Hey, it's Steve Eisman and welcome to another episode of The Real Eisman Playbook. So, when this podcast got started April of last year, one of the first guests were my former partners, Vincent Daniel, Porter Collins, and Danny Moses. We had this really great conversation. And since last April, I mean, to say that the world has changed sounds stupid. It's just so incredible how much things have changed. And you know, sometimes it's a good idea not to interview someone, but to sit down with some old friends and kind of hash things out. So that's what we're going to do today. Porter, Vincent, welcome back.
So let's start. I mean, where could we start? We could start with anything. Let's start with Scott Bessent. Okay. We'll do a little bit, we'll do like a lightning round. Like Porter, what do you think about what the hell's going on with Scott Bessent and the Treasury Department buying long-term treasuries?
Well, this is our old sandbox, right? This is the Fed. This is monetary policy. This is the Treasury. I think they're screwed. You know, they're at a point where they have to try these extraordinary measures because they're out of things to do and they're trying to keep a lid on yields, but inflation's a problem. It's still high and you know, Bessent is doing his little dance, but they can't do anything. And at this point, you know, I see it as interest expense plus entitlements is, call it 10% of tax receipts. There's nothing you can do. You can't cut interest unless you... well, you certainly can't cut interest. I mean, you can in theory cut entitlements, but no one is even talking about it.
We've been talking about this for how long, Steve? And they haven't done anything.
And so I don't know what you do. You either got to raise taxes a lot, which...
That's not going to happen.
Not going to do it. Print, right?
And so, you know, you can see why... you know, I think I've had as much conviction in this precious metals trade as I've had in anything in a long, long time. So, explain to viewers who are not familiar with precious metals, what is the relationship between on the one hand what you're talking about, interest rates, and on the other hand precious metals? Because it's not intuitively obvious to most people that they're connected. So explain it to people like why do you think owning precious metals is the result of everything you just talked about with respect to interest rates?
Well, it goes back, you know, you got to take a little history lesson, but in terms of central banks used to own assets, right? When you own debt, you're owning a liability, right? And they own US government bonds. I know it's an asset, but it's someone else's liability, right? And so gold is an asset. And that's why you've seen central banks around the world, including China, buy more and more of it, right? And so I think you've crossed or close to crossing, depends on the gold price obviously, as between gold and treasuries as which is bigger as a percent of central banks' balance sheets.
So you're talking mostly about gold.
Gold. Yes. Gold. And you know, gold's nothing. It's just an asset but it's an asset that doesn't have any debt. It just sits there, right? And so it's a rock. It's a rock. And it's formed in outer space, but it's a rock and it basically everything else is crashing against it, right? And so that's the sort of thesis. It just stays there. Everything else goes down, right? So its value in dollars goes up because the dollar goes down and that's been the history. And if you look at the chart of it, the US dollar has gone down and down a lot in the last hundred years. And I think that trend continues and probably, you know, accelerates at this point because they're out of arrows.
So you like gold as kind of a result of all this stuff?
Yeah. I can't tell you what it's going to do today, tomorrow, but like I think...
Yeah. But I think, you know, if I look back in five years, I think it's going to be a lot higher then.
If you put yourself in the shoes of Bessent, I like doing this. Like what would...
I do. And I would say, well, what would I do? Well, the first thing I would do is I would go up to...
Well, by the way, before you say what you would do, you're in Bessent's shoes. Articulate the problem from his perspective. What's the problem?
So the problem is that right now I have, as Porter said, expenses that are higher than receipts. Right? That's one of the issues. To the point where 40 trillion times an interest rate is a big number and it's really eating into all the other things the government can do and going higher. So you need rates lower, right? So that's the problem. My primary agenda, my issue is to get rates lower because that's the problem and it helps the economy, of course. And of course it helps the economy. So the first thing I would do is go up to my boss which is President Trump and say respectfully, Mr. President, can you end this war? Because if you can end the war maybe we could get oil down from say 86 to 60. Inflation expectations will come crashing down. Rates will come crashing down. And so that gives us time.
And the president just said no.
Well, the president just said, 'For some reason, I can't.' Right? I think he's trying to be fair, but it's not working. Okay? So then what do you do? Right? Then you say, 'Well, then we need to cut entitlements.' No. Then we need to raise taxes. No. Like these are all nos. So then you start with theatricality and deception by playing twist games that the three of us when we were in the office together and if we saw something like this we would start laughing at each other and like what's 4 billion going to do? Well he said at least 4 billion which means it's infinite. He's trying to have his Draghi moment. So I think he is going to keep trying to get rates down because that's what he needs to do over the next six months to nine months. It has to.
Why do you say 6 to 9 months?
Because I just think they need time for inflation expectations to come down. And you're trying to make a bet that somehow, someway economic growth will slow a little bit, not a lot, to a point where inflation can come down to the point where rates... But this is all a bet that they're trying to make. And in the interim, I think they're playing a lot of games to try and pull forward lower rates by signaling to the market, this is what we're going to do. I'm going to get what I want. You better follow my lead so rates can come down.
And the war was just a massive strategic error from, you know, an interest rate and debt perspective. I think he thought they would be over in, you know, two weeks. He did...
And he... That's a bad miss.
Yeah. Okay. All right. I'm going to voice my opinion.
Here it comes. So, you know, I'm not nearly as hung up on the deficit as you guys. As you know, I have this whole comedy routine where I go people like you are part of the 'oh, the deficit' crowd. You know, we've only been talking about this for the last 25 years. I don't think, despite how bad it is, that it's like imminent doom and destruction at this point. I don't think we're close, but we're moving in that direction.
I mean, the question is define doom and destruction. Like we're not going to... think the rates are going to go 50 basis points higher at the end of the day is not the worst thing, is not to me the worst thing in the world. I think the mistake that Bessent made is basically putting a line in the sand. Now he has to defend it.
That's... this is what J.C. Miller said. By the way, did you read about the scandal about J.C. Miller?
He wrote it on AI. He wrote...
Oh, that he admitted to it.
He admitted to it. It's like that's why it's not a scandal.
My response to him is you could have just written it yourself. It's not that complicated. You know, why would you do that? It's lazy.
He said he's an econ major, not an English major.
You could still write a stupid editorial that's five paragraphs long. It's not that complicated.
It was 100% written by... 100% every word. Every word. So I think it's a bad sign. I think that doing it is actually the sign of weakness. Not the problem is not the sign of weakness. Doing it.
I'm a little more nervous than I've been. And let's leave it at that. So what we would contend always was that when you woke up in the morning and you turned on CNBC, right, and you saw rates benign, Nvidia up, Apple up, that made everyone come and said, 'Nothing's wrong here,' right? Underneath the surface, the amount of work that they're doing to make sure that everyone wakes up in the morning and sees calm, I think is incredible. And this is the first time that people are starting to see what we see.
It was just so out in the open that it couldn't be hidden anymore. Right. And saying like to me it's like he's been doing this for about 5 years.
Well, the Fed has. The Fed has.
The Fed has, correct. The irony here is that Bessent comes in and says, 'I don't want to do this anymore' because he's in a box.
Right. And Bessent says, 'I'm going to replace you.'
I have a theory for that.
So the theory is that... let me just explain because viewers understand this. So the Fed over since basically 2010 has done quantitative easing multiple times where the Fed goes out and buys treasuries with the idea of bringing interest rates down. That's supposed to jumpstart the economy. It never helped the economy but it did help the stock market go up. So Bessent as a new head of the Fed has basically said I don't want to play that game anymore. I don't want to do quantitative easing and what's more I don't want to talk about it. So he's stepped aside and they're still doing QE every day. They just don't call it QE. They're printing money every day.
Yes, they're printing money. They're not actually going... but in theory he has stepped aside. Now Bessent comes in and says I'm going to do it.
That's... so you first off they're playing a great good cop bad cop, right? I think the majority of the market has been conditioned to look at the Fed as dovish or hawkish and that's their signal, right? So when he's hawkish...
The market can cool off maybe slow down maybe market will go down maybe rates will go down that's the biggest thing, right? Whereas Bessent is wide open and no one really knows because no one has focused on him before. Kind of no one knows really what the Treasury is doing, what's this twist thing. What's...
It's not just the Treasury. It's wide open. The entire fiscal... you know, that we're running $2 trillion deficits or whatever the root cause of all of this.
6% or 7% budget deficits.
Look, the only way that the government is ever going to do anything about this is if we get close to the edge.
Yeah. They just said, you know, it's not just entitlements, it's defense. I mean, it's the whole budget. So, how are you going to get the federal government to... you don't even necessarily have to cut the budget, but you could, let's say, slow the growth rate by half. Let's say that's what you could do. But they're not going to do it unless things get really bad.
A month. Remember that? A month. And what they cut was nothing.
Correct. So, it has to get bad. There was supposed to be all this fraud and you know and there probably was but it's nothing.
But that's nothing compared to what's actually being spent legitimately on Social Security. You can't say that what's being spent on Medicare is illegitimate. It's just a lot of money.
Correct. It's probably a lot of fraud too. So...
I'm sure it is. But it's a lot of money.
But it's a lot of money and there's parts of the government, I mean the defense department, you know, there's stuff that the government spends on. It's not fraud. It's just they spend a lot of money. So would you sort of concede to us that you know any part, you guys were kind of right about calling you the 'oh, the deficit' crowd?
But I'm not saying it as passionately as I used to. All right.
Just want to put that on record.
You want to put it on record. You got it on the record. Okay. All right. So let's talk AI. So I had on a guy named Ed Zitron. He's like Mr. Negative AI and he does like the kind of research that you guys do but on AI. So he puts out something every week that's like 20 pages long.
Right? And he pointed out something I didn't know because when he came in, Nvidia had just literally just reported the night before. And so I said to him, Nvidia's revenue numbers were up over 100%. And he said, 'Yeah, but...' and then he pointed out and I confirmed this later in the day that in the 10-Q there's in Note 7, I actually looked this up, stuff that we used to do to financial stocks. So Note 7 says that the top five direct customers of Nvidia accounted for 70% of accounts receivable in the quarter. Okay. At the end of the quarter.
Yeah. So on the one hand your revenue is up over 100%. On the other hand it's totally concentrated in a handful of names and a couple of those handful of names are not looking so good. OpenAI certainly...
OpenAI is in trouble. So I'm just curious. I mean we could talk about this for the next 10 hours. Give me your thoughts about the whole what's going on in AI from where you guys sit.
I spoke to a friend. He's a friend of ours. Yeah.
Okay. And he has one of those jobs where he would publicly traded company name not for attribution. Let's call him Mr. X. Mr. X told me that his company's queries are up, I'm forgetting the percentage, 30, 40%. Tokens, the amount of tokens he's using for AI, right? But his costs are down something like 60%. Because what the company has done, in my words, not his, is centralize all the queries that are made in AI and rather than sticking everything in leading edge, trying to figure out what are leading edge frontier queries that require best-in-class versus the off-the-shelf open source. So in other words, they're very careful now about what they send to Anthropic and OpenAI and everything else they send a small percentage of the very, very important queries to them and everything else they let's say they give to the Chinese open-weight models. So therefore the costs have come down a lot. So be careful that the costs are coming down.
Now, let's take that. That's just one example. So, you can't make a whole mosaic on it, but assuming most enterprises are doing this, right? How do we get to the returns on invested capital of all the money that we're spending on artificial intelligence? So our view is yeah the funding can continue as we've seen but at the end of the day are we dealing with a very similar and Porter is probably going to speak about this...
Capex boom that history would suggest you have boom, bust, and then what we get are good cycles afterwards, right? And that's where we stand. This is like the topic.
Yes. I had Torsten Slok on and he said, you know, GDP will grow let's say 2% this year, at least half of it is AI capex. So if all of a sudden OpenAI failed and the whole thing reversed the economy would go into recession almost immediately. No, you know I'm not making the call. Listen, we're not...
I'm not making that call yet.
We're not AI experts. This is not our expertise, right? But you know I look at the balance sheet of OpenAI or Anthropic and I look at what you know the these hyperscalers have gone from huge cash flow machines, not machines, like spew out cash like no one's ever seen and they were buying back their own stocks to go in the other direction to issuing debt to Google...
And in some cases equity. Google issues $85 billion in equity, right? Bought by Buffett, which is like geez, that's not a sure... or I guess it wasn't Buffett, but sure not a distressed purchase, right? So I think you're in a different paradigm here. And yes, it scares me, right? And you know, they're going to force this issue, right? They're going to let OpenAI come public. They're going to let Anthropic come public because they need to. My contention always is that just like SpaceX, it's bad for the market because it's supply, right? It's new stock of supply, right? And that's what usually has killed markets, right? That's in 2000, in 1929. That's what killed the market was new supply of stock. And so it's just supply demand. It's kind of that simple, right? And so we've had this machine where, you know, everyone's been investing in their 401k and you have new supply of buyers every day, right? They talk about the S&P. It's the dumbest investment philosophy ever, right? If I get more money in, I buy. If I get money out, I sell. There's no other thought to anything, right? They don't think. That's the two thought process. And so if you flood a market with capital, right, it's problematic. And that's the way I think about it. And that's what makes me nervous.
Um, you know, look at SpaceX. Where's the... you know, when everyone who made all this money finally sells...
Asteroid mining? Don't poo-poo asteroid mining.
Exactly. I was impressed by that.
I loved it because I'm a sci-fi guy. I don't even know what you're talking about, but I'm sure Musk saying...
No, in the S-1 there's a whole section about things that SpaceX will do in the future and one of them is asteroid mining. So in my weekly podcast I commented I said, you know, it's kind of interesting that there's a show on Apple right now called For All Mankind, which is a sci-fi show where asteroid mining is a major theme.
You know, full self-driving is about a decade behind and it's at level three. So, you know, he makes a lot of good comments that don't quite come true. So...
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So my thought about the whole AI thing, which is what makes me nervous right now, is that there were some very good reports by some Wall Street firms that basically said that 70% of hyperscaler AI revenue is from just Anthropic and OpenAI.
Correct. That make sense?
Yeah. And then so if you just take that math, that equates to about 25 to 35% of their total cloud revenue.
That's huge when you think about it.
That's why they need to come public.
Yes. Well, I know they need to come public. The problem is that the OpenAI numbers that have just come out are actually quite poor.
Yes. Compared to Anthropic, they had huge market share and they just lose it every day.
Well, and they keep losing it. And Steve, you're closer to it than we are. The sequential growth rates, are they slowing, accelerating?
So, Anthropic put out like 11 and a half billion in revenue for the June quarter. They didn't say anything about costs and that was up over 100% in 3 months.
OpenAI was at 6.5 billion and it was up only 18% in 3 months. Its costs were 12 billion. But the crazy thing was that if you look at forget about the percentage increases, if you just look at the dollar changes in three months their revenue went up a billion and their cost went up three.
So I think OpenAI is in trouble and if OpenAI and you know when you're not profitable as you know...
Narrative is everything like our country.
Right, narrative is everything like our country. Exactly. So like look, if you're a really, really profitable company and somebody writes a bad newspaper article about you, big deal. You know, the stock goes down for a day. Who cares?
You buy back stock. Who cares? You're swimming in money. But when you're OpenAI and you're bleeding cash every single day and all of a sudden the narrative has really started to change and they've lost a tremendous number of people.
It's bad. Your cost of capital is rising.
Yes. And you can't afford that.
And you can't afford that. I make this joke that whoever buys OpenAI out of bankruptcy, it's going to be a fantastic deal.
And that's the history of what happens though, right? Just like the railroads, if the railroads failed. Whoever bought Wachovia, you know, when Wachovia was purchased for nothing, you know, it was a great deal for Wells Fargo, right? Same thing with Bear Stearns. Like that's what happens.
You guys do a newsletter.
And you wrote an article about shorting.
So, why don't you share with people your thoughts from that article because it was kind of interesting.
Thanks for reading, by the way.
Yeah. Well, I like to read.
Are you a fan of The Untouchables?
So, I was thinking about...
But really, when you think about a movie, whatever movie Sean Connery is in, he outshines everybody else all the time.
There's got to be... I love Finding Forrester. You must love Finding Forrester. He's unbelievable. He's unbelievable. And anyway, so...
It's not a soup question.
A great line. It's a great line.
I thought about his arc, right? And his character and it's kind of like shorting stocks or the way we probably feel right now, right? Like we just want to go long, you know, we'll choose gold, you'll choose whatever, be the B-cup, but then all of a sudden you get like interesting shorts that come your way. Right. And then you got to make a decision, right? And then do I do it or not? Do I do it or not? And you know that if you decide to do it, and we could talk about like one where we decided to go there, you know, you're in for a war.
Yes. Most of the people in the investing world like you're short, they're long. Not only that, let's think about the people who are short for a living, right? When you look at the Citadels, Millenniums, the 72s, what is probably not well known is that the people that work there, the pods as they're called...
Explain what a pod within a Millennium or Citadel is. What does that mean?
When you work at a Millennium or 72, their GPs, their grand PMs will give you an allocation of money, right? Call it $2 billion.
So, I could be running a team.
And I don't raise any money. The money is raised at the parent.
Correct. Ken Griffin gives you the money.
Or if I'm at Citadel, Ken Griffin says, 'Oh, I think this is... he's a good guy. I'm going to give him 250 million in capital. Go do something with it.'
And so, and if I'm running the financials pod...
Like you guys ran at Citadel for a while, then what you're doing is they gave you money and you're investing long short in financials.
Correct. Now, let's keep it simple. For every long that you have in your portfolio, you have to have almost dollar for dollar a short.
At these firms, right? And these firms have grown.
They're huge in size and they're highly levered.
Explain that. What do you mean by they are highly levered? People don't understand this world.
Well, and it's amazing. And I'm not saying even I think the financial media doesn't really understand this world all that well. So let's just say make up a number that Citadel has 25 billion in capital that they're running for their investors. That investors have given them $25 billion. When you say it's levered, what does that mean? So in order to lever, you have to make sure that your annualized volatility is statistically below a certain level. Call it 6, 8, 9%. In order to do that, you have to have a very low net on your longs and your shorts are roughly equal.
And then once you figure out that gorgeous science, you can leverage yourselves 5 to 1, which means in other words, Citadel would be running they have 25 billion in capital, but they borrow and they're running 125 billion in positions.
Got it. And so if you and it's all long short and it's roughly equal half half of the 125 billion is long and roughly half the 25 it depends at least on the equity side on the equity side then there's they do you know energy and fixed income and stuff like that but on the equities you know they but they match it so perfectly on a beta dollar you couldn't for every I think they'd sweep it every five minutes so you were perfectly hedged.
Right. And this is on a beta adjusted basis.
Beta, factor neutral basis.
What does that mean? Beta factoring ourselves. I apologize. So beta is it has to be beta adjusted. So the beta of your longs have to equal the beta of your shorts. Correct. They also want you to be factor neutral. So every stock has a personality.
Right. That's the word I would use.
I can't be long value like or like this is the Leupold guy. The whatever his name was.
Yeah. So he was long AI short software.
Right. Right. Ken would not any of these firms would not allow you to have such mismatches, right? They want you to be long some software and short the bad software. And so you're more perfectly balanced with.
You could be 100% long one sector and 100 or sub sector and 100% short another subsector.
Long growth short value. Can't do that.
Can't do that. You're not supposed to long neutral factor neutral at least at least where we work. But I know the other shops are very probably roughly similar.
So their return thresholds for their shorts are very different than ours, right? Meaning.
Meaning if they're long let's let's go into our neck of the woods. Okay, right 100 million of JP Morgan, right? And they're short a 100 million of Bank America and they would do that something like that.
If they made a spread between the two of three to 5%, they're happy and they're done, right? And they have to move on to the next trade.
When we're shorting stocks, we want to make like 150% or whatever. They want a big hit.
So, but because they're the predominant short in the market and their size market share of the overall market and trading is so ubiquitous, it almost makes it impossible. They know like every short that we would come up with, right? They're probably short as well in size. And if it doesn't work for them in 3 weeks, they're covering. So, you have to contend with all these squeezes, let alone that the market just generally goes up.
What we used to do for a living is brutal, extremely more difficult.
There are much more shorts in the market than there were than there used to be.
Explain that. Why are there more?
Because these firms they lever up and just the dollar amount of shorts is so big like there just wasn't amount the the amount of shorting that occurred 20, 30 years ago wasn't as big. It was a small little.
Cuz they're bigger and they're levered.
