Escalating Tensions in the Strait of Hormuz

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Dinner party with the girls We'd have to decorate. Surprise date night? thing to wear But Amazon's prrime same day delivery lets you say yes before the moment slips away Try that new popcorn maker, order those cheeky drink glasses, get that new perfume, and turn that I wish we could into an I'm so glad we did Visit ammazon d. com slash prime to find millions of items delivered fast. Same day delivery. It's on Pime. Available in select areas. Terms apply . If money is evil then that building is hell Oh Welcome to Profty Markets. I'm Ed Elson. It is july fourteenth. Let's check in on yesterday's market vitals. The major indices fell after the U.S and Iran clashed over the weekend. Brent Crude rose as President Trump resumed the Strait of Hormuz's blockade and proposed a twenty percent toll on cargo. more on that later That sent treasury yields rising as well as traders priced in higher inflation Kalcii, the odds of a rate hike before year end hit sixty seven percent Meanwhile, SK Heinnix led a global chip sell off. We will get to that later too. And finally BpaseX shares dropped another four percent. nearing their IPO price of one hundred and thirty five dollars per share. Okay. What else is happening Apple is suing openen AI The iPhone maker filed suit in federal court on Friday, accusing OpenAI of stealing trade secrets to build their own hardware business Apple claims that hardware business is now, quote, rotten to its core by its illegal reliance on misappropriated trade secrets. Apple also alleges that openAI pushed job candidates to reveal confidential information during interviews The company is seeking damages, asking the court to bar OpenAI from using its trade secrets and to force the company to return its confidential materials. OpenAI responded in a statement saying, quote, We have no interest in other companies' trade secrets, this drama comes just as OingIe prepares to launch its first hardware device and of course, gears up for one of the most anticipated IBOs in history Joining us to discuss this drama. We're speaking with Alex Cantrewetz, author of the bigig teechnology newsletter and host of the big technology podcast, Alex. Thank you for joining me. The statement that really jumped out at me in this lawsuit is the one that I mentioned. The statement by Apple that open Aess hardware business is rotten into its core Pretty intense language makes me think that this lawsuit is A big deal, but I don't know. what do you make of it Yeah, Apple first of all really sees the threat coming from Op AI. If you think about where openp AI sits, of course, like it's working to expand an enterprise, but it hasn't given up on consumer. And where they're focusing in consumer are these bidirectional voice models. So instead of you taking a turn and the AI taking a turn to talk A model that can listen and talk at the same time, which is going to make much more natural speech. And of course, that's the way that Siri is accessed by people is through conversations. So Apple certainly sees that openp eye is developing a technology that could threaten its business. Of course, openen ee has a billion users of Chat GPT, according to some third parties And so if you unleash that, you know with all those users and maybe build your own device, that could be the thing that cuts off Apple's growth So there was a great Wall Street Journal article today talking about how Apple has gone thermonuclear O companies coming for its business in the past. And of course, you know the most prime example is the Android makers in previous years. So this could be a replay of that for sure. It's not to say that Apple doesn't have a case against Oen AI. If you look at the filing, it seems like Open A you know is basically dead to rights on this one where Apple You some of the most sloppily collected corporate espionage in the history of business on behalf of Open AI, where OpenAI basically did some of this trade secret ceiling on Apple computers, which Apple was able to see. So they definitely have a case against Open AI. But because openen AI is a threat Apple in this way to get to your original question, I expect this to be a fierce battle. I don't think Apple is interested in settling. I think they'll try to take it all the way through to get to a judge ruling, which includes some pretty painful discovery for openp AI. and we're just getting started here. I guess the big question for openen AI is Is this going to be harmful to their business? Is this going to be a real problem or is it kind of sort of background noise? I mean, they've got this, they've got a lot of other lawsuits in the pipeline, theseese safety and wrongful death lawsuits, these copyright lawsuits, lawsuits coming in from various state attorneys general Um, I mean, a lot of people are firing up of lawsuits at this company and now onene of the most valuable companies in the world with one of the largest balance sheets in the world is doing the same thing. I mean You have to think at some point this is going to be a real problem if they have to figure out how to grow the business. And at the same time, they're spending, I don't know how many many dollars on fighting these lawsuits. Is this not going to be a real problem? Yeah, I think it will be a real problem. So I would say first of all The good news for O openen AI or the bad news, depending on how you want to look at it is this hardware business isn't a real business yet, right? So it's not like Apple is going to stop them in their tracks and they lose a billion dollar business unit right away. But that being said, they do have great hopes for it. And because it's not a full business yet and it's so early on If it's up to the judge and the judge says, Hey, you know what, Open AI, you can't use any of those Apple trade secrets that you took. it could cause Open AI to sort of unwind this hardware production to maybe the very beginning if the judge sees it fit. So this is something like, you know, OpAI has been talking a lot about this device. and when you think about the company going to IPO, which you mentioned at the top Obviously that's going to be something that it's going to talk to public market investors about, the potential for it to actually make a lot of money based off of these devices. So if that' to rollback from the beginning, that's going to be pretty damaging to its IPO case. And one of other thing I'll point out is Isn't it interesting that seemingly every partner that OpAI partners up with comes back at it like this? Of course, it was partners with Apple, with the Chata BT integration to Siri, partners with Elon Musk at the very beginning now Elon, of course hates them, partners with Microsoft, now Sat Nadeela, seemingly every other day has a Twitter essay about how it's strong to work with openp AI. and the list goes on So you need friends in business and that might be the thing that hurts openp AI more than any of the legal action is the fact that one by one it seems to be alienating its partners. Yeah, it's a really interesting point. It seems that if there's one enemy that everyone has decided to hate on in Silicon Valley right now, It does appear to be open AI on literally all angles. Absutely. And I guess you have to ask the question of what does that ultimately do to the business? What does that do in terms of their ability to fundraise, especially with the IPO coming up It seems like the answer is it's not going to do anything good I assume maybe your belief is that the outcome of this specifically, I mean, if this lawsuit kind of trends in the direction that it appears it will be that maybe they will just cancel this hardware product in this hardware business. Is that kind of How this ends if Apple wins? Yeah, there's a range of possibilities here from like the complete cancellation to like having to like go back to the drawing board to the judge saying basically O you did wrong, but you slap on the wrist because it was just like one employee and one executive that's involved but tangentially involved and we can't really prove even with Discovery that you've copied, any Apple IP. So there's a wide range of possibilities here One more thing I would say about this is that it's almost an indictment on the company's hardware efforts it would bring in it's brought four hundred former Apple folks. and that they've been so I feel like they've been so reliant on using the Apple Way for so long. They can't think out of the box. And if you're building a technology, a new technology based off of this novel native invention, which is generative AI, Do you really want to have people who are like so kind of lost on their own that they have to go back into the old Apple roadmap documents to kind of point their way towards the direction? O do you want people do you want people in there thinking from the very beginning of what this device can be regardless of what Apple's built in the past? If it was up to me, I kind of want the second group of people I would say we got this technology. We don't want to bolt it onto anything new Where do we go from here? but it doesn't seem like that's the direction open eye has gone. Yeah. And literally starting with Johnny I, who's the legendary product designer over at Apple, they bring him in and then they take a bunch of Apple employees along with him. I want to just shift gears for a moment and talk about Meta because there's been some really interesting developments over at Meta. The stock surged fifteen percent last week it was up six percent on Friday alone because they launched this new AI model called Muse Spock one point one People are excited about it. They were talking a lot about it. and also crucially One of the main goals is that it's going to be a lot cheaper than a lot of the other models, which puts a lot of pressure on open AI, a lot of pressure on anthropic. Meta was considered one of the AI losers as recently as like two weeks ago. It seemems that the market is kind of flipped on this. and I know that you actually interviewed Meta's CTO last week. J as we wrap, I'd love to get your thoughts on what's going on with Ma. and how invvestors have kind of Change t on that stop. Yeah, right. Ad meta to the group of folks that are attacking Open Ae. Of course, they've come out with this new model twenty five percent cheaper in some cases than the frontier models that companies like Open Ae offer. One thing you know it's also a testament to open Eye's business that all these companies are coming after them because clearly they've built something. Right. But on the meta front in particular It's hard to say whether to view them as a winner or a loser right now. Yes, the market went up last week for or the meta stock price went up last week But it's really kind of tough to pull apart exactly what the reason was. Now maybe it is because they finally built this model that's doing well on the benchmarks if they've done that before. But my hunch is that it's probably because these rumors that they might start licensing some of their excess compute were sort of confirmed by Zuckerberg. And the market has been sort of wary of Medis continual spending for a long time now first on reality labs to make VR goggles and mixed reality glasses, and now on this AI buildout with very little to show for it. This may be sort of a short term market reaction saying, well, you know, you've spent all this money, you haven't delivered much. att least give me some profit by licensing out your excess compute for like very high margins. And that's, I think what we're seeing here. What do you think is the direction for Meta's AI business? Because there was obviously those headlines that they're going to sell their access compute And that phrase excess compute was striking because all we've heard about is how there's no excess compute because there's so much demand. But the reason that they it appeared they were doing that is because they realized that building their own internal AI wasn't quite working out those were some of the rumors that we heard, that was in part of the reporting And then they come out and they release this new AI model And it makes you think, o, maybe they are really focusing a lot of effort on their internal AI. Maybe this is a thing that they're doing the two stories seem to be at odds with each other, I guess I'd be interested to get your views on which one is the more credible story or which one is more accurate. It's interesting. They know, Zuckerberg said that there's a chance that they'll sell some of this compute, but he didn't want to call it excess compute, which is weird because I would say if you're going to sell stuff that you're not using for a higher price than you bought it for, it's like the definition of selling your excess, but I won't get into an argument with him on that. Look, ultimately you have to separate the model, which like they've released an impressive model and the product Because ultimately, you can use just a certain amount of compute for training The area where you're going to use the most compute is for inference, peopleople actually using your product And for Meta just doesn't seem like that product that they've created so far has been used enough to merit having all those data centers, which is why they've kind of expressed this openness to sell it. So ultimately for Meta Great job building the model. the model become somewhat of a commodity now. No one's really cracked consumer AI. I mean, even open AI is well not giving up on it, you know is really has eyes for enterprise more than consumer right now. And so you if Meda can't crack it, despite the fact that it knows a lot about you, knows your interests, has all this data, has all this compute, has all these engineers than who will? And for the time being, you know, it's not going to be able to really make use of all those data centers. It buils in anticipation of the demand for this product taking off until it's able to figure this out All right, Alex Kantrowitz is author of the Big Technology newewsletter and host of the B Technology podcast, Alex. Thank you so much for joining us. We appreciate your time. Thanks so much Ed After the break how Korea's stock market turned into a casino And for even more markets insights, you can subscribe to my weekly newsletter, simply put at simply put. profgmedia. com When you need to build up your team to handle the growing chaos at work, use indndeed sponsored jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this showel will get a seventy five dollars sponsored job credit at indndeed dot com slash podcast. That's indndeed dot com slash podcast. Terms and conditions apply Need a hiring hero? This is a job for indeed sponsored jobs wishing you could be there live for the big game, soaking up the atmosphere in the crowd Too often, life gets busy or the price hld you back Priceeline is here to help you make it happen. 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At its peak last month, the Cospy Ka stock market was up nearly one hundred percent on the year, making it the best performing major index on the planet That rally has been supercharged by a financial product. beloved by retail traders and that is the single stock leveraged ETF since launching in late May, sixteen of these ETFs all tracking Samsung and SK Heyinix Korea's largest membory chip manufacturers have tripled in size to more than nine billion dollars. Today Those ETFs and the two stocks they track account for over seventy percent of all trading volume. in Korea But now are beginning to form. Yesterday SK HNx plunged more than fifteen percent in Korea on investor worries that the trip trade may be overcrowded. That sent the cost be down nine percent, forcing regulators to pause trading across the entire index And this volatility closely follows Friday's listing of SK Heinck shares on the NASDAQ. The company's American shares fell nine percent yesterday too and it took other memory stocks like Micron, Sandisk and Western Digital down as well. So Here to tell us how Korean markets got hooked on leverage and what it all means for investors around the world We're speaking with Luke Caa, head of Markets at Sherwood News. Luke, good to see you. Thank you for joining me here 's so much in this story because it's a confluence of all of the things that investors are so excited about right now. You've got memory chips going up and then coming swinging back down. alsoso the leverage ETF's which seem to be kind of turbocharging both The upswings and the downswings. I mean, let's just start with SK HX for a moment because it fell fifteen percent yesterday. itss biggest single day drop ever. one of the most important stocks in the stock market right now. What do we know about why that happened? Why did it take such a tumble? In terms of fundamental news, again, I don't think there's, too much here to point to, in that. And that's probably the most concerning point of it all, right? When you have a situation like this, I go back and I think, well, two months ago, three months ago, when this thing was going up, six percent, seven percent every day. Did we stop and ask, Hey, what's the reason why this is happening? I don't think we did fairly often. You don't tend to do that in the good times. And so what it was happening during that as we know now and as you've touched on, is that this trade was getting built up by more and more leveraged exposure. And in fact, if you look at South Korean markets You had a combination of taking out margin loans to then buy a leveraged product. That's leveragage squared, man. So when you have that situation happening and you have the stocks have, whether it's a technical catalyst traverse or a fundamental catalyst traverse, I don't start asking, why is this happening? I start saying, you know, ye, big moves make sense given the the volatility you had on the way up and the leverage that we know was in the trade. So the movements that you're describing here, it sounds a lot like A meme stock. I mean, no fundamental news, nothing actually happening that should trigger such a violent downswing, just leverage retail trading excitement and they're not excitement vibes essentially is that Basically what is driving one of the most valuable companies in the world right now. I would say, you know, yes and no because the difference between this and you know, say you know a pure mmium stock move is this has so much fundamentals behind it. If you look at the earnings revisions that memory stocks have had, the you know the amount of pricing power they've been able to demonstrate, the way their profitability has increased and the way that they still look if you're using just kind of a naive forward price to earnings ratio, cheap, these stocks have had a much better fundamental quote unquote reason to go up than others have. I think you know the problem is to a certain extent, stories get sufficiently well understood and you know, a confluence of factors, whether that's you know, Micron being kind of unable to hold It saw post earnings, wh that's kind of simply the fact that we went from the best quarter for semiconductors ever to now a period of time where you know as a calendar flips, that's often a catalyst to just based on position waiting, change things up a little. I think what you have here is just more a recognition that the ways in which we choose to get exposure to the market has a heavy heavy influence on the market itself. You can call it the tail wagging the dog or you can say it's just you the tools we use define us. So I just want to dive into these leveraged ETF's for a moment, which by the way Korea's regulators are not very happy about it. They're pretty worried about it. One of their top regulators said that he quote should have laid down to protest the launch of leveraged ETFs by any means necessary. Clearly a lot of people think that this is a problem Why do they think that it's a problem and just backing up What actually are leveraged ETFs. So in its most basic form, the it's right there in the name in that you're buying a product that will advertise itself as delivering two X, let's say, the daily return of the instrument. it's saying it's tracking. So for instance, in this case, SK Heinigs. What is actually being done in this case is usually that the ETF provider will have a total return swap with a bank in which the bank agrees to effectively, you know warehouse a lot of that exposure and be the one that is making a lot of the changes, the incremental changes kind of on the backke end in terms of boosting its exposure or lowing it, depending on what the shares do on that day. But effectively, it is an agreement that this return will be delivered During big up markets, what you will see is then there's kind of a need to be buying and feeding as it is going up and then selling when it's going down. So it's incredibly pro cyclical. And this is why you get a lot of talk, chatter well deserved. I think Dean Kernut macro Risk addvisors has been someone that's flagged this very well about the rebalancing activity of these products is one thing that enhances a lot of these swings and the volatility that we've seen. One also interesting thing that I think has come up in these products is just the idea that we're using them so much that it's actually impacted equity funding costs. So you kind of, for instance, you saw at about the time of the SpaceX IPO and as assets under management in these products was really ramping up, equity funding costs were rising. It was just becoming difficult to meet all this demand for leverage products. It was about this time that you also saw some of these big funds switch from using total return swaps and say, hey, we're going to use a little more in terms of options in terms of being able to try and replicate that two X return. That introduces kind of another source of drag. But what that really was is that was a big bell ringing saying, hey, the system cannot accommodate all this demand for leverage on semiconductors and in particular these memory stocks Yeah lookingooking at Samsung and SK Hyinnix, they now make up more than half of the Korean stock market's entire market cap and those ETF's or accounting for, as I said seventy percent of the trading value, onene of the lawmakers in South Korea has said that the cost be their entire stock market, has quote turned into a casino And those numbers M me think that's pretty fair and it doesn't seem I mean, it doesn't inspire a lot of confidence as an investor Would you agree with that characterization of the Korean stock market at this point I would agree that almost every stock market, look at the US. More and more, the stock market is where we go to make long term bets supposedly about the future of American companies. And we increasingly do this using options with four days to expiry. So I don't think the casino culture is something we can lay simply at South Korea's feet. It's probably something that would most often be laid at the American market's feet Beyond that, it has a long history in Japan too, with very active retail traders playing with leverage. The human desire to make money quickly is not something that shares any one nationality. That's something that we can definitely unite on. Luke Kawa is head of Markets at Sherwood News Thank you for joining us. My a pleasure. Thankk you around here The Iran war continues. and this time, the U.S blockade of the Strait of Hormuz, the thing we need open to get prices down is A according to President Trum The U. S. will reinstate its naval blockade of the Strait of Vermz. Yes, that is the same blockade that was central to the memorandum of undernderstanding that was agreed upon less than a month ago, the same blockade that the U. S. had stated in writing that they were lifting Well, now it's over Now we're back to where we were a month ago The only difference is that Trump will now charge a twenty percent fee on all cargo that passes through. And so if we were to calculate what that would add to the price of, say, a barrel of oil Well, at the current price of eighty three dollars, which is up more than thirty percent yet to date, by the way, that would presumably mean that the new price would be one hundred dollars a barrel How was that a? Good thing if inflation is already up to four point two percent and rising Probably not, but don't take it from me take it from the Secretary of State Marco Rubio, who literally said a month ago that this kind of thing isn't even allowed. Well, that's the law.ese It's an international waterway No country is allowed to charge tolls or fees on an international waterway That's existing international law. That's the way it is and international waterways all over the world, and that's the way we expect it' be here. So I don't think we have anybody to convince around here in that regard. I think all the countries in this region would agree with them. So clearly, whatever strategy we had we're not even pretending to have anymore. And I will continontue to talk about this, so long as people continue to believe that this Iran intervention is anything other than a full blown disaster. which it is Four to five weeks is what they said. We are now in two week They told us we have a deal. Within days that deal was broken. They told us the blockade was off. Well now the blockade is back on. It is a constant propaganda machine. And if ever there was proof that you can't trust anything that comes out of this guy's mouth, this is it. this is your proof And it's not really a debate So we will continue to track what's happening in Iran, not just because it matters for the world, but also because it matters for our economy. because the more he screws this up, the worse inflation will get, which means the more likely interest rates will go up and therefore, the more likely stocks will go down. That is why investors have to care. But going forward, Next time a political leader starts speaking belligerently about invading other nations, as if that is the silver bullet to all of our problems I would just hope that we can all agree to look back at the track record and recognize one simple fact and that is This shit doesn't work Okay, that's it for today. This episode was produced by Claire Miller and Allison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen O'Donahghue and Mia Silverio, and our social producer is Jake McPerson Thank you for listening to Property Markets from Profperty Media. If you liked what you heard, give us a follow I'm Ed Esison. I'll see you tomorrow