got a lot of incoming earnings, but they're going to have to dip into debt I think somewhat soon Number two You just said it Memory and chip costs are climbing. So it's not as if this mountain is going to suddenly get a little bit shallower, It's going to get steeper. We might see continued increases in necessary CapEx spending over the next few years, seven hundred do, eight hundred, nine hundred billion dollars annualized And then finally Costs are going up. What's happening to revenue Well, look, you've got these cheap Chinese open models that are just a few quarters, maybe a few years behind the frontier models in terms of capabilities. And they give customers a place to go costs a lot less than Mc Claude and openp AI are offering And so when you put all of that together Less cash highigher costs slower revenue Why isn't this thing going to crash When you say this thing, let's be specific, are you talking about the entire stock market No, let's just talk about AI infrastructure. Project Why isn't there going to be a major correction as these companies recognize that the thing that they're building is impossible to stomach. given operating margins that they are required to hold on to to justify their valuations. So the hyperscalers, which is maybe the list that you're talking about or maybe not, And if you collect them, they are trading at a forward PE. so a multiple of what their forward earnings are projected to be is at a multi multi multi year low All of the risks that you are describing are very, very well known and understood which is why if you want meta The second best advertising platform that the history of the globe has ever seen, you can buy it for seventeen times next year's earnings. You have never had the opportunity to do such a thing Ben and I have been commenting on the market for a long time Over the last fifteen years, what I've seen consistently is people trying to scare investors. because they want the glory of a Dr. Michael Burry. And I would much rather Somebody be mad at me for not getting them out. than to have been the person that cost people a lifetime of earning a return of their money in the stock market. So I'm not going to say that the stock market may not pull back. That is always a risk. Of course it will be pullbacks along the way. But we've been having this bubble talk, Derek, literally for fifteen years And so quickly we forget That guess what? There was a bubble in twenty twenty I guess what happened B Apple fell thirty percent Google fell forty four percent. Amazon fell fifty six percent. Nvidia fell sixty six percent. Netflix and meta lost seventy five percent, Drk And we forget that it happened That was a bubble And we just talk about it epopped. And we just move on to what's next bubble Now, that is not to suggest that you can credibly make a bubble case for where we are today. And if somebody would say, Hey, Michael, you dumballedd assole, how do you not see a bubble? Here's what I would say to you This is this is the data point If I were to look back on five years and say, oh sh, okay, this should have been the one. Morgan Stanley projects that SpaceX is total revenue C reach point three point four trillion dollars in twenty forty three point four trillion dollars in twenty forty That would be the data point that I looked back on and said, wh, I wish I sobered up. That's ten percent of the current economy, essentially. But I see so many people with these legitimate concerns. I don't see and it's very easy to find excesses pockets of speculation. so I'm out blind. In general, I don't see peopleeople that are just throwing caution to the wind. I see the opposite I see people looking for reources to say, Why, why shouldn't I sell Tell me why this doesn't end in tears. And I don't know what time it is on the clock to me that makes me feel like it's not yet Midnight Are you looking for support in your weight management journey? Zbound Tzepotide may be able to help. 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Bonus issued at non withdrawable bonus betets, which expiire seven days after receipt Restrictions applies see full terms at fandool. com slash sportsbook. Gambling problem call one eight hundred gambler or one eight hundred My reset I feel like there's two issues here that I want to make sure I disentangle. One issue is like And even three One question is Should we understand AI to be an infrastructural or financial bubble Number two is Can the typical investor stomach a typical bubble And number three is like our bubbles common, which is related to Number two I understand that like bubbles are common And I understand that bubbles can be stomached because we have a resilient economy and we can bounce back But neither of those things, I think goes directly to the question of Is this a bubble And so Ben, why don't you take a crack at it? I am interested in just what yous. No no, no I will. When putting together just even even the well understood ingredients, you know, as Michael said, the less cash, higher costs possibility of slowing revenue growth as more people switch from the really expensive frontier models to the cheaper models. I think one way that Brian Armstrong at Coinbase put it is that he said the lower eighty percent of AI use is going to rely on models that are ninety nine percent cheaper, right? That was one way I think that he predicted the near future Why should putting all of this together not make us a little bit bearish about the future of AI So I have cognitive dissonance is this idea that when you have two competing Theuries in your brain at one time Your mind seeks to reduce that discomfort by picking one of the theories and kicking the other one out. I'm just going to latch onto this one. and I have extreme cognitive dissonance going on because you've talked about the railroad bubble in the past, Derek, right? I've written about that. This, the dot com bubble, the telecom buildout, every innovation in history that had CapEx relative to the economy of this size, this one checks all the boxes, right? All the spending. Anytime there's an innovation, there's always extrapolation. Mikeael talked about these insane space X numbers. There's always extrapolation, there's too much excitement We got everything we wanted in more of the d. com bubble . com boom, but we had to go through the bubble had to burst first to get there, right? If you'd have told someone in nineteen ninety seven You're gonna to have YouTube someday, streing streaming movies Everything we have on the internet, right? This little thing in your in your pocket that is wireless interternet. like people would go, yes, everything we want and more is going to happen. But you had to go through the bus to get their First And so I think that if you check all those boxes you' got to go, oh my gosh, this you know, this has to be that. But I can only get seventy five percent of the way there because there is so much demand for this. And it feels like we're only scratching the surface on how much people in businesses are using it. Now the problem is, Dario Perkins is this macro analst from TS. Lambar. he calculated that eightighty percent of the current revenues right now is just circular. It's spending from the hyperscalers. So this thing hasn't completely jumped into the mainstream yet, right twenty percent or so is from businesses actually spending. Could we actually see this magical thread of the needle on handoff where this turns into RI before we have a crash. and I think there's a difference between a bear market, which is, hey, these stocks fell thirty or forty percent. because this happens in volatile industries like this versus The NazAakq fell eighty percent in the dot com bubble, right That's a crash. You know, I think anything fifty percent or sixty percent over is a crash That's what I I'm having a hard time figuring out. Is this going be just a bear market when it gives up a little bit? or is it going to be a full fledged crash? And I'm kind of leaning towards just bear market where no one's really satisfied Right? We didn't get a huge bubble popping, but we still had some give backack because the hypersalers pulled back for a time or whatever. That's kind of where I'm where I'm right down the middle of the fairway on this Michael, I feel like Ben's headedging there just a little bit. I appreciate the explication of cognitive dissonance and I basically, I think agree with then, which is that I am incredibly divided on this issue I mean, give us a hard take, man. Like, is this a bubble or ain't No, this is not a bubble If you had to pick One stock that represents everything that's happening. with the AI build out It would have to be invidia. would you gentlemen agree Okay NVidia is trading twenty four times its forward earnings That is not a bubble That is not close to a bubble. Now, perhaps the earnings are overinflated or overestimated. and it turns out that actually, hey, it wasn't twenty four times, buddy. it was fifty times. All right, fine. I suppose that's possible, but I will say I am happy to have the guy with the egg in his face who says, no, this was not a bubble. I know the signs are there. I know it's very, very, very easy to say, bubble. But we haven't even spoken. this is beyond the point of this conversation about all the supply chain bottlenecks and the natural governor And I don't mean the goveror of twenty four times Ford earnings for Nvidia. I mean what production can actually keep up with at Taiwan semi. And Derek, I know you' talked to these experts all the time. You can't just turn up you can't just turn it up. And so I think that this supply this compute constraint that everybody is probably really tired of hearing about. Get used to it, because I don't think it's going way any time When we ran your show in twenty twenty two, remember there was a Boomberg headline like, economists see one hundred percent chance of recession. And we were on the show and we kind of did the same thing where we hedged. And you said, no guys, make a choice. and we both said no recession. I think if you're going to do that and hold my feet to the fire, I would also say no bubble. I think corporations are so much better run today than they were in the past. think that I think that they have the ability to see us through this and the fact that these businesses do produce so much cash flow as it is and they're so diverse and dynamic I think we've never seen companies that are this mature in this well run. try to pull off something like this. And I think if anyone can do it, theseese are the biggest best companies we've ever seen in history And I think if anyone can do it and sort of Make this handoff. I think they can do it So if I'm pushed to it, I'll say no bubble a couple of comments. Number one I like that that last thought, which is that We live in a society and swim in a news environment that is overcome with negativity bias. We've talked about this a lot with psychologists, with sociologists, sometimes with investors. I mean, there have been studies including published by Brooking showing that Financial news is more negative today relative to the underlying reality than it's ever been in recorded history And so there's a way in which, despite the fact that I don't like negativity bias in the news, negativity bias is actually interestnteresting medicine for bubbles Because if you have a financial news system that is addicted to calling out potential bubbles, I would have to think that at the margin, it makes those bubbles less likely. It at least creates a set of conditions that seems quite unlike the conditions of nineteen twenty seven, nineteen twenty eight where there was such unbridled exuberance about the future of America never having a recession again about, you know, the people you know, driving the cabs or the, you know, the horse drawn carriages telling their passengers about all the stock that they were buying on margin. That's the opposite of a new of a new system is sort of cooded with negativity bias. And so maybe there is a world in which the negativity bias that is endemic to financial news is at the margin sort of helpful for taking, say, the price ratings ratio of NVIidia from fifty, sixty, which it might have been, I don't know, if this company existed in nineteen twenty eight to twenty four, which it is today That's point number one. Point number two, I will say this about about the Nvidia PE ratio. I was at a party in San Francisco Just after I had this podcast interview with Paul Khadroowki, where he made this really full throated case for why he thought that artificial intelligence was the most obvious bubble of all time. And for the most part, Michael or Ben, he recited your case. He said, look at every time we've spent full percentage points of GDP on a new infrastructure project It's a bubble again and again. it's the canals, it's the railroads, it's fiber optic cable and the dot com bubble. It's always a bubble. And I went to this party and I don't want to say this is clearly off the record. There were a lot of folks sort in the general like extremely online AI commentariat that were there. And one of them comes up to me, sort of buttonholds me and says I heard your podcast with Paul Kadrroski about how AI is definitely a bubble. Do you, sir? Know the PE ratio of Nvidia. And I said, I do. I know that it's thirty one. I just had a conversation with Azim Aazar about the case for AI not being a bubble. and that was the first case first point that he made. So for all the listeners out there who want to sort of successfully banter with professional investors about whether or not AI is a bubble defefinitely Google the PE ratio of Nvidia before you go to the party because it will come up. Then the last thing that I want to say and then Michael, I want your reaction to this whole, you monologue that I'm giving in the middle of the podcast which is not particularly good radio. Exonential view, which is the great substack that Azimazar overseas, they just came out with a report today on the state of artificial intelligence. and it's their conclusion again, that total external AI spending, right? So this isn't Open AI, buying the chips from NvidDia and then paying Microsoft for the cloud services, which is all inside of the system. This is me, Derek, you Michael, you B been giving open AI money because we say we want to pay for your service. He said that that number right now is about one hundred seventy five billion dollars annualized, which is roughly What The depreciated value of the CapEx is for a single year. So we are at a point right now where it doesn't necessarily seem like it's headed toward the obvious obvious bubble zone. Michael, you made a face when I was quoting some of those numbers, but in general, how do you feel about this about this general case for An and nothing about her I made two faces My first reash was, oh, that's not really that much money U hasn't even started It hasn't even started. Every one of your listeners, I'm sure is playing around with the tools and stuff But the average American The average person around the globe We haven't even spoken about the robots which are coming. We are so, so early. It doesn't mean that the stock market hasn't the hedge hasn't digested all the fure. It did that in two thousand. I don't know what the future holds. But in terms of where we are in the AI life cycle, we are in the top of the first inning.. I mean, it really hasn't begun I do think one interesting, we haven't really seen whats happen with Fable and Mythos and that offering phanthropic that essentially was advertised or or maybe just honestly communicated as being a top end cybersecurity expert, but based in Silicon. I mean, we haven't even entered the possibility of AI taking a sliver of cybersecurity spending, which itself is a hundred billion dollars business. And so I think you're right to point out that yes Right now, we're looking at enterprise use cases for coding. We're looking at people like you and me sort of asking questions of open AI and Claud on a daily basis. But there's all kinds of applications for this technology that are really hard to see if They really live like two and a half years away from where we are right now. Like two and a half years ago, it would have been entirely reckless and frankly quite stupid to say that artificial intelligence could be used by expert coders to help build artificial intelligence. That just wasn't a part of the offering and now it exists. So I think this stuff is difficult it's difficult to think about, but I did want to get your takes and whether or not you thought it was a bubble. I want to move on to a couple other pieces of the investment landscape U In addition to the hyperscalers being down, so is Bitcoin down thirty two percent this year, forty four percent in the last twelve months thenen What is going on, you think with Bitcoin? Is to a certain extent, is it like There's a sort of universal conservation of frontier tech energy. and it just like went from crypto to AI. And so a lot of people that were just like really obsessed with crypto for four and a half years were like, nope, sorry, I'm not interested in that anymore. I get out of my portfolio. I just want to be long micron. Like why do you think Without a recession and without further interest rate hikes, Bitcoin has had just such a calamitous last twelve months I do have this theory that investors can only pay attention to one rocket ship at the moment and one risk, right? That's all we have time for is we're going to pay attention to oneisk and one risk only. And then we're gonna move on to another thing And I think that's what's happened here too, because the one thing you can hang your hat on for crypto and Bitcoin was it's at least a risk on asset. Sure it didn't hedge inflation. and sure it hasn't hedged against like an economic slowdown or something like that. But it's when tech stocks go up, Bitcoin also goes up. That's been at least the one thing you could hang your hat on. And then this year, it hasn't been the case And I do think there's something to the fact that this was seen as like a startup technology, right? It's a way to invest in the startup ecosystem of this blazing new technology. And then AI comes along And it's like, oh There's something here that actually has use cases you can see. And with crypto, you can't see them.rypto. with the use case. Yes, right? It's almost like wow How long have we been waiting for this crypto use case? You know the big retail boom was in twenty seventeen. That's when people really started to talk about it over Thanksgiving dinner with their families, right? Remember the whole thing where the first Bitcoin huge boom happened And we haven't really got that great use case like people have been predicting And think I think it is kind of fascinating that in a risk on moment, Bitcoin is not taking off. And for a while there, people said, well, it's like a software stock, I guess. but then software stocks came back and Bitcoin kept going down And it's really and you had gold going up this year earlier in the year or last year and Bitcoin wasn't keeping up with gold. So I think I think it's led a lot of people to perhaps Finally question Bitcoin really was more of this religious cult. than anything. It was you had true believers And they could shift their narratives every time something happened. Well, we said it was this, but now it's this And we said it was that now it's this And it's like you're kind of running out of narratives. And I think a lot of the investing public has moved on after we got this big boom from from an ETF. It's like, okay now what? AI actually, you can see it, right? It's right there. And I do think a lot of that like it's just taken a lot of the air out of the balloon Michael Bitcoin was basically like a mini bubble. I mean, down forty four percent in twelve months, likeike that's pretty catastrophic. What do you think happened? It's software I mean, if you if you overlay a chart of Bitcoin