Oil prices approached $110. This has sparked more inflation fears and the market is feeling dicey. The crypto world had a bad week and it is unclear where the industry goes from here. FICO wields a monopoly in mortgage credit scoring and its monopoly is going to break. Is AI really going to destroy us all or is something else going on? Dario Amodei, the CEO of Anthropic, followed up with his own doomsday thoughts. The entire future of Anthropic and OpenAI depends on there not being any slowdown. AI won't cause extinction, but these two CEOs are creating massive damage. It's a perfect storm. So, what's really going on? Here's my theory.
Hi, this is Steve Eisman and welcome to the weekly wrap. This is for the week ending Friday, September 18th, but recorded Thursday night, September 17th. This last Wednesday, September 16, on our premium Substack subscription service, we posted part one of a two-part master class on how to analyze banks. I'm providing you with all the tools to understand how banks work and how to think about large cap, midcap, and small cap banks and the investment banks as well. Originally, we had planned for part two to drop in two weeks. However, we changed our minds and part two will now drop next Wednesday, September 23rd. On this week's wrap, we will discuss one, the war in Iran, the rising price of oil, the Fed and interest rates. Two, has Scott Bessent lost all credibility. Three, more news on FICO, the credit bureaus, and now the mortgage insurers. Four, the crypto world had a bad week. And five, is AI really going to destroy us all or is something else going on?
The war in Iran continues with no sign of any letup. Both sides are bombing each other and doing damage. As a result, oil prices approached $110, but then pulled back. This has sparked more inflation fears with the result that the 10-year yield climbed for a time above 5%. Now, for quite some time, I have been saying that the market will not be able to stomach some level of long-term rates. Originally, I thought that level was 4.5%. And that was wrong. But here we are at 5% and the market is feeling dicey. Also, because of these renewed inflation fears, investors have been worried that the Fed will raise rates at its next meeting. And in fact, this week, the Fed did raise rates by 25 basis points to a range of 3.75 to 4% to contain inflation. Fed officials also penciled in an additional hike later this year. This rate increase defies President Trump, who has been calling for the Fed to lower rates. On Wednesday, the market was not pleased by the Fed's actions. Not so much because of the hike, but because of the intimation that there would be more. However, it's all about long-term rates. And on Thursday, long-term rates declined below 5% because the market, at least for the moment, is assuming that higher short-term rates will cause the economy to slow. As a result, the market rallied back on Thursday. For now, 5% on the 10-year does seem to be the demarcation line.
A few more points on interest rates. The rise in long-term yields, I believe, is not just due to the war or oil prices or even inflation fears. These have all played a role. But there's something else. This year, approximately $500 billion in AI-related debt has been raised. That's a lot of long-term debt and it is creating a crowding out effect. In other words, some investors would rather buy AI long-term debt than long-term US Treasuries. It's a perfect storm for Treasury Secretary Scott Bessent, and I don't envy him his position. Clearly, he wants to drive long-term rates lower. With US debt at $40 trillion, higher rates feed the deficit even more. That is why he announced a program to buy $4 billion, later increased to $6 billion, in long-term Treasuries. Unfortunately, it worked only for one day and rates have simply marched higher since then. He needs a much bigger bazooka or an alternative buyer. Now, I don't think that Bessent is going to go off and hide in a cave. He will come back with some new plan. What that plan will be, I am not yet sure.
Moving on. I have been short FICO for a while. My thesis was that the company got greedy and raised prices 1,600%. I'll say that again, 1,600% over the past 5 years. FICO wields a monopoly in mortgage credit scoring and they have abused that monopoly. One of the keys to the short is that the head of the FHFA, the regulator of Fannie Mae and Freddie Mac, agrees with me and has been criticizing FICO relentlessly. Last year, FHFA created a mortgage pilot program whereby 21 lenders would use the alternative to FICO called VantageScore. A few weeks ago, FHFA went on social media and blasted FICO and stated that the pilot program was now good for all lenders. All lenders. He also criticized the credit bureaus for price gouging as well. His criticisms have been very effective from a stock perspective. Year-to-date, FICO is down 43% and Equifax and TransUnion are down 25% and 15% respectively. The reason why Equifax is down more than TransUnion is that Equifax has a bigger percentage of its profits from mortgage scoring than does TransUnion. I remain short FICO and think that its monopoly in mortgage scoring is going to break. The most recent data indicates that VantageScore had a 10% market share of new mortgage loans securitized and I expect that percentage will go much higher. Bill Pulte is not done. He is now going after the mortgage insurance sector. Companies like MGIC, Essent, and Radian. What's mortgage insurance? You, the borrower, pay for the mortgage insurance, but it does not benefit you. Mortgage insurance is designed to protect the lender. If your home goes to foreclosure and sells for less than you owe, the insurance pays the lender the difference. Pulte is arguing that the industry, the mortgage insurance industry, should be much more pro-consumer and could do a much better job of informing consumers when mortgage insurance is no longer necessary. We shall see how this evolves.
The crypto world has been working on a bill in Congress for quite some time, years in fact. The crypto industry has invested hundreds of millions in this bill called the Clarity Act. This bill is designed to create a clear rulebook for digital assets and cryptocurrencies in the United States. And a few weeks ago, it looked like the Clarity Act was going to pass. And that explains, I believe, the rally in cryptocurrencies and in the stock price of Circle, the stablecoin company. However, this week, senators blocked the bill with Democrats citing concerns over ethics provisions and with a few Republicans joining in opposition as well. This is a major blow for the crypto industry and it is unclear where the industry goes from here.
Moving on, normally when I discuss AI, I analyze financials, growth, and balance sheets, and I discuss, for example, how much money Anthropic and OpenAI bleed. But the news of late has little to do with that, at least on the surface. In reality, it has a lot to do with it. Let me elaborate. It all started with Jacob Coxon, a 27-year-old artificial intelligence researcher. He resigned from Anthropic and put out a social media post claiming that labs, AI labs, are racing toward self-improving superintelligence without proper controls. And he claimed that the people building AI secretly believe it could kill everyone by the end of the decade. In other words, Terminator. This post received millions of views. The media went nuts. And to pour fuel on the fire, Dario Amodei, the CEO of Anthropic, followed up with his own doomsday thoughts.
