WEBVTT - Steve Eisman on Banks, AI and His Next Big Bet 0:00:10.800 --> 0:00:14.400 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.440 --> 0:00:17.480 I'm Tracy Alloway and I'm Joe. Isn't all so, Joe. 0:00:17.520 --> 0:00:19.720 This is a very special live recording. 0:00:19.880 --> 0:00:23.400 I'm really excited about this one. Always enjoy live recordings. 0:00:23.560 --> 0:00:26.079 We talked to our guest recently a few months ago, 0:00:26.120 --> 0:00:28.320 and a lot has happened since then, So. 0:00:30.720 --> 0:00:34.000 All right, let's just jump Yeah, you've given it away, Steve, 0:00:34.000 --> 0:00:36.159 but we're going to be speaking with Steve Eisman. He is, 0:00:36.200 --> 0:00:39.400 of course, a senior portfolio manager over at Newburger Berman. 0:00:39.479 --> 0:00:41.360 So thank you so much for coming back on the show. 0:00:41.360 --> 0:00:42.760 Steve. Oh, thank you very much. 0:00:42.840 --> 0:00:45.320 So let's see, the last time we spoke to you, 0:00:45.320 --> 0:00:47.760 you seemed okay about the banks, and. 0:00:48.520 --> 0:00:50.120 I don't know if I would say, okay. 0:00:49.920 --> 0:00:53.160 Okay, Well all right, let's talk about what happened since then. 0:00:54.000 --> 0:00:56.280 What what did we just see in the financial system? 0:00:56.760 --> 0:00:59.000 So if I could sum it up in like a sentence, 0:00:59.000 --> 0:01:00.680 because it's always pretty good to try and sumon up 0:01:00.720 --> 0:01:04.720 in a sentence, I'd say, we're not having a banking crisis. 0:01:04.760 --> 0:01:08.600 We're having a crisis of certain banks. That's like a 0:01:08.640 --> 0:01:16.759 really good frickin line. So pay attention. So I mean 0:01:17.400 --> 0:01:21.000 the saying goes that generals always fight the last war. 0:01:21.920 --> 0:01:26.280 The last war was credit quality and capital, which that 0:01:26.400 --> 0:01:31.000 problem was solved. The problem with Silicon Valley was that 0:01:32.200 --> 0:01:37.240 the correlation between all their depositors was essentially one. In 0:01:37.280 --> 0:01:39.760 other words, they were all the same. It would be 0:01:39.840 --> 0:01:42.600 as if, you know, you had one depositors with one 0:01:42.680 --> 0:01:46.679 hundred and fifty billion dollars in the bank. And what 0:01:46.920 --> 0:01:51.560 happened was Silicon Valley had a very simple business model. 0:01:51.560 --> 0:01:55.480 They just took in deposits from VC and they bought months. 0:01:55.800 --> 0:01:58.880 That was it. They made very few loans and gave 0:01:58.960 --> 0:02:02.320 great service, and so when rates were at the bottom, 0:02:02.360 --> 0:02:05.840 they brought long term bonds at subterranean rates. The Fed 0:02:05.880 --> 0:02:09.200 starts raising rates. Who knew, and all of a sudden 0:02:09.200 --> 0:02:12.720 they have massive mark to market losses in their portfolio, 0:02:13.120 --> 0:02:15.680 which if they had, which essentially wiped out their equity. 0:02:15.720 --> 0:02:17.679 But that's not enough because you could always hold the 0:02:17.720 --> 0:02:20.960 bonds to maturity unless you got to sell the bonds. 0:02:21.840 --> 0:02:24.639 So if you remember last year, the stocks that were 0:02:24.680 --> 0:02:28.480 down the most were the companies that had high revenue 0:02:28.480 --> 0:02:30.919 growth and negative earnings. They were down anywhere from seventy 0:02:30.919 --> 0:02:35.919 five to ninety percent. That characteristic is the same thing 0:02:35.960 --> 0:02:39.760 as venture capital companies. So venture capital couldn't raise any 0:02:39.760 --> 0:02:42.560 more money. The venture capital companies had to pull their 0:02:42.560 --> 0:02:45.880 deposits out of the bank. Eventually, Silicon Valley rate out 0:02:45.880 --> 0:02:49.880 of liquidity, they sold their bonds, and the rest is history. 0:02:49.960 --> 0:02:52.960 You know, thank you Peter Thiel for closing a panic 0:02:53.400 --> 0:02:56.639 and the next morning they were done. That was essentially 0:02:56.680 --> 0:02:59.840 the story. So after that, everybody, you know, basically started 0:03:00.080 --> 0:03:04.200 running every single bank that had the same characteristics as 0:03:05.000 --> 0:03:09.080 Silicon Valley signature which went that same weekend. First Republic 0:03:09.160 --> 0:03:13.760 pack West Western Alliance. Obviously, First Republic is gone. You know, 0:03:13.919 --> 0:03:18.639 probably this part of this crisis is largely over. There's 0:03:18.680 --> 0:03:20.600 a problem with the earnings of the banks, but I 0:03:20.600 --> 0:03:23.519 don't think it's unlikely. I think at this point that 0:03:23.639 --> 0:03:25.000 anybody else is going to go under. 0:03:25.440 --> 0:03:29.160 Well, you mentioned and you know, the generals always fight 0:03:29.200 --> 0:03:31.640 the last war, and so people weren't paying very close 0:03:31.639 --> 0:03:36.080 attention to depositor correlation, it would seem the supervisors apparently not. 0:03:36.640 --> 0:03:39.000 And then of course, you know, people were not concerned. 0:03:39.120 --> 0:03:41.240 They're like, oh, credit risk is solved, and then maybe 0:03:41.240 --> 0:03:44.440 they weren't so aware of the rate risk. 0:03:44.600 --> 0:03:48.080 The problem was they don't read the research. If they 0:03:48.160 --> 0:03:50.560 read the research that's out there, they would have known 0:03:51.120 --> 0:03:54.560 the losses to the to the dollar. But it's in 0:03:54.600 --> 0:03:58.040 my experience that regulators don't read Wall Street research and 0:03:58.080 --> 0:03:59.520 they try and find it out on their own. It's 0:03:59.520 --> 0:04:02.520 a lot easier just to read the research, trust me. 0:04:04.640 --> 0:04:07.480 So from your perspective, though it was out like there. 0:04:07.480 --> 0:04:10.400 Are, there's no questions, There's absolutely no question, no reason. 0:04:10.480 --> 0:04:12.960 There's absolutely no question that the investment community knew what 0:04:13.040 --> 0:04:16.520 the losses were on Silicon Valley's portfolio to the dollar. 0:04:16.800 --> 0:04:20.080 Huh, Well, can I ask you? I mean, let's say 0:04:20.320 --> 0:04:22.960 we have a FED meeting coming up, obviously, and you 0:04:23.040 --> 0:04:24.840 know there's a lot of debate over whether they're going 0:04:24.880 --> 0:04:28.000 to pause or hike again. But if they hike again, 0:04:28.520 --> 0:04:31.080 how problematic would that be for the banking system? 0:04:31.160 --> 0:04:31.360 Now? 0:04:32.760 --> 0:04:35.720 Well, I mean, what's what happened during the pandemic was 0:04:35.720 --> 0:04:41.440 that was the banks were flooded with liquidity, and so 0:04:41.520 --> 0:04:43.640 what's happening now is people are but you know, what 0:04:43.640 --> 0:04:45.880 were you going to do earn twenty five basis points 0:04:45.880 --> 0:04:48.640 and money market funds and sort of pointless? So now 0:04:48.880 --> 0:04:50.599 I don't know if any of you notice, but you know, 0:04:50.600 --> 0:04:52.240 if you want to buy a three month treasure, you 0:04:52.279 --> 0:04:56.359 make five point four percent. That's not bad. So people 0:04:56.360 --> 0:04:59.520 are taking their money out of the bank and putting 0:04:59.560 --> 0:05:01.800 it to money market fund So what's happening is the 0:05:01.839 --> 0:05:04.840 regional banks are really pulling in their horns in terms 0:05:04.839 --> 0:05:08.880 of lending. You know, do I think that if the 0:05:08.880 --> 0:05:12.359 FED keeps raising rates that will accelerate. Maybe, but a 0:05:12.360 --> 0:05:13.479 lot of it's happened already. 0:05:15.080 --> 0:05:18.000 Just to stick on the banking system for another minute, 0:05:18.000 --> 0:05:21.080 you know, like obviously there's another cliche that's out there, 0:05:21.200 --> 0:05:24.480 like the FED keeps raising until something breaks, and then 0:05:24.480 --> 0:05:27.400 when SVB happened, like, well, there was the break that happened, 0:05:27.520 --> 0:05:29.320 except it turned out that wasn't the end of the 0:05:29.400 --> 0:05:31.240 hiking cycle like it would have been. That would have 0:05:31.240 --> 0:05:33.480 been like, you know, if you're writing history, you could 0:05:33.520 --> 0:05:35.760 have imagined a version where SVB is the end of. 0:05:35.680 --> 0:05:38.960 The hiking cycle. It broke not big enough. It just 0:05:39.000 --> 0:05:41.960 wasn't big not big enough, you know, as I always 0:05:42.000 --> 0:05:46.960 I said long time ago, when JP Morgan goes down, 0:05:47.600 --> 0:05:53.159 Planet Earth burns, when when Silicon Valley goes down, it's 0:05:53.200 --> 0:05:55.520 a match, you know, like a match. 0:05:55.279 --> 0:05:59.960 You know, well, okay, one one more ba. 0:06:00.279 --> 0:06:02.280 More than a match, maybe a match book. 0:06:02.880 --> 0:06:06.919 One of those like automatic rider things. One more banking question, 0:06:06.960 --> 0:06:07.839 but you mentioned might have. 0:06:07.880 --> 0:06:10.040 One more banking question, okay. 0:06:09.520 --> 0:06:13.880 Full disclosure. Uh you mentioned profitability. There are financial is 0:06:13.920 --> 0:06:16.599 a good bye in an environment where maybe they have 0:06:16.680 --> 0:06:19.440 to compete for deposits a little more and rates are 0:06:19.440 --> 0:06:21.960 going up and NIM is getting net interest margins are 0:06:21.960 --> 0:06:22.720 getting compressed. 0:06:23.680 --> 0:06:24.880 I mean, there's always a trade. 0:06:25.720 --> 0:06:25.919 You know. 0:06:26.000 --> 0:06:28.719 The banks are very very cheap on a price to book. 0:06:28.839 --> 0:06:32.080 They're very very cheap on earnings. You know, the problem 0:06:32.200 --> 0:06:35.480 is that because of the money leaving the banks into 0:06:35.480 --> 0:06:38.280 money market funds, it's more likely than not an estimates 0:06:38.320 --> 0:06:42.920 are too high, you know, longer term, you know, if big, 0:06:42.960 --> 0:06:45.560 if we go into recession, we'll have a credit cycle. 0:06:46.040 --> 0:06:48.440 And I mean the joke in amongst the people you 0:06:48.480 --> 0:06:51.280 know that what I call the financial services mafia is 0:06:51.640 --> 0:06:53.440 the banks have collapsed and we haven't even had a 0:06:53.440 --> 0:06:56.840 credit cycle yet. So you know, if you want to 0:06:56.839 --> 0:07:00.640 financial services mafia, can it tell you? 0:07:00.760 --> 0:07:02.159 Okay, but there is there. 0:07:02.040 --> 0:07:06.440 Is, but they they are known, Okay, I know almost 0:07:06.480 --> 0:07:08.279 all of them. Okay, now these are the people who 0:07:08.400 --> 0:07:13.320 traffic in largely you know, the financials for twenty years. Okay, 0:07:13.360 --> 0:07:16.360 and you know it's not like we go on vacation together, 0:07:16.680 --> 0:07:19.400 but we know each other. In fact, we don't go 0:07:19.440 --> 0:07:20.280 on vacation together. 0:07:20.320 --> 0:07:24.720 Okay. Well, just you know when after as IVB collapped. 0:07:24.800 --> 0:07:28.080 One other element of this was like do we really 0:07:28.120 --> 0:07:30.960 need so many banks in this country? And the people 0:07:31.040 --> 0:07:32.920 look up North and Canada and they're like, they only 0:07:32.920 --> 0:07:34.600 have like six or seven banks here and we have 0:07:34.720 --> 0:07:37.080 I don't know, fifteen thousand or something like that. 0:07:37.000 --> 0:07:37.880 More like five thousand. 0:07:37.960 --> 0:07:40.400 More like five thousand are we gonna have? You know, 0:07:40.440 --> 0:07:42.200 in ten years, will we be done with a thousands? 0:07:42.240 --> 0:07:44.600 Like how much consult? No? Really, no way. 0:07:45.040 --> 0:07:48.280 First of all, the regulators will not allow JP Morgan 0:07:48.280 --> 0:07:51.480 buying First Republic is one off. The regulators do not 0:07:51.760 --> 0:07:54.000 want the large banks to get any bigger through M 0:07:54.040 --> 0:08:00.480 and A. You know, could there be mergers between regional banks, sure, 0:08:01.120 --> 0:08:05.080 but to go down to from five thousand to a thousand, 0:08:05.240 --> 0:08:08.160 I mean that's a lot of work. You know, it 0:08:08.200 --> 0:08:12.040 is choose your poison. In Canada, the banks are safer 0:08:12.080 --> 0:08:17.200 because they're oligopolies, but they can charge much higher fees 0:08:17.760 --> 0:08:21.280 for their customers. Here there's a lot more competition, but 0:08:21.360 --> 0:08:23.160 because there's a lot more and because there's a lot 0:08:23.200 --> 0:08:26.239 more competition, prices are lower. But then you have problems 0:08:26.240 --> 0:08:28.120 with credit and just stability. 0:08:28.280 --> 0:08:30.560 Sorry, you just reminded me of one more banking question. 0:08:30.640 --> 0:08:34.520 So apologies in advance. But you're an expert in moral 0:08:34.600 --> 0:08:37.280 hazard basically based off of yours. 0:08:36.960 --> 0:08:39.040 I don't know if it's an expert you. 0:08:38.920 --> 0:08:42.160 Have experience with moral hazard. What do you think about 0:08:42.200 --> 0:08:46.800 deposit insurance in the aftermath of SVB. I mean, the 0:08:46.840 --> 0:08:49.280 depositor has got a full bailout. There's now discussion about, well, 0:08:49.320 --> 0:08:52.840 why not just have universal deposit insurance? What would that mean? 0:08:54.440 --> 0:08:59.559 Well, if it had been up to me, and believe me, 0:08:59.600 --> 0:09:02.800 it was not to me, and nobody called me over 0:09:02.840 --> 0:09:05.240 that weekend. But if it had been up to me, 0:09:05.480 --> 0:09:09.160 I would have let Silicon Valley fail and then I 0:09:09.160 --> 0:09:11.720 would have guaranteed all the deposits and that would have 0:09:11.760 --> 0:09:14.800 solved your moral has its problem. I mean, it's not 0:09:14.960 --> 0:09:19.880 like they guaranteed Silicon Valley and they guaranteed all the 0:09:19.920 --> 0:09:23.000 deposits and people didn't pull their deposits out of these banks. 0:09:23.200 --> 0:09:25.720 So you would have been in the same situation, but 0:09:25.800 --> 0:09:28.600 you would have solved your moral hazard problem. I actually 0:09:28.640 --> 0:09:31.880 don't know technically if the regulators even have the authority 0:09:31.920 --> 0:09:36.040 to raise the deposit in churns level unless it's an emergency. 0:09:36.600 --> 0:09:39.280 I think it would require some sort of act of Congress. 0:09:39.320 --> 0:09:42.319 But regardless of good luck with that, right Senka said, 0:09:42.320 --> 0:09:44.959 whether it's even doable, right, there is this question that 0:09:45.000 --> 0:09:47.160 a lot of people felt after SVB and they saw 0:09:47.160 --> 0:09:49.679 all these depositors immediately made a whole at one hundred 0:09:49.760 --> 0:09:52.960 cents on the dollar. Why is banking like a private 0:09:53.520 --> 0:09:56.720 for profit enterprise as a thing if there's sort of 0:09:56.760 --> 0:09:57.959 like key aspect of age. 0:09:58.240 --> 0:10:01.080 I mean, the problem is when whatever these things happen, 0:10:02.280 --> 0:10:05.160 it seems like the regulators adopt the attitude that if 0:10:05.160 --> 0:10:08.199 we don't do this, we're going to have the system's 0:10:08.240 --> 0:10:11.120 going to burn. You know what, system's not going to burn. 0:10:11.200 --> 0:10:13.760 You know, in two thousand and eight that was true, 0:10:14.240 --> 0:10:18.480 you know, with Silicon Valley really wasn't true, but for 0:10:18.520 --> 0:10:20.640 some reason the regulators felt it was true, and that's 0:10:20.640 --> 0:10:22.760 why they acted the way they did. I don't think, 0:10:23.800 --> 0:10:25.839 you know, for what it's worth that I think that 0:10:25.840 --> 0:10:29.280 deposit insurance is going to be guaranteeing everything within after 0:10:29.320 --> 0:10:30.640 the first twelve months. 0:10:31.120 --> 0:10:35.199 Was there anything in the recent banking drama that reminded 0:10:35.240 --> 0:10:36.960 you of two thousand and eight or was it just 0:10:37.000 --> 0:10:37.880 completely different? 0:10:38.160 --> 0:10:42.520 Totally different? You know, the problem with what you're hearing about. 0:10:42.920 --> 0:10:47.360 You're hearing about the regulators raising capital requirements by you know, 0:10:47.400 --> 0:10:51.480 ten percent, twenty percent. That's useless because this wasn't a 0:10:51.480 --> 0:10:54.440 capital problem. This was a liquidity problem. And by the way, 0:10:55.920 --> 0:10:59.520 no matter how much liquidity you might have, you don't 0:10:59.559 --> 0:11:03.439 have enough does a run on the bank. So this 0:11:03.520 --> 0:11:08.440 is more of a I think, an examination issue rather 0:11:08.480 --> 0:11:11.960 than a liquidity issue and a capital issue. 0:11:12.240 --> 0:11:15.280 By examination, you mean the examiners of. 0:11:15.520 --> 0:11:18.840 San Francisco examiners should have been all over Silicon Valley, 0:11:19.240 --> 0:11:21.760 you know what. I think what the press said was 0:11:21.800 --> 0:11:26.199 that they went in and they suggested nicely that Silicon 0:11:26.360 --> 0:11:29.640 Valley start looking into its issues. You know, a regulator 0:11:29.679 --> 0:11:33.920 should not be asking nicely, they should be telling meanly. 0:11:35.600 --> 0:11:37.360 But for some reason that wasn't done. 0:11:38.440 --> 0:11:42.199 Well, what responsibility do you think tech has in this 0:11:42.320 --> 0:11:45.000 whole saga, because I mean, the last time we spoke 0:11:45.040 --> 0:11:49.680 to you, we were talking about the stunning continued resilience 0:11:49.720 --> 0:11:52.520 of a lot of tech growth stocks, and it feels 0:11:52.600 --> 0:11:56.360 like that wave of money is alive and well, but 0:11:56.600 --> 0:11:59.080 kind of more flighty than it used to be. And 0:11:59.120 --> 0:12:02.040 in this instance, it basically infected the financial system. 0:12:02.760 --> 0:12:04.880 I'm not following you. What do you mean infected the financials? 0:12:04.960 --> 0:12:07.840 Well, it got into the banking system as tech and 0:12:07.960 --> 0:12:10.240 vcs kind of pulled their money away from SVB. 0:12:12.320 --> 0:12:14.280 I mean that's true. I mean part of the issue 0:12:14.280 --> 0:12:16.720 is that it's so easy to move money today electronically. 0:12:18.760 --> 0:12:20.839 I think it was a very big mistake by the 0:12:20.960 --> 0:12:25.079 regulators to allow basically every Vingle VC fund and every 0:12:25.120 --> 0:12:28.440 single VC company to bank with one bank. That was 0:12:29.120 --> 0:12:30.760 you know, reminds me a little bit of the sub 0:12:31.040 --> 0:12:33.120 You know, people used to say in terms of subprime 0:12:33.160 --> 0:12:36.319 mortgages that you got diversification. And so the affair was 0:12:36.320 --> 0:12:38.360 a low correlation. It turned out it was a correlation 0:12:38.440 --> 0:12:40.800 of one. This was more obvious that it was a 0:12:40.800 --> 0:12:41.600 correlation of. 0:12:41.480 --> 0:12:44.560 One in the UH, in the finance industry mafia. Was 0:12:44.600 --> 0:12:47.840 this something? Is this something that comes up and people 0:12:47.880 --> 0:12:50.000 aware of this or was this like, oh what where 0:12:50.040 --> 0:12:50.320 did this? 0:12:50.360 --> 0:12:52.480 Now they were aware of it? They were aware of that, 0:12:52.559 --> 0:12:55.160 they were aware of signature First Republic. I mean, it's 0:12:55.200 --> 0:12:56.880 just math in. 0:12:56.880 --> 0:12:59.719 Terms of risks in the financial system. Now do you 0:12:59.800 --> 0:13:02.120 think think like there's a strong case that we should 0:13:02.160 --> 0:13:05.800 be looking more at deposit concentration. And also maybe I 0:13:05.840 --> 0:13:08.440 don't even know how you would measure this or enforce it, 0:13:08.480 --> 0:13:11.679 but like social media risk, the idea that people all 0:13:11.720 --> 0:13:14.320 start talking about, like, oh, Credit Swiss is in trouble, 0:13:14.360 --> 0:13:16.440 SVB is in trouble. First republics in trouble. 0:13:16.520 --> 0:13:19.120 Well you know what Credit Swiss was in trouble. SVB 0:13:19.320 --> 0:13:21.240 was in trouble. First Republic was in trouble. 0:13:21.280 --> 0:13:22.840 Well, this is why it would be hard to enforce, 0:13:23.120 --> 0:13:23.320 you know. 0:13:23.800 --> 0:13:25.760 No, but they were actually in trouble. It didn't matter 0:13:25.800 --> 0:13:28.480 what was being said on social media. So I don't 0:13:28.480 --> 0:13:29.520 put a lot of stock. 0:13:29.320 --> 0:13:33.360 In that, Okay, I keep saying, like last banking question, 0:13:33.480 --> 0:13:38.079 but how much did the experience of you know, two 0:13:38.160 --> 0:13:40.000 thousand and eight, two thousand and nine, the regular the 0:13:40.040 --> 0:13:45.040 reforms DoD Frank, et cetera. Put the regulators in a 0:13:45.080 --> 0:13:49.240 position like had something like SVB happened in a different era, 0:13:49.400 --> 0:13:51.839 would it have been worse? How much did the sort 0:13:51.880 --> 0:13:54.800 of post crisis changes make it such that you can 0:13:54.880 --> 0:13:59.240 have a pretty substantial regional bank fail without much spillover. 0:13:59.880 --> 0:14:02.040 I think the regulators learned was that you have to 0:14:02.080 --> 0:14:06.000 be fast. So the fact that they guaranteed deposits over 0:14:06.040 --> 0:14:10.240 a weekend and seize two banks was very important. So 0:14:10.320 --> 0:14:13.520 they did learn that lesson, But they weren't looking for liquidity, 0:14:14.040 --> 0:14:15.760 you know, duration problems. 0:14:17.040 --> 0:14:21.600 Should we talk markets wider markets? Yeah, you know what 0:14:21.640 --> 0:14:24.480 I'm we should just throw out some single stocks and 0:14:24.640 --> 0:14:28.040 just have you Yeah, but why don't we start started 0:14:28.360 --> 0:14:30.560 in video because I think that's like the. 0:14:30.520 --> 0:14:33.920 Figure not going to do buy sold. That's fine because 0:14:33.920 --> 0:14:35.160 my firm would shoot. 0:14:35.320 --> 0:14:37.640 Word association, word association. 0:14:37.800 --> 0:14:42.200 Yes, and I mean literally shoot men. Okay, this tomorrow morning. 0:14:43.080 --> 0:14:44.840 So what do I think of Nvidia? I mean, let 0:14:44.840 --> 0:14:45.840 me let me tell you what I think. Well, the 0:14:45.840 --> 0:14:51.160 whole chat gpt AI situation. So, I mean, as everybody knows, 0:14:51.200 --> 0:14:53.360 the market's been very narrow this year. If you take 0:14:53.360 --> 0:14:56.600 out the eight big tech stocks, the market is maybe 0:14:56.680 --> 0:14:59.560 a one or two percent, you know, in terms of 0:15:00.080 --> 0:15:04.040 what's happened so far. You know, Vidio is selling a 0:15:04.080 --> 0:15:07.240 lot of chips because everybody wants to get into the act, 0:15:07.960 --> 0:15:11.840 so they're sort of stocking chips. But what we don't 0:15:11.880 --> 0:15:16.520 have yet is really too many apps. And so I 0:15:16.560 --> 0:15:18.640 love the story that was in the papers about the 0:15:18.720 --> 0:15:22.120 lawyer who had a case he had to write a 0:15:22.120 --> 0:15:25.000 brief and so he asked chat GPT to write the 0:15:25.040 --> 0:15:29.320 brief and all the citations didn't exist. That guy's going 0:15:29.400 --> 0:15:33.280 to be disbarred. Okay, thank you, chat GPT. So the 0:15:33.360 --> 0:15:37.320 apps aren't there yet. So right now, you know, this 0:15:38.480 --> 0:15:42.600 story is just just in a few data centers. You know, 0:15:42.640 --> 0:15:44.520 at some point in the next six months or so, 0:15:44.560 --> 0:15:47.120 it'll probably get rolled out into all the data centers 0:15:47.120 --> 0:15:51.520 in the country. But so the beneficiaries are the people 0:15:51.520 --> 0:15:54.440 who sell the hardware, the chips, send everything connected to 0:15:54.480 --> 0:15:58.840 the chips, the obvious companies that have the data, and 0:15:58.880 --> 0:16:01.840 then after that we really don't know, you know, does 0:16:01.880 --> 0:16:05.440 this benefit into it or not benefit into it. Does 0:16:05.520 --> 0:16:09.000 this help eccenture or hurt Accenture. It's unknown, and we 0:16:09.080 --> 0:16:11.920 don't know yet who's going to be creating good apps 0:16:11.960 --> 0:16:14.000 that's going to do very well. So right now the 0:16:14.040 --> 0:16:16.080 story is very narrow in terms of investing. 0:16:32.440 --> 0:16:35.640 But the market seems to I believe the market seems 0:16:35.680 --> 0:16:39.680 to be of the view that the incumbent those eight companies, however, 0:16:39.720 --> 0:16:45.920 many of there are Meta Alphabet and Video Microsoft, that 0:16:46.000 --> 0:16:50.080 they are going to accrue the big financial gains from 0:16:50.120 --> 0:16:53.160 AI in general will somehow accrue to them. And do 0:16:53.200 --> 0:16:56.280 you think, like how confident would you say? Like, is 0:16:56.320 --> 0:16:58.760 the market right? Is the market overly confident in the. 0:16:58.840 --> 0:17:01.960 I mean, who you know, I'm not a fortune teller, 0:17:02.320 --> 0:17:04.720 although some people think I was a fortune teller, but 0:17:06.280 --> 0:17:08.280 I mean that's the obvious case. I don't have any 0:17:08.320 --> 0:17:11.040 reason not to believe that, you know. But we'll see 0:17:11.040 --> 0:17:12.840 in a year or two years, what's going to happen. 0:17:12.920 --> 0:17:15.160 This is, this is this is not going to happen overnight. 0:17:16.040 --> 0:17:19.280 Well, how should investors think about you know, there have 0:17:19.320 --> 0:17:21.760 been many instances at this point of people coming out 0:17:21.760 --> 0:17:26.000 with revolutionary technology of one sort or another, often packaged 0:17:26.080 --> 0:17:29.879 under a very exciting name like Generative AI. How should 0:17:29.920 --> 0:17:31.080 investors think about that? 0:17:31.200 --> 0:17:33.960 Like, We're got to give you an example of a 0:17:34.000 --> 0:17:37.520 group that used to be hot and it is not 0:17:38.800 --> 0:17:43.920 the payment space h Okay, PayPal, Square, et cetera, et cetera. 0:17:44.480 --> 0:17:47.520 So so, by the way, I've done payments for a 0:17:47.680 --> 0:17:50.320 very long time, and I will tell you that every 0:17:50.359 --> 0:17:54.680 five years, somebody comes in and says, I got this 0:17:54.840 --> 0:17:59.560 thing that's going to completely disintermediate Visa and MasterCard. I 0:17:59.600 --> 0:18:02.560 swear to every five years like clockwork, and two years 0:18:02.640 --> 0:18:07.440 later they come back and they say no. So other 0:18:07.520 --> 0:18:12.560 than Visa MasterCard, who has long term staying power and payments, 0:18:12.640 --> 0:18:15.240 is never obvious. But the space used to be really 0:18:15.280 --> 0:18:20.080 really hot, especially the companies that you know, again big 0:18:20.119 --> 0:18:23.359 revenue growth, negative earnings, and but what's happened over the 0:18:23.440 --> 0:18:26.639 last several years is so much capital has gone into 0:18:26.680 --> 0:18:30.920 this space that they're basically killing each other and it's 0:18:30.960 --> 0:18:34.119 not hot anymore and people are exiting. Is that going 0:18:34.160 --> 0:18:37.400 to happen to chat GPT? Less likely because you've got 0:18:38.119 --> 0:18:40.480 real bohemoths that are going to be spending a lot 0:18:40.480 --> 0:18:44.160 of money. But you know, around the app part, we'll 0:18:44.160 --> 0:18:45.000 see what happens. 0:18:45.040 --> 0:18:48.240 But it seemed there's a good chance that maybe outside 0:18:48.320 --> 0:18:51.720 the behemoths, a lot of money will be spent from 0:18:51.760 --> 0:18:53.880 companies that just kill each other and drive each other 0:18:53.920 --> 0:18:58.239 into the ground. Reason So obviously, you know when you 0:18:58.320 --> 0:19:01.640 see a company like in video uh trading at over 0:19:01.800 --> 0:19:04.359 thirty x revenue. 0:19:04.960 --> 0:19:07.320 It's actually not trading at thirty x revenue. It's trading 0:19:07.800 --> 0:19:11.359 you know after the the most recent uh you know, 0:19:11.400 --> 0:19:14.040 the stock one of twenty six percent, but the earnings doubled. 0:19:14.040 --> 0:19:16.320 I think, you know, the pe got cut in half. 0:19:17.080 --> 0:19:19.679 So I don't remember where the pe is right now, 0:19:19.720 --> 0:19:22.720 but it's not insane anymore. It's actually lower than it 0:19:22.840 --> 0:19:23.880 was before they reported. 0:19:23.960 --> 0:19:26.840 So when you see that, like obviously and it seems 0:19:26.840 --> 0:19:30.120 sort of lazy, and people like dot Com this is Cisco, 0:19:30.760 --> 0:19:33.359 this is loose you know, Sun Microsystems, just these like 0:19:33.359 --> 0:19:36.120 completely unreal when you when you look at these numbers, 0:19:36.160 --> 0:19:38.719 like they don't look like unreal. They don't look like 0:19:39.119 --> 0:19:40.280 some of those numbers from those. 0:19:40.200 --> 0:19:42.440 Well, I'm gonna look at videos the pure play. Yeah, 0:19:42.520 --> 0:19:44.520 then there's a MD We'll see how well that their 0:19:44.600 --> 0:19:47.680 new chip is going to do. You know, how much 0:19:47.720 --> 0:19:50.080 is this going to add to the earnings of Microsoft 0:19:50.119 --> 0:19:52.399 and Google and Meta. Well, it's not gonna be as 0:19:52.480 --> 0:19:55.080 much as in video obviously, you know, but how much 0:19:55.119 --> 0:19:57.040 it accelerates the growth rate. I mean, we're really not 0:19:57.119 --> 0:19:59.000 going to know this for a couple of years because, 0:19:59.040 --> 0:20:01.480 like I said, it's gonna take time to really develop 0:20:01.560 --> 0:20:04.040 something that's not going to have somebody write a brief 0:20:04.080 --> 0:20:07.720 where all the citations are wrong. I go back to 0:20:07.760 --> 0:20:09.879 this over and over again. It's stunning to me, Tracy, 0:20:10.920 --> 0:20:12.960 I would not read the site. I used to be 0:20:12.960 --> 0:20:15.040 a lawyer. That a lawyer would submit a brief where 0:20:15.080 --> 0:20:18.760 he does not read the citations and the brief is astonishing. 0:20:18.960 --> 0:20:21.640 I think there's someone actually suing chat gpt for defamation 0:20:21.760 --> 0:20:24.040 now because of some of the stuff it spat out 0:20:24.080 --> 0:20:24.920 from that incident. 0:20:25.040 --> 0:20:27.760 Tracy has seen many of my attempts to use chat 0:20:27.800 --> 0:20:30.399 gpt for work, and so is well aware of a 0:20:31.000 --> 0:20:33.840 let's just say it's not it's not mission critic, it's 0:20:33.880 --> 0:20:35.200 not mission ready, it's not. 0:20:35.200 --> 0:20:37.720 Ready for prime time. I do think it's very sweet 0:20:37.720 --> 0:20:41.120 that Joe is always very very polite to chat gpt 0:20:41.680 --> 0:20:45.040 just in case the robots, you know, eventually take over 0:20:45.119 --> 0:20:46.840 the earth hedging your butts. 0:20:46.880 --> 0:20:48.760 That's true, I would say, please and thank you. 0:20:48.920 --> 0:20:52.320 Well, that's good life advice. Okay, Well, just on the 0:20:52.320 --> 0:20:54.119 broader market. I mean, the last time we had you 0:20:54.160 --> 0:20:57.119 on the podcast, you were talking about a new paradigm 0:20:57.160 --> 0:21:01.080 for markets, and you are very care careful to emphasize 0:21:01.119 --> 0:21:04.480 that this doesn't happen in a straight line. You know, 0:21:04.560 --> 0:21:06.879 there are fits and starts. People hold on to the 0:21:06.960 --> 0:21:09.479 old way of thinking, you know, for as long as 0:21:09.520 --> 0:21:12.159 they can. Sometimes, when you look at what's happening with 0:21:12.200 --> 0:21:14.720 some of the tech and growth stocks right now, does 0:21:14.720 --> 0:21:18.320 that support the thesis is this the last gasp of growth? 0:21:18.480 --> 0:21:20.920 I mean, for example, let's go back to the high 0:21:21.000 --> 0:21:25.520