Speaker 1: Pushkin. I'm Lidia Dean caught, I'm Michael Lewis.
Speaker 2: And surprise, we're here for an extra episode of The
Speaker 2: Big Short companion series one.
Speaker 1: We weren't expecting that's.
Speaker 2: Right, Yeah, because we got the hedge fund manager Michael
Speaker 2: Berry to be on the podcast.
Speaker 1: We didn't really get him to be on the podcast.
Speaker 1: It's funny. What happened.
Speaker 2: Well, first we should say how Michael Berry is.
Speaker 3: Michael Berry is one of the three main characters in
Speaker 3: both the book and the movie of The Big Short,
Speaker 3: and he was a really important character to me.
Speaker 2: And in the movie he's played by Christian.
Speaker 1: Bale and in the movie he's played by Christian Bale.
Speaker 2: He doesn't do interviews, and we've asked him to be
Speaker 2: on the podcast earlier and he said no. So yeah,
Speaker 2: So what happened.
Speaker 3: First he said, you know, I'd like to help, and
Speaker 3: then he said I don't, I wouldn't like to help.
Speaker 3: And then what happened was his trading activity got released
Speaker 3: to the public, which it does. He has to file
Speaker 3: a thirteen F four with the SEC saying what his
Speaker 3: positions are. And as though it's not a perfect picture
Speaker 3: of what he's doing, it did say that he had
Speaker 3: put on big short positions against U Palanteer and Nvidia,
Speaker 3: so he was betting against the AI bubble.
Speaker 1: All he did was file what his positions were.
Speaker 3: He didn't go on he doesn't do media, he doesn't
Speaker 3: do interviews, and it exploded like it was on Twitter
Speaker 3: on CNBC, people were both attacking him and praising him,
Speaker 3: and his reasoning for not coming on the podcast was
Speaker 3: he wanted to lay low and he was trending on
Speaker 3: Twitter for forty eight hours, so it was like, what's the point? Yeah,
Speaker 3: he can't lay low. Yeah, And as he tells us,
Speaker 3: he says like this only happens to me. But I
Speaker 3: was really glad to have him on because I felt
Speaker 3: like we were missing somebody.
Speaker 2: Yeah, no, same, and also because people were asking. I
Speaker 2: was getting messages and being like, are you guys gonna
Speaker 2: have Michael Berry?
Speaker 3: There's something also nice about subjects who does just who
Speaker 3: aren't promiscuous, who don't just talk to.
Speaker 2: Everybody, because that makes you feel special, or it makes you.
Speaker 3: Feel special, makes it makes your audience feel special, and
Speaker 3: the reader feels special like nobody else has this story.
Speaker 2: And one thing I wanted you to explain it is
Speaker 2: he was one of the first people, one of the
Speaker 2: early people right to bet on the subprime mortgage crisis.
Speaker 2: And when he was trying to do it, there weren't
Speaker 2: any financial instruments to do that right.
Speaker 3: You had to It was how to do it in
Speaker 3: a way where if the madness just kept going and going,
Speaker 3: you weren't going to be bankrupt quickly. So you could
Speaker 3: have done things like bet against mortgage companies in the
Speaker 3: stock market. You could have shortened their stock, but you
Speaker 3: know that's a it's a beth. It's hard to hold for.
Speaker 1: A long time, and so you have to your timing
Speaker 1: has to be exquisite.
Speaker 3: What he did was basically invent, or have Wall Street
Speaker 3: firms invent for him, the credit default swap on subprime
Speaker 3: mortgage bonds, which is essentially an insurance policy on bonds
Speaker 3: backed by some prime loans. So if the loans go
Speaker 3: bad and the bonds go bad, you get paid off
Speaker 3: on this insurance policy. Think of it like I get
Speaker 3: to buy insurance on your house and fire insurance and
Speaker 3: if it burns down, I get paid. So there's something
Speaker 3: a little goofy about it. I mean, it used to
Speaker 3: be very oddly. It used to be that I could
Speaker 3: go buy life insurance on you, and if you died,
Speaker 3: I got paid a bunch of money.
Speaker 1: This obviously creates a very bad incentive murder. Yes, yes, exactly.
Speaker 3: But you can do this in the financial markets. You
Speaker 3: can buy insurance policies on other people's bonds and if
Speaker 3: they the bonds go bad, you get paid. You couldn't
Speaker 3: when Michael Barry started to think about this situation, you
Speaker 3: couldn't buy an insurance policy on a subprime mortgage bond.
Speaker 3: So he had to go help Wall Street create it
Speaker 3: for him, and then all the other characters in the
Speaker 3: story are then using that thing he creates to make
Speaker 3: the same bed.
Speaker 2: Is there anything else you wanted to say related to
Speaker 2: Michael Berry?
Speaker 3: I would say that the one other thing that's interesting
Speaker 3: about him is that he so let me into his life.
Speaker 1: He just doesn't really do that usually.
Speaker 3: It created an intimacy, Like I just really got to
Speaker 3: know him and really enjoyed like just hearing what he
Speaker 3: had to say, Like I just learned stuff from him.
Speaker 3: Even when he doesn't make money on what everybody he's making,
Speaker 3: it's really interesting to hear what he's thinking and just
Speaker 3: like have that as part of the furniture.
Speaker 1: In your mind.
Speaker 2: Michael Lewis's conversation with Michael Berry is coming up. It
Speaker 2: really is a very fun listen.
Speaker 1: I remember you handing me your emails, and like.
Speaker 3: You had, like thousands of you had communicated with the world,
Speaker 3: your whole trading life for years through email, and so
Speaker 3: it was a real time account of your thoughts of
Speaker 3: Wall Street's response to your thoughts of how the market moved.
Speaker 3: It was unbelievably valuable. It was so different from like
Speaker 3: everybody reminiscing. Do you remember that?
Speaker 4: I remember that, and those emails I think were the
Speaker 4: main reason I didn't get sued by my investors, Because
Speaker 4: if I had been a skilled orator or somebody who
Speaker 4: loved giving conference calls, I would have done conference calls
Speaker 4: with my investors and then maybe they wouldn't have been recorded.
Speaker 4: And but here I had emails with everybody on everything,
Speaker 4: and so it was very clear where we stood with everybody.
Speaker 3: You were like for me, you know, people came to
Speaker 3: the right answer in different ways, and you came to
Speaker 3: the right answer in such a satisfying way, because not
Speaker 3: only did you see that the irresponsibilities in the subprime
Speaker 3: mortgage market, but you actually had a theory about the
Speaker 3: timing of it when it was all going to come unraveled.
Speaker 3: And the problem with these positions like with oh, there's
Speaker 3: a lot of insanity and X or Y is that, yeah,
Speaker 3: you can be right, but you can be wrong for long.
Speaker 1: Enough that the market just takes you out of your positions.
Speaker 4: I think that's right. This is why this is the
Speaker 4: Big Short. It's the once in the century opportunity to
Speaker 4: actually say, I know when this is going to happen, right,
Speaker 4: you know, I've compared this to the nineteen nineties bubble,
Speaker 4: and the reality is there was no telling.
Speaker 1: When that would end.
Speaker 2: Right.
Speaker 4: In most situations like this, there's no good way to
Speaker 4: time it, and shorting it is just a high risk endeavor.
Speaker 3: Well, we're going to get to today, but I wanted
Speaker 3: to just revisit the Big Short just a little bit.
Speaker 3: And I'm curious what effect it had on your life.
Speaker 3: I mean, there was the trade, there was the book,
Speaker 3: and then there was the movie. You did let Christian
Speaker 3: Bale come and hang with you for a day, but
Speaker 3: you were remarkably chill about the whole thing. And I
Speaker 3: don't think I've ever felt like I've really recapped with you, like,
Speaker 3: what effect this thing had on you?
Speaker 1: If any I think I didn't know? I you're right.
Speaker 4: I mean, I'm on the autism spectrum. So I'm pretty
Speaker 4: good in my own head and I'm pretty good at
Speaker 4: blocking out stuff. And so even this movie, I saw
Speaker 4: it at the premiere. I haven't watched it since the book.
Speaker 4: I read it when it came out, and I haven't
Speaker 4: read it since. That's how I felt about it. We
Speaker 4: just I just move on and so kind of took
Speaker 4: it as it came. I went to the premiere because
Speaker 4: my whole my family wanted to go to the premiere.
Speaker 4: And I, you know, as you know, I don't do
Speaker 4: interviews because I don't feel I'm good at this, and
Speaker 4: so I you know, I haven't done one, I think
Speaker 4: since like, I haven't talked to anybody since I think
Speaker 4: the sixty minutes interview about the Big Short about this
Speaker 4: in an interview format. And now it's the tenth anniversary
Speaker 4: of the film, fifteenth anniversary of the book, and yeah,
Speaker 4: I can't believe it's been that long. But you know,
Speaker 4: I just kind of go on and do my thing
Speaker 4: and it doesn't really affect me too much.
Speaker 3: You didn't feel it puts you in the position of
Speaker 3: oracle that all of a sudden, people are expecting you
Speaker 3: to predict the next thing.
Speaker 4: It was, as we mentioned, it is a very unique circumstance.
Speaker 4: It was a once in a century type trade. People
Speaker 4: say one, you know, once in a century, flood, once
Speaker 4: in a century, this one, and it's not really true,
Speaker 4: it happens every ten years. But this was that opportunity
Speaker 4: was very unique. And I've basically told everybody I can
Speaker 4: it ever since that that that's not going to happen
Speaker 4: again anytime soon. What made it unique, Well, I was
Speaker 4: basically permitted to buy insurance on these bonds that were
Speaker 4: incredibly I liquid, and I was permitted to basically buy
Speaker 4: insurance and then trade and profit off them without actually
Speaker 4: having the insured item. And it this was not expensive.
Speaker 4: Nobody thought this could happen. I'd put on a lot
Speaker 4: of my position by late two thousand and five, and
Speaker 4: I got a call from Go and Sack saying, what
Speaker 4: are you doing. You're the only person who noticed. You're
Speaker 4: not a mortgage fund, you're not hedging, You're doing something different.
Speaker 4: It's not something that people were generally aware of. And
Speaker 4: I was and so I could kind of walk in
Speaker 4: and basically.
Speaker 1: Pull the caper off.
Speaker 3: There are three things I want to talk about at
Speaker 3: the back end of the big of your story in
Speaker 3: the big short, and then I want to move on
Speaker 3: to the present. But the first is, you have this
Speaker 3: terrific win, your investors make a lot of money, and
Speaker 3: you end up closing your fund.
Speaker 1: You remind me why you closed your fund.
Speaker 4: My investors were generally mad at me, and they were
Speaker 4: generally mad at me even when things went well, and
Speaker 4: I didn't feel at the time I had goodwill with anybody.
Speaker 1: I didn't.
Speaker 4: There was only one investor I shouldn't say his name,
Speaker 4: but love him. He is the only guy that invested
Speaker 4: with me that last year and a half or so.
Speaker 4: Nobody came to me, nobody, nobody wanted to invest with huh.
Speaker 4: And even when we made the money, it was who
Speaker 4: We don't want to go through that again.
Speaker 3: Did anybody ever call after the book, after the movie,
Speaker 3: after they got their money back and a lot more?
Speaker 1: Did anybody ever call you to apologize? No? No, no, no, Kit.
Speaker 1: It's kind of an amazing I did. I didn't expect it.
Speaker 3: I know you didn't expect it, But this sort of
Speaker 3: like at some point when there was cooling off and
Speaker 3: they looked at they looked at their winnings. I would
Speaker 3: have thought someone would have called and said, you know, sorry,
Speaker 3: I got so angry at you for doing this trade.
Speaker 4: No nobody did, okay, and I didn't expect it. It's
Speaker 4: Wall Street. When did you reopen twenty thirteen? And since then?
Speaker 1: How have you done?
Speaker 2: Done? All?
Speaker 1: Right?
Speaker 4: I think it's all been the same since. So I
Speaker 4: remember when I opened again. I didn't want investors I
Speaker 4: didn't know. I didn't want to be above the SEC
Speaker 4: threshold for registering as an investment advisor. I wanted to
Speaker 4: keep it small. So I just went to people I
Speaker 4: knew and some of my own money, and we created
Speaker 4: a fund. It was probably a situation where if I
Speaker 4: wanted to, I could have raised billions, but that wasn't
Speaker 4: my intention.
Speaker 1: You didn't want to relive the experience you'd already had.
Speaker 4: I didn't want to deal with Wall Street. I didn't
Speaker 4: want to deal with those kinds of investors. I knew
Speaker 4: who my good investors were from the prior time, and
Speaker 4: those were the only people I wanted to deal right,
Speaker 4: And so it just was a small operation. And I
Speaker 4: kept trying to keep it small, and I didn't really
Speaker 4: market it. I didn't market it at all other than
Speaker 4: just that first group. And what happens with that is
Speaker 4: that some of those people that were with me in
Speaker 4: two thousand, individual doctors or whatever, they get old, they
Speaker 4: actually pass away. Ultimately, it just became a something. There
Speaker 4: was a natural attrition in the pool, and so it
Speaker 4: kept us small.
Speaker 3: I have not paid that close attention. All I see
Speaker 3: is every now and then there's some explosion on Twitter
Speaker 3: about you.
Speaker 1: And it's wrong.
Speaker 4: They're all wrong.
Speaker 3: We're going to take a quick break, and when we return,
Speaker 3: I asked Michael Burry about why he placed bets recently
Speaker 3: against two large tech stocks, Talenteer and Nvidia. So let's
Speaker 3: talk about this. Explain to me you have this very
Speaker 3: small operation with just a handful of investors. What are
Speaker 3: the filing requirements? What do you have to hand in
Speaker 3: so that people can see what you're doing.
Speaker 4: They get to see US securities traded in the US
Speaker 4: that are stocks. They get to see stocks, and they
Speaker 4: get an incredibly bastardized version of options.
Speaker 1: Okay, how is it bastardized?
Speaker 4: Because say I buy fifty thousand put options on Pallenteer,
Speaker 4: and that's fifty thousand times one hundred, and so I'm
Speaker 4: short strike fifty way out of the money. It's like
Speaker 4: a it's two hundred dollar stock. Now I struck, but
Speaker 4: I think it's worth thirty or less, so I buy
Speaker 4: them way out of the money. Two years out, you're
Speaker 4: betting the pontaive is going to drop by a lot
Speaker 4: a lot in two years, but over a long period
Speaker 4: of time.
Speaker 1: Right and the press.
Speaker 4: I'm working out and I see on CNBC I have
Speaker 4: a billion dollars short position against Palenteer.
Speaker 1: It's ten million dollars. I saw this too. I couldn't
Speaker 1: believe it.
Speaker 4: So what they do is they take the underlying shares
Speaker 4: under those options contracts and they they multiply it out
Speaker 4: by the current stock price. We're so I have a
Speaker 4: actually it was less than two dollars option, and it
Speaker 4: was being prices if I owned the two hundreds, so
Speaker 4: it was two orders of magnitude off. And that happens
Speaker 4: also with index So so I would take hedges on
Speaker 4: my portfolio and people would say, oh my gosh, he's
Speaker 4: shorting a billion and a half of the s and
Speaker 4: P five hundred or he's shorting, and there'd be these
Speaker 4: explosions and it's just wrong. It's notional. But's interesting is
Speaker 4: that they don't do this for anybody else.
Speaker 3: So maybe you should give more interviews. I asked you,
Speaker 3: what effect the big short hat on your life? This
Speaker 3: is an effect the big short hat on your life.
Speaker 4: And compliance and my compliance. Since the financial crisis, everything
Speaker 4: changed and compliance. We have a compliance officer inside the firm,
Speaker 4: and he just keeps saying, don't talk to anybody, don't
Speaker 4: talk to anybody, don't respond to him, don't respond to anybody.
Speaker 4: And so I think since the movie came out and
Speaker 4: this really started happening, there was a frustration building in
Speaker 4: me to want to say something yeah, and I couldn't.
Speaker 4: And so when COVID came about, I had some strong
Speaker 4: feelings on that.
Speaker 1: So I went on Twitter.
Speaker 4: But I was only allowed to talk about the that
Speaker 4: weren't stocks, and so that's fine, I mean, but I
Speaker 4: had to talk about social things and I got in
Speaker 4: trouble with that, because everybody gets in trouble with that.
Speaker 4: So I got off Twitter, but you got back on.
Speaker 4: I got back on recently because we deregistered. I don't
Speaker 4: run that pool of money anymore, I'm just going to
Speaker 4: run my own.
Speaker 3: Money in so it's you're just your money now. So mostly, yeah,
Speaker 3: why did you decide to do that? I think that
Speaker 3: we're in a bad situation in the stock market. I
Speaker 3: think the stock market could be in for a number
Speaker 3: of bad years, and I think it could be a
Speaker 3: longer bear market, more akin to two thousand. But the
Speaker 3: structure of industry, the industry has changed. Back then, it
Speaker 3: was hedge funds, mutual funds, separate accounts, businesses. But there
Speaker 3: were people running pools of money and thinking about stocks
Speaker 3: and investing in stocks, and so I felt I didn't
Speaker 3: know I was on the autom the spectrum. I felt
Speaker 3: though I had an edge there I could. I'm kind
Speaker 3: of sit outside of all these human psyches and like
Speaker 3: and figure things out, and it worked well. Today it's
Speaker 3: all passive money, and.
Speaker 1: It's a lot.
Speaker 4: It's over fifty percent passive money.
Speaker 1: There's index funds, less.
Speaker 4: Than ten percent of money some say is actively managed
Speaker 4: by managers who actually thinking about the stocks and in
Speaker 4: any kind of way that's long term. And so the
Speaker 4: problem is in the United States. I think when the
Speaker 4: market goes down, it's not like in two thousand where
Speaker 4: there was this other bunch of stocks that were being
Speaker 4: ignored and they'll come up even if the Nasdaq crashes.
Speaker 4: Now I think the whole thing's just going to come down,
Speaker 4: and it would be very hard to be in a
Speaker 4: long stocks in the United States and protect yourself. And
Speaker 4: so that's why I decided to get out of it.
Speaker 1: Because the fund had to be long in some way.
Speaker 4: Well, I didn't want to go through that with investors again,
Speaker 4: I see, and that makes sense. Of course, I closed
Speaker 4: the fund and I got I put on all the
Speaker 4: positions for myself right away the same.
Speaker 3: So you're still in the position. So I want to
Speaker 3: talk about this position. I found it again. I was
Speaker 3: watching it from a distance. But tell me what I missed.
Speaker 3: Someone c NBC, whoever gets a hold of your thirteen
Speaker 3: F on this thirteen F it says Palatiner positions.
Speaker 1: Is especially big.
Speaker 3: It looks big because it looks big because they're the
Speaker 3: put ups. Just they're way way out of the money.
Speaker 3: They were struck at fifty. So, okay, you had to
Speaker 3: release this information about your fund.
Speaker 1: You weren't advertising it to the world in any unusual way.
Speaker 3: You weren't going out and talking trash about Palenteer. You
Speaker 3: just this position gets released, right, and then the next
Speaker 3: thing I do, I see Alex Karp, who runs Palenteer,
Speaker 3: like going after you for owning puts on his stock.
Speaker 1: And I don't think. I mean during the.
Speaker 3: Financial crisis, you will remember that the head of Morgan
Speaker 3: Stanley at the time, John Max, he blamed short sellars
Speaker 3: for what was happening to him and they banned short
Speaker 3: selling of the stocks very I think, briefly.
Speaker 1: Right, but it's always a really.
Speaker 3: Bad sign when people start going after the short sellers.
Speaker 1: It's in the United States, in the United States, and.
Speaker 3: I was thinking, oh my god, I guess wouldn't want
Speaker 3: to be in your shoes like you didn't you just
Speaker 3: made a trade.
Speaker 1: But he's provoked me.
Speaker 3: I want to understand your trade. It's about that pollunteer
Speaker 3: goes way way.
Speaker 4: Down, way way down in two years.
Speaker 3: What do you understand about their business as the market
Speaker 3: doesn't huh.
Speaker 4: So my belief is that this is a company that
Speaker 4: had a set of applications that were very expensive to
Speaker 4: install because you had to hire their consultants, like after
Speaker 4: you bought the software just to install it, and learning
Speaker 4: right and Pounteer had this reputation in government government contracts
Speaker 4: is a nasty business, and I think they figured out
Speaker 4: how to do it and get some contracts.
Speaker 1: How much of their revenues government contracts.
Speaker 4: It's fallen off a lot. It was it was almost
Speaker 4: it was a majority, and now it's like more even
Speaker 4: because it during this the AI build out, they've basically
Speaker 4: marketed themselves to corporations. Well, corporations have come to them.
Speaker 4: C suites of every public corporation have board members CEOs
Speaker 4: who feel under the gun to AI something. And so
Speaker 4: there's this scramble and now they're not the only one.
Speaker 4: They keep saying they're the only ones. But IBM has
Speaker 4: does basically the same thing. Their business is actually bigger
Speaker 4: than Pallenteers, and they are not really All government government
Speaker 4: contracts are not generally that profitable, and so you know,
Speaker 4: IBM's got a really good business inside it, but it
Speaker 4: doesn't get the credit for a Pallenteer valuation on that business,
Speaker 4: even though it is growing fast too. It's growing bout
Speaker 4: as fast as Pollenteer or was. And so let me
Speaker 4: put it this way, there are I think five billionaires
Speaker 4: that came out to Pollunteer because they own volunteer stock
Speaker 4: and the revenue was four billion or let basically four billion,
Speaker 4: so the billionaires to revenue ratio is greater than one.
Speaker 1: And I've never seen that book. Is that what attracted
Speaker 1: your attention in the first place?
Speaker 4: Well, it that was a that's a cute little thing.
Speaker 4: Was Wow, there's how do they get five billionaires out
Speaker 4: of that group? And so out of a company that
Speaker 4: has four billion of revenue and actually, uh stock based
Speaker 4: compensation basically to weighs almost all their income. They have
Speaker 4: to pay their people who are doing all this consulting
Speaker 4: so much in stock that they just use stock based compensation.
Speaker 4: And then what they do is they buy that back.
Speaker 4: And the company would like you to just give them
Speaker 4: credit for what Wall Street generally does is they take
Speaker 4: the earnings per share and then they add back to
Speaker 4: stock based compensation because it's non cash, and they add
Speaker 4: it back to the earnings. And I think actually the
Speaker 4: way Gap accounts for stock based compensation is skews low
Speaker 4: versus what it actually costs the real cost. You can
Speaker 4: look at the how much are companies buying back to
Speaker 4: offset that dilution, and you can just take that amount
Speaker 4: and deduct it from cash flow. And so if you
Speaker 4: do that with Palenteer, historically they don't make anything. So
Speaker 4: I basically looked at the company and said, you're worth
Speaker 4: this much and you really don't make anything of its
Speaker 4: tiny a little bit of revenue, and you have all
Speaker 4: these billionaires.
Speaker 3: You had an argument back in two thousand and eight
Speaker 3: for when the subprime mortgage bond market was going to
Speaker 3: start to unravel, when people are going to start a default.
Speaker 3: Do you have a timing argument for now with Palenteer?
Speaker 4: Well, I think this is the AI, the AI consulting thing.
Speaker 4: So Pallenteer and Nvidia are the two luckiest companies on
Speaker 4: the planet. Neither produced a product for AI. No I know,
Speaker 4: but they're the two poster children for AI.
Speaker 3: Yes, in Video was a good computer graphics chip company.
Speaker 4: In Video was a computer graphics chip. I actually knew
Speaker 4: the CFO. We talked in twenty fifteen or sixteen. I
Speaker 4: went long the stock and I and I said, hey,
Speaker 4: you're doing a great job. I love how you're buying
Speaker 4: back stock. Her kids was on my kids basketball team.
Speaker 4: I think I bought the stock like a year or
Speaker 4: two later. The stock was up to like it went
Speaker 4: from twenty to ninety at the time, which is like
Speaker 4: forty cents now after the splits in video was lucky.
Speaker 4: They got lucky once with the crypto mining because crypto
Speaker 4: mining needed GPUs were the They weren't customed for cryptal mind.
Speaker 4: They were just the thing that was there that could
Speaker 4: be used. And then AI came along, and it's the
Speaker 4: same deal about a year and a half ago. A
Speaker 4: year and a half to two years ago, Pound Chair
Speaker 4: was not an AI company. Basically, when chat GPD came out,
Speaker 4: they basically put an AI cover on their applications that
Speaker 4: were they were selling and then all the consulting.
Speaker 1: On and they call it AI.
Speaker 4: But that's what every company is doing now.
Speaker 1: But is there a timing argument for AI? Then?
Speaker 4: Yeah, So this gets to what does this bubble look like?
Speaker 4: This bubble looks an awful lot like the dot com bubble,
Speaker 4: which is not really a dot com bubble. It was
Speaker 4: a data transmission bubble. It was a huge build out
Speaker 4: of fiber, and a huge fiber needed routers, and routers
Speaker 4: needed fiber and it just blew up. So the market
Speaker 4: peak was in March tenth of two thousand. Cisco grew
Speaker 4: fifty five percent that year revenues in two thousand and
Speaker 4: it grew seventeen percent in two thousand and one because
Speaker 4: the investment continued. It actually peaked for about a year
Speaker 4: after the top in the market. And so what you
Speaker 4: can do is you can look at net investment, which
Speaker 4: is capital expenditures less appreciation over time, and you can
Speaker 4: put it against GDP to kind of a nominal GDP
Speaker 4: to compare it across eras, and you get these nice
Speaker 4: mounds of investment manias. And what you see in every
Speaker 4: prior one was the relevant stock market peak was before
Speaker 4: you were even halfway done with the capital expenditure. In
Speaker 4: the majority cases, the capital expenditure hadn't even peaked yet.
Speaker 4: And so right now we're ramping up for capital expenditure.
Speaker 4: And what's happened is we've gotten into this part of
Speaker 4: the phase where if you announce a dollar of cap
Speaker 4: X on AI, your market capital go up three dollars
Speaker 4: for every dollar you have. Oracle we saw that with Oracle.
Speaker 4: Giant Company was up forty like incredible. Larry Olson was
Speaker 4: briefly the richest man because they announced it's massive multi
Speaker 4: hundred billions of dollars of basically spending that they would
Speaker 4: have to well, they announced bookings, but they would have
Speaker 4: to spend. They're still building it out. Where are we then,
Speaker 4: I can't say, because it hasn't happened fully yet. We
Speaker 4: are at levels of prior peaks. We're at the level
Speaker 4: the shale revolution relative to GP. We're at the level
Speaker 4: near the level the dot com where when the dot
Speaker 4: com stock the NASDAC peaked.
Speaker 1: So you felt two year puts were enough.
Speaker 4: I thought two years would be enough. Yes, I think
Speaker 4: two years would be enough. I think you know, if
Speaker 4: you're going to buy something now by healthcare stocks, they're
Speaker 4: really out of favor. If your own something that has
Speaker 4: been gone up a lot, you've done really really well
Speaker 4: in it, it's shooting straight up, and you know it's
Speaker 4: I think it's kind of overvalued, you should I think
Speaker 4: that's a something you should sell.
Speaker 3: I want to ask you one weird question more question
Speaker 3: about the stock market, and that is you own Berkshire
Speaker 3: Hathaway and berksh Hathaway just.
Speaker 1: Announced that we just was revealed that it bought a
Speaker 1: big chunk of Google stock.
Speaker 3: Did that disappoint you or do you see how they're thinking,
Speaker 3: we don't know that that is buffet that bought it
Speaker 3: one two. Google is the value investor's favorite in that group.
Speaker 3: It's the one that everybody said, well, it's cheaper than
Speaker 3: all the others, it's got its relative value, and it
Speaker 3: is Google. But I know that since I got Chat
Speaker 3: GPT in claude, I don't use Google right, and Google Search.
Speaker 3: The magic thing about Google Search was how little it
Speaker 3: cost because most requests were not monetizable. So for the
Speaker 3: eighty five percent of searches they get that are not,
Speaker 3: nobody's gonna buy it even looking to buy anything, or
Speaker 3: think it's not product related.
Speaker 1: It's it's history.
Speaker 4: You know what did Columbus really do?
Speaker 1: You know?
Speaker 4: It's not monetizable, and so they better not lose a
Speaker 4: lot of money on that AI changes.
Speaker 1: That AI is expensive.
Speaker 4: I run queries regularly that I know costs tens of
Speaker 4: dollars just for my inquiry one inquiry. Google had had
Speaker 4: those searches down to infinitismal fractions of a cent. So
Speaker 4: that business is the golden goose and it's really basically
Speaker 4: all their cash flow. So the other thing about llms
Speaker 4: is that look back to the dot com boom. That
Speaker 4: was an amazing telecommunication revolution. If you were alive in
Speaker 4: the eighties and then you're alive in the two thousand,
Speaker 4: it's nothing the same. It changed everybody's life in a
Speaker 4: dramatic way. And still AOL Justice connected its last dial
Speaker 4: up just like a year ago of this earlier this year.
Speaker 4: I mean, the penetration was very slow in the United States.
Speaker 4: It was pretty lightning fast in places like in Singapore,
Speaker 4: sold these one city countries type thing or urban areas.
Speaker 1: But it was it was.
Speaker 4: A long time by the financial crisis. But even after
Speaker 4: the financial custis there was a lot of people in
Speaker 4: the United States who were not online or were on
Speaker 4: you know, we're in not really doing it. So back then,
Speaker 4: as that connectivity came up, there was a lot of
Speaker 4: things people want to sell. People wanted to sell goods online,
Speaker 4: they wanted Amazon grew on that. They wanted to socialize online.
Speaker 4: They want to do these things with lms. Most people
Speaker 4: are getting what they want out of them right now
Speaker 4: on the free level, and they're massively penetrating. What more
Speaker 4: are they going to do for the average person? Not
Speaker 4: that much. The money is going to be in the
Speaker 4: in the developer space, and there's a lot of money
Speaker 4: in that space. But this idea that I mean, a
Speaker 4: very small percentage of people want to pay for their
Speaker 4: LM and they won't ever have to because they're going
Speaker 4: to be so that this is going to be commoditized.
Speaker 4: So I think you're getting a sense of how Michael
Speaker 4: Berry's when we come back.
Speaker 3: From the break, I finally find out why he decided
Speaker 3: to talk to.
Speaker 1: Me for the big short.
Speaker 5: How did the Volkswagen Beatle go from being Hitler's dream
Speaker 5: car to a hippie icon. How did a disgruntled center
Speaker 5: fielder change the business of sports. I'm Jacob Goldstein and
Speaker 5: on Business History, my co host Robert Smith, and I
Speaker 5: dig into the people and companies who created the modern world.
Speaker 5: Business History is full of innovations and failures and insights
Speaker 5: into how business works today. At the end of today's
Speaker 5: episode of Against the Rules, we're going to play a
Speaker 5: clip from our episode about Jim Simon's decades ago. Simon's
Speaker 5: basically invented modern algorithmic trading, and after a few early hiccups,
Speaker 5: including buying up all the potatoes in Maine, Simon's built
Speaker 5: a machine that generated incredible returns for decades. The show
Speaker 5: is called Business History and the previous coming up at
Speaker 5: the end of today's episode of Against the Rules.
Speaker 1: So I'm going to let you go in a minute.
Speaker 3: But there are a couple of other things I want
Speaker 3: to ask you about because I just want to pick
Speaker 3: your brain on them.
Speaker 1: What trigger is a debt crisis in this country?
Speaker 3: Like you, are you paying much attention to our government's
Speaker 3: finances and how do you feel about them?
Speaker 1: And where do you think it's headed.
Speaker 4: So predicting this stuff is the problem. I always kind
Speaker 4: of put it in terms of, you know, waiting for
Speaker 4: Castro to die. It's not a strategy. The people live
Speaker 4: a long time. Countries are very powerful and they can
Speaker 4: do a lot. The United States is the reserve has
Speaker 4: the reserve currency. Obviously, Trump is bullying around the world
Speaker 4: right now, so there United States is still a very
Speaker 4: primary country, and betting that they can't find a way
Speaker 4: is not something I'd want to do anytime soon. I
Speaker 4: do think it's ridiculous. I mean, we have what four
Speaker 4: and a half trillion in taxes from individuals. We have
Speaker 4: about four hundred billion in from corporations. I mean, you
Speaker 4: could double the taxes on corporations. That's four hundred billion.
Speaker 4: What does that do for you. We have a trillion
Speaker 4: dollars in interest payments on our debt every year, so
Speaker 4: you know when you get that trillion, that interest expense
Speaker 4: is getting up there, and then you have all the entitlements.
Speaker 4: We do not have the social cushion that a lot
Speaker 4: of other developed countries have, but we can't really afford
Speaker 4: him doing much more than we're doing.
Speaker 3: So you think the death's just going to keep growing
Speaker 3: and growing and growing. But you wouldn't want to bet
Speaker 3: when it breaks.
Speaker 4: No, you can't because it's the United States.
Speaker 1: How do you feel about FED independence? Do you care?
Speaker 4: I think I have a different I have a kind
Speaker 4: of a sick view on this. I think that Trump,
Speaker 4: when Trump starts running the FED, it might become the
Speaker 4: end of the FED, because if he's running the FED,
Speaker 4: then everybody's gonna hate it, not just me, so we'll see.
Speaker 4: I think the FED is has done a lot of
Speaker 4: damage over the last one hundred years, or since it's
Speaker 4: inception in nineteen fourteen, and I feel we don't need
Speaker 4: the FED. We don't need it unless the FED is
Speaker 4: going to say, look like, why are they going to
Speaker 4: drop rates? There's no reason to drop rates now, inflation
Speaker 4: is starting to come up a little bit. The economy
Speaker 4: is muddling along. But our neutral rate is not one
Speaker 4: percent or zero percent or where Trump wants it. Our
Speaker 4: neutral rate is probably around four percent. There's probably around
Speaker 4: where we are now. And think about when you drop rates,
Speaker 4: you kill all the savers, all the fixed dunks on
Speaker 4: income people. They suffered for so long, they're actually finally
Speaker 4: getting a rhythm to their lives. Again.
Speaker 1: None of this is costless.
Speaker 4: And you think you're going to just drop rates, be
Speaker 4: careful what you wish for, you might drop rates. And
Speaker 4: because of the debt situation that the curve can steepen.
Speaker 1: Did you just say you want to get rid of
Speaker 1: the FED? Yeah?
Speaker 4: I think the FED doesn't do anything very helpful. I
Speaker 4: think it's the easiest job in the world.
Speaker 1: What do you replace it with?
Speaker 4: I think the US Treasury could have a department that
Speaker 4: just makes these decisions. I mean, the FED already's monetizing
Speaker 4: treasury debt whatever. I mean, they're almost the same department already.
Speaker 3: Your institutional pessimism, does it lead you to, like, I
Speaker 3: don't know, bitcoin or gold or one of these refuges that.
Speaker 4: I think that bitcoin at one hundred thousand is the
Speaker 4: most ridiculous thing that sane people are sitting on TV
Speaker 4: talking about bitcoin. They' just casually it's one hundred thousand
Speaker 4: down now it's ninety eight thousand. It's not worth anything.
Speaker 4: Everybody's accepted it. It's the tulip bulb of our time.
Speaker 4: It's worse than a tulip bulb because this has enabled
Speaker 4: so much criminal activity to go deep under under.
Speaker 1: So where do you hide with your I have gold.
Speaker 4: I've had gold since two thousand and five days.
Speaker 3: I'm gonna let you go back the last question I have.
Speaker 3: Did you I never asked you this question. You let
Speaker 3: me into your kitchen in a really you made yourself
Speaker 3: very vulnerable, and you let me tell your story. Do
Speaker 3: you regret it?
Speaker 4: When you showed up, I knew you from Liar's Poker,
Speaker 4: and I didn't know what you were going to write
Speaker 4: about me, because you're you're a great author. I knew
Speaker 4: I knew you from Moneyball and Blindside. But when you
Speaker 4: deal with Wall Street you tend to be very fairly critical.
Speaker 4: And so I'm a big hedgshod manager just shorted your house.
Speaker 4: You approached me. Actually, I got a call from a friend.
Speaker 4: You talked to think one of my friends in New
Speaker 4: York and he called me and he said, I just
Speaker 4: talked with Michael Lewis. Congratulations, You're gonna be one of
Speaker 4: the heroes in his new book. And that was when
Speaker 4: I really realized, oh, this is going to go okay.
Speaker 4: So in a way, I was giving you all that
Speaker 4: stuff defensively. I didn't want you having a I wanted
Speaker 4: to make sure you had everything full disclosure, because I
Speaker 4: thought I was I didn't do anything wrong, and I
Speaker 4: wanted you to know that.
Speaker 1: Yeah, you know.
Speaker 3: And your appeal to me was you were and are
Speaker 3: a fantastic teacher, like a really good explainer of your
Speaker 3: own thoughts, and your own thoughts can sometimes be peculiar,
Speaker 3: like just different than what other people are thinking, and
Speaker 3: you don't mind holding them, you know, you don't mind
Speaker 3: having views that just would embarrass people who were less
Speaker 3: sure of themselves to articulate.
Speaker 4: Well being on the spectrum. I just moved back into
Speaker 4: my own head and along.
Speaker 3: So it was great seeing you. I'm sorry you're not
Speaker 3: out here more. And if you were out here, I
Speaker 3: wish you just let me know because I am down
Speaker 3: in your old neck of the woods, sum and it'd
Speaker 3: be fun to go grab dinner.
Speaker 4: We're still out there a lot, so I'll look forward
Speaker 4: to seeing you all right, Miss you, yeah, miss you too.
Speaker 1: Thank you, Michael.
Speaker 2: Against the Rules The Big Short Companion is hosted by
Speaker 2: Michael Lewis. It's produced by Me, Ludy jan Kott and
Speaker 2: Catherine Girardeau. Our editor is Julia Barton. Our theme was
Speaker 2: composed by Nick Burtel, and our engineer is Hans Dale.
Speaker 2: She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela
Speaker 2: Lawrence and the rest of the Pushkin Audiobooks team. Against
Speaker 2: the Rules is the production of Pushkin Industries. To find
Speaker 2: more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts
Speaker 2: or wherever you listen to podcasts, And if you'd like
Speaker 2: to listen ad free and learn about other exclusive offerings,
Speaker 2: don't forget to sign up for a Pushkin Plus subscription
Speaker 2: at Pushkin dot FM, Slash Plus or honor Apple show page.
Speaker 2: And you can get The Big Short now at Pushkin
Speaker 2: dot f, Slash Audiobooks or wherever audiobooks are sold.
Speaker 5: It's Jacob Goldstein. I'm the co host of a new
Speaker 5: show called Business History. And we're bringing you a clip
Speaker 5: right now from an episode we did about a mathematician
Speaker 5: named Jim Simon's. Simons wanted to take human emotions out
Speaker 5: of investing, and after a few early hiccups, including buying
Speaker 5: up all the potatoes in Maine, he created one of
Speaker 5: the greatest money machines in history. I really hope you
Speaker 5: like the clip, and if you want to hear more,
Speaker 5: please check out the show. It's called Business History and
Speaker 5: it's available wherever you're listening right now.
Speaker 6: They were doing what we would call today machine learning.
Speaker 7: A machine learning is like, essentially, you build a system
Speaker 7: in a computer, you feeded a bunch of data and
Speaker 7: the system sort of builds a map of the relationships
Speaker 7: in that data, and then with new data it can
Speaker 7: kind of interpolate or extrapolate and make guesses about.
Speaker 1: What should come next.
Speaker 7: And of course today we have a exciting, maybe misleading,
Speaker 7: confounding term for machine learning.
Speaker 5: We call it AI.
Speaker 6: Exactly right, right, this is still very basic machine learning,
Speaker 6: and the computer at the time keeps making mistakes that
Speaker 6: they didn't really understand. So, for instance, once the computer
Speaker 6: developed a taste for potatoes main potatoes, the system kept
Speaker 6: buying main potato futures in the state of Maine.
Speaker 1: Potato potatoes, big harvest next year or whatever.
Speaker 6: Yes, okay, until two thirds of the company's money was
Speaker 6: in potatoes. They were all in potatoes. And they got
Speaker 6: a call from the regulators.
Speaker 7: The CFT CFPP Commodi Futures Trading Commission.
Speaker 6: Right yeah, saying whoa who are you guys, Like, what
Speaker 6: are you doing over there? You have almost cornered the
Speaker 6: market on potatoes. You have to sell. And they ended
Speaker 6: up losing money on the trade because blown out on potatoes,
Speaker 6: they had stopped the computer or whatever the computer's plan was.
Speaker 6: But you know, this was just one small weird thing.
Speaker 6: Simon and Baum were really kind of nervous about this
Speaker 6: whole thing. They had taken investors' money, they didn't really
Speaker 6: know if their system worked. And as the story gets told,
Speaker 6: they start to like second guess the computer and themselves,
Speaker 6: and they start to think, well, I have this intuition
Speaker 6: that gold's gonna go up because of the geopolitical situation,
Speaker 6: and they'd make some money on that, and then they'd
Speaker 6: lose some money on that, and so by doubting their
Speaker 6: own system, it just wasn't really working and At that point,
Speaker 6: they're just Wall Street investors. Right when the big computer
Speaker 6: trying to buy more potatoes and the man won't let
Speaker 6: them buy potatoes