Bulls vs. Bears: Who’s Right About This Market?

Say you're an aspiring pop star, how do you know if your song's a hit? It's getting harder to tell. I think that something is going on where the machinery of popularity has changed under a feat and we don't really know why or what it means. This week on Explanage Me how to avoid being a flop. Find new episodes, Sundays, wherever you get your podcasts. I was thinking I was pondering the question. You're a terrible straight man. This is why my comedy is not resonating, let's start this again. Why do I only get sick during weekdays? This is unbelievable. How can I play this game? Why? Because I have a weekend immune system. Oh yeah, you're at home. I'm at home. The studio is broken. There's no wife I'm working at the Vox Media studio which is insane to me so I'm recording from home. I kind of feel like it's COVID again, zooming into this but that's okay. So Ed I know you well enough and also I have a very strong intuitive sense for young men. Something's on your mind. You're distracted this morning where you are upset about something or something on your mind. Are you overwhelmed with gratitude for the successful professional opportunity you have, like what? What is running through your head right now? What's up with that Elson? You seem down or distracted. I'm distracted by a work related event but I shouldn't disclose it on this podcast right now so I can talk to you about it otherwise. Is it a bad thing or a good thing? No, it's kind of a bad thing. I mean it's not a big deal. It's just one of the guys that we had on the show. We did a clip that used some of his data that didn't give him the attribution. When that's happened and I've been on the other side of that, I'll hear someone literally parrot something I've said and I think, "Wow, it wouldn't be nice to just occasionally reference my work when you're literally parroting what I've said." The best response is, and I've gotten this response and sometimes I haven't, and also I've been on the other side of that where people said, "You cited my data, please reference it." It's sad. I think the best response is, "You're right. We have a lot of respect for your work. We do boost signal boost your work a lot including having you on the show, which it sounds like we did and I don't know who we're referring to. But we'll correct the record and be more careful moving forward. I hope you accept our apology and our commitment to doing better." That's exactly what I did. I mean, yeah, exactly. I only get nervous if I actually think that I'm in the wrong and in this case, I do think I'm in the wrong. That's great self-realization and just to go, I just interviewed a psychotherapist, so I think I know everything about psychotherapy right now, but the shit that hurts, where you get really upset or something online, fucks with your mental health, it's when there's a kernel of truth in it. Yes. When it's like, "Oh, I did fuck up," and this happens to me a lot because I sell out a stupid shit. I go back and I get attacked and I think, "Okay, the stupid shit and jealousy are bots are weirdos fine." It's when there's a kernel of truth and you're like, "Yeah, I did get that wrong." Exactly. So what do you do about that? I think with actual people who take the time to reach out to you, and I did not have the self-awareness when I was your age. I used to rear up and get back in their face and think it was about winning the argument. And then what you realize as you get older is that it's not winning the argument. It's maintaining the relationship and saying, "I understand why you're upset." I fucked up here. And to be fair, we love your data and we do signal boost it a lot, which it sounds like we do here, but something fell through the cracks here. I apologize. I'm happy to correct the right. And it's like relationships. When someone's upset, my, when I was your age in a relationship and someone would get upset with me, I'd attend and see they're trying to get back in their face and prove them wrong. And then what you realize as you get older is if someone's upset and you value the relationship, just acknowledging that they're upset and that likely because you trust them and they're smart, there's a real reason why they're upset in a valid reason and to move to a sincere apology and then move to what you're going to do to try and fix it in the future. I did not have that self-awareness when I was your age. But anyways, I'm going to charge you $300 and tell you that we have five minutes left and kick you out of my office now. I think that was a great session, Ed. I thought it was good. I think I learned a lot. Yeah, it's true. I mean, there's something about just the acknowledgement that is weirdly important that you don't really realize until later on. It's like, it's not so much saying sorry, but that is important to people, but voicing exactly what is bothering them and saying it out loud. Like, I acknowledge that this is exactly what happened. It is, it's surprising how important that is in relationships and in conflicts. Like, you can't just be like, I'm sorry, like, it's kind of no, now you need to acknowledge fully. Well, in trying to avoid the non-apology apology, I'm sorry if you're upset. No, no, no. Yeah, exactly. We were wrong. We fucked up. I apologize. And this is what we're going to do to make sure it doesn't happen again and try and correct the situation. And then if they don't accept that, call them a snowflake and a bitch and move on. Should we get to today's news and should we get to today's business news? Let's get into it. Last week, the S&P 500 hit fresh record highs twice on Tuesday, the index class. Climbed nearly 2% to its first record close since June and the following day it notched another intraday all time high. The rally has led some investors to believe the worst of the AI driven sell-off is behind us. But not everyone is convinced, Michael Barry recently warned that it is possible. We are near a major top adding that the market could be setting up for a quote 1987 type fall. So Scott, what we wanted to do in this segment is sort of lay out the bull cases and the bear cases because it seems that these two factions are extremely at odds with one another right now. We are hitting record highs and yet at the same time, there is a huge amount of anxiety about AI and about the sustainability of this business about all of the debt which we'll get into. And of course, we cover a lot of it on our show. But I wanted to start with the bull case and we've gathered a few clips here from some famous investing bulls that kind of lay out why the S&P hit a record last week and why investors feel optimistic about AI. So I'm going to start with a clip from Gavin Baker. He is the CIO of a tradies management. This is Gavin Baker and why he's still optimistic about AI. I look at what's happening in the stock market and I feel like a foolish optimist. And then when I talk to people, whether it's people at the labs, whether anyone in this ecosystem, like I'm like bearish relative to essentially everyone. This is Alex Saasadot who's the head of well rock capital management. This is on the same podcast and Vest like the best. And here he explains how adoption of AI is only at the beginning and therefore it's probably going to grow significantly more. You know 200 or I don't know how many set 800 million people are using AI. They're just using AI 1.0 which is like a search engine on steroids. But now with these new primitives where you have clawed on your computer, linking it in and then they're going to build true AI bots. And then big corporations are going to build much larger. But where are we in terms of the amount of people doing that? I mean, Sundar said it's 10 bips of the knowledge workers of the world. So anthropic has something like 14 or 15 million DAUs, probably a small portion of those are truly doing AI the way you can do it. So that 10 bips, it's classic S curve where these are the tankerers and then it's going to go to the early adopters, then it's going to go to the early mainstream. But you're going to go from 10 bips to 1 to 2 or 3% to 5% to 15% in the next four years. And kind of a light switch this year went off in the enterprise where everybody realizes they need to do this now. And then finally this is our friend Josh Brown on his podcast explaining why he is still very bullish in this market and why he believes this is a healthy bull market. If you gave me a legal pad and say, fill the first page, yellow, yellow pad, fill the first page with every characteristic you would want for a market rally in order to feel confident to stay long, like write down all the things. Here's what I would write down, okay. Earnings beats in every sector. I think we have 10 out of 11 companies are on average beating or something like that. check. Rotations, leadership stocks getting killed, and other stocks becoming new leadership. Defensive rallying with cyclical, growth rallying with value, large cap rallying with small cap, revenue growth ahead of expectation, not just games with earnings or buybacks, but like actual sales growth ahead of what's being expected. This raising their expectations for next quarter during this quarter across the entire S&P 500, which is what's going on, international stock support, lots of IPOs but not too many IPOs, like every single thing that I would write down on the pad to say, healthy market, we have all of it. That's the bull case right there. We'll get into it, but your first reactions. I think the economic incentives of someone in the job I do is to catastrophize more than is actually warranted. So, do you just play Josh's comments? I love what Josh says, and that is you always have to ask us, help us go right. The problem I think we're facing, I think what people have to be cognizant of, is the market is now six stocks, and Alphabet and Amazon alone drove nearly half of S&P earnings growth. It feels like the metrics are overstating the positive case, if you will. To me, I think the data around the fact that things are overvalued, or the bear case, if you will, the one piece of data that I just think is very hard to argue with is that if so much of the market is concentrated on the well-being of the prospects of AI and the investments in these hyper-scalers, we need, if you look at the CAPEX, to get a reasonable rate of return on the current CAPEX by the hyper-scalers, we're going to need to recognize or create $2.5 trillion in incremental revenue from AI. Right now, the cumulative revenue being produced by AI is $150 billion, so we needed to 15 X just to get to a sustainable or justifiable ROI on the current CAPEX. I think that is unlikely. By the way, that $2.5 trillion number just to put it in context is greater than all of the revenue of Big Tech right now, so to get a market-level ROI on the current CAPEX, we need to double the current revenues being registered from Big Tech. That's not to say the market. I think the market will be up from where it is in 10 years. I think AI is going to prove to be a fundamental technology. I think there's going to be a lot of winners, but similar to the Internet in '99, or the railroads or whatever you want to call it, the railroads proved to be tremendous, create tons of shareholder and stakeholder value over the next century, but that didn't mean it didn't bankrupt a bunch of railroads shareholders along the way. When I look at all the traditional metrics, I just think there's more asymmetry to the downside than to the upside, but let me do my land acknowledgement here in terms of, what does that mean, Scott? What do we do? I'm not suggesting you sell right now. My attitude is always be in the market. What I do think people need to be mindful of, though, is based on historical norms and trends and ratios that do have value, whether it's the Buffett index, looking at total valuation of the market relative to GDP, whether it's K-Shiller, whatever it is, whether it's PE, whatever you want to call it, things look very frothy right now. So what do you do? I believe it's never been more important to think about diversification and also perhaps contemplating lowering your leverage because if there is, if we are, if you believe as I do, that we are susceptible to a pretty dramatic correction in the next 24 months, you don't want to be out over your skis and put yourself in a position where you might be a four-seller because of leverage. I think that's exactly right. Just to go to the bull case again, I think a lot of people are trying to understand why exactly did the market's rally? Why did we hit this all-time high in the S&P? There are a few things in there. One that we should just acknowledge is just optimism related to Iran because Scott Besson said on Tuesday that the U.S. and Iran would reach a deal. He said they would reach one, quote, "Today or tomorrow." I.e. Tuesday or Wednesday didn't happen as this continues to go on. They keep on saying things and then the thing doesn't materialize, but we're just going to sweep Iran to the side for a moment and focus on the thing that really matters in terms of growth prospects and that is AI. What the bulls would say is that earnings growth is really strong right now. Even if you remove the markups in Amazon and Google's stakes in those AI companies which exploded their earnings as we discussed in the previous quarter, if you take that out, the S&P is growing really strong on an earnings basis, 27% earnings growth. The other thing that Josh talks about, his view is that he says the trash has been taken out. There was the collapse of the cost fee, there was the situational awareness collapse, that's all kind of happened and so maybe we've sort of flushed out some of these crazy speculative bets out of the system maybe. Then of course, just that AI demand is still growing. The GPU prices keep going up. The compute deals keep getting signed. The revenues of every AI company continue to grow practically exponentially and that's all true but to your point, it doesn't answer the fundamental question that I'm still thinking about which is where is the ROI on the end product of AI? Where is the ROI that should be reflected in open AI's business or anthropics business? Because you look at the earnings growth today, it is entirely dependent on this data center build out. When Goldman Sachs has data, AI investment is expected to drive nearly half of S&P earnings growth this year. We could do the analysis and try to figure out what exactly the number is right now but I think that sounds about right. Especially when you consider how much money these big tech companies are plowing into the data centers. It's coming out to like $750 billion this year and then you have to ask yourself how long is that going to last and why is that happening? Why are they spending all of this money? I think the most important number that we learned last week came from Bloomberg which showed that open AI made up 70% of Microsoft's AI sales last year. The whole system relies on open AI and anthropic. Two companies which have been proven based on the leaked financials we've gotten to be incredibly unprofitable companies that are burning tens of billions of dollars a year. I don't see how this is sustainable at this point and I want investors and the bulls to be answering that question. Frankly, I don't care how much the semiconductor stocks earnings have gone up. I know they're going up. I know that they're selling chips to big tech obviously because the big tech companies are building the data centers. My question is how long is this data center bill that going to last and is it actually going to be sustainable? Because if you're relying on all of your AI business on one company, then what are we doing here? What happens if open AI implodes tomorrow? What happens if they can't get enough money from the, raise enough money from investors? What if they can't raise enough money from the debt markets? I mean, at some point, they need to get profitable, otherwise the whole thing does collapse. That's what I would say to the bulls right now, why don't you answer that question because that's the most important one right now. The thing you've been talking about a lot on property markets, which really resonates with me and I also appreciate that you're one of the many things I like and respect about you is you're not afraid to go, you're not afraid to be a contrarian and you go where you think the truth in your own gut is taking you regardless of what the narrative is. The narrative is that these AI valuations are everything, and if you don't, and these 5x revenue compounders will continue to compound. If you don't say that in support, the septic tank that is the majority of EC's portfolio right now, it's a crime against humanity and you're morally deficient. There is literally a fairly thin string, a piece of yarn, I would argue, that if pulled on, we'll bring down the S&P, which will push us into a recession and push the West into a recession, and it's the following. The American economy right now has become a giant bet on AI. What is it? 70% earnings growth, 92% of GDP growth coming from the CapEx from these hyper scalers. And the most significant thing to happen, or the two most significant things to happen, are one, in the U.S., there used to be all of these sources of new incremental demand on the consumer side, whether it was X getting into AI, because X AI was going to have a much offer, whether it was meta that was going to offer llama and different consumer AI applications. And then all of a sudden, they've all said, wait, we're not, you don't seem to be capable of building the front end demand to our platforms, so we're going to lease out our back. and to one of two companies, OpenAI or Anthropics. So there's basically two sources of demand creation right now, and everyone else is pivoting to supply creation. So you have an economy, which seems to be very dependent upon one sector, a small group of companies within that sector, and only two sources of demand creation, and both of those companies are hemorrhaging money right now. So it just feels as if the market is incredibly fragile right now, and then the chaser effect or the other fear factor is, again, what I think is one of the more dramatic numbers and that approximately 10% of token usage in January 2025 was from Chinese LLMs, and now it's approaching two thirds. So the market is bifurcating. I still think the frontier models are German automobile companies, higher margin. There's going to be a big market for them, people want debugging, safety, security. Look at Microsoft co-pilot, which is double that's number of seats. Most AI analysts say it's one of the shittiest applications, but there's something to having a big company debugging, compliance, security, you know, all the good stuff that comes with Microsoft. Yeah, it's another little asset in the giant bundle that is Microsoft Office. Just plug and play, and you know us, and you can trust us, even if it's not a great product, it has a great warranty, right? But the fact that the LLMs are coming in and doing to Silicon Valley would Tokyo did to Detroit over 20 years, but in this instance over 20 weeks, I don't think anyone's being very honest about what's going to happen or the impact that we'll have. All of these numbers assume we're going to dominate every aspect of the air market globally. I just don't think that's the case. So this is a concentration upon concentration upon concentration built on massive expectations, but also we have such a tendency to focus on the S&P. I think we're going to be winners from AI. I think you and I are going to be better off from AI in terms of productivity and new job opportunities. Just as we're better off from vaccinations, jet transportation, the railroads, the electric grid, but along the way, through different cycles, all of those industries lost a shit ton of shareholder value. I think we're at that point. Amazon went on to be an amazing company. It lost 93% of its value from 1999 to 2001, because we were in a cycle where things the froth translated to ridiculous valuations that could not be sustained by anyone including Amazon, and I think we're sort of the numbers would say we're at a similar point. We'll be right back after the break, and if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify or wherever you get your podcasts. Support for the show comes from Zbiotics. After a night out on the town, your body just can't bounce back like it used to. That seems like you're forced to choose between a great night or a great next day, while that can change with prealcohol. Zbiotics prealcohol probiotic drink is the world's first genetically engineered probiotic. It was invented by PhD scientists to tackle rough mornings after drinking. Here's how it works. When you drink, alcohol gets converted into a toxic byproduct in the gut. 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The Blast Zone is very clearly those two companies, Open AI and Anthropic, which are based on what we know losing money, but I should add, we don't really know much at all. In Open AI's case, Ed Zittron got his hands on the financials and he leaked them and we learned from those financials that Open AI lost $21 billion last year. We can make estimates and do analyses based on that as to what we think is going on over at Anthropic. But I want to play you one more clip from this Gavin Baker interview on the Invest Like the Best Podcast. I should just clarify. I'd love to have Gavin Baker on the podcast. I think we have reached out to him and Gavin, if you're listening to this, we'd love to have you on and talk about this. But he said something that I think was really problematic in that episode and he kind of just skipped over it. But I want to play this to you really quickly and then break it down. The AI has accelerated and Anthropic continues to grow really strongly and is almost certainly pumping out significant amounts of free cash flow. There is zero evidence that Anthropic has generated any free cash flows whatsoever. And they have even said by their own estimates that they don't expect to generate any free cash flows until 2028. And by the way, if they had generated any free cash flows, I can guarantee you we would be hearing about it because it would take the stock market. Why are they raising $36 billion from the debt markets on top of the other $35 billion they raised a couple of months ago from Blackstone? So and he just, you notice his language is almost certainly generating significant amounts of free cash flow. Like, I don't know what he's thinking when he says that. But that's, you can't just say that because the reality is that jump that he makes there just deciding that almost certainly it's happening. That is what the entire AI ecosystem is depending on right now. And to me, the fact that he says that tells me that there are some serious misunderstanding in the equity markets right now as to what is actually going on in AI because if there are a lot of other investors who like him are just randomly assuming that the Anthropic Business Model actually works, despite there being zero evidence to support that argument. Then we have a serious mismatch in terms of investor expectations and the actual reality on the ground and granted, we don't know because Anthropic won't tell us, but we did our own analysis of Anthropics numbers. We did it based on what we saw with the OpenAI's financials and based on our estimates, Anthropic lost around $11 billion last year and we would expect that number to continue to go up because of the massive amounts of their spending on training and inference. So that, to me, is the problem. Why are we pretending like OpenAI and Anthropic, like those businesses are working? I mean, how are we making that jump? Because that's the real problem. Yeah. I think if he'd said if these companies dramatically reduce their catbacks, they would get to the cat full of positive. pretty soon, because if you look at the top line in the sector's growth, I think that's a defensible argument. Usually, though, you have to have positive growth margins. And what I've been saying is that I just signed up for a fair was cloud pro, whatever. And it's $200 a month or something. And I read somewhere that it's costing them $1,000 a month to service my $200 a month product. But yeah, look, I think I think if he said these companies could be cashflow positive, if they decided to dramatically scale back their capex because they're growing so fast, I think that's maybe a defensible argument. But I don't, I don't see any evidence that these companies are producing anything resembling free cashflow right now. And that's the whole point. And that, like, that is the whole question in this bull market is, can open AI's business make money and can anthropics business make money? And you have the number one AI bull going on podcasts saying that they're already making money almost certainly quote-unquote. And it's not true. And so I'm just like, what are we doing here? I have this DAC or this talk I do call the AI optimist. We have such a tendency to look at everything to the lens of the success of America is the success of the SMP. It's such a damaging metric because it doesn't measure PSA. It doesn't measure obesity. It doesn't measure anxiety. It doesn't measure, you know, let's say general sense and purpose among young people. And I believe AI is going to be a net positive for society. We're going to be, I think it's going to increase productivity. We're going to come up with new ideas, new medical treatments, faster cycle time for pharmaceuticals. I think it's going to be a net positive as long as we figure out the risks and the regulation to try and start to the externalities. We, you know, we've been able to control nuclear detonation for almost eight years with regulation and leverage in a harness. I believe nuclear fission to the benefit of all mankind. And there's a real issue around whether what regulation is keeping up with this technology. But the notion that everything comes down to whether these stocks are going to continue to go up. Okay. Just because you don't think these stocks are going to continue to go up doesn't mean that technology is a failure. It doesn't mean you're wrong. It turns into I have never received the type of push back and hate as when I question the valuations of companies in a VC's portfolio. And that is they attack your character. They don't want to make a good faith argument back and forth. It's, no, the whole world depends on whether or not open AI has a successful IPO. No one doesn't. And also there is a positive to all this catbacks. Thank God or it's a feature, not a bug that America is willing to get out well ahead of its keys on a regular basis. And the shareholders are willing to incur these types of draw downs because we like risk. And we're willing to take these risks. And most nations aren't willing to take these risks. And we benefit. We will benefit from this catbacks. It may, I believe, cause some volatility. The market might be a drawdown. I think a lot of investors in my view are likely to lose a lot of at least paper gains in the next 12 to 24 months. The catbacks that went into railroads was well ahead of where should have been a cost shareholders a lot of money. We have all benefited from that catbacks. The catbacks on the internet, which got hysterical and irrational from an investor standpoint, we have benefited from. So even if the S&P has the kind of drawdown, I think it's going to have. I would still argue there's real societal benefits from the fact that America is at risk aggressive culture. And we make these types of extraordinary catbacks. You know, it's not the steel in the ground from global crossing or whatever, you know, these companies that imploded from these telco infrastructional eight nineties. You're still registering, I think, benefit from those irrational investments. There's a lot to like here, but the notion that everything about the benefit or the progress or prosperity of humanity is all linked to whether the S&P goes up or down. I don't know. I've said to you for a long time, I think your generation would benefit from what I call, I don't know, a sane correction such that you have the same entry point into great companies that I had as a younger man, because all the narrative and all the pumping and all the shaming online, if you don't say, oh, a $44 billion acquisition of X made sense, all of the shaming is one thing. And that is the current equity holders want this thing to go higher. And the narrative is, okay, we need rational people to say, you know, is it kind of the Michael Burry like implosion? Probably not. Is it the permable things go up forever? No, it's probably somewhere in between. And what I can't stand is the narrative is you're a good guy, a good citizen, if you're continuing to pump. But if you want to have a rational conversation about maybe should's overvalued right now, there's something wrong with you. You're anti-American. Exactly. All we're trying to do is to get to the truth. Like, that's literally all I'm trying to do here. What is the actual value of these companies? What is the actual fair value estimate for these big tech companies? Have we considered the fact that they're relying on two companies alone for their AI growth? That's where they're getting all of their growth right now. And how have we considered the fact that those companies that they're relying on aren't making money and could easily go out of business if they can't keep raising billions of dollars ad infinitum from the equity markets, which we're already starting to see, look at anthropic going and borrowing 36 billion dollars from Blackstone this week. I mean, that's all we're trying to do. And as soon as you say that, I mean, you shouldn't be so offended by us doing that. It shouldn't be an offensive thing that we're trying to get an understanding of the truth. It's fine. If we're wrong, then we'll be proven wrong. And that's all we're trying to do here. We're trying to get an understanding of what actually is the value here. And it seems that everyone's so sensitive because they have these stories in their heads and they get very upset if you decide to start poking any hole in that story because I guess they believe that this is their ticket out. But it's like gravity's going to come at some point. So I think we should be having a rational conversation about all of these. On this point, I think it's worth asking the question, like, you know, we're bringing up some of the AI anxiety right now. And the question that I keep asking myself is to what extent is that anxiety priced into the markets right now? And I think that the answer is that as of basically this week, when the markets went way up, the anxiety is increasingly being ignored. So if we just look at some of the multiples, Microsoft is up to 27 times earnings, which I think at this point, it's pretty fully valued. I mean, you know that I bought the stock at 380. It's up 30 percent since then. So that's great. But I mean, the benchmark that I keep trying to look at is how did these companies trade before the AI boom? And the answer is last week, Microsoft traded lower than its multiple pre-AI this week at trades higher. We look at meta as an example, meta as a company company that I think the anxiety is priced in. It's trading at 22 times earnings. Pre-AI was trading at 31. So that's a company where I think investors are looking at the situation saying, we're not sure whether arrow ROI is going to come from, which I think is great. I think there's some rationality built into that stock right now. But you know, Google, Amazon, they're getting very expensive at this point, especially Google. And it does seem that investors are looking for any reason whatsoever to just kind of shirk away the possibility that this whole AI thing won't work out. And so that's really what we have to keep an eye on. I don't think that we're in totally crazy town. But I do think that it's, as you say, it's quite frothy. That's something that we have to acknowledge. I don't know. I think we're firmly in crazy town when I know friends of yours who are talented kids raising money for their company. It's a billion dollar valuations. And I get it. I was there. You know, in 1997 or 98, I raised money for a red envelope, but 120 million dollar valuation on revenues. I forget what it was. But and at the time, I was happy to defend it and talk about why we were going to be worth a billion dollars and Credit Suisse first boss. I was talking about taking as public. You're never, you don't feel you're in crazy town when you're in the asylum and benefiting from it. I mean, so, but yeah, on any reasonable metric, any reasonable metrics, this does, you know, whatever you want to call it, this to me feels like, yeah, we've officially moved in and taken up residents in crazy town. It almost changes week to week. I think you're probably right. It's like this week we're in crazy town. Last week, it was a very different market. And this is part of the problem. The volatile is so insane week to week. The fact that Amazon reports its earnings and then it goes up 15% in a single day. Like, I mean, it's almost hard to gauge where actually we are at this point in time. But I think I will agree with you that in this week on August 6th, Thursday, Thursday, August 6th of 2026, which when we're recording this, we are in crazy town. But I could see it swinging back tomorrow or the next week. It's very, very hard to gauge at this point. We'll be right back. And for even more markets content, sign up for our newsletter at profgmarket.com. Support for the show comes from SOFI. Education can be one of the most valuable investments you can make in yourself, but figuring out how to pay for it is a huge financial decision. The good news is you have options at every stage of that journey. That's where SOFI comes in. 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Please borrow responsibly. Support for the show comes from BCX, the public ticker for private tech. For generations, American companies have moved the world forward through their ingenuity and determination, and for generations, every day Americans could be a part of that journey through perhaps the greatest innovation of all, the US stock market. It didn't matter whether you were a factory worker in Detroit or a farmer in Omaha, anyone could own a piece of the great American companies, but now that's changed. Today our most innovative companies are saying private rather than going public. The result is that every day Americans are excluded from investing and getting left further behind while they select few reap all the benefits. Until now, introducing BCX, the public ticker for private tech now available wherever you buy stocks. VCX by Funrise gives everyone the opportunity to invest in the next generation of innovation, including the companies leading the AI revolution, space exploration, defense tech, and more. Visit getvcx.com for more info. That's getvcx.com. Carefully consider the investment material before investing, including objectives, risk, charges, and expenses. This and other information can be found in the funds perspective at getvcx.com. This is a paid sponsorship. Dear Mr. President, I want things to always be right between us. I also know I've been distracted all week, forgetting to eat throughout the days and even forgetting to sleep. I never want to bring you anything but joy. I'm sorry I lost my focus. You are all that matters to me. I don't ever want to let you down. Thank you for being my guardian and protector in this life. I have learned so much about myself on this trip. For the first time in I don't know how long you forced me to unplug. I didn't have to be human printer. Thank you for always being there for me. To modify a classic, I could not have parted with you to anyone less worthy. And I will add, it is I who is unworthy. With all my heart, Natalie. What is going on with Natalie Harp, President Trump's human printer, on today explain from Vox? We're back with Profty Markets. Last week marked SpaceX's first post-IPO lock-up expiration giving employees and early investors their first opportunity to sell shares since the company went public in total, more than 911 million insider shares became eligible to trade, more than doubling the free float. The stock was relatively stable following the expiration. And that came just days after SpaceX reported its first earnings as a public company. On the surface, the results looked impressive. Revenue surged 92% year over year, but investors weren't satisfied in the stock fell 8% after the report. At the time of this recording, the stock is trading around $109. It's down 52% from its all-time high. So I'm going to take my victory lap right now. This was my prediction before the IPO. As soon as it hits the market, SpaceX stock will immediately explode 25%. However, my other prediction is that within six months, probably sooner, SpaceX stock will be cut in half. Why? Because the valuation makes no sense whatsoever. It has indeed been cut in half, 52% down since it's high of $225 per share. We'll get into the earnings as well, but maybe Scott, your initial reactions to this stock price movement. It's a good business. The rocket business, Starlink, or the product on top of the rocket business. Starlink revenue was up 66% to $4.3 billion. That's double with Palantir's quarterly revenue. A subscriber growth doubled to $12 million. But the problem is, great businesses that are overvalued with this thick layer of this enormous bet that may or may not be paying off. AI CapEx was up 550% to 18 billion in one quarter. So SpaceX is now spending more on CapEx and Oracle and more than Exxon for a unit that is unproven right now, diluting a generally strong satellite business. Then the bottom line is the valuation is still insane. If you didn't know this company had been cut in half, you wouldn't think it's undervalued or you wouldn't think it's overvalued. It's still ridiculous right now. In addition, I think the most negative forward-looking indicators in addition to the valuation is kind of a point around the fiduciary here. You have the nominal CEO of three public companies and he's tweeting 20 times a day. Attention is a key resource here for a CEO running three companies and he's not allocating it correctly. I thought my prediction was there'd be a tiny bit of a short squeeze because I thought the revenues, typically when you take a company public, when I've been on the board of companies we go public, we know what the first quarter earnings are going to be and we don't take the company public unless we know the first quarter earnings report is going to be really strong. This was a strong earnings report but a strong earnings report for a company that's trading at a regular value way. The market is looking for any reason to take this company down and also I think existing shareholders that have been in this thing for any distance of time are looking for any opportunity to sell because they've probably to Elon Musk's credit registered enormous gains and they're like, okay, even though the stock's been cut in half, I might be up 10 or 20 acts. Boy, am I going to hate it if this company is a 12 bucks in six months, which it could be. If this company was straight, if this stock was trading at $20 and you didn't know it had been at 1.210 and you did any sort of reasonable analysis looking at the sectors it competes in with the most successful companies in that sector trade at, it wouldn't be cheap at $20 a share. So any opportunity to sell, I would argue people are doing the math here and going, yeah, and what you will see, I think the only thing on the demand side will people who anchored off that 230 and go, oh, it's a good entry point. Where are stock traded below? And this is one of my flaws as an investor. I always think of, okay, if, you know, I'm thinking about buying shares and snap. I think snap is dramatically overvalued and I think at some point, Evan has to wake up from this, this decade-long hallucination where he's wasted $3.5 billion to try and prove he's Steve Jobs, he's not, he's Mark Zuckerberg and it's a great core business. It's the easiest five or 10X I see in the marketplace. If we can just convince this one guy to either spin the hardware unit or reduce the amount of money he's taking into the street and burning it. But you have to look at, I think, at underlying fundamentals and valuations and say, what is the asymmetric risk to the upside or the asymmetric risk to the downside? I don't see, and again, this is a mean stock. I don't see any reasonable justification for how this company, again, goes back to being worth 120 times revenues. I just don't see how you thoughtfully find demand from different shareholders to do that unless Elon again pulls a rabbit out of the hat and starts talking about, I don't know, space, you know, space, data centers in space and why it works. He tried, in that earnings, he tried to pull many rabbits out of the hat and I think what we learned is that people are now calling bullshit on him. I'll just, let me just tell you some of the things he said. He said, they're going to build data centers on the moon. So it's not just orbital data centers, it's now it's lunar data centers. He said that those moon-based data centers are going to be serviced by humanoid robots. And he also said that their factories will allow humanity to quote scale to 1000 times the economy of Earth in terms of intelligence launched to space, but probably maybe even a million times. So he's trying to do what you're saying. And it is the only way that they can get that stock back up to where it was in the few days after it went public, is they basically just need to pull the wall over people's eyes and wave a magic wand and start talking about data centers in space and and interstellar travel. of the bullshit that we've gotten so used to coming out of him. But I think people are now getting sick of it because it's not compelling anymore. And as you say, he's spending half his time on Twitter, he's spending half his time tweeting about wokeness or about things happening in Minnesota or God knows what he's talking about. He's the CEO of two companies at the same time, Tesla and SpaceX. I guess he's also the CEO of XAI now. I guess he's also the CEO of X, formerly known as Twitter because, remember, Linda Yaccarino left. They haven't even found a replacement. And that's in addition to all of the bullshit that he was getting up to in Washington, which he now admits was a mistake. He says he got carried away with the politics. I mean, this guy's brain has genuinely rotted. He's totally lost his marbles. And we see it in the interviews. I think we're finally reaching a point where investors are at least beginning to recognize that. They're hearing the things that come out of his mouth and they don't sound like some crazy genius who understands things about the future. They sound just like a crazy person who's lost his grip on reality and honestly, it lost his grip on his sense of self. I think we're seeing that in the prices. We're seeing it in Tesla too. It's down 30 percent here today. That's the Elon premium dying. I think that's what's happening. I wish I'd acted on this like anyone and I still think a basket, a basket of shorts around AI and AI just in companies is probably a decent way to hedge right now. But the musk meme, every meme stock eventually just becomes a stock. And it's like my son gave me this stat that I thought was so interesting. He said that no one is ever able to stay airborne for longer than a second, even Michael Jordan. It's like it's weird. They can get to 0.95, 0.97, maybe 0.98, but it seems like the one second barrier ironically, everyone eventually gravity wins. Gravity is undefeated. And I still believe in the stock market over the medium and the long term, gravity is undefeated. Eventually companies trade at the high or the low end of their sector in the high or the low end of market, you know, market valuations. That will eventually happen to this company. It's happening now. Tesla's an automobile company that wraps steel around, you know, around an axle. It's a great company. It should trade at the top of the automobile range, which means it's stock has another 70 or 80% to fall. SpaceX is an amazing business. It's a launch business that has a near monopoly. Great. It'll grow, you know, but it's growing 24% or was growing 24%. Sumid doubles, there's no way to justify the valuation. It's basically Comcast and space with incredible launch capabilities. But gravity always wins. Well, they're not even a space company anymore. They don't even want to be a space company. They're an AI company. You even have to space businesses doing well, even if the connectivity business, which by the way is crushing and you and I will bullish on ages ago on stall link, which we were excited about. I mean, I don't know if you remember, when we started hearing about SpaceX going public, we were excited about this company and it was a moment, it was a refreshing moment where we're like, we actually like this thing. This thing actually makes sense. And then they had to just stuff all the bullshit around it, specifically the AI. And now we're seeing that in the earnings, which I also want to get into. He's using the excitement and his ability to engineer what is one of the most overvalued IPOs in history at this size, if not the most overvalued given its size, to fund his vision for AI. And he might be right, the guys are visionary. But even if he is right, we're buying essentially an AI company at a multiple to the AI companies that seem to be more successful than his company right now. I mean, if you look at what are the multiples on revenues of open AI and anthropic based on the most recent rounds of valuation, what are they somewhere between 10 and 20 times revenues? But he's saying invest in my, my, my Comcast and Space company. It's really a bad AI that's really a laggard in the AI business. I'm spending all the money. That's what this valuation is dependent upon. And it's a, it's a horrible investment compared to the other players in the AI space with respect to valuation. So at some point, almost every stock is a good buy, regardless of the business it's in. And at some point, every stock is a bad buy. You know, regardless of how strong the underlying business is, if the valuation, this is a business, this is, this is a failed in my view. A, I won't say failed, a mediocre or meddling AI company cosplaying a space exploration, all these big words, rocket, meme stock. And I think people are, like you said, are calling bullshit. And most of the shareholders are thinking, I'm going to clock my 10x gain versus a 3x gain in 12 months. And, and are getting out and selling. I can't even imagine the amount of selling pressure that's going to happen here is these unlocked. And also, all of the, all of the additional incremental lockups he put in place indicate that he doesn't believe the market can't support that the current price can support the natural selling pressure if shareholders were able to sell these shares and make their own decisions. So he's made it easy to buy, but he's put in place friction around selling. What does that tell you about his confidence in the current valuation? I just want to go back to some of the numbers you brought up in the earnings because I think at first this seemed like a pretty good quarter, like their revenue grew 92%, which was better than expected. Their operating losses narrows to around $143 million in losses versus last quarter, where it was like two billion. So, you know, it looked good at first, but the key number that people forgot about or didn't acknowledge, and then suddenly acknowledged when they saw it, was the CapEx, which was $10 billion last quarter, and this quarter it was $18.5 billion. And almost all of that was AI. So essentially, what we're seeing here is for every dollar that SpaceX is generating in revenue, they're spending $2.35 on capital expenditures. And so if they were to continue spending money at the pace that we're seeing in terms of their capital expenditures, they will burn through the entire $86 billion that they raised from their IPO in about 16 months. So they're running out of money very, very quickly here. And so whenever we look at the operating expenditures for a hyperscaler, and I think that's what we've got to start calling SpaceX at this point, anyone who's building a data center and whose story about their AI growth comes from building data centers and selling compute. Operating income or operating losses don't matter. All you need to look at is the capital expenditures because that is where all of the money is going. They're buying chips. They're buying big long-term capital intensive assets in order to build out these businesses. And when you look at that number, suddenly you realize, hold on, this thing doesn't work. At least it doesn't work right now. And it's kind of a pipe dream as to whether it'll work out in the future. By the way, the fact that they're going to burn through all of their IPO proceeds in like less than a year and a half, it tells you something about what they're going to have to do next, which is going to have to raise a shit ton more equity and more debt issuance too. They're going to have to sell tons more debt, which tells you why the banks are being still so sick of fantic about this company because the banks know there's still huge deal-making fees that are in this company. They want to be first up to sell SpaceX's next follow-on offering, or SpaceX's next debt round. I mean, they're going to have to raise so much more money. And I think that's why you saw some of these big banks actually raising that price target, despite a quarter that was quite frankly pretty miserable from a CapEx perspective. It was like how surprised I was when I found out I was colorblind. Literally, the news came out of the purple. Just thought we needed a little dad humor there. Just thought we needed to break up. You're, what was me? No one appreciates my my thoughtful bearish remarks, a little dad humor there. And you got you got SpaceX, right? You're going to even be proved more right. And like I said, what I was thinking about education or been thinking a lot about higher ed recently. And Bill Maher was saying that the problem with higher ed is you guys are promoting an orthodoxy. And I'm like, that's not the problem. The problem is the homogenization of higher ed. And that is four out of five faculty members have said they don't think a conservative would fit into their faculty. And I've seen this firsthand. My department at NYU is just like so woke. It's frightening. And I'm like, this does the kids into service because even if they decide to adopt progressive values, and there's evidence showing that as people learn more about history and science, they do tend to skew more progressive as they go more higher education. We're doing them at this service. If one, we don't give them the ability to have a thoughtful conversation around opposing viewpoints. And we start teaching them that having a different political viewpoint makes other people morally deficient. And the same thing's happening here in the markets. And that is people are trying to say that if you're not a bull on these AI and not pumping the portfolio of of the VCs who are constantly on CMBC in the entire ecosystem. that benefits from an inflated market and more trading and more volatility and up and away, that somehow you're morally deficient. No, we need to have a thoughtful conversation on both sides, such that people learn or smarter and quite frankly, protect themselves a little bit. And I wish I'd have more thoughtful conversations with people around. Scott, you are a talented, hardworking person. It makes no sense that you're raising this kind of money for these companies which have little revenue. You should sell more and you should diversify and realize a lot of this success right now was not your fault and that things can change fast. And I mean, I was thinking about, I got invited, let's bring this back to me Ed. In '99 I got invited to Davos. I was like a rock star. I was invited to speak to the 40 largest, the CEOs of the 40 largest energy companies in the world. I was speaking to the CEOs of Saudi Aramco and Exxon and Shell and they were asking me how to run a business and I was all of 33. By 2001, the third year, I was invited back. I couldn't get them being because people literally thought it was a criminal. Oh, you're one of those fraudsters from Silicon Valley that raised money and lost it all. And the reality is, it's just helpful to have a thoughtful conversation on both sides, both for the entrepreneur, for investors, for everyone, just to have a rational conversation, you're not a bad person if you're a bull talking up your own stocks fine, you're not a bad person if you think things have gotten way too frothy. But the thing I didn't, I really didn't appreciate when I was your age and advice entrepreneurs listening, is market dynamics will always trump individual performance. And the mistake I made was thinking that if I just threw myself at something, be highly concentrated, it will work out. No, sometimes, sometimes your success isn't your fault and neither is your failure. And in '91, I wasn't as smart as I thought. And by 2001, I was in as dumb as everyone else thought I was. But I think these conversations that are too cited, if you will, or both sides get accurate representation are really important. And having said that, folks, there's only one side here. This shit's coming down. I'm sorry. This shit is coming down. Enjoy it while it lasts. And if you have shares in any of these companies and you're sitting on a gain, I would do everything I could to lock in some of those gains and putting it in really boring shit right now that is at least an arm's distance away from the eye trade. But anyways, I'm doing what I'm contradicting myself. - Well, just to your point, I feel like Leapold, Ash and Brenner and what happened with situational awareness is the perfect example. And this is what Michael Graham was telling us when he was on the show last week, where it's like, you shouldn't be giving $20 billion to a 24-year-old. That's not going to lead to a great place. And as you often said, like if you tell a 24-year-old enough times that they are Jesus, they are inclined to believe you. And I mean, I wonder what is done to his life that his fund collapsed in the matter of a week because he did convince himself. He bought the hype that a lot of the investors were trying to tell him and he went for ex-leverage on the hottest stocks in the market. And then what do you know? The whole thing comes crashing down. I think it's a perfect example of the thing that you're describing where the pumpery actually turns out to be a negative for a lot of people. It actually does a lot of both financial damage and then also psychological damage long-term. Because I mean, yeah, people now say, oh, Leapold, Ash and Brenner is a fraud. He's the sound bank been freed. He's Elizabeth Holmes. And it's like he was just a kid who was managing money and people kept giving him money. And so he kept doing what he wanted to do. Well, Leapold did do anything wrong. I mean, he might have been reckless. He might have been out over his skis. But if a 24-year-old can raise $20 billion hoping that the eye trade keeps going and he puts on massive leverage, I know the idiots here are the people who decided to invest in a fund that was 5X based on a 24-year-old supposedly inside into the, I've met geniuses. They put their pants on one leg at the same time and they're subject to the same market volatility as the rest of us. Look how fucking smart you are. If the S&P is off 40% over the next month, I don't care how many roads call it. You know, whatever, whatever prizes you've earned, you're gonna lose your shareholders, a lot of your shareholders' money. And let me tell you exactly how it feels. In '99, in late '99, about 24 of us were invited by a private jet manufacturer to an airfield to look at jets 'cause they said they were willing to take stock and private companies in exchange for plans. And we all went to this massive airfield and we looked at different jets and all of us and our kind of 30s were going like, "Oh, I want that one, I want that one." And I did have enough quote unquote awareness at that point to go, "This shit won't last." I was self-aware enough to go. They had a bunch of 30-year-old douchebags from Silicon Valley pointing at jets they want that that wasn't gonna last. By within 12 months, my accountant told me I had negative net worth and I should consider selling my house. And that moment, when I had that conversation, I remember exactly where I was. I was in the offices of profit. I remember thinking I need to go home and have a conversation with my wife around the possibility of having to sell our house. And 12 months before that, I was telling her about the plan I was gonna, we were gonna buy. And I remember thinking, "So let me tell you, let me tell you, I mean, new wife, building a future, she's working her ass off, she's working her ass off, you're starting to think about kids. Oh, we're, honey, we're buying a challenger 300. Oh, wait, we may need to sell our house. So let me tell you, it sucks. I think his situation is a little bit different because my guess is he's made so much money that he's not gonna have to sell his house, that he's been able to clock in a phase unless he did something stupid like leveraged his own portfolio. It's a lot of reputational risk and damage, but he'll be fine because he's clearly a very intelligent person in our society, one of the wonderful things about America is we love to forgive. He'll, you know, he'll have a scarlet letter on his chest for a while, but he'll be able to raise money. If Adam Newman can raise hundreds of millions of dollars to go buy apartments and call them flow and pretend it's something new or different than just buying apartments, which is a good business, that's one of the wonderful things about America is we love to give people a second chance. And I hope he's not in the same financial position I was, but there's nobody doubt about it. It absolutely fucks with here, especially I think, I'm trying to think as a young man, in some ways it's easier for a young man 'cause you have more time to recover. And I was a bit, I don't wanna, I was a bit sociopath and that is, I just wasn't that cognizant. I didn't care about Ruth. I almost got kicked out of UCLA three times and it didn't bother me. If I had been kicked out, it would have been really bad. It would have been, but I just kind of didn't care. It's like from zero to 30, I did not have enough anxiety. I was sleepwalking through life. I wasn't worried about the ramifications of my actions or risk. I was just like, oh, I'm fine, I'm telling you. Everything would be fine, it'll work out. From 30 to 40, I had just the right amount of anxiety to be aware, take some precautions, start to think about diversifying. From 40 on, I have way too much fucking anxiety. All I can think about, my son is super responsible. He doesn't drink and drive, he's super responsible. But I still find, I still create scenarios about the dangerous mean streets of Aspen for an 18-year-old. And then I worry about ridiculous scenarios. They probably won't come to bear in our society. And I worry that we're going to have a civil war between the red and the blue. I mean, my mind just goes fucking crazy places now. I don't know where I'm going with this other than a need for antidepressants. Add wrap us up here. (laughs) It's helpful, it's helpful to know all of this. Yeah, let's get into our week ahead. I think we've uncovered all we need to uncover in the financial market. So we'll see inflation data from the consumer price and producer price indices for July. We'll also see earnings from rocket lab, AST space mobile, core weave, and super micro computer, or all of the very hot AI or space adjacent stocks. Scott, any predictions? I think the down draft in SpaceX is basically forcing everyone to come to from this. I think it's Narcan or I don't know what the term is. Whatever they do to bring you back to consciousness. I think that SpaceX is, you know, having over the last 30 days is forcing a lot of people. This isn't the canary in the coal mine. This is the blue whale in the coal mine screaming. And there's just no ignoring what is happening to SpaceX and forcing people to get out pencils, not, you know, not fairy dust and magic wands and actually look at these companies through evaluation lands and something regarding what would be a reasonable valuation for these. Long winded way of saying, I just I think SpaceX's march down is just beginning, the declining tide is going to suppress all boats here. I have a very similar prediction. First, I'm going to take a quick victory lap because last week, my prediction was that we had hit the bottom full meta. It immediately rebounded about 10%. So we'll see if it holds, but I actually, I think that meta is one of the only big tech stocks right now that is actually still relatively undervalued because I think so much fear and anxiety is priced into that with good reason, but I think that we hit the bottom seems like we did. My prediction for this week is the same as you. I think there is so much selling pressure coming down the pipeline for SpaceX. I think this thing falls another 20 to 30% by the end of the year. This episode was produced by Claire Miller, Nelson Weiss, and engineered by Benjamin Spenser. Our video editor is Jorge Coltty. Our research team is Dan Chalon, Kristen O'Donohue, and Mia Sovario. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Profty Markets from Profty Media. If you liked what you heard, give us a follow, and tune in tomorrow for a fresh take on the markets. And kind, bring you up as the world's top.