Weekly Predictions and Outlook

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This Monday. com ad was created by a team of people and AI agents. The agents wrote the copy and managed the timelines, while our human creative director made sure it all made sense. Easy Create your own AI agent today on Monday. com Today's number sixty That's the percentage of Gen Z people who say they would find someone extremely attractive if they never used AI to make personal decisions I'll tell you, I am just sick of Gen Z's arrogance. They walk around and act as if they rent everything Have you heard? from Michael Sybolist. I may or may not have heard from him, but I love the direction that we're heading in and I don't want to change a thing. I's because you're some Princeton prude with like wants a Pim's cup, doesn't know how to drink beer Tell a good joke. You've had better dad jokes. I'll say this one was This one was okay. maybe six out of ten. You've had some bangers last week. I forget what it was, but it really It really hit the spot. So we're trending in the right direction So I'm not going to tell you what my correspondence with Michael Sembist has or hasn't been. All I know is that he's been a blessing to the show. I'm not going to say anything. How are you? It's not coming home I agree. I'm not gonna lie I hear you I'm struggling to find any silver linings or any positives out of that World Cup. Well, it's not like you flew to the US with your entire family thinking you were going to go see England in the World Cup final Now I'm going to see youal and Messi which I granted is great soccer, but Do you think it's bad for? I'm gonna to wear my team England jersey. Do you think that's bad form to wear that to the final or do I show my loyalty? Well, take any support we can get. I mean, you might get heckled and people might call you a wanker, but that's okay. Well, that's called social media. That's called me. That's called a weekday for me, E. Have you read my comments You're used to it. used to it. Yeah it is it I got it. I mean It's hard to describe that feeling of just ure disappointment. but something I've thinking aboutcause you're young, trust me, you'll get used to it. Yeah, H I told you about my divorce, my companies My general my general, like every time I look in the mirror now just the horror and disappointment. justust too I give you my sort of takeaways on just being an England fan and also just being a football fan in general somethinghing I' been thinking about is It's so annoying How much worse it feels to lose. Enjoy it is to win? Yes Losing the intensity of the feeling of losing is so much greater than the feeling of winning. I mean You know, we went to to the England game and saw Norway. We had a great experience. I had an amazing time. donon't get me wrong, but we got the win and then I'm kind of like, okay, like under the next one. great. that semif final loss couldn't dig myself out of the hole And you never feel that way when you win And what is that about human psychology? That's alcohol. So no, I'm serious. When was you When I was your age and I drank, it'd be like six hours of euphoria With a ten minute hangover, a couple Avilla diiaacoke and boom, I was ready to drink again And as I've gotten older, the euphoria shrk and the hangover is Increased So just you know, you're going to have more of that. diminishment of upside with a dramatic expansion. I get excited about very little anymore, but I'm worried about fucking everything. Who are you rooting for? I don't even know who to root for. Well, I know who I'm rooting for in the final, but it feels like it literally feels like getting a hand job from my cousin at Thanksgiving. It's just not nearly what I was hoping for.. Well, who't know what for I don't know where that came from I like I just kind of didn't really aignnowledge just move on because it's kind of normal. At this point. Who are you rooting for in the final? Look, to be honest I don't like either of these teams. I don't I think I don like Yamal? I used to like Yamal, but something I've been thinking about' my problem with Argentina, my problem with Spain now is both of these teams are filled with very, very arrogant people And the celebrations, I don't know if you saw the celebrations of the Argentina players after the England game, but they put up this sign saying the Falkland Islands are Os and the way that they celebrated after the game. like there's just a sense of arrogance. I think Messy is an exception, but the rest of the team and the rest of the players, the way they carry themselves They're just not very humble. The same is true of the Spanish team. I used to love Lemignamal because he was this kind of cute kid with braces who sort of No one knew why he was so good, but he just happened to be this incredible phenomenon. Now he's kind of bought into his own hype and you can sort of see him gettingetting that sense of arrogance, I can feel someone saying the same thing about me, but regardless, I wanted quuiet English Humble people. to go all the way and to do it. do it for us. I wanted the Dan Burns and the Anthony Gordons to win. and instead It's the superstars. it's It's the same old, same old And I wanted to see I wanted to see someone else. I wanted to see someone else rewarded being And that's what we're going to see. So I'm not going to support either of these teams. Messi' the greatest player in history. He's the goat. If he wins this, then it'll be kind of nice that we'll have like just a conclusion to that debate, the undisputed goat, but I really I really can't get excited about either of them. I didn't like the way the game ended either. I didn't the vibes at the end of that game were distinctly different from the vibes at the end of other games. I was kind of disappointed It's, I mean, at this stage, there's so much wrapped into it, emotion. politics patriotism. I mean,'s very it's very intense. Plus, that's such a historic game with the Hand of God and Maredanonna in nineteen eighty six There was a lot in that. How much joy did we get from Team England though? I'm actually at that stage where I'm I really am appreciative of the players, the coaches and the fans because I got so much joy. one hundred percent The game I went to with you, the games I watched with my boys. I just thought I thought that team was just And in typical British fashion, they're just going to be second guessing everybody and ship hosting the coach. They had an amazing, I think they had an amazing tournament. I agree. And everyone's saying that he made the wrong decision by putting on the defenders. It's the same decision he made against Mexico. Take it to your fantasy football league Let's give the guy a break is my view. We'll get ship posted in the comments. That's okay. We'll get over it. We have a lot to get into here, so I'm gonna to launch us into our first story It was another brutal week for Open AI. We've discussed the company's hell weeks before This one might have been one of the worst yet. The headlines kept piling up. Apple firstirst sued open AI, alleging that its stole intellectual property The startup announced it is shutting down its Atlas browser less than a year after its launch. It's president of Applications. Fiji Simo said she is stepping down Its first AI device leaked and a movable speaker wasn't exactly the reveal that many people were hoping for The company was also reportedly caught selling advanced AI models to Chinese firms blacklisted by the Pentagon. And then there were the financial and the competitive pressures, according to E Marketer Open AI's ad business is on track to miss its own forecast by ninety percent SMP also recently downgraded Oracle's debt to triple B minus, just one notch above junk status, citing open AI as a key credit risk end quote. At the same time, anthropic is reportedly gearing up for investor meetings ahead of a potential IPO as soon as October, so it appears Anthropic will win the IPO race. Plus Deepseek, the Chinese competitor is preparing for its own IPO and it could file as early as this year. A successful public debut could make it even harder for open AI to attract capital. So So much went wrong for open AI at this point last week. and you can feel the Scharden Freuder on all sides of the spectrum here because in a lot of ways they've alienated the left from a political perspective because of coosing up with Trump after there was the falling out with Anthropic. At the same time, they're also kind of alienating the right. We've seen that Elon Musk has been shit posting Sam Altman, they're alienating everyone. Then we get this Apple lawsuit. accuses open AI of being quote rotten to its core. They said that their behavior of stealing hardware secrets was, quote, normalized and exemplified by leadership and was, quote, the tip of the iceberg. So that wasn't very good. We have the Atlas browser shutting down, we have Fi Simo stepping down. We have the Oracle downgrade. We have open AI selling its models to these blacklisted Chinese companies, which doesn't put it in good books for The government, and that was of course, kind of one of the only edges that it had over anthropic A lot to get into, a lot went wrong your reactions. moreore than just the headlines. What I'm thinking about is a pattern here and that Every bubble seems to kind of pop in the same order. firstirst the applications disappoint, then the infrastructure gets overbuilt. And finally, capital markets catch up and close att the turn of millennium Pets. com failed before WorldCom and today the cracks are showing at open AI and the next is the infrastructure Open A is reportedly worth over a half a trillion dollars, yet almost every major narrative has flipped just in the last sixty days. Consumer products are struggling mananagement turnover is accelerating monetization is proving harder than People expected and competitors aren't dying. They're lining up to go public So it's becoming sort of We used to think they were spending as if this's a market's going to be huge, and it's going to be win or take all with justifying this drunken intoxicated spending. but it's become capital intensive, brutally competitive, and increasingly commoditized and The real risk isn't that open AI loses, is that nobody wins enough to justify these valuations And we see an unfurling of the collapse from B to C to B to B to infrastructure similar to ninety nine And, you know, again, history doesn't repeat itself, but venture capital sure as hell does And that is it is massively overspent here in these valuations are going to come down dramatically, but I've You know, I've always said, oh, it feels like ninety, you know, you want to say it's ninety nine. It's probably more like ninety seven. This does feel like Q four Uh ninety nine and then March of two thousand is now in, you know in plain sight. You were saying when we were talking about this offline that you think that we're going to have to see a management shake upp here just based on everything that Sam Altan's gotten wrong. And I think I mean there is the AI bubble question, which is like does the AI business model actually make sense if you are in the front end AI business And that's something that has been kind of an open debate U I mean, if we look at the financials of open Air and anthropic theseese companies that are losing a lot of money, you would think It doesn't really work right now. Maybe it'll be kind of the Uber or the Amazon where they spend all of this money and then eventually they figure out to make more money than they spend and eventually it turns into a viable business, but that's kind of an open debate. and I don't blame Sam Altman or his execution U on that reality. I mean, the reality is that compute is very expensive, buildilding the data center is very expensive. and so far it's been very hard to market a viable product, which is commensurate with the costs They're awesome executional mistakes that we've seen. from Sam Atman, O would be he's trying to launch this hardware business And apparently he's been stealing from a company that he had previously formed a partnership with Like that's something you kind of have to remember about open eyes. they used to be Partners with Apple The plan was that openpen Aye was going to power Siri And then Apple turns around and announces actually, no, we have a new partner. It's Google. and now we learn why that is. It's because Apple thinks that openen AI is quote, rotten to its core and that they have been stealing trade secrets poaching their employees. So just from like a relationship management perspective, like Clearly, that is a huge mistake. There was the issue with we're launching all of these side projects, and now we're saying that none of these side projects are actually panning out, like the Atlas browser and like SRa, the image generator, which they shut down as well Um, I mean, just in a remarkable way Sam Altman is getting the entire world to hate him And it's almost like nothing He says or does. can go right And I've never really seen that from a CEO, a CEO who has become so unlikable not to one faction of the country or one faction of the market, but literally to everyone, I can't find really anyone who is supportive of this company who doesn't have a financial interest in this company And that's wild from a CEO perspective. I mean, there's just so many things here AI has been the most poorly managed brand over the last twelve months, and I feel like the couout de Gas Bureass brand management was deciding that Kein O'Larary should be the spokesperson for data centers I think he made himself the spokesperson, but I agree. They should have shut him down quick. And just said, boss, if you got this thing built? to shut the fuck up Look, the I think the thing that really hurts here in terms of credibility and provides legitimacy to what is often perceived as just competitive wrangling is the lawsuit from Apple And they're claiming that OpenAI stole trade secrets by poaching over four hundred Apple employees. and OpenAI had recruits bring Apple prototypes, which by the way, isn't illegal on its own, recruiting employees. There's been laws passing you can't have Steve Jobs and I forget who it was, Bill Gates had a kind of a gentleman's agreement that later serviced in emails that they wouldn't poach each other employees. And that's not competitive. All that is a transfer. power from employees who want multiple vetterors on their labor and that that's illegal. You're allowed to recruit other employees unless that employee is an executive and assigned a gard you know garden leave or a non compete, which you have to compensate them for. But anyways The strange thing or the irony of the suit is that Apple has reputation in the industry for stealing other companies' ideas And they're one of the most frequently sued tech companies for patent infringement. And in the reality, this goes to a larger and I'm not saying they are, they aren't guilty. But the reality is The majority of companies that have outside shareholder gains, and this is true of an economy that's growing faster than five percent a year They're essentially thieves or probablyroably more accurately a strip miner. And that is in the nineteenth century, the US stole manufacturing technology for textiles and littered the Eastern Seaboard with manufacturing, technology and capabilities and even actually kidnapped artisans from Europe China has built an entire economic model on IP theft And so most of these guys are suing each other. But when Apple comes for you in this case, their communications are very good. It's not an individual. they're not getting into a pissing match with this ego versus this ego. They're just saying, look, they're laying out in a legal kind of adrooit adult format This company is guilty of, you know, kind of, mass theft, if you will But it is really incredible how the momentum is flipped on open AI. And now we know that Anthropic is scheduling its IPO talks. Supposedly that listing's going to come in October. whichich is very soon, that's only three months away U and you know, there was a debate of like Who's going to win that race between andthrropping an open eye, who's going to sort of capture all of the energy and the capital in the room It's clear that Anthropic is going to win that race. In fact, if we look on Cowy, the odds that they will announce an IPO before twenty twenty seven are up to seventy four percent. So this anthropic IPO is happening. Open AI is tabling theirs. But then the fact that in the same week, we also learn that deep seek is planning its IPO? To be clear, we don't really know anything about it It's very confidential. We don't really know anything about their financials. Um, but they're out there and they're planning this And it seems like the debate used to be, you know, who's going to get out first? Is it going to be anthropic or open aI? That's not of question. Now the question is, will Deep Seak get out before open aire And that poses a whole other Slw of questions and risks for the company. I mean, what do you make of What do you make of that? Well, I think the biggest story that has that it's got of must know coverage is that is what I think is I would refer to affectionately as is AI dumping from China. And that is free Chinese models went from less than a third of all traffic in late twenty twenty five to about two thirds recently and It's much less expensive I mean, essentially what's happening in the air market has condensed what's happened to industrial economies in Europe But instead of it taking two decades, it's taken two months, and that is they steal the IP on a cell phone tower from Siemens, and then they manufacture it with cheaper labor and they sell it back to Telcoos for forty cents on the dollar And there are a lot of regional LLMs in China and they have access to cheaper power, cheaper chips power consumptive And they're also subsidized by their own local governments And I believe, and I said this before that she has a vested interest at the ultimate Ohio class submarine to be flipped against us is to engage in AI dumping. And I think it's happening And you hear our stories of VCs, encouraging the portfolio companies to use these open way Chinese models But you're saying The best business model in history is IP theft. A close second in terms of a pricing mechanism is eighty percent of the market leader for half the price. And deep seeking these Chinese openwight models claim they're ninety percent of the market leader for a third of the price I think this is going to be the next geopolitical pawn once Trump actually, if Trump actually figures out what's going on here quickly enough But the entire economy right now is a giant bet on AI And China has come in with a with a product that is near near frontier for a lot less money. and that is going to start to and Mia are Head of research put together this graph that just blew my mind one of those mountain graphs. And you see the frontier models at like eighty, ninety percent share in China, five percent or ten percent, Th these Chinese models And the mountain of Chinese of consumption of Chinese open way tokens has exploded And yet it's not getting that much coverage. It's as if The U.S auto industry was hollowed out over call it twenty thirty years and it started with the Honda Civic and then they had an accord and then oh wait, but that's just one company. No, it's Toyota, which became the largest. auto company in the world in terms of production volume what the Chinese automobile industry did to Detroit in about three decades It feels like Beijing is doing to US AI frontier models in about three months We'll be right back after the break and by the way, we will be going live on substack with Noah Smith tomorrow at one hundred thirty Eastern. Don't miss it Subscribe now Support for the show comes from Quintince. 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I think you've got You've got this sort of lack of goodwill in the marketplace. and we saw there was this viral of Alex Carp on CNBC basically saying that he's done with open AI and anthropic because their tokens are so expensive and the value' not there. And it so feels sort of like corporate America is turning on this company, which I think could be a problem in terms of these B to B contracts, which are pretty important, both for open andanthropic. You've got this Apple lawsuit And all of the other lawsuits, by the way, that Openir is going have to fend off, but the Apple being probably the most well capitalized, which could legitimately shut down their hardware business You've got just competition in general As you pointed out, the market share statistics a year ago, child GBT was at seventy six percent today it's at fifty and that's because there are two Major insurgents, one is Claud, which has gone from one point six percent market share to ten percent. Gemini has gone from nine to twenty eight. So Gemini is exploding as well And then I think the most significant and the most important is the price war. appears to be breaking out right now And that is The pricing of these AI models is clearly becoming front of mind for enterprises and it is very quickly becoming a race to the bottom because you have meta that is coming out with their model, which is dramatically cheaper. And they have literally stated that it is their mission to initiate a price war because they know that they can play that game. they have the cash. Oen AI and Anthropic can only play that game for so long because where are they getting their money from? They're not getting it from profits. They're getting it from Aenture capital And so at some point If the investor spigot turns off, they can no longer play that game. Gemini is also pricing their models lower, but the elephant in the room And I'm one hundred percent in agreement with you on this. clearly the Chinese models It is clearly Kimmy all of these Chinese models, which are so dramatically cheaper. than the US models that it's hard to actually fathom. just to go through the data here Price per million output tokens for Op AIes model, GBT five point six is forty five dollars. for Claude Fable five, it's fifty dollars equivalent price Deep S model is eighty seven cents. So it is ninety nine percent lower. than the American alternatives. and Obviously now we're seeing that China is stealing market share. I don't know. I mean, we see all these benchmarks on like which model is the best and there's all these debates. like you know, people kind of generally assume that open AI and anthropic have the best best in class world class models. I'm not going to chime in on that But what I do know is that people are using the Chinese models because the Chinese models can get the job done fast enough well enough and they are so much cheaper that it would be ridiculous not to turn to them, which is why you're seeing the increase in market share. It's also why you're seeing a lot of these blue chip American companies that are making that switch we've gone through some of them before. Coinbase, Shopify, Airbnb, Uber, they're all starting to switch over. to use these Chinese models. and it seems to me that this is clearly the elephant in the room for not just open eye, but for all of American AI at this point and How could Xi Jinping? How could the CCP, how could China not be trying to target this because if we are as dependent on AI as we are It is clear that this is the fastest way to bring the industry to its knees, initiate the price war, get everyone back on the side of China, take up that market share. and then the question for us becomes what happens If this keeps happening What happens if they continue to eat into that market share And I wonder if, I mean, this is a question I'll pose to you. I wonder if That is going to be the tipping point for an open eye or an anthropic, the fact that they cannot compete with China What do you think I think they can can be. I do think that they're So there's a market for Emirates and Delta. there's a market for the LVMH and the high end the frontier models with better IP will be great businesses. The problem here at is that When I raised money for Red Evelope at one hundred and twenty million, thinking that I was a genius getting that kind of valuation The problem was it was really difficult and stressful to try and raise money for the next two years after the market collapsse because the people who came in at one hundred and twenty pissed off and didn't want to raise money at a lower valuation and you end up with all sorts of expectations and repricing options And to a certain extent, the One of the One of the real anchors around the neck of open AI and anthropic right now is eight or nine hundred. and that is eight or nine hundred billion dollars, which is what all their last round investors are anchoring off of because I believe Oen AI and Ananthropic will still be amazing companies If they decline by eighty percent of value, that means they're worth as much as Starbucks. They're worth as much as Disney. They're amazing companies But the expectations and the valuations have just gotten so far out over their skis that the narrative will naturally be reallyally negative, but I do think there's a market for the premium frontier model People want U. S. companies. in addition, And this was, I thought the most puncturing statement for Alex Carpon, it was brilliant and he's talking his own book, but it doesn't mean it's true He said People turn to Palantir because what they want is a thick layer of innovation and protection on top of LLMs Because if you' and he didn't say this, but I'll project. If you're Apple, you don't want to upload your board decks and project plans and product roadmaps into any LLM and have them incorporate it, again, strip mine it and incorporate it into future answers for Samsung and Microsoft who were posing the same queries, especially after you've literally found evidence of them stealing your hardware products. I mean, if you're already anxious and then you see the lawsuit I mean No way you're starting that enterprise contract I mean, this is the narrative that's emerging that is really powerful These are companies that have ingested all intellectual property. without consent or compensation They strip mine it and then sell it back to the people who are losing their jobs because they've stripped mined their initial IP. That's not a good that's a business model that should get people angry. And So there needs to be, I mean, this lawsuit is going to be interesting. I still go back to an original or an idea I've had for a long time and that was do what the record recording artists do and have have an organization that's on top of them like the record association, f what it's called players. And basically they have means of assessing every time Private Idaho is was played by the B fifty two's awwesome song on every radio station across America And then they say, oK, radio stations, approximately twenty basis points oral half a percent of total playtime was B fifty two songs We license, we do a blanket license for X dollars. char we charge you We charge KOQ one hundred six point seven Rock of the eighties in Los Angeles, the greatest radio station ever We charge you or two and a half million dollars a year for a site license and omnibus license to access to all of our music to play and then you run ads against it And then we take two percent of that and we send it to Warner Brothers or whoever represents. The B fifty two' s None of that goes on. Again, bringing this back to me If I would type in In the Voice of Sky Galloway, I will see literal sentences from chapter seven of one of my books But I'm not getting any compensation So the strip mining, I think an adult will come in and say, Adobe did this and it didn't seem to pay off, but Adobe' Visual LLM. Firefly, whatever it was called. they actually only had licensed imagery because they wanted to say, look, we've We are holding up to our standards of IP. That is yet and privacy IP theft Aual theft of intellectual property, not only IP theft from individual consumers, but IP theft from other organizations. U this is all going to lead and I'm teasing my prediction here. We're going to have a new CEO at OpenAI within the next six months. Could you expand on that prediction while we're here? I'll do what Rachael Madow does. I used to love watching Rachel Madow and I got so sick of her saying, what if I told you that I knew the name and the identity of the person who killed JFK Stick around. And then you have to watch four minutes of commercials convincing you had opioid induced constipation and restless legs. And then you come back and she's like, There is a man. He has a name Another man is showing up and has a solid thesis and why was this man stay with us. and then we'd cut to another commercial break. I'm like, I have had it. Rachel Madow is the biggest biggest, I won't use a word teas of some kind Im like gave up. I'm like, I am not willing to endure more commercials showing me how much it sucks to get old to find out who Who killed Jeff Kag? Anyways, should I do it now I should I wait for predictions? I would like to hear it now because I myself am impatient. so I'm gonna assume that the listener is too. We're about to see O AI acquire a company called Sierra And that is the best companies don't stop at the platform. They develop their own applications. Microsoft didn't stop at Windows. built our bottom built office U Apple didn't start with IiOS it built the apppp store. Open AI is worth about half a trillion dollars, five hundred billion do, Sierra which is essentially Sarah has one of the best enterprise AI products And they're going to, I believe they would check so many boxes, acquiring Sarah and installing Brett Taylor as the CEO because Op AI has one of the best frontier models and Sierra has one of the best enterprise AI products, and Bret Taylor may be the best enterprise software operator of his generation So As foundation models get cheaper The intelligence will be commoditized and it'll be the scarce asset won't be IQ, it'll be customer relationships. workorflow integration and enterprise trust, That's Sierra. and at five billion dollars, which is what it's worth in the market, say you pay ten That's a two percent dilution and you not only get real progress in your application layer you get something that'll increase the value of open AI by one hundred billion dollars by calming the waters with someone who is seen as not only someone who understands the technology, but has a very elegant smooth hand around retention of employees and smoothing over. Keep in mind, this is the guy They shoplifted forty four billion dollars to Eillon Musk and forced him to close and didn't get into a pissing match with Elon Musk. Elon Musk does not shit post Brett Taylor. Think about it. He had to pay forty four billion dollars for a company that's now worth three billionars And he's not out calling Brett Taylor a crook So this this solves the Altman problem, the insecurity in the market problem. Bret Taylor, we got Cloud cover to make massive reductions in CapEx. They can pay Bret five or ten billion of that incremental hundred in increase in valuation, they get they get the day they announce this acquisition This is just makes so much industrial logic. Anyways, OpenAI acquires Sierra and installs Bret Taylor as their CEO and kicks Altman up to chairman. Wow. Okay. Sam Altman out what was the timeframe? I would say it's six months. you know, might be it might be twelve, but Sam Altman is on the green mile He's an innovator, not an operator. They need an operator. They need an adult in the room right now. He just clearly doesn't know how to handle employees who want to leave He's made a fool of himself with certain statements. that are just immature quite frankly He has not made the right moves in terms of relationships with other organizations U so they need an adult and and Bret Taylor kind of just reeks of competidence. the entire Every investor at OpenAI would have about a seven day exhale if they announced that Bret Taylor was the new CEO. It's a very bold prediction, but the more you think about it, the more it actually isn't that unreasonable given how much of a shit show it seems to be at open air right now. I think it's just helpful to play out how these kind of situations might unfold for open Ayes business like And we think about this Apple lawsuit I mean, what could go wrong here? What could go wrong is that The Hwb business just shuts down And that seems to be very much on the table for open AI right now. The other thing that we saw were those e marketer estimates of chatbot ad revenue. So I mean, it's worth thinking like What would Chat GBT and open AirS advertising revenue actually look like if they were as low as e marketer is predicting for the chat ad revenue market at large. The other thing to think about is these price wars. like What would happen if open air had to reduce that model pricing And you know, pick a number. We picked a number. We said, what would happen if they had to reduce their prices by eighty percent, kind of like worst case scenario. put all those things together if you eliminate hardware business, if you dramatically reduce the ad business, if you dramatically reduce the pricing power that OpenAI currently has and seems to be seeding with every passing day. And then you project all of this out, they have said that they're going to be profitable by twenty thirty But when we put all these estimates together, what we find is that actually no, they won't be cash flow positive, they will be losing about one hundred sixty five billion dollars a year That's when you put this all together And so In other words, if these things go wrong Business just flat out won't work at all At which point you have to start asking questions as to what actually happens to openp AI. Someone say it just goes bankrupt. It just implodes. I don't really think that's going to happen I think the more likely scenario is that there will have to be some sort of massive restructuring, some sort of M andA event. Probably it gets sold to a larger AI company. The point being, all of these very very speculative investments and very speculative bets. They kind of all have to go right for open AI to make it to make it out of this live. Unless something massive happens, unless you shake things up in a massive way But it is really getting to that point. And I think the question for investors is, which thing do you decide to worry about I think if there's anything that I would be worried about, if I were an investor in open AI, it would be the China problem. It would just be the pricing, just flat out Because at this point, they're losing control of the narrative. The enterprises are turning against them with every passing day. They're telling them theseese tokens are too expensive. There is a lot of incentive to switch over. to a Chinese model. Maybe the government bails them out, maybe they see some regulation that makes None of that even regulation wise even possible That does seem to be where things are trending at this point We'll be right back and for even more markets content, sign up for our newsletter at propertymarkets. com upport for the show comes from Delete Me The internet makes it easy for scammers, stalkers and hackers to do their thing. That's just a fact But it's important to remember that there are ways to protect yourself That starts with protecting your data and DeleteMe can help you do just that Deleimi does all the hard work to wipe your personal information from data broker websites. It was named the top pick for data rememoval serervices by Wirecutter And our producer Jennifer Sanchez has tried delete me. She was surprised to find out. how much personal information was actually already out there. but toletely made it very easy her to clean it up. 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Surprise date night? thing to wear But Amazon's prime same day delivery letesss 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 amazon d. com slash prime to find millions of items delivered fast. Same day delivery. It's on Prime. Available in select areas. Terms apply We're back with prorofty markets. People keep saying that the market is diversifying, but the deeper you look, the harder that argument is to make. It seems like every part of the market is becoming increasingly dependent on AI Take small caps. Some of the best performing stocks in the Russell two thousand this year AI beneficiaries. Max Lineia, a semiconductor company is up four hundred and twenty four percent year to date computing company, Rack basace technology has gained five hundred and sixty seven percent. In total, roughly twenty four percent of the Russell two thousand now has some exposure to the AI trade. The same pattern shows up in emerging markets The MSCI emerging markets exX China ETF is up thirty four percent year to date, but much of that performance is driven by its heavy exposure to Taiwan and South Korea. two markets whose largest companies are deeply tied to the semiconductor supply chain. So Scott, I just want to simplify this One of our biggest concerns about this market has been over concentration You know, the top ten stocks make up forty percent of the whole S and P, it's up from twenty percent just thirty years ago Um There's this overreliance on AI that we've been worried about. But this year I'm just we're hearing a lot from investors that that is changing, that big tech has been underperforming and that we've seen this diversification or this broadening of the markets, and let's just play a clip of what some investors have been saying broadening of the market. We're seeing more participants to the upside. Look, I think the broadening of the market. we've argued for some time that it would be extraordinarily healthy if the market broadened and that's really been going on Since the end of October, it's been an incredibly broad broadening out. I think that broadening out theme, which was one of our themes as we entered the year. I think that broadening out theme is going to be quite relevant again. The trouble is that when you actually look at all of these quote unquote, broadened segments, the stocks that are doing all of the broadening are AI stocks and you look at the S and P Big tech isn't carrying this market true, but AI still is. the best performing stocks have been Intel, Seaagate, Western Digital, Micron, Dell, Sandith, all of the sexy AI names that we keep on hearing about. And the same is true of every other sector and we can go through them in a moment Before I do that I'll just start with your reactions. The CMBC pundits who will always find a reason like real estate agents will always find a reason why you need to buy now if you're a buyer and why you need to sell now if you're a seller These folks own stocks and so they're always going to come up with a reason why you should buy more Um The market is not broadening. It's just finding new ways to buy NvidDia people your analysis, these pundits are pointing to small caps, emerging markets. industrials, utilities, even real estate. and if you scratch the surface, the same story emerges. seemiconductors, power demand uh, like even cooling systems or fiber, data centers, AI software, that's not diversification It's second order concentration In nineteen ninety nine, everything eventually became an internet stock. Today everything's becoming an AI stock And that's not necessarily bearish. It just means investors are kidding themselves when they use words like broadening as some sort of code for diversifying away from AI. That's just not happening If the AI trade sneezes, We're not catching a cold. We're getting we're getting pneumonia and buying quote unquote, AI adjacent stocks. and calling it broadening is like ordering a diet of Coke with your double double from in and out. Be clear folks. You still bought a fucking cheeseburger. That's what you've done here. You've bought a cheeseburger. ust looking at some of these sectors, like you mentioned utilities which a lot of people you would think of that as Diversification away from technology, away from tech, away from big tech But if you look at I mean, it's up that sector is up seven percent year today. If you look at the companies that have been driving that, it has been the companies that are quote unquote AI compute providers or AI power providers. It's companies like Dominion and Bloom Energy, which is up one hundred forty three percent this year. The same is true. you mentioned real estate. Who are the winers in real estate right now? It's not REITs that are building houses, it'sEITs that are building data centers. It's digital reality trust Iron Mountain. It's these companies that are basically going out and being AI landlords similar to what we saw. in our conversation with Mike Nvigratz, same is true of industrials. Caterpillar is now an AI stock. Verttiv is an AI stock. They are carrying that sector. And now you know we can Tal about the size of companies, large caps versus small caps. A lot of people would say, oh, we're broadening because the Russell two thousand, which are the small cap companies that they are outperforming this year. Well, actually if you look at the returns, more than half of them have come from AI related stocks. The same is true by region. A lot of people say, oh we're broading we're getting into international markets. Emerging markets are outperforming well no, because South Korea and Taiwan have accounted for seventy five percent of those returns because most of those gains are coming from three companies TSMC, Samsung. and SK Hinex. So we're starting to see this problem in the way that we talk about markets where there's this idea that we're diversifying, that we're kind of getting away from AI. But we should be very clear like AI is literally touching everything in this market. It's even touching fixed income And this is something that C and Slock over at Apollo has talked about, AI now accounts for nearly half of all investment grade bond issuance. So you could think like, oh, the equity markets are being kind of overlevered to AI, but the same is now true of bond markets and I want to play you this clip Um This was again, this was Torsten Slock who was one of the one of the heads over at Apollo And he's talking about like the six thousand forty portfolio, which is sort of the classic balancing of your portfolio, where your sixty percent equities, forty percent bonds. He reframes it in a very interesting way. This is what he said. This AI I think better workout, better workout. Because if that doesn't work out, work worse Your portfolio will be in troubed. That's why ironically, the best investment recommendation today is the new sixty forty is really To do sixty, maybe AI and forty non AI So in other words, the best recommendation for investors is to invest in non AI, things that are not correlated with this one factor becausecause if there's one thing we have learned in finance since the financial crisis is factor investing. You don't want to be exposed just to one factor. And at the moment, there's one factor staring all of us right in our eyes and that is AI is literally everywhere. I think he kind of sums up. Exactly what's happening here. right? Well, of the big tech companies we talk about, who's the least concentrated or dependent upon AI? Apple That's exactly right. And what's Apple? What's apple Apple Stock one year performance It's up sixty percent You today It's up twenty three percent All the other guys My my pick, Amazon, It's still related to AI, but mostly diversified. It's up thirteen percent this year And then look at the guys who are ground zero for it, you know, Microsoft, right Um you know, Microsoft's down. So Look out below. I if as a general theme If I could go long a basket of stocks, it would be GLP one. And if I could go short a basket, it's AI. But be clearify. I mean The reality is I don't I'm not suggesting you invest in gold bars or assets or cash. I think you're always in the market. I'm always in the market because you don't know when these You know, you don't know fast and howirrational the markets are going to run. I'm always in the market, but you absolutely need to be diversified and you need to really understand what the term diversification is because If you're in the SMP or even in what you think are small cap stocks I think at this point, you really want to think about how do I to mostly diversify away from AI. And that is not easier right now because everything seems to be somewhat correlated. to AI but I will say that I think if the market goes into a pretty serious recession, I still think people are going to find The budget for the Wagovi U I still think they're going to pay their rent. I think the builders and the REITs are going to do okay here consonsumer products, defensive stocks, but this feels Wow, it feels frothy right now and it feels like there are cracks You know, the size of the Grand Canyon beginning to emerge. We talk a lot about diversification and it's we're learearning more about this market is it is increasingly difficult to diversify because of how much AI has kind of penetrated everything whether it's emerging markets, whether it's small caps, whether it's bonds versus equities, like AI literally touches everything Do you think the right movers for investors at this point. like how do you handle that problem. brief history of diversification In the eighties, people people some finance professors, uncovered research or published research saying you get risk free return when you diversify And Ray Dahio says that the entire objective of the most successful hedge fund ever, Bridgewater, arguably, was to find fifteen uncorrelated distinct cash flows that if you could get to that point You'd always beat the market with lower or higher sharp ratios or whatever it is. and Investors listened in the eighties and these enormous hedge funds started buying Australian stocks and Japanese bonds Because people listened and diversified, everything became more correlated. whichich meant that the biggest hedge funds when US stocks went down began selling their Japanese bonds when they needed money. So now almost it's almost impossible to be to be uncorrelated with AI and the SMP and American tech You just don't want to be a ground zero and just a personal learning here and I've said this a lot I've been rich three times Why? Because I've lost it all twice. lost it all in more twice. in two thousand and two thousand eight. because I never understood the power and the importance of diversification once you have an asset base What am I doing H I'm selling down my big teack And some of this also might be FOMO of having missed out because I have not made a lot, I have not made, I guess, in an adjacent way I've made money from AI, but I was offered thropic at I think, twenty billion, and I'm gott to be honest, I'm angry I didn't do it And I haven't I haven't been big in AI. So some of this might be just sour grapes But what I'm doing is my big themes are the following GLP one now not first and foremost, but unfortunately, I think the biggest trend in society right now is going to run unabated is income inequality because of courourt decisions that let people throw as much money as they wanted in an election. So we're going to continue to see a leakage of capital and power and rents from workers and consumers to shareholders, which will disproportionately affect the top one percent who own a disproportionate amount of shares So what am I doing? I have a disproportionate amount of my net worth in high end real estate because I think that I mean, this is where my biggest investment is. I think anyone worth over fifty million dollars is going to have at least one home in one of five places, Dubai, London, Palm Beach, New York or Aspen And I have invested about half my net worth in buying really high end homes in four of those five And the secondary benefit or the psychic can come because I'm at a point in my life where I'm not all just about financial return I'm about psychic return is A I enjoy these houses and I'm hoping it'll force my sons to visit me more. Which based on my orientation weekend, that strategy isn't working. Did I tell you that he literally didn't text me for two days? I'm in fucking Charlottesville with nothing to do wearing orange sunglasses, and he didn't text me once a He didn't text me once, literally. You told me that he physically blockaded the door with his body I didn't hear about the texting problem. I walked in as soon as I put his bag down, I saids like, Okay, thanks, dad, I love you and literallyism me out of the room I mean, it was like God, am I that bad? Anyway But I don't know where was going with that. That took me off I'm getting emotional, but look What I'm doing and in this is I'm too a certain extent violating my own thing about diversification, but I think you're going to see inflation And I think you're going to see massive increases Unfortunately and income inequality And the thing I love about real estate for my own mental health, talking about psychic returns I want a lower percentage of my assets and publicly traded stocks because I'm checking this fucking thing ten times a day And the thing I love about private markets and real estate is I don't get a scorecard every day And soy it taps into this really unfortunate overwhelming trend of regulatory capture and income inequality, which is going to continue to run unfettered for a while and believing that we're going to swing to the left and bring in a democratic socialist or whatever they're calling. whatever however they're trying to wallpaper over, head up your ass economic policy and anti Semitism masquerading as some sort of youthful energy, fine, have at it But it's not going to get in the way of the regulatory capture of the wealthiest. Those people are going to use Representative Shaval is an example of how fucked up this whole democratic Socialist movement is in the middle of America is going to continue to put up with a regressive tax structure that results in a ridiculous amount of accretion of wealth to people in the top zero point one percent of pay less and less taxes. and hopefully they'll all buy my home. how we get I don't know how I'm also not even sure what about the democratic socialists is getting you so riled up becausecause we're about to snatch def feeat from the jaws of victory. Socialism doesn't work. Capitalism works as long as you rest on a bed of empathy and you keep reinvesting in the middle class with redistribution of income. I agree, but I look at what Mamdani hass done so far and it hasn't been socialism. Everything he's done so far has been like surprisingly very reasonable The rent control is the only thing I disagree with and also what he's done with the way my stuff. I want to be clear. I'm not talking about M Donny. I've said, I mean, I didn't mean to get political while I always get political. I think you have to rally around people when they're elected and give them the benefit of the doubt. I think he is done There's some things that upset me about him, specifically the new litus tests for the people he seems to elect seemed to be in my opinion. There was not one woman who she was a little crazy, but a little crazy. Ban the police, no borders, murdereerss should not be in prison. showed up to an anti Israel rally on october the eighth. Yeah. she is about to become the poster child for the Republican Party to convince Middle America that okay We keep making rich people too rich, but they're fucking crazy Anyways, I worry we're about to snatch defeat from the jaws of victory by swinging way too far way too far . I think you're letting this one woman taint your views of everything. That is entirely true and accurate. And let me also acknowledge the other side Boomers like myself don't get to pick their flavor of disruption. And what I will say about Mam Dani and these new candidates is they're bringing surprisingly, he himself has been surprisingly measured. He's good. thoughtoughtful. G politician. Yeah. He's great. more power to him. I want to be supportive of him. I want to be supportive of youth. and people my age don't get to pick their flavor of disruption I've been calling for disruption. Democracy needs a turnover and a shedding of skin. Yeah. I don't disagree with directionly what you're saying, which is this is only going to get worse. I mean what's going happen? belieelieving that electing people who think We shouldn't have prisons or we should are demonized billionaires One of the attributes that Middle America loves, the people who decide elections, is that where Europe fucks up is the following they would rather be worse off as a whole if they're more equal America says We don't mind being. unequal. As long as a whole, we're all doing better. Billionaires are fine As long as the average wage growth goes up and prosperity goes up It has gotten so out of control that it's now coming at the cost of the middle class and the average person who can't afford to send their kid to school or buy groceries But America, generally speaking, one of our core attributes is we don't demonize success, we celebrate it. And we're okay with inequality to a certain point, as long as it doesn't, as long as as a whole, we're doing better. We've had huge inequality since nineteen forty five. That's a key component of capitalism for incentives. It has gone way too far and rather than swinging back to something reasonable like a progressive tax structure, alternative minimum tax, reduction in reduction in transfers of wealth from young to old We're going to The Democrats are going to elect, I worry, a group of people that have economic policies that feel like North Korea light or East Germany like in the middle of America is going to go no fucking way, and we're going to end up with JD Vance and continue to demonize transgender people, continue to have corruption, continue to have stupid crypto scams, continue to overturn and roll back the rights of women. Where am I going, Ed? Get me out of this Save me here, Bring me back We were talking about diversification This is all part of your real estate Diversify. I think this is part of the problem. is that traditionally the index fund The whole point of it was diversification Like that was what they have been for The S and P, the idea that you just put it in, you cover your eyes, you're all good, you're set, you're diversified. It's all of corporate America. No worries But increasingly what we're seeing is like you can't really depend on that as much as you could in the past. The same would be true of like the NASDAQ one hundred, which to be clear, I don't think that's actually has ever been a true diversification device. But if they're now just figuring out ways to figure out these loopholes such that SpaceX can get stuffed into the index, like you're increasingly realizing that these index funds, these passive investment vehicles They're not what they used to be marketed as, which is just pure safety in the market, everything's diversified. problem because One of my views is like I'm a big fan of index funds. L I'm a big fan of passive investing, putting it in the market, being broadened and diversified and letting the market do the work. But I think we're now starting to have to ask questions as to what true diversification is. By putting your money in the S and P, you're not really doing the job of diversification, which means that you now have to start doing some homework if you're super interested in getting yourself diversified. It means that you do need to go and explore different sectors and different markets that have less exposure to AI. That's homework that you'd ideally not have to do. If you're just investing your for one K in your R IRA, in your retirement account. But now we're realizing maybe you do have to do that And so I think the question for us and for listeners and for all investors now is, can you go out and find sectors and investments that are not levered to the hilt on AI. Some people would say, oh, maybe like financials, maybe the banks not really. If we look at the bank earnings that we just saw this week They're getting all of the returns juiced from AI because of the debt issuance to build the data centers, because of the equity trading, which is because of the AI stock explosion. Those aren't really covered. I think you have to work really hard, dig really deep and find companies and investments that are not exposed. One I'll give you one sector that I think isn't exposed hasn't been getting love. It was one of my picks at the beginning of the year, and I'm gonna stick to it. It's the healthcare sector I think that is a that is a sector that has not infused AI at all yet And perhaps maybe they will, at which point you will start to see some real returns But I do think that's the question and it's a very hard one for investors to tackle. Like when The dot com collapse happened.