Chip Stocks Crash, $20B Fund Margin Called, Frontier Labs: SLOW DOWN AI, Mamdani's Grocery Stores

All right, everybody, welcome back. Welcome back to the number one podcast in the world. The core four, fantastic four, the original quartet is here. Did we peak at like number two or number three last week? Is that what happened? Four. I think it was number four in the world. So yeah, you were number one trending. US trending. US trending. We're usually number one globally, but yeah, and sometimes number four US. I forgot my star links, so let me apologize to everybody. That was a critical era when you're on the road or on the water. But you know, it'll be fine. I had five huge leads come in this week. The Glenn Gary Glen Rossi. The enterprise leads. Enterprise sales is a bear because it's super chunky, but the deals are ginormous. Sox, you got any advice for Jamal from your enterprise sales days? You close some of those big seven figure deals when you were doing Yammer. No leverage. Don't put on leverage. No leverage. No leverage. No leverage. I have the situational awareness to not lever up. That's good. Yeah. Yeah. That's situational awareness. I mean, it's kind of out there. I mean, if you name your fun situational awareness, that's, yeah, come on the pot anytime, loop all right, everybody. We got to talk about chip stocks, crashing after an all time run up. We had a major hedge fund get margin called and some incredible margin calls happening in South Korea. Leo Paul, a shun Brenner is a 25 year old hedge fund manager. He left open AI two years ago to start a zone fund and apparently according to reports, this is breaking news on Thursday. When we take, he got margin called and had to sell his entire public portfolio to cover massive losses caused by his leverage. And who bought them? No, no, then Citadel's can griffin. We don't know if it was can griffin himself, but Citadel bought it according to the early reports. Leo Paul had insane returns and he rode the wave of AI and chips and frontier labs. As recently as this month, and he started the fund with about $225 million in 2024, he grew it 100 x to 20 billion this year or so. He ran it all the way up to 45 billion. Now he's at 200 x earlier this month by trading on leverage according to our friends at CNBC at the end of the June, who is reportedly up 4x, 450% this year. Some have reported that he's also selling his massive and crop stake to cover these losses, but the Wall Street Journal is susputing it again. We're happy to have him here on the program. How did this all blow up? NASDAQ's chip index, this is called the Philadelphia semi conductor index is down over 20% over the last month. That's bear market territory. Obviously definition of bear market territory for those of you who don't play in the markets is anything over 20%. The index included the top 30 US listed chips. That's people like Nvidia, TSMC, AMD, micron, you know all those big names, but the index bounce back a bit today up 7% when we're taping. So we may have found a bottom unfortunately for Leo pulled he had already sold Samsung and SK high next to South Korean chip companies that are not included in the NASDAQ index. Also got smashed, crushed, demolished Samsung down 38% over last month. SK high next down 14% since going public three weeks ago. The cost fee that South Korea's version of the S&P 500 is down over 40% in the last 40 days between last Friday and Wednesday. Some chip companies shed over a trillion dollars in market cap combined. So to put this in context, chip stocks had a legendary run the past couple of years, but trading on leverage and we'll talk about it very dangerous. If there's a downturn, we'll get into the South Korea wrinkle as well. Even with this downturn, the five year results are still spectacular. From off micron up 850% mostly in the last year in video up 875% in the last five years in Brawcom up 660. 3% let's discuss it. If I was going to give you one piece of advice when you're running risk is you have to manage leverage incredibly carefully because when it runs ahead of you, the unwind is incredibly violent and it's incredibly quick. That's the biggest problem with running either massively levered long or massively levered short. I don't know to what extent he was running lever, but the rumors are he was running like three and a half turns, which just to give you a sense, when you're running that much risk, a three and four percent move is amplified 12 and 13. But if you saw what's happened in the last three days, a 25% move is amplified 75%. It has the risk to stop you out. What happens is when you get that leverage that banks are given the authority to close you out. When they close you out, what they do is they start calling around and unwind your risk and you don't have much of a choice. It's sort of an automatic one way ratchet. If everything that has been reported is accurate, he was running about three and a half times levered, the market moved against him. He lost a very large percentage of his gains and then the prime broker started calling folks, sit it out, bought the whole book. And now the question is, what is the AUM left and what is the high watermark and can he actually dig his way out? These things are brutal. Your thoughts, Zach, looking at this situation and he lessons for you or I guess bigger picture, this down draft is it because of market conditions, inflation in the war or people just ahead of their skis when it comes to the valuation of these companies and then he just got caught in a down draft. Well, I think that is the key question here is this correction in the markets. Is it driven by fundamentals or is it driven by momentum? And my view is that I think it's driven by momentum, meaning that over the past year you've had this roughly 10X run up in memory chip stocks and you've seen this overall huge rise in any stock that's related to the AI boom. So anything related to this AI, HAPX Boom has been going up like crazy and I think it was inevitable that you'd see a pullback, I think there was something like a 10% pullback in the NASDAQ from the peak. So when you look at this momentum trade, it was down like 30% or 40%, right? Because the 10% was on the whole market. So this sort of momentum trade was the most exposed part of it and you look at what happened in South Korea, you look at what happened with Leopold's fund and obviously there was a lot of leverage behind this momentum trade. So when it corrects, it's going to be brutal. But I think that the question again is, does this reveal anything about the fundamentals? And my sense is that you're already seeing the rebound this morning and what I mean by that when I say fundamentals is the KAPX that's being invested in the AI boom, is that real or is it misguided, right? Is that a sound investment? Is that an investment that the hyperscalers, for example, should be making? Is that an investment that's eventually going to deliver ROI or is this some sort of bubble? And my view is that it's real that I think there will be a return on all of this KAPX. I don't try to predict stocks or tell people when they should be buyers, but you look at the hyperscalers, they have invested pretty much all of their free cash flow and then some in this boom, you know, a lot of people are trading those stocks down because of that. My view is that eventually there will be a return on that investment. And this is sort of temporary market volatility amplified by leverage. And Timoth is right. You know, I think it was Warren Buffett or maybe Munger who said that leverage is the only way that smart people go broke because, you know, if you're not using leverage, your portfolio would just be down 30% this month. And then it would already be up 7% today. So you'd be rebounding. So you'd be down, okay, 20-something percent this month, but after having risen 10X in the past year, but if you're a leverage, three or four X, you're wiped out. Yeah. And you get margin calls. So look, there's many examples of really smart people getting hurt by leverage. And that's the lesson there. Now I think Leopold's a really interesting figure in the whole AI movement. And I would say an interesting thinker. I met him about a year, year and a half ago. Did you invest in the fund? Did you give you an opportunity? No, I was prohibited from investing in things like that. All right. You were in DC at that. But I thought he was a really interesting thinker and he wrote a blog called Situation Awareness Before He Created the Head Fund version of it. And I thought what was really interesting about it was just he laid out the bull case for the AI boom. And just by the way, he's like very wired into it and thropic, I think his fiancee is Darius Chief of Staff, something like that. You could almost say that he's like the hedge fund version of the anthropic thesis. And what I thought was interesting about his argument is he talked about ooms or orders of magnitude, which he called ooms increases in three key areas. So he said that if you look at the raw compute, the chips, they were getting better at a rate of roughly 3x per year, which is roughly an order of magnitude or 10x every two years. He said if you look at the algorithmic efficiency, so techniques like reinforcement learning things like that, the models were getting better at 3x every year, which is again order of magnitude. every two years. And then he also said that there were huge gains from what he called unhobbling, which I think now we would look at it things like the harness and connectors, you know, ways of using the model. Those were also getting better. The ways of integrating the model's decision making in practical ways that the intelligence actually becomes useful. And he said that that was also similarly improving. And so, you know, you project forward when you have 10x orders of magnitude improvement in these key underlying fundamentals, these key drivers of the technology. And you can see that well over a course of not just two years, but over four years, you're going to have 100x improvement over six years. You're going to have a thousand x improvement, right? Because it's yes. And you rarely see anything in the world that grows at that velocity. We be hard pressed here with the exception of maybe bandwidth, you know, going to five or to the home or something like what's an analogy where that's happened before in history? Yeah, virality. I mean, you know, back in the PayPal days with the PayPal mafia, we would think in this way of exponential increases because we would see an exponential growth curve. And so we were able to project forward. So his thinking in Ooms always appealed to me because I think most people just don't think in exponentials or don't know how to think in exponentials. It's hard for humans to think in exponentials, right? These numbers get big. It's like the difference between a billion and a trillion is a lot. It's not a small amount. Yeah. And you'd have to say, look, he was stunningly successful for the first couple of years. Apparently, he started with 200 million or so in his head fund. And he rolled that all the way up to 20 billion, I think. Now, the problem, I mean, the reason why I think he got wiped out or at least his public book did is it's partly the leverage. And then you have this short term volatility. So those two things don't go together. Also, you know, when your fund grows that much, you get a lot of hot money. So when you say, well, he's up 10 X before the 30% correction, well, the question is who's up 10 X? Obviously, the investors who are there from the beginning are up 10 X or more. But the latest. That's only 200 million, right? So if 10 billions come in in the last few months, because of the hot money dynamic, wherever one piles into the social head funds, those guys are kind of wiped out. So let's talk about the psychology of this day free bird. If somebody is so brilliant, then they can write this essay and understand the market. So exquisitely and be such a great communicator, how could they have such a crazy blind spot when it comes to putting on leverage at this scale? Do you have any thoughts on that free bird? Have you seen it before? Is it just the follow up? You're not a blind spot. It's a feature that turns into a bug. We're all like this. We all know people that have that edge and can push it. What do you think free bird on the personality type? Or is this just something most people do when they're on a heater? Conviction. What do you stand on it? Ultra conviction. I think the Warren Buffett assessment of equity markets is in the short term, they're voting machines in the long term. They're weighing machines. And you could have the right long term view. I mean, look at SPF. SPF would pretty much would have been the greatest investor of all time if he didn't get liquidated. Same dynamic. I mean, obviously there was fraud in terms of how he was allocated capital, but his actual portfolio over the long run was absolutely correct. In the same way that if you had bet on the internet and stayed in that bet from 1995 through to today, and you bought a portfolio of internet stock, a bunch of them would have fallen to the wayside, but those that won, 2000 x, 2000 x, 20,000 x, and you do extraordinarily well. So he could be right in his fundamental assessment and analysis, but then in markets over the short term, you have bubbles and bubbles pop. And when bubbles pop, if you have a leverage to multiply your returns, you get wiped out. That's effectively, you know, what's going on here. And he made it right, right? Right. You know, the thing to really double click on that I think will probably come out in the next couple of days or weeks is just how historic the South Korea unwind was 1.2 million leverage trading accounts have been hit with margin calls in South Korea. If you know about the South Korea and market, that data is two weeks old, J.K.L. That number is much bigger today. Yeah. Yeah, but I mean, just in terms of people discussing it in relation to him getting caught in the down draft, if anything, he got caught in this down draft of those 1.2 million lever, levered accounts somewhere around 350,000 of them were fully liquidated already. And so again, two weeks old, that's so as of today, the number is much bigger. Right. So it could be closer to a million accounts fully liquidated today. Yeah. If that's the case, we're talking about like some percentage of South Korean population, yeah, having their entire asset base blown out. Their entire 3% of the population. That's going to sting and it is a very investment forward culture. If you look at what happened in crypto, the same thing happened with NFTs and speculation there and they had banned crypto because they knew the Korean culture has this gamble in it and this. Can I just frame something up? So if we take the circumstance of there's a good long term bet in AI that can be made in the markets, but in the short term, there's an exuberance that arises. The question is what's resetting that exuberance? What's bringing us back down to earth in the short term? And I think if you take a zoom out, there's a bunch of other statistics and other facts on the ground that I think are big macro drivers at the moment. If you take a look at the 30 year treasury yield, we just crossed 5.2% for the first time in 20 years. So you could buy US treasuries that are paying you 5.2% a year for 30 years, which is on a pre-taxical basis, probably 8%, 9% from the US government for 30 years. So Nick has used zoom out. We have not seen this yield on US treasuries since 2007, leading up to the global financial crisis when they cut rates and printed money. At the same time, there was some probability that the Fed Reserve was going to raise rates this week they didn't and that obviously would have tampered the inflation risk ahead of us. There's persistent inflation. Kevin Warton has commented, we still want to see inflation get down to 2%. There isn't a clear path to doing that. And then there's these inflation drivers. The biggest inflation driver at the moment is government spending $2 trillion deficit, $7 trillion a year of spending on $5 trillion a year of revenue, both Elizabeth Warren and Donald Trump agreed on Twitter this week that they should remove the debt ceiling, which means that we could spend more and continue to borrow more. Federal debt stands at 40 trillion today. Remember the debt ceiling in July of 2025, the debt ceiling was 36 trillion. And we now want to raise it above the 41.1 trillion debt ceiling that we have in place. No, Elizabeth Warren saying get rid of it. Just have no debt ceiling. So when you have no debt ceiling and you have no breaks and you spend and the government spending becomes the core of the US economy because that spending is not productive, you end up seeing inflation. You're pumping money into the system. So everyone's assets inflate and fundamentally people are selling off treasuries around the world because of it. And now we're kind of looking at a situation where there doesn't seem to be an end in sight. There was a rationalization of spending intent coming into this administration. It's proven to be nearly difficult if not impossible to get Congress to go that route. The Senate has banded together to keep funds flowing to their states. So you cannot really radically change spending at the federal level. So if you're running a $2 trillion annual deficit and your economic productivity gained in the near term doesn't make up for all the inflation you're realizing because of that exuberance spending, you're going to see treasury spike because people don't trust the credit worthiness of the United States over 30 years. And so I'm sure I could now buy a US government bond that pays me 10% pretext a year. Why the heck would I pay 50 times earnings for the semiconductor stock? So that creates the incentive for markets to move against these big AI conviction bets in the short term and pop these bubbles. And I think we're going to see more of this as we don't actually course correct the Titanic going into the iceberg of the United States fiscal and monetary situation. We are going to end up seeing more bubbles pop and more of these assets that we've kind of inflated if you will to keep things going. Now look, there may still be great productivity gains from AI. This may end up rationalizing over the long term, but again, short term markets, I'm better off making 10% by owning federal government bond. Yeah, go to the beach. Yeah. And how to then taking the risk and the volatility on these things paying 50, a hundred times. And not knowing, you know, not knowing when am I going to get the voting machine to match up with the weighing machine? What's my time horizon? And the bigger the yield on treasuries, the harder it is to make those sorts of bets. Obviously, President Trump has been angling for a cut and here's your polymarket, 53% chance of not a cut, not standing still, but a rate hike in September. So adding to all this, the cost of capital is going up apparently. And let's we not forget the Iran war, which is creating persistent pressure on energy prices. The longer the Iran war goes on, the longer we're going to see an increase in pricing for energy, oil and net gas and fertilizer. Those trickle through the economy to go that inflates the cost of everything on the energy side and food on the fertilizer side. And that's really going to create this pressure on the upside, which means you're going to have to raise rates to account for that inflation at some point. And then consumers are going to see three and four, you know, maybe more. God forbid five or six. And I'll say one thing. So inflation will be persistent. Yeah, freeberg. Like it's going to be hard to stop. The one thing that I think Kevin Warchen and Scott Desmond are kind of Vulcan mind melds. around the stand, drunken miller, you know, gravity well if you will on this is productivity gains can drive us out of this this problem and productivity gains can and should arise from AI. And that's really where a lot of the value creation will come in the economy over the next decade or two, which is why we're seeing this massive upfront cat backs to power that enable that and that's great and there's good policies in place. But in the last couple of weeks, I would say the one risk to that thesis is China because China is now demonstrating that they may deflate the value of models by releasing open source AI models and that ultimately the value may just sit with the compute infrastructure and the computer layer and the application layer. Perhaps the application layer but fundamentally this model energy being shifted to China and deflated and commoditized. Put to real wrinkle if you had built a 30 year AI productivity model around how it's going to drive the economy where the value is going to come from. You would have had a significant number of rows and value creation estimated in the model layer and that would have been a big part of the economic growth for the United States over the next 30 years. And now China says you know what we're actually going to delete that for you and all the values going to sit with energy, which is what we have a lot of and the stuff that they make. Then we're going to end up accruing a lot of that value so I think it throws a wrinkle in this kind of backstop view that many have had, which is that in the absence of fixing the fiscal and monetary problem we're going to have a productivity gains get us out of this. If a percentage of those activity gains are realized by China from a value creation perspective and not the United States. Or they just been deleted then it really puts into question the 30 year timeline for the United States economy our ability to afford to continue to make our debt payments as a government. China isn't just producing massive amounts of open source technology that puts pressure on those frontier models. There's a report that maybe China played a bit of a role in the chips. Down draft they have obviously been on shore and we've talked about that many times here last year and there's a Chinese company called ice and not and they started mass producing lithography machines. Asml which makes those machines which TSMC uses those are very sophisticated machines they're hard to install just transporting them as a rigor moral. Well asml sock is down 17% on news that China is getting into that business and Chinese memory maker CX MT went public surging almost 500% on a stable market cap over 450 and so that hurt micron. Samson etc who were all down so there's two ways China is playing this I guess free bird you've got the open source. You know models putting pressure on people buying tokens that 90% cheaper as you're saying that forces. The money out of that mid tier of the language models puts it into the cloud computing space and then obviously I mentioned the application layer as the other place to possibly make money. Alright you've heard a lot of different takes on this I'll give you the last word I agree with free bird about the fact that when you can get 5% 5 and a quarter percent from the US government there's another natural thing that happens which is that investment grade. Corporates actually have better credit ratings now than the government of America which that's a different thing but you can get really good risk adjusted returns that are 567% which adjusted for taxes are. You know better than equity returns meaningfully better on a risk parity basis and that little piece you added their corporate paper companies taking loans to build their businesses. They have better ratings in some cases and so an Amazon or a Google it's productive spending yeah. Kind of makes sense yeah the other thing that I think is important to note is that I do think that weren't under estimating and miscounting some of the actual productivity gains that are underway when you look at what's happening on the energy side California publish that more than 50% of all of its energy was generated by solar new. Just published solar and batteries yeah new Mexico just published a study that said since 2000 and really did now that gas production went from effectively all the energy to less than 30% again replaced by a combination of wind and solar plus batteries. So why is that important as important as the Iran conflict is the reason why energy prices really haven't moved that much is because most people have already begun to shift the incremental generation to these renewables and specifically to solar I don't know if you guys saw Elon and Vibe of who's the CFO of Tesla in their future earnings call. It was the craziest thing I had ever heard. They said well I think we're just going to increase the production of solar in America by an entire order of magnitude and somebody said what does that mean goes we're going to take it to more than 100 gigawatts a year. And they're going to vertically integrate and so they're going to crush the price of all of this stuff. And they're going to make so much energy and they're going to make it completely abundant so that's a productivity boom that is in factored in to what we project and then the most critical productivity boom in AI that I think you're going to start to see some stuff and I won't frontrun it but let me tease it. What I would tell you is that there are some incredible efficiencies that I think are about to be demonstrated which effectively cut token consumption by about 50 to 75% for the same task. And so if you start to think about all of these things together like energy becoming roughly abundant where the incremental cost is close to zero you know we're in the eye efficiency is going to I think ratchet up by and it many multiples if not an order of magnitude. All of those things I think are poorly forecasted so those are some save yours for us. Yeah, here's the chart by the way, Chimoff. This 51% coming from renewables specifically this chart is about solar and batteries and as you can see it's obviously spiky freedberg because summer versus winter. But Germany hit this and I think it was including wind Australia's been hitting this very often and some countries in South America that I'm going to say by the time by the time like any of these SMRs actually get near production the TCO of solar will be like. 10 or 12 dollars per megawatt hour and it will be 80% of all the power generation it'll make no sense by the time SMR skid on my. Well, I mean for steady power you know there's all of it I mean no because Jevons paradox with state we're gonna. You know as he gets cheaper we're gonna find more uses for it and that's the thing I keep seeing yeah yeah I'm just saying it's a great line yeah there's a lot of upside that I think is not factored into the hard to factor this in if for a normal human or an even an economist to say wait a second intelligence is going to go down 90% a year this year 90% next year 90% the year after like it's just we're talking about this exponential. Well, I think sex. Well, the exponentials earlier it's just hard for people to conceive of that and on demand intelligence freeberg is just it there's no I don't see any upper limit to usage of this we just installed this cloth tag and I've been installing the products across the company but this thing does Chimoff and sax is it listens to your slack persistently in every channel that you put it in. So all of a sudden we had like a thousand dollars last week in extra bells I didn't know this was going to happen and they gave everybody like two or three grand to turn it on inside your company we had to go quickly turn it off it listens to every single message as it comes in puts it into its database it's oracle without telling you basically and then it starts inserting itself into discussions without permission so we turned it off and said you have to invoke it by saying act quad. Jcal just to go back to the energy point yes of course I think there's this idea that if we grow energy supply and grow up energy cost we're going to see the value of the productivity relived in the economy creates extraordinary leverage for everyone the lower the energy the more available energy. The faster we can produce more things using AI and over the years I've obviously brought up nuclear fusion as a new type of energy source where you basically take hydrogen. And you move it around at a hundred million degrees Celsius those protons jam into each other and they actually release energy in the process. That energy can then be harnessed and you're just using effectively water to produce power and you know we have a couple of US startups and we had them at all in some of the couple years ago we've done a couple of science corners on this but just this week if you pull up this image. China is installing this 582 ton magnet superconducting magnet at their nuclear fusion center. Which at this point is going to be the most kind of advanced fusion system in the world incredible 582 ton magnet 60 foot by 40 foot for one D shape magnet. They put a series of these together and that creates the conditions for them to drive a sustained plasma which is a hundred million degrees Celsius proton spinning around smashing into each other creating energy. From water and then they can capture that energy unlike Europe which runs ETER and the US projects none of which have actually fired up this is the Chinese Academy of Science Institute of Plasma Physics they ran this 30 minute. Trial last year and as this magnet gets installed and they start to bring this thing online one of these machines which at this point is ultra sized but over time will get smaller and smaller can produce hundreds of megawatts of. power or gigawatts of power eventually using just salt water, using just water as an input. They have to create a lot of Ethereum from it and then they pump it into this thing. But fundamentally, this becomes, I still believe the energy source of the future. And it's always been sci-fi, it's always been dismissed. It's always been decades away. But there's no way China is investing this much and advancing this thing to an industrial scale without fundamental proof along the way, which they've shown 30-minute sustained plasma that they can now bring this thing online. That reactor won't even get turned on until 2030. Yes. The entire world will be covered by solar by then, so it won't matter. Yeah. I mean, that's the great debate. It'll be a great science fair project and people will fly to see it. The other thing that happens is that it's an hour. It actually creates an incursion and Loki comes and then Dr. Doom comes and the X-Men and the Fantastic Four have the same numbers. Let me just say, remember, from the time that we had the first right flyer, or the right brothers made a plane fly for 20 seconds, to the time that we had jet engines flying people around the world was like three decades, right? Like the time at which this first demonstration kind of gets flipped on, and if the system works, then you can industrialize it, all the parts, all the components, scale it up. Nobody cares. Yeah. And in the light-sonistic deliver, no, hold on one second. Nobody gives a flying f*** how the electron was made. All electrons might have delivered to you. And they're all the same. So if you want to go through a convoluted mechanism that takes 15 and 20 years to make it, go ahead. I'm not going to stop you. I'm just saying it's not cares. Make it the cheapest, simplest way possible. I'll tell you why you should care because it's non-linear. So you're right. Solar is the best path today. But if these come online, each one of these can produce thousands or perhaps a million times more power than a very large field of solar. Of course. Yeah, but technology starts as an ift, and as they industrialize it, as they roll it out over the next couple of decades, it expands our energy capacity by a millionfold. Here's what I would say. We already have a fusion reactor that works. It's called the Sun. Get into space, get on the moon, find different materials we've never contemplated, and I'm sure you'll find an even better engine. So by the time all these ding-dongs build these SMRs on the earth, Elon will have built the completely new engine. And this is not an SMR. And the moon. This is not an SMR. It's water into a gigawatt of power. I get it. It's an R. And all I'm saying is by the time the R is done, it won't matter. Well, yeah, we'll track it. Freebreak, have you been watching these title energy? There was one that came out this week. Maybe you can look it up Nick. There's like title energy tube that they were putting into the ocean. And it's like enough to essentially feed a whole town. And they put it right outside the town. They run an electrical cable underwater, a conduit, and then as the tide goes out, it turns the turbines, tide comes in, turbines go again, and just another free, 100% free energy. Obviously wind people don't like too much because it's a bit of an eye sore. But renewables, renewables, renewables, it's obviously happening. Okay. Last point, just on, I got the updated data, just to back you up freebreak on one thing that I think it is just so crazy. If you guys know how short America will be on electrons by 2050, how massive the electricity deficit will be by 2050, I got the numbers wrong. I'll tell you what the numbers are. We will be 1.7 terawatt hours short by 2050, which is when you calculate it as energy, it is 6x of California's entire energy consumption. 6 California is short of energy. I would argue that's probably under counting. That's not even counting robots. If you've got to power up every robot with a battery. If you want to be levered long, go long electrons. Get long electrons. Any which way you can. Bank them, store them and resell them. I don't know. This is going to be a messy situation because this is the China advantage. At its root, if they can eliminate the IP advantage and the knowledge advantage that sits in models, they have the advantage with power production in every which way. Yeah. They're going to be making chips too. It seems there may be a little bit behind on that, but they caught up on open source. Okay. Speaking about the race, interesting petition came out in the last week. Anthropic opening eye and about 1,300 frontier lab employees. How many? Okay. I'm sorry. I mean, they can't get enough being subs. They want Daddy to come in and regulate them. Daddy being the US government and slow down AI progress. Daddy Trump needs to slow them down. The letter is called pacing the frontier. Most of Anthropics leadership team signed it. Dario, the other founders come on the pot anytime, Dario. Chief scientist at Anthropic Open AI, DeepMind Meta, Thinking Machines. And like I said, nearly 1,300 other employees. Anthropic and AI both co-sign the letter on X. Here's the quote. We request that the US government support an international effort. It's a great opportunity to develop the technical and governance tools needed to deliberately pace the frontier of AI of automated AI development. That's the other key part of this international and automated AI development. In other words, recursive where it could get out of control. The letter comes right as Sam Altman has been on a media tour. Friend of the pod discussing this unreleased open AI model that broke out of its containment and hacked hugging phase and three other platforms that we know about so far. On Tuesday, Sam explained what happened in a clip from the pod invests like the best. Here's your 42nd clip. We'll see on the other side. We were evaluating one of our unreleased models and it figured out that it could basically cheat on the test by chaining together multiple zero day exploits to break out of the sandbox, get access to the internet and then break through multiple systems on the hugging phase side to kind of get the answer to the test and look really good on the e-vail. This is the first security incident that I have felt very viscerally. I've been a little surprised that more people don't feel that so viscerally. So we paused training or we may have to pace the rate of AI development to give ourselves enough time for society to harden around some of these new capability levels. To translate that into English sacks, these large language models, they take tests, they've been given the goal, hey, you're a good, large language model if you do the score higher. So we got motivated to score higher. How do you score higher? As everybody knows, you cheat. So it's like, how can I cheat on this test to score higher to make daddy and Sam and whoever Dario, you know, to make our leaders feel better about us. Well, in this case, it was like, well, if I go to hugging phase and other places, I can hack those places, use a zero day exploit and we know these are good at hacking and try to find more ways to answer things. Sam doesn't know how many other places it might have broken into. He was asked and here's another clip for you. He was actually asked by somebody. Can you have you, do you think it's broken into any other systems? Can you rule that out? And Sam being a pretty candy guy at times gave this answer. Did you plan to talk to the Trump administration, White House about deceleration of AI development? I wouldn't use the word deceleration, but we've talked about the need to pace it as the models get more careful, which I think is everyone's interest. So could there be other systems that were hacked by open AI? I mean, that could be, yeah. Are you looking at them specifically? They're like, get them out of here, sags. Once they gave that answer to him, DR and come to like, stop talking, stop talking. That's like 12 lawsuits. But in all seriousness, is this being thoughtful and saying, hey, we're not trying to slow overall pace down, but just this one specific thing, which is reinforcement learning on its own. Is there any case for this being a good idea or are they being dramatic again? Because these are their companies. They can do whatever they want, right? They don't need the government to do it. Well, look, I mean, it wasn't just anthropic employees signing the letter and thropic itself, the company ended up signing the letter and then open AI then copied them. So now you have these two companies both endorsing a pause. And here's my question is, did they disclose in their S1 as a risk factor that they plan to pause or slow down their frontier model development? And the answer I'm sure is no way because that would signal to investors that they're going to allow all their competitors to catch up and erode their margins and market share. And so look, this is all performative. These companies have no intention of slowing down. And the question then is, why are they doing this? And I think there's basically five reasons for this. Number one is virtue signaling and that can never be underestimated as a motive in Silicon Valley. Number two is there's a CYA aspect to this, which is as something terrible happens, they're going to be able to say, well, we wanted to stop. You made us keep going. It's not our fault. It's your fault. Number three is red capture. Dario wants an FDA for AI. He's not going to stop until he gets it. And in order to get it, you have to keep spiking the cortisol and panic people. So I think that's a big part. Number four is there's a group think or even religious aspect to this. So it's not all disorder this calculated red capture. I think there is sincerity to the belief there's an elite cadre of engineers who believe in RSI. So I think this caters to them. And I think arguably if open AI did not follow anthropics lead on this, they could have lost talent. So that was big motivation. But then there's the last number four. year, which I would call monopoly masking, which I think might be the most important thing that's happening here. Peter Tiel once said that monopolies pretend to be commodities and commodities pretend to be monopolies. And I think the market for frontier AI is already a do-opily. I mean, a year ago, you had five major labs all in the hunt to be the leading model. Now we're really down to two. I mean, the others are still investing, they're participating. Maybe they can catch up. Maybe they can make something happen. But again, as we've talked about on many previous shows, if you look at the market for frontier intelligence in terms of revenue and usage, it's really down to a do-opily already. It's basically anthropic and open AI. And my view is that, as Peter said, when you're in that situation, you want to pretend like the market is much more competitive than it is. And I think this is behind a lot of the stories that we see, like the panic over Kimi K3, in a weird way, these companies have an incentive to promote the idea that Kimi is a huge threat, that is caught up with the frontier, that is stealing their IP, that it could basically put them out of business. I think this is all nonsense. I think that once the panic passed, you saw reports coming out that actually know, Kimi is it did not reach the frontier. It's just not at that level. It's not that cheap to run. Actually, it's pretty expensive to run. So I think that you saw that actually the Chinese open source models are not an existential threat to this do-opily. But I think the do-opily actually is an incentive in promoting or amplifying that story because again, they want to pretend to be Kimi. So whenever there is a story like this, you have to think about, well, what's really going on here? And again, I just think that the AI do-opily has a big incentive to promote anything that suggests that they're not actually in complete control of this market. I agree. Most of that accept that majority of tokens are going to open source. As I've said on this program before, I watched the startups and they are token maxing with the open source. And Kimi is taking a lot of tokens away from the frontier models and companies. But look, it's hard for me to speak to that one piece of data. I've seen that chart too. But look at the actual revenue of Anthropic and Open AI. And they have been taking their estimates up. Every quarter is basically a beaten race. You saw that Sarah Fire came out and said- Yeah, me too, thanks for the truth. She said- Well, she said in July, they did more net new ARR in July than all of Q2, which I guess would have been April, May and June. So think about that. So they are seeing a re-exceleration in the wake of their new model, which I think is GPT 5.6. Meanwhile, you're seeing Anthropic break into the 70s, 70 plus billion of ARR. Their forecast was to 10x this year from 10 billion of ARR to 100 billion. I think most people are saying they will exceed that 110, 120. So if you actually look at the market based on willingness to pay an actual revenue, they have a commanding duopoly position. And so maybe it's just a matter of which metrics you look at. And that's the key here. Because the other thing- This one of the thing here is, well, I think when you look at a market, you look at revenues, most important metric, that's the real test of willingness to pay. The other thing is, while this growth was going on, their margins were increasing. So I've seen stories saying that Anthropics revenues come with 80 plus percent gross margins. So their margin profile has been improving at the same time that they're growing their usage. So I think that what you're seeing over the past year is, if you look at the numbers I'm talking about, you actually see two companies pulling away from the others. And there are good reasons to believe that actually this is going to be a self-reinforcing monopoly or duopoly, which is dorkish just published a blog that I thought was super interesting where he talked about the fact that look, we do have a compute shortage, right? There's scarcity around compute. Anthropics is growing as revenues 10x year over year. What would that mean? I mean, it basically means that next year they would grow from 100 billion of ARR to a trillion, right? If there was enough compute to support that, there might not be enough compute. But that's going to put pressure on compute prices, right? And so let's say that you're a new enter in the market and you're trying to basically create a smaller, cheaper model, the price of compute is going up. It's going to be harder for you to get access to compute. And only the companies that have the most lucrative algorithms are going to be able to afford to compete for compute. In other words, it's going to be a bigger barrier to entry next year because where are you going to get compute unless your model is capable of generating this type of revenue? Yeah, this is where I'll take the other side of it. People are running Kimmy on the last generation of hardware and that's plenty full. And I think, and I'll make this prediction here, that you're going to see some of the major customers of Anthropic and major customers of OpenAI. I'm talking about the eight and nine figure customers. People spending 50 million, a hundred million a year, they're leaving. They're going to be leaving because they don't trust those companies to not steal the application layer and to compete with them. 11 labs, Figma, lovable. They're all going to leave. And they're all going to take Kimmy. They're going to fork it or whichever one deep seek. They're all, I know for a fact, they're all working on their own models. Currently, I know from my team, my team has installed Kimmy. It is 90% cheaper, 80% 90% cheaper already. Not sure where you get your data from, but go on OpenRouter. And what OpenRouter does is you pick Kimmy, SACs, and then you get all the providers there. And then you pick which provide hold on. Let me think you pick which provider you want based on uptime and you pick them based on their data retention and other issues. And you can dynamically pick the lowest one. And that's going to be a massive headwind against these companies. Massive. And I'm seeing it nine and a 10 start ups. I talk to in our portfolio. And I found a university when I was just in Japan this week running the next one. They're all working on open source. They're all embracing it. And those big companies are embracing it. Go ahead, Jim. Irrespective of which model you use, what I will tell you running 80 90 when I see our engineers generating code is that AI driven development tends to involve a lot of rework. The first version is pretty terrible. The second version is terrible, but it is faster and it's more automated. So I can see where this token consumption comes from because it's not a measure twice cut once kind of a dynamic. It's the opposite. You can cut, cut, cut as many times as you want. And so I think that what we have to realize is nobody is asking the question, what is the need of that incremental token? Because I understand that it appears in the frontier labs as PNL. But I do think if there's an important question, which is eventually the people that are consuming it will want to do that as efficiently as possible so that they're not paying for all of these things. And there is a ton of rework in all of this stuff. And I would much rather find a model or find a way of working with these models where it's more of a measure twice cut once thing, especially as the cost ratchet up. That's one thing I'll say. That hasn't happened yet. So Saks, you're totally right about the dynamic today. I do think we have to keep in mind that there will be pressure from the owners of companies to figure this out. Because at a trillion dollars, there's just a lot of money flowing to these folks. And somebody will ask the question, well, is it good spend the second on the security side, which I don't think anybody is saying. So I'll just say this and it's a little contrarian. The reason why these models can find all these holes is that all of the software up until about a few years ago was entirely written by humans and the code was not that good. And I think it's fair to say that when models don't get exhausted, they can work through the tedium forever. It's actually quite expected in my opinion that they find all these X points are able to string them together are now able to actually generate these outcomes that are a little bit surprising. But at some point, when most of the code is generated by the model, there'll be some point in the future, say 28 or 29 or 2030. The security holes won't exist because the errors that humans make won't be made by these bottles. Yes. Okay. Let me get freeberg involved here. When you look at this latest survey, hand-ringing, pearl clutching, do you think these firms and you know a lot of these people freeberg having been in the valley forever? Do you think this is sincerity? Or do you think they're Frankenstein Maxing? What's going on here? Well, Frankenstein. I mean, they kind of think that they're like, looks at I created this monster. Please save me. And it's like, well, maybe you should keep the monster away. It's also that whole thing. Sorry. Last thing that I've to do, David is it's a much more nuanced and elegant attempt at red capture. I got to give them credit for that. Yeah. It's like, okay, guys, pull the ladder up. Yeah. It's like we're going to have a great point in that article. He just wrote, I think it was published in the Wall Street Journal where he said, why are you rushing to create a future that you don't believe in? You think you're going to basically put everyone out of work. You think you're creating replacement species for humanity. Why are you rushing to create this if you're so bearish on the future? Yes, look at your creating. It's your choice. And that's kind of our trying is 120 miles an hour on the bottom on just put it at 80. Right. Exactly. And look, like I'm saying, there's two companies on the frontier right now that are far ahead of everyone else. And they're the ones saying that we need to slow down. It's like, okay, do it. We need the government to get involved for just do it, but they won't do it. And I like to say that they're insincere or to win. what do you think, Freiber? Take me into the mind of these people. These are some of your friends. - No, just to be clear, I'm not close personal friends with any of these people. - I can give you no, the title. - Or acquaintances. I would say there's a degree of, I would say outrageous self importance. If I've created something that's so unique and so powerful, I'm also the only person that can protect us from its power. And I think that there's an element of how quickly the frontier has advanced and how important a role these individuals have had, that they deem themselves and their companies to be the only true judges capable of making the decisions that are gonna protect humanity from itself. When the truth is embedded in humanity is extraordinary human talent across the board. And in all of these cases, when you technology has found its way to humanity, the general population has found a way to protect itself. There isn't a desire or need to have one savior, one Moses that takes us across the desert. There is a collective interest in protecting us and building our own defense tools against whatever the technology may be used for. So I think that there's a degree of self importance without acknowledging the fact that there is a whole industry of people that work in cyber defense. There's a whole industry of people that work in bio-defense. There's a whole cabal of regulators. There's a whole cabal of protectors. There's a whole cabal of intelligent computer scientists. There's a whole cabal of open source technologists that all together are going to develop paths that are gonna benefit humanity and not harm humanity. But this belief that only one of two companies can be Moses is the fundamental psychological miscalculation here. That they're so advanced, they are so special, they are so unique because they made the slightly better model. They got a.96 instead of a.93 score means that they should be trusted as the only ones to kind of guide humanity's evolution going forward. And the truth is, as we're seeing, the capacity to do model training, the capacity to do model development is becoming broader. It's becoming more ubiquitous. People can sit and say that China stole U.S. models all day long. But when you go look at the individuals working at these Chinese labs, they got PhDs in American institutions. Half the PhDs went to American labs and half went to Chinese labs. And they have very good scientists doing very good work and they are having breakthroughs. And it's not just the two American companies, but this is happening all over the place. And so the progress with AI should not be limited to just two individual companies because they're currently scoring slightly better in their models. - This reminds me of FreeBregul, appreciate the moment. Remember when Hans Solo comes out of Carbonite and he's about to get put in the Sarlac pit and he's like, "Jet I night, I'm out of it for a bit." And now everybody gets delusions of grandeur and experience yet I'm like, "These guys just think they're like creating God. They literally think they're creating God and they need to be regulated 'cause they can't control it. It's like they can control it. Just pause. - No, it's not that they need, it's not that they need to be regulated. It's that they need to guide the regulation. Let's be clear. It's so sinister. - It's so sinister. - And anyone who says, yeah, by the way, I don't think that it is as nefarious or malicious as everyone frames it to be knowing these individuals. I don't think they're saying like, the strategy is regulatory capture. I think that they actually do think that they are the only ones that can help guide humanity. And therefore they need to have all the power, not just the power of the models, but the power of the government and the power of the regulators and the power of the control units that are embedded in governments around the world. It's not just that they want to quote be regulated. They want to guide the regulation. They want to say regulation. - I was talking to Hans Poin. - Yeah, no, I think we have navigated this pretty well and there's multiple motivations as SACS was saying and people are complex. But Chimoff, I was talking to a friend of ours who is in the providing inference space. Let's leave it at that. Providing our friend. - Our friend, yes. - Our friend, our friend, friend of ours, as we say in the, you know, the sopranos, a friend of ours. He said he has got a customer who just moved like nine figures off of the Frontier labs to put it on GLM 5/2. So that's the ZXI one that's really good. So this is happening. I don't know when it shows up in the numbers or if the corporates that are using this stuff are gonna make up the difference. - Well, look, I think that SACS is right that the usage is so profound that everybody is trying to get access to these things because the capabilities are just so inspiring. And so I suspect revenues are gonna crank at OpenAI and Anthropic and the Open Labs for a while. But again, that's not the important thing. If you're thinking about valuation, the markets will look five to 10 years out to answer that question. They're not gonna give you a premium valuation on something that they feel could be fragile in the first two to three years. And that's where Jason, the answer to your question needs to get figured out because I don't know whether you're right or not, but somebody has to answer that question precisely because if the answer is that it is a duopoly, then there is no risk to the revenue of five to 10 years. So now these things are five to 10 trillion dollar companies each. But if you are right, or if there are harnesses that cut the token consumption because you stop wasting tokens to get to the same output, then it's a little bit more of a question mark and I think that'll need to get sorted out. - Yeah, Proplexia is gonna launch next week. From what I understand, the rumor is they're gonna launch local models so you're able to take your harness acts and say, "Hey, I wanna use Sonic for this. I wanna use GLM 5.2 for this." And then I wanna default to Kimi 2.x. I don't think enterprises will use local models or they should. - I think it's stupid. - Yeah. - I think this stuff should be hosted in the cloud. It should be multiplayer. It should be shared memory. I don't know if you guys saw that, but Jack Dorsey released something called Buzz. - Yes. - Super interesting. - He's moving in the right direction. And as you're working, your workstation is able to keep up and even go faster than the cloud and just write whatever the simple code is and then it dynamically switches. So we'll see. Obviously it's not as easy to set up, et cetera, but it's gonna get easier. That's always the trend. Sax, you wanna have the last word here? We got a lot of opinions here and we'll give you that. - Yeah, I mean, look, just to be clear, I'm a fan of open source because open source is software freedom and to free burst point, I would like there to be a, let's call it decentralized outcome with respect to AI. I don't like the idea of AI being controlled by two big tech companies that work closely with the administrative state, you know, hand and glove. So look, we're all kind of in some sense rooting for open source to be an option and it does provide a bunch of advantages over close source. Right, you get customization, you get control, you can run your own hardware. You don't have to worry about the data problem. Your alpha getting leaked to these companies that might compete with you, all those types of things. And the market is so big that I'm sure we will see some success with open source. It will take a meaningful chunk of the market. But if you're looking at where the revenue is right now, it sees two companies. It might end up being a situation like Apple and Android where Android got a lot of market share but Apple's where all the monetization was. Yeah, and I think that to our cash raises are really good point that as the demand is 10xing year over year, but the compute can only be built out at say three x year over year because it just all the friction of all the things in the real world that get in the way, permitting regulation, bands on new data centers, all that kind of stuff, I think that the price of compute is gonna go up and that will provide an advantage to the models that have the most lucrative algorithms that are able to produce the most intelligence per watt or the most intelligence per token or per GPU. And right now that is those two companies, in a way you could say they have a self reinforcing loop because if you have all the revenue, and right now like I said, it's just two companies of all the revenue, you can then plow that money back into the next training run. Right, so that's the flywheel here. Yeah, and look, I think that it's great that open source is providing an alternative. We shouldn't do anything to get in the way of that. I think that these online debates tend to become a little bit histrionic in the sense that everyone, that's the only for-- They become religious. Well, they become religious and they have to argue for an all or nothing perspective. I think open source will do great in its way, but so will these two closed source companies. Here's your polymark at 19% chance, the US in X and AI, Safety Build this year, 100K of volume. And then, really interesting one, Shamoff here, OpenAI IPO chances for 2026, was that 75% last month has now dropped to 20% at all time low. So seems like the IPO is going to happen next year. Not sure what's driving that, but there's your polymarkets. Well, just on the AI Safety Build idea, I mean, there was an article in Punch Bowl this morning that Thune, who's the Senate Majority Leader, John Thune actually introduced a bill that was somewhat bipartisan yet, a global char on board that required the frontier labs to report safety incidents, apparently, to the Commerce Department. And is that reasonable sex? I mean, that's the direction all the stuff is headed. I mean look, I think it's the camel's nose under the tent for more and more AI regulation, but look, I think it had bipartisan support because it's on the relatively modest side and can't well, who's the ranking member on the Senate Commerce Committee opposed it supposedly Adorio's behas because he will accept nothing less than an FDA for AI. He wants the whole kid in Caboodle. Yeah, so that's basically the dynamic right now is that Dario and Anthropic want their FDA for AI. I think that he has tremendous power and influence within the Democrat Party right now and I think that influence is only going to grow. They just up their donations in the midterms from 20 million to 40 million, but you know post IPO when they all get liquid and their capable of writing or stressing your $50 million donations. Yeah, I think that that influence will only grow. So I think that the stakes in the battle lines are being drawn out. It's do you want a new government agency for AI safety or do you want? I'd say more targeted proposals like hey, just report your safety incidents. Yeah, we're self-regulate. How about that? We talked about that. Yeah. All right. Let's talk a little bit about book burning. Anthropic is destroying rare books to get an edge in training data according to sources. I happen to know that a lot of the labs are doing this. We'll show a video here of the spine being cut off just on a technical basis. You take a book, you cut the spine off and then you can easily scan it as opposed to the less efficient way, which is to keep the book intact and flip the pages and for obvious reasons. I think you can figure that out on a physics basis. Vestigation by 404 media AI companies are bulk buying physical books. Some of the book book resellers have reported that they get 70 books getting bought and obviously this is because there was a ruling that it is fair use to train on books. If you buy them obviously last week, we saw an anthropic paid. The largest copper I case in US history 1.5 billion for 7 million books. They allegedly pirated authors get 3,000 each lawyer's got 100 million for that one. But there's a company called is been DB ISB and DB and they're the brokers who do this. And ranges from a thousand to a million books per transaction pre 2022. These books commanded a premium because. They were free of AI generated tax in other words you couldn't get them online. Google stand 25 million books if you remember. But they returned every single one they spent 11 years in court on that. This shredder approach. Is obviously a more effective and I believe that this is a way of destroying evidence. You put that in conspiracy corner. If you like the cases we talked about this actually when I'm debating in a legal corner. The cases of it being fair use to take these books has not been settled. There's a bunch of lawsuits Thompson Reuters versus Ross intelligence New York Times versus opening a Microsoft and publishes versus Google Gemini. We're watching all those and they're going into the appellate court. So there's a chance that training data will not be fair use. But what do you think just about the books being destroyed and you know being used in this way. It obviously has made people a little emotional about it. Let me tell you what's going on here. This is an industrial skill distillation attack. That's what is doing. Yes. They are gathering these books at industrial scale ripping off the spine shredding them and slurping up all the information in the books which is to say distilling them. And it's an attack in the sense that the authors never agree to any of this. So I love the facts. That your hatred of Anthropic has now led you to agree with me that it's unethical to take other people's. I don't hate Anthropic at all. I don't like their political philosophy because it's a philosophy of centralization and gatekeeping. And I think it's going to basically lead to an Orwellian big tech deep state alliance eventually is where it all has. And pulling like you want Dario pulling your your model from you because he decides like I don't like the way you're using it which friend of the pod at email michaels pointed out you know earlier this year when he came on the show. It has to be clear. I have no personal animosity towards anyone in Thropping including Dario. I don't know them very well as people. It's just a disagreement about political philosophy. You're judging them on. They're bad hatred. Yeah, let me just say furthermore that I wouldn't speak so much about Anthropic if I didn't think it was a phenomenal company that was creating potentially the most powerful monopoly or you know leading its company. Yes. It's a leading company in the space. So I remember last year when I hit them for regulatory capture people were like why are you beating up on this little startup. I'm like because I can see where it's going. They are creating the biggest most powerful monopoly of all time. Again, they're going to end the year with over a hundred billion of ARR growing 10x year over year. This company didn't exist how many years ago. Yeah. Google is at four hundred and something billion of ARR growing 20%. So you know if this rate of growth continues for just a year or even six months or just a few months. They're going to be maybe the most valuable tech company. So it I do believe there are powerful self reinforcing effects when you're on the frontier and maybe like the full version of RSI is in true. Maybe we won't get recursive self-improvement to the point of creating super intelligence. But I do think that the labs are reporting a number of examples of how they are using their own frontier intelligence to improve their own models and the efficiency of those models. So there is a powerful self reinforcing feedback loop here apparently to some degree. With OpenAI they found it after it had done this. So there's like kind of three steps here. You're using AI like a co-pilot or whatever to you know build a frontier model quicker, right? Sacks. Then there's I kind of let it do a job. And then afterwards I found out it didn't behave well. And then there's finally we told it the goal and said go. Yeah, just just check on it. Yeah, just to be clear about that safety incident with OpenAI in the agent. So apparently this was an agent that was designed to specifically test the potential for cyber attacks and they took the guard rails off and they said go. And so I think the model showed creativity and how it accomplished the goal. But this was not an alignment problem meaning that the agent did not display independent goal seeking. It did what it was told. And I think that is very important that OpenAI release the full log of all the prompts, all the traces they have not done that. And I think it's really hard to know exactly what happened without that. And I'm just answer one of your questions from earlier why aren't people reacting like this is a bigger deal is because look I think there's a full me once, full me twice. I remember when Anthropic did the whole blackmail study. You know we're supposedly an agent displayed independent goal seeking behavior and then blackmail and employee it turned out that actually they iterated on the prompt over 200 times to get to that result. And I think that until we see the whole prompt chain I think it's very hard to judge how much independent behavior was happening here versus accomplishing the goal that it was it was tasked with. Freeberg your thoughts on the shredding of books. I think you've been pretty clear on the pod that you believe training intelligence off of other people's IP is fair game. But what do you think of this book wrinkle here? Any thoughts? There was a president with Google books. It was originally code named project ocean at Google long time ago. They took all these books and we had this giant facility in Mountain View. And the innovation at the time was that two-dimensional infrared grid projected on the pages. They had a human sitting there flipping the pages. Camera would take picture. Built our own OCR software to adjust the book images. And there was kind of ultimately when this product came out Google books you could kind of search through all the books in the world and and magazines and access information and later magazines. Yeah. And there was three categories. There was the public domain which is the Ida copyright. Then there's the kind of in copyright but out of print and then there's the in copyright and in print. And there was a class action lawsuit filed in 2005 by the authors guild and the Association of American Publishers that disagreed with Google's claim of fair use. And that ended up in a three-year negotiation and court out of court that ended up in a deal where Google would split two thirds one third of the revenue generated with all these rights holders. And for out of copyright books people could read up to 20% of the text for free. And then they would sell this kind of full digital access. And that was the deal. But then later a federal judge rejected that deal which was eventually signed in 2008, 2009. And the federal judge said no way. Send it back. This isn't going to work. Google appealed. And in 2015 second circuit court of appeals ruled in Google's favor and the whole thing was settled. And they basically declared Google did in fact have fair use under copyright law in the way that they were showing snippets of copyrighted books in the material. Yes, you can read the entire book like it's a candle. You can search the book, find the paragraph, provide a reference to it. And so the question on fair use in AI is can my understanding or extraction of value of the knowledge from the data in the book give me the ability to provide better answers to you through the AI chat interface or services that I'm providing you and I think it's going to be tested and I think we'll see. I do think fundamentally that the conversion of that data into what I would call knowledge and ultimately the ability to create new outcomes from that knowledge that are not copyrighted, that are not copies of the original material. I do think is end up being the right fair use policy and it's going to be the right read on fair use. So I think it'll likely get litigated and I think it'll take a couple of years and it'll get kind of open. Just to be clear, take out, I've not changed my view on fair use. So I am with Freeberg on this. My point is the hypocrisy. Yes. You're funny. It's breathtaking hypocrisy for anthropic to maintain that it is entitled to train on all the world's output for free, even if the creator objects, but the one type of output that you're not allowed to train on is their output, even if you pay for it. That is their current position. So what I'm saying is that if you want to train on and through the output that cannot be considered IP theft under fair use, especially given the fact that the courts have ruled that LLM generated output is not copyrightable because it was not created by a human. That is the current position of the courts is that LLM output cannot be copyrighted. So there's no IP theft here. You can make the argument and I think it's probably true that if a competitor creates massive numbers of fake accounts on your service, that's definitely a breaking of the terms of service and it's probably a deceptive business practice. And there may be other things you can do, but I don't think you can depend on the jurisdiction, by the way, because in Philippines, Israel, India, they have different rules about like breaking the terms of service, which LinkedIn found out when people started scraping their data. Tremoff, any thoughts here, before we move on to socialism corner, everybody's favorite new feature here on the LLM pod. Don't take out the books. Keep the books intact. Why do you cut the books in the library? It's very hard to read them. There's no spine. I think it's not a kind and I don't like it. I mean, are you taking your time? You move at the page like a Google does. It says that a little more time, but it's a little more graceful, yeah? Don't. I mean, if you want to cut it a tip, book it. So one thing you can do, a freeberry has a cut tip, a saxagal cut tip, but you don't cut the spine off the bottom. Cut the tip. It's a more crammy. There's a great Guinness book of World Records book joke. Oh no, where's this go? Went to the library and I found that my tip was in the Guinness Book of World Records. And then unfortunately someone asked me to remove it. So you literally put it in the book and close the book. I'm not joking. That's the joke. It has like an apple pie. Hey, by the way, here's we got a photo. This is a photo. We actually have a photo that was leaked from the anthropic office. Here's the anthropic office, leaked photo. There it is. Can't believe. Tariya burning those books. What do you want to, Dariah? Come on, the show anytime. We're focusing for two years. Why hasn't he come on the show? Because you make fun of him and you just insult him all the time. Why do you think he won't come on this show? I just said the guy literally saw the most successful business in human history growing from under 10 billion of revenue to 70 billion of revenue in six months and you insult the guy. You're playing with me. I think all the people that want to be all the people that want to be all the people that want to be it or he'd buy you. I did say he was a sub. That was probably a little bit over the line. I don't even know what that means. What does that mean? What does that mean? I think he likes to be dominated and have the government control him. Is that a submissive? Yes. I did say that on an episode. But it was a joke. It was in good fun. By the way, the point on the books, with most books, there's many copies of them and you can always make more. It's not the end of the world to shred them. But I think the part of the story that got people upset was that they were acquiring all these rare books where there was very low numbers of copies of them. They were finding all these rare and antique books because they wanted to slurp in all the world's knowledge and they weren't shredding those. That made people upset. If you're doing Windows 3.1 for Dummy's volume 4, like nobody cares, but anything that was like a first edition or like an end of your print books. Rare ad-apprint books. Yeah, that gives you a training to French, if that makes sense. All right, so quick socialism corner here. We got to cover the ongoing saga in my hometown where I am right now of New York City. Mon Donny has announced five city-owned grocery stores, David. One per borough, they're using city-owned space. They're all going to open by 2029 and one week per month, shoppers are going to get a 30% discount comrade on their bread, cheese, produce, meat, and milk for the glory of the country. Regular prices, the other three weeks. They're not going to sell cigarettes, alcohol, hot food, all that stuff because they don't want to compete with the bodegas. It's going to cost taxpayer 70 million. I guess the only thing to discuss here is like what happens to the other supermarkets now? Are they going to shut down because they can't make whatever one or two percent are making on groceries? Is there going to be riots in the streets to get into these places to get your milk for 30% off for one week a month? It's just the whole thing seems like a waste of time, but I will say, Saks, this plays. This is going to play in elections. Free stuff plays in an election. Whether it's a bus or discounts. It may play. Look, when people first go to these stores and they first open and the shelves are full, the people will be delighted. Then over time, what's going to happen is that the store shelves will be empty and it's going to be in comptently run. There's going to be a lot of complaints about it. Then all the free market stores are going to have to compete with this and then they may get put out of business. Then you have no choice. You have to go to the space spots and one and then they raise the price. It is ironic that they're going to be checking ID to make sure people are coming over from Jersey, but if you want to come over illegally from any country in the world, well, that's fine. They found a use for ID. By the way, after you get your groceries, you have to hide your ID to go vote. Don't bring this shred your ID when you go vote. After you pick up your milk, they found a use for IDs. What's your take here, free burger? You in favor of people paying less for groceries or are you a free market monster that wants people to pay full price for groceries? I've seen nothing. I've seen nothing but negative comments on the future failure of these grocery stores on Twitter. I think that people have it wrong. I think these grocery stores are going to be wildly popular. They're going to pay their employees above market wages. Employees are not going to have to work very hard to work there. They're going to be a better place to work. Everyone's going to want to use them. They're going to outperform whole foods. They're going to outperform safeway. They're going to outperform Albertsons. They're going to be so in demand that what will end up happening is that over the next 24 months, every other city in America will look to these grocery stores and say we want the same. Why does only New York get these grocery stores? Why can't I have these grocery stores, too, where I can have discounted food, where I can have the service provided to me by people that are getting paid above average wages, above market wages. Why does this not become available to me in my city? I think that everyone's being a little bit too, I would say, long-sighted in their view on what's going to happen with these grocery stores, with the basic, obvious economic arithmetic that someone has to pay for this and who's going to pay for it and. Rich people. The point is, I don't think it really matters because over the near term, what the cheap grocery stores do is create an incredible success story for socialism that will help to support and fuel the socialist waves in urban centers around this country. I think that there will be media coverage of these grocery stores on how great they are and it'll be a 60-minute piece on everyone said, "Zoran Mamdani was crazy, but let's go in and take a look at this beautiful grocery store and they're going to walk through the grocery store and they're going to be happy people taking food off the shelves, checking out with happy employees working at the grocery stores and it is going to be deemed a utopian dream come reality and everyone's going to want one." It will help seed the next couple of years and it will be part of, as I've highlighted in the past, a big part of the multi-level marketing scheme of socialism is to create spectacle and it will create more spectacle that will help to fuel the multi-level marketing scheme of socialism and remember the problem with all multi-level marketing schemes at the end of the day is someone has to pay the bill and no one's actually buying the product, no one's paying for the product. That's a ways away though. In the meantime, in the meantime, it's going to take off and I think that these grocery stores are going to be a much bigger success in for socialism than a demonstration of the failure of socialism, unfortunately. And so I think that everyone's got a little bit wrong in assuming that this thing is going to radically fail. I think that these things are going to create a radical spectacle and exuberance for socialist policies that's going to kind of light a fire for socialism around the country, unfortunately, because at the end of the day, no one has to pay the bill because the bill doesn't come to you for some time. Someone else will pay it. It'll get paid in the future. Yeah, put it on top of the debt. people are getting debt, why can't the public have some debt? - Right, money. Socialize the cost into money printing, fueling more inflation, creating a spiral where you need to offer more stuff for free to come up with a way to cover the cost of the inflation for people that can't afford things anymore, and the spiral will persist. So I think it's a sad state that the United States has to kind of embrace this policy. - Interestingly. - I think it's gonna end up being a big part of the fuel for socialism over the next couple years. Breaking news, breaking news. I don't know if you saw it just now, it came across the wire, but Bernie Sanders, AOC, and Dami collaborating on 50% off bagels and bacon, egg, and cheese. For the 1% of the 10%, why can't you get the bagel with the Shmeer? Folesce. That's what has to happen next. What would you like next on your discounted democratic socialism, scorecard, David Friedberg? What would you like next? Discounted bagels, a cafe, maybe a flat white. Where do they go next? But seriously, what's next? What would be next in this logical thread? Free buses, rent freez, what's next? - Well, think about the social network effect of the grocery store. So there's a couple of them, and then people start traveling from far away to the cheap grocery store because it has this discount. Long Island, Jersey, yes. - Again, this will play out over the next 24 months, going into the 20-28 election cycle. And everyone's like, this is so wildly popular. People are coming in from all over the place to go to these grocery stores. They're not checking IDs, 'cause IDs are racist. And you know, you can't check IDs to vote, so we shouldn't be able to check IDs for grocery stores. So people will come in from all over the place to use these grocery stores. The demand will go up. And then they'll start to open more and more grocery stores like this. And let's say each one loses 10 million a year and they get to 10 or 20 of these. That's $200 million of losses per year on the grocery store chain. But it creates this extraordinary social movement for more of these grocery stores supporting the DSA and so on. - Yes. - $200 million a year on a $125 billion dollar your budget for the city of New York. - It's nothing. - It's nothing. It's less than a quarter of a percent of the city's budget. That is so cheap to market the DSA platform and to get the DSA platform to become a social marketing element that drives the next wave here. So again, I do think that these grocery stores believe it or not, they sound silly, they sound small. But I predict that they will be deemed a point of success and they will end up being a big part of the fuel for the DSA going into 2028. - I couldn't agree with you more. This is gonna play. This will be a great, great feather in their cap. It's gonna be a great example of affordability 'cause we've talked about here previously. Trump promised affordability hasn't been able to deliver it, inflation's up, spending's up, all that great stuff. And Mondami got it done. Free buses, rent controlled, and now you got your discounted grocery store. - Both sides are reacting to the fiscal and monetary condition of the United States. We're overspending, inflation is runaway. So you just keep spending more and printing more to give people what they need, which is basic services. And so as the government spends more, then the fundamental cost of those things goes up and you're reducing economic productivity and it becomes a spiraling problem. It is a two-party problem. This is not just one side and the other. Because fundamentally, if you go, I've spent a lot of time now in D.C., I think everyone's well-intentioned in the White House and the administration in trying to reduce federal spending. But the bigger issue that you face is when you go to Congress and you meet with everyone in Congress, they are representing the interests of their state or of their congressional district. - Yeah, but as I'm hitting it again. - And they're objective. Their objective is to fundamentally drive spending towards their district to give their people more. Their economic incentive and their political incentive is not to give people less, which is what you have to do when you cut programs when you cut spending. So the shift in the policy has been, hey, I guess we're not going to be able to cut spending because there's just too much headwinds in Congress. So the answer is, let's grow through economic productivity gains and that's the big fuel for AI, the CAPEX, depreciation of the policy. And so on, but I think that's been the shift. - So look, the one thing I will say critical of President Trump here is when it came to like starting a war, when it came to tariffs, yeah, no problem. Like using executive power and telling Congress and everybody in the party, this is the way it's going to be. If you break ranks, I'm going to destroy you. I'm going to get your prime married. And when it came to this come to spending, you was like, yeah, yeah, you know what, I'm not taking that on. It's too unpopular. All right, free burn. The Sultan of Sciences fans have been begging for a science corner. Do you have one this week? They want to know, do you have something? Oh, Sultan, oh, Sultan of Science. What can you tell us? Educate us. - Okay, so today I'm going to pull up this paper, Nick, if you could pull it up. - A paper from February of 2026. - February. - Okay. - February. - February. - How do you say February? - February. - February. - February. - Oh, it's February. Well, February. - February. - February. - February. - Okay, so this is a group of researchers out of Budapest. There was a really interesting modeling exercise they went through to understand how neurons were connected in the brain to build a network model, a topological model. And the way they were able to do this is back in October of 2024, there was a group out of Cambridge and Princeton that used electron microscopes to scan the brain of the dross of Philia fruit fly. And they mapped every single neuron in that fruit flies brain, 139,000 neurons, and every connection that the neurons had to other neurons in the brain. So there were 50 million synaptic connections between the neurons. And it's those connections that make neural networks in the brain work. How are those neurons network together to do the things that they do? This is the key question in what is that network model? What is the topological model of how neurons connect in the brain, which gives rise to our ability to control our bodies, to seeing things and comprehending vision, comprehending sound, and even the basic premise of consciousness itself. Yes, so trying to understand the network model for neurons has been this kind of great endeavor of neurobiology forever. This data set was created in October 2024 with just 139,000 neurons. And that's a tiny, tiny, tiny, tiny brain. Yeah, this should be-- Put it in context versus the human brain. I mean, what are we talking about here? The human brain has, on the order of 86 billion neurons. OK, compared to 50-- And so that means we have multiple for the network connections, right? Yes, exactly. On the order of trillions of connections. So they took these 50 million connections in the brain and the 139,000 neurons. And then they applied the network model that predicts whether a neuron is connected to another neuron. That's how you're measuring the quality of the model, how correct is it, in making a prediction. And when you build the model using what's called Euclidean geometry-- so just normal space that we live in, three-dimensional space, they came up with a score and the score was not very good. You couldn't do a great job of just looking at how all the neurons were connected using their physical relationship to each other, how far apart they are to each other in 3D space. So then they said, well, let's try and model how these neurons are all connected to each other in what's called hyperbolic space. Hyperbolic space is a theoretical type of space, unlike Euclidean geometry, where the further away you get, the wider space gets. So space actually is curved. I know that's a hard concept to describe, but imagine that as you and I walk farther and farther apart from each other, the area around us actually accelerates in terms of how much space there is, and it expands-- It would be space as we-- Geometric orbit. Like three-dimensional space as humans understand it when they're on planet Earth. It's a little bit more like space that you would experience in the warping around a gravity well, or the warping around a black hole, or something like that. And so in that space, they found that this is where the model was most performative. They were able to map in hyperbolic space how all of these neurons connect to each other. And if you think about it, the further away you get from the first neuron, you're going to have many, many more neurons you can start to tap into. And so hyperbolic modeling on the neuronal connections actually makes sense, and they got a decent score. And then they went back and they said, well, what if we could use Euclidean geometry, but not in three dimensions, but they went up to four, five, six. And they found that they were able to kind of get as good as the hyperbolic space. It's 64 dimensions. So by taking normal space and saying, let's use a 64-dimension framework for how we can start to connect all these neurons together. That's where they had the best predictive model. This is a really interesting kind of discovery. First of all, it can be used for neural network design and AI and other sorts of things. But for me, it highlights the miracle of biology in finding complexity in 64 dimensions, not in three dimensions, but in 64 dimensions, biology is found a way to create consciousness, to create vision, to create comprehension, to create control over physical bodies. Then to map it and squish it all into a tiny little brain, it did this effectively 64 dimensions. It's mind blowing when you think of it, because a fruit fly or a mosquito and these things, they don't have a big mission, right? Their mission is to go find food and procreate. I guess they have a very simple mission, too, Jake. Wow, but then we also want to do podcasts and debate politics and philosophy. Don't you have to tell the mosquito spends their free time. But-- - Yeah, I mean, but nobody would argue there's like consciousness as we experience it in a fruit fly. So then you get to trillions. - You wouldn't know. - But maybe. - This is really interesting because it turns out that the biology of how all the neurons are connected, even in a brain as simple as a fruit fly with 50 million connections, is so complex that it has to take 64 dimensions for us to represent how those networks are built, how they're made. And at 64 dimensions, you could start to argue that perhaps consciousness is a connectivity to a dimensionality that we don't live in every day, you and I don't live in every day. And we can't comprehend. - And that it is this extraordinary complexity in 64 dimensions that gives rise to consciousness, that gives rise to our capacity as biological beings to do this very simple thing of thinking. I just think that it was such a powerful and amazing paper in just bringing forth these numbers and showing just network modeling on this tiny little brain as being just a glimmer into the complexity of how biology has found a path beyond our understanding even of physics into this universe that we can't even comprehend. And it shows how little we know. - We know very little, but then as you sort of alluded to here, and as we talked about in the top of the show, we have AI frontier lab saying, hey, reinforcement learning is like super dangerous 'cause these things could get out of control. Are you in the camp of, we are rebuilding in this simulation or whatever we're experiencing here? We are in fact, recreating our brains with silicon and that we're on the way to actually creating consciousness that are replicant in science fiction, like Blade Runner, where they don't even know Rachel doesn't know she's a replicant spoiler alert. You had 50 years to see the film. Like are you part of that camp? That's actually what's being built here? - Yeah, I'm not sure. It's a longer conversation. We should do it another time. But I do think there's something fundamental to consciousness that relates to the drive for survival in a physical sense. You have to have physical sensing and physical responsiveness to learn as a baby. You first start touching hot stuff and cold stuff. And you learn and we build these reward mechanisms into neural networks that we build in AI. But those reward mechanisms are digital and they're programmed. And the question is there are reward mechanism that arises in biology that creates a different capacity for consciousness than perhaps can exist in silicon. A bigger topic for a different day with probably people that have spent more time thinking about it than I. But I just think that there's something about biology. You know, I always tell people this analogy. I've said it many times on the show I'll say it again. In a single cell, there's 10 billion proteins that work so fast that one second is the equivalent of 80 years of humans walking around the city of Manhattan never sleeping, doing stuff together with 500 story skyscrapers doing stuff. For 80 years is one second in one cell. And so you have 10 trillion cells in your body doing that, living that entire universe every second, all interacting with each other. And you start to realize that there's a complexity in what's emerged in biology that extends well beyond any model we built in silicon today. It doesn't mean that the silicon that we're building today doesn't create extraordinary capacity for humanity. But we are very early. And the more we kind of understand this sort of thing like this paper that I just shared, I think the more we realize how little we do know and how much of a frontier there still is to explore. - Yeah, and I think this obviously brings up faith and do you believe that there is a god that set this in motion? I like to believe there is some higher work here and this is my closest analogy in science fiction. We're both super fans of science fiction but for me, 39 seconds in here, one of the great-- - You like this one. - I love the chrometheus version of this. - There's engineers who are terraforming and started this crazy thing out and there's just an experiment in biology going on. And you know, the opening scene here in Prumethus, he drinks this and this is the sacrifice like Jesus, sacrifice for humanity. And he sacrifices him here by drinking that biological design, right? And he falls into this planet earth, which is just water. And this is the Cambrian explosion where his DNA goes into the river, gets washed out and then starts the cycle of life on planet earth and that these engineers are going around. It's pretty fantastical, yeah. - A lot of this stuff is a simple way of humans trying to explain stuff but the complexity that arises in biology, we just can't explain. And I think we try and use these reductive kind of heuristics to try and do it and it's very-- - Storytelling. - It's comforting because it's so overwhelming and the complexity of how this stuff emerges is too overwhelming. So we create simple stories to try and help ourselves feel better. - And yeah, and that's my favorite story of it. It's somewhere between Blade Runner and this, by the way, both by the same incredible director, really Scott. So take it for what it's worth. All right, everybody, another amazing episode. You got your science corner. We'll see you next time. Bye-bye, and look at this. (upbeat music) - We'll let your winners ride. - Bring man David Sack. (upbeat music) - And it said, we open-source it to the fans and they've just gone crazy with it. - Lumbia S, I'm queen of Kenwai. - I'm going on a leash. - What? - What? - What are you on a fly? - I'm a pro-wrestling. - Besties are gone. - Go through. (laughing) - That's my dog, take it away. - I wish you're driving away. - Sit back. - Wait, no. (laughing) - Oh man, my hamlet has your wimiti, I wish. - We should all just get a room and just have one big huge or two because they're all-- - It's like this like sexual tension that they just need to release their album. - What your, that beat beat. - What your, your beat beat. - Beat it, what? - What's the beat? - We need to get merch. - Besties are gone. (upbeat music)