If anything goes wrong for OpenAI and Anthropic, both of whom are losing billions of dollars, then the whole thing unwinds.
Losing billions is a euphemism. If only they were just losing billions.
Billions, right? Right. Losing a lot more than that. So, I mean, the question to me is how likely is that if? And at the very least, I would expect the likelihood of that if to be priced in to some extent. But when I see the S&P trading at record highs,
No, the markets don't work that way. The market's going to kind of have to get hit head over the head by a 2x4 because it's been a bull market for so long and everybody just buys every dip.
In other words, it's purely reactive at this moment versus proactive and predicting what might happen.
It's not going to be proactive at all. You know, Michael is trying to anticipate. God bless.
Welcome to Prof Markets. I'm Ed Elson. It is August 6th. Let's check in on yesterday's market vitals. The major indices were mixed after a series of highs. More on that in a second. Brent crude was relatively stable. Treasury yields were flat. And finally, Google shares fell nearly 4% on news that DeepMind's chief scientist is leaving and its CEO Demis Hassabis is stepping aside. Okay, what's happening?
The S&P 500 just hit another record. The fresh intraday high yesterday followed Tuesday's performance in which the index rose nearly 2% to its first record close since June. The Nasdaq also gained nearly 3% that day and the Dow crossed 54,000 for the first time. Across the markets, it seems as though investors have shaken off the AI anxieties that have defined much of the past month. But someone isn't buying it, and that is Michael Burry. In a note on Tuesday, the investor who called the 2008 crash said he's sticking with his bets against Nvidia and Micron and Tesla and Palantir and the semiconductor index. He said, quote, I continue to believe it is possible we are near a major top, adding that we could see quote a 1987 type fall. Now investors are left wondering who's right, the bears or the bulls. Here to discuss, we're speaking with Steve Eisman, the legendary Big Short investor and host of The Real Eisman Playbook. Steve, thank you for joining us on Prof Markets.
You are one of the other guys who called the 2008 crash. One of the other guys in that movie.
Yeah. Well, it'll be on our tombstones. There's no question about it.
Exactly. I mean, what do you make of this market right now? Because I thought we were all worried about AI, worried about the debt, worried about the reliance on a handful of AI labs, but we're sitting at record highs. So, what is the market actually telling us right now?
I mean, I could construct the bear case for you or, you know, we'll talk about it, but you know, right now, number one, the US economy is very strong. You know, all the banks reported mid-month in July and the credit statistics were as benign as they possibly could be. So, there's no credit issues in the US economy overall. It's a strong M&A cycle. The IPO calendar is not bad. And there's no question there's still a K-shaped economy, but you know, if you look at the numbers of Visa and Mastercard, the overall payment volumes are quite robust. Where you do see things like the K-shaped economy would be like in a company like Procter & Gamble who has no revenue growth. You know, that's not what's driving the economy right now. You know, things are fine. There's no one, you know, despite all the hysteria about AI is going to destroy every single job on planet Earth, the employment numbers are still very, very strong. I think that's why the market keeps going higher because things are just okay. Now, I do think that the AI story has gotten a lot more complicated. You know, if you and I were sitting here a year ago, it would all be rah-rah. I mean, there wouldn't even be — you'd be hard-pressed to find anyone who had anything negative to say. You know, maybe someone like Gary Marcus, who has been on my show, he's probably been on your show as well. I love Gary. You know, Gary has a lot to say, and it's all great, but Gary was like the lone — you know, July of last year, Gary Marcus was like the only person on planet Earth who had anything negative to say about AI. You know, you have Ed Zitron as well. What I would say is the issue is, you know, if you compare this to '08.
So, Michael and I both had the same thesis, which was underwriting, mortgage underwriting standards have deteriorated dramatically. And then what was good about the thesis was every single month securitization data came out showing credit quality of hundreds upon billions upon billions of mortgages. And so you could actually see the deterioration every single month. You had a data set that was incredibly robust that came out every single month and said to you, you're right. So you had this reinforcement, you know, if you're going to construct a negative AI story. Well, you don't have a securitization database that's going to help you. So what's the negative story? So let me tell you what I think is potentially the negative story, but it's not here yet.
So, what's made the AI story more complicated is the following. Number one, there's no question that the business is much more capital intensive than anybody possibly could have imagined. So, you know, companies like Microsoft and Google and Amazon, you know, companies who once threw off cash like it was water have negative cash flow.
So, that's a big change. Now, that doesn't mean that these companies are on the verge of anything bad. It just means that the dynamics of their business have really shifted. They're investing massively. Whether they'll get great returns, we don't know yet. But that's one big change. And I think the other major change is that the LLM, agentic AI business, which is really Anthropic and OpenAI and really just a few other people, doesn't seem to have any moats around it because, you know, people switch from model to model, and now you have the open-source models from China which are much cheaper and people seem to be switching to, and so maybe there'll be a price war. Maybe not. Where I think the chink in the armor potentially is, I read this report that basically said something like 70% of Amazon's and Google's and Microsoft's AI capex businesses are from OpenAI and Anthropic.
So now here, this is what I'm looking for. If a massive price war broke out because of the Chinese models and OpenAI and Anthropic got in big trouble, that would unwind a lot of the AI trade because then OpenAI and Anthropic would not be able to spend as much, which would mean that fewer chips would be bought. I mean, you could figure out the rest. But until that happens, you know, these companies are keeping spending money like it's water. So, you know, Nvidia is going to report on, I think, August 26. I mean, it has to have a good quarter. How could it not have a good quarter when Amazon is spending $225 billion this year on capex? So, until we see real weakness out of OpenAI and Anthropic, I'm not on Burry's side.
Well, this is very interesting because, as you mentioned, we're seeing more numbers on the reliance on OpenAI and Anthropic at least among the big tech companies. Just today, Bloomberg reporting in their own analysis that 70% of Microsoft's AI revenue is coming from OpenAI, a company which, of course, Microsoft had invested in. So I think it's a fair thing to say that Microsoft is investing money in OpenAI and the money is coming back to them in the form of their AI revenue, which literally is most of their entire AI business.
Yes, you brought up an important point. You know, if we see a price war come into play, if anything goes wrong for OpenAI and Anthropic, both of whom are losing billions of dollars, then the whole thing unwinds. Losing billions is a euphemism. If only they were just losing billions.
Billions, right? Right. Losing a lot more than that. So, I mean, the question to me is how likely is that if? To me, it's quite likely at this point. To me, it seems as though the signs are going in that direction. And at the very least, I would expect the likelihood of that if to be priced in to some extent. But when I see the S&P trading,
Markets don't work that way. I mean, you know, the news is still — the economy is still good. If there is a price war, the market's going to kind of have to get hit head over the head by a 2x4 because it's been a bull market for so long and everybody just buys every dip.
In other words, it's purely reactive at this moment versus proactive and predicting what might happen.
It's not going to be proactive at all. You know, Michael is trying to anticipate. God bless. He's got more guts at this point than me because I just think it's, for me, it's premature. I'm waiting. If it does happen, and I mean, you think it's very likely and I wouldn't necessarily disagree, but it could be a year from now. So that's the thing. I mean, if it's two months from now, that's one thing. If it's a year from now, then all these companies are going to be spending money like they've been spending money and it's the same story. So assuming that Anthropic and OpenAI do get into trouble, the operative question, the real question is when? How long is it going to take? And I don't think anybody — I certainly don't have an answer to that question and I don't think anybody else has an answer to that question at this point.
Right. To what extent do you think that other investors on Wall Street — to what extent do you think the market is asking the question? Agree with you that no one has an answer. I don't have an answer. You don't have an answer. But you and I seem to be asking that question at the very least, which is instilling a little bit of a sense of hesitancy or at least anxiety around the whole ecosystem. Do you think that people are asking the question, or is it that the numbers are just too exciting? No one cares.
You know, I wish I could answer that question. It'd be nice if we could get all the investors in a room and do a little group therapy and then we could have an answer.
