Elon Musk Spent $366M On The Midterms — Will It Work?

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Big corporations and private equity have seen all of this, and have rushed into the sector. Why your vet bill is so high, that's this week on Explain It To Me. Listen to new episodes, Sundays, wherever you get your podcasts. If money is evil, then that building is hell. Welcome to Profty Markets, I'm Ed Elson. It is October 14th, let's check in on yesterday's market vitals. The S&P 500 was flat, after New York's Fed President eased fears of an aggressive rate hiking cycle, meanwhile the Dow and the Nasdaq decline, the yield on tenure treasuries slipped from last week's highs, Brent crude held above $106 per barrel, and finally earning season kicked off with the banks, JP Morgan Chase stock fell after posting a rare profit miss due to reduced deal making and bond trading, meanwhile Goldman Sachs stock rose as a strong quarter of equities trading led them to an earnings beat. 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But Musk isn't alone, according to the New York Times, 20 big donors have spent a combined $1.2 billion on this year's elections, or but two backed Republicans, meanwhile AI and crypto groups spent $127 million across 100 primaries this year, and they have one roughly 90% of them. So joining us to discuss the money that is shaping the midterms, we're speaking with Bradley Tusk, venture capitalist political strategist and writer, Bradley, welcome back to the show, I would like to start with that $366 million number, your reactions. It's obviously a big number, right, you can't say that it's not, and I'm not going to sit here and say that it won't have an impact because it will. With that said, let me give us some more hot take on all of this, which is I think that the role, the perception of the import of money in campaigns is overrated. I think that most money in a political campaign goes to broadcast television commercials. So the reason why broadcast TV is so expensive is by definition, there's a limited amount of spectrum. So there's a limited amount of time in the day. So therefore there's a market value for a 30 second ad, a 60 second ad, whatever it might be. And that can be really high, so in a place like New York City, it could easily be a million dollars for a couple of days worth of 60 second ads. However, not that many people watch broadcast TV anymore, right? I see what I watch sports, some people who watch news, but by and large, people are watching their TV on streaming, and there are some ads on streaming, but most of the time people don't see it or they're able to filter it out, tremendous amounts of money gets spent on direct mail. So that's like when you open your mailbox and these annoying, kind of big, oversized postcards that are saying that someone's a pedophile or wherever it might be, those go in the garbage. And I think they go in the garbage without people even glancing at them most of the time. And if you look at a lot of the more recent political phenomenon, whether it's Donald Trump on the right or Zara Mandani on the left, they didn't win because they had the most money. They won because they had the most energy and because they fit the zeitgeist of the moment. So Mandani won because affordability was an issue that for the people who do vote in a primary in New York City elections, that mattered the most. And he was a charismatic candidate who played incredibly well social media. And through social media and grassroots, he was able to win and in the general election, he ran against Andrew Cuomo, almost spent 70 million, Mandani spent 17, Mandani destroyed him. And the reason why is Cuomo's ads were just the most conventional six PM on NBC news. And I don't think they were reaching anybody. And Trump was outspaned by both Harris and Hillary Clinton and he beat both of them. And so I think that while money is certainly a problem in politics, it's less of wanting people think. He said in May 20 to revive this Elon Musk, he said that he said quote, in terms of political spending, I'm going to do a lot less in the future. And then suddenly, suddenly he's come out and he spent more money on this election than I ever before, which tells me that he probably feels desperate in some way. I guess number one, what is the ROI? How does he believe that the ROI is going to come to fruition for him by investing so much in these midterms? And two, is it going to be for waste? Because it looks as though the Republicans are not pulling so well. I think that largely will be for waste. But I think the ROI for him comes in two things. One is the reality, which is that for the people that he helps, they owe him and whether his needs are for SpaceX or for Tesla or the boring company or something else, he can call them upon them for help. He is probably also trying to stop the house from flipping because when the House Oversight Committee starts grilling people left and right, private citizens especially don't have the same ability to not to fight subpoenas that government officials do. And so Musk, Jared Kushner, they're going to be very frequent attendees in Congress in the coming year or two. However, with that said, his money is not going to change the fact that the house is going to flip. The other thing is that for him, there's value in the perception, right? So for as long as politicians think that fundraising is really, really important, if he has seen as the biggest spender, that creates a certain amount of fear and deterrence that's useful for him anyway. And for normal people, that kind of money obviously is unimaginable. But if you're literally worth the trillion dollars and it's a rounding error or a rounding error, it might be worth it purely for perception stake. Just looking at the amount of billionaire spending now, 300 billionaires accounted for a fifth of all federal campaign contributions in the 2024 election. These numbers continue to rise with every election cycle. You're saying that they probably have less of an impact than we think, but is there a point at which they do start to influence our democracy? It's the other way actually. I think that it has an impact until a certain point and then the returners become diminishing very fast. There's only so many ads you can see before you tune them out completely. And when everyone is saying the same thing all the time and just lobbying themselves back and forth, you just stop paying attention. And so I think that the first money in might actually be impactful, but then it becomes less impactful. But keep in mind, if you're a billionaire, one, you probably became a billionaire because you believe that money is the only thing that really matters. So therefore you're going to over-index on it and two, that's the thing you have. No one, your endorsement is that Elon Musk's endorsement would hurt most candidates. You can't really impact things in other ways because simply this is the only real resource. And I think there's still a distinction of how you use money. So for example, my consulting firm runs a super PAC called Investent Tomorrow, which is a clean energy super PAC. And they've taken out some of the Freedom Caucus members who have been really anti-clean energy. But the way they've done that is to just try to be really clever. So for example, Chip Roy, who's a Congressman from Dallas, ran for Texas Attorney General. He was way ahead when we got in the race. And we started running ads not on broadcast news and not even about clean energy. Our first ad was called Naga Enough. The whole point was Chip Roy is not nice enough to Donald Trump and isn't conservative enough. And we only ran the ads on rumble and truth social. And so we were reaching people who were super high-prepensity voters in a Republican primary. And Roy ended up losing that race by 11 points. And we've done that multiple times with other people. So money can be helpful, but that whole effort so far has spent $6 million. We're not talking about lot of money and three incumbent members of Congress have already gone down. Several other primaries have already been won. So it's not that money can't be helpful, but it has diminishing returns quickly. And the very nature of technology has changed the way that you reach voters, which makes things that are free or very cheap, like social media, really impactful, and makes things that are highly expensive and outdated, like broadcast television, much less impactful. Do you have any thoughts on how these midterms will play out? You said the house will flip any thoughts on the Senate? I mean, the Senate, look, I mean, you know, you can look on Kalashie or anything like that. You would get the sense that roughly 52 Democrats will end up with about 52 seats. But the question then becomes to what end? I mean, ultimately, I dislike Trump so much that I'm for anything that rebukes him, even though I'm an independent. But you know, whether that Democrats have the House and the Senate or just the House, no legislation is moving. So yeah, confirmation of judges, there's some things at the margins, but in the Senate, you still need 60 votes to invoke closures to stop a filibuster. Democrats are not going to have anywhere near 60. And I would argue that there's actually not going to be much impact on tech in the midterms simply because Trump is so anti-regulation, he's going to veto things. They're not going to override him. And in states, there will be lots of legislation that does move, but on a bipartisan basis, you have Republican governors go after AI and Democratic governors go after AI. They're going to go after data sectors. So fundamentally, I actually think that despite all the attention and all of the money, at least when it comes to my industry of tech, you're going to see relatively uniform results that would have been exactly the same kind of regardless of who wins or loses in a few weeks. Is there a world in which receiving money from these billionaires who are becoming increasingly unpopular in popular culture? Is there a world in which it actually hurts you that if it comes out that you receive money from Elon Musk, that's a bad thing? Sam Holman's a good example of that. So there was a primary for Congress in New York City. He was the mean Manhattan scene, so probably some ways that was high profile congressional district in the country. And Alex Boros was one of the two leading candidates who were a bunch, but Open AI came out very aggressively against him because he passed frontier model regulation in Albany, and that propelled his campaign. Because when voters heard that Sam Holman hated Alex Boros, that made them like Alex Boros, not Boros lost, but Sam Holman inadvertently tried to kill Boros, ended up helping them. So, yes, I do think these companies have to be very careful because at least in certain things like social media, data centers, forms of AI like frontier models and hyperscalers, antithope is so great that it could actually have a collateral damage effect. What do you think the future of money in politics will look like? The amount might continue to increase. I think the efficacy will continue to decrease. And I think that it's going to be a while till this is fully understood and realized because there's a massive industrial complex of people who make money through the money of politics. So they're doing nothing to disillusion billionaires of their belief and billionaires fundamentally believe that the only thing of life that matters is money, especially their money. And so they're not going to be too fast to say, oh no, I don't think there's actually an ROI here. And so while I don't think that money most of the time is going to be all that well spent, I think it will continue to be spent. All right. Bradley Tuske is venture capitalist political strategist and writer. Bradley always love having you. Thank you. Thanks for having that. I appreciate it. After the break, ship stocks keep sliding. And a reminder to please vote for us at the Signal Awards. Go to vote.signaltheward.com. We really appreciate it. Support for the show comes from Genoa. Most meetings end with a bunch of action items floating around, but they're not documented anywhere concrete. Someone thinks they're handling something, but it's not actually written down. A week later, nothing has happened and nobody knows who owns the task. That's the problem. Grenola was designed to fix. Grenola is an AI-powered notepad that makes meeting notes useful. 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The IMF warned yesterday that a shop drop in AI investment could cut global GDP by 1.1% by 2028. Last week Bank of America's analysts said that a bubble is building in tech stocks. An analyst Jeffries wrote that the AI boom will likely end in "massive capital destruction." So is Wall Street changing its mind about AI? Here to break it down we're speaking with Gil Luria head of technology research at DA Davidson. Gil, great to see you. Thank you for joining us. So chip stocks are having a rough week. The cost be is down which of course is largely comprised of these chip companies and these memory companies. What is triggering this sell off right now? What are investors so worried about? There's plenty of headlines to worry about between misunderstandings about opening up as gross and net revenue, Chinese competition, pushback on data centers, the politicization of AI. There's plenty of those kinds of headlines that keep coming and the market's very jittery. But you know financial analysts and we deal in earnings reports and cash flows and income statements and all we've heard over the last several weeks. I want to just be clear about that. From all the companies throughout the AI value chain is not only are they reporting very good results. They're saying the results and the market is better than it was three months ago. They're saying that their outlook is better and raising guidance and they're saying that their visibility is better than its ever been. That's everybody from the companies that make chip equipment, the companies that make chips, to the hyper scalers, and the model companies. So I think where investors get jittery is they just don't believe it can last and that's very understandable and on one hand time we'll tell on the other hand the companies have to do a better job of explaining why it is that they say they have such good visibility. Some of the recent comments we've seen from bank research that I've just collected here. the box is that sounded quite concerned. They said, quote, "Total AI revenues running at around $250 billion is not going to cut it when the ecosystem needs well and excess of a trillion. I've yet to be presented with a credible framework as to where this money is going to come." Jeffree said, "It can no longer be assumed that large language models will ever be profitable. There is a 2008 real estate credit angle to this AI boom." Clearly, in terms of the supply chain of the chip manufacturers, as you say, the earnings are great. The money's coming in and it appears that it will continue to over the next 12 months. It seems like a lot of the concerns are around as you go down the value chain or you go down the supply chain where a lot of the large language model companies, the AI labs, they haven't demonstrated profitability. It's not clear how sustainable this ecosystem actually is and for how long these extraordinary profits for the chip manufacturers will last. What is your view on those concerns at this point? Yeah, I'm going to take the other side of a lot of those arguments. Let's just start with the fact that in the next few hours, Anthropics is going to give us, for the first time in a little bit more of an official manner, what it's revenue is. Tell us what their revenue run rate is, it's likely that combining their revenue run rate with open-age revenue run rate will be well in excess of $100 billion. That number a year ago was maybe $10 billion and a year before that it was zero. That is actual companies and consumers spending on using AI models. By the way, those numbers are probably coming at anywhere between 60 and 80% gross margins, depending on net or gross revenue, which is a very healthy level of margin. It's not open-age, probably not cashflow-positive, Anthropic may actually be cashflow-positive because their growth has been so fast, they couldn't spend fast enough, but on an incremental basis, their revenue is actually quite profitable and is still growing very fast. Now the nature of long-term investments in an economy are that in year one, you invest a cash, in year two you get a little bit of profit and that grows in years 3, 4, 5 and 6. We're really in year one. Of course, we're not generating enough to justify the returns. We need years 2, 3, 4 and 5 to be much more profitable than year one in order to justify the investment we just made, but again, the indications are that companies and consumers are willing to spend their models, sometimes more than last year, twice as much as they were 3 months ago, and as that growth continues, we are looking at the possibility of having tons of returns. I think over the next 12 months, that's the likely trend. Obviously, the bigger question is what happens after that? Do the models get better? Is the diffusion through enterprise technology organizations going to improve? Are we going to use the AI models? Are they going to create real value? Those are bigger questions, but as we look in the next 12 months, the answer is probably yes, it's what's beyond that, that is through key investors. On the question of the profitability of OpenAI and Anthropic, we'll just go with Anthropic for now on those gross margins, it seems like one of the open questions is how they are calculating those, specifically whether they are stripping out their training costs, which is obviously one of the largest costs that they incur versus their inference costs, which is the cost of actually running the model versus building the model. There's an open question that I've yet to understand what the true answer is, is are they factoring that in or are they stripping it out? Plus there is the question of are they stripping out their revenue sharing agreements with some of these other companies like Amazon? If the answer is that they all stripping them out, does that change your view on the question of sustainability here? Yeah, so we are talking about accounting. So let's just walk through OpenAI numbers because there was so much discussion last week. Let's say that it's $70 billion, including the hyperscaler cut, which is 20 billion. And so a 50 billion goes to OpenAI, they're probably making $30 billion of gross margin on that. Because the $30 billion is after only the compute expenses, the revenue from inference after compute expenses and after the markup to the hyperscalers. Now their training cost is likely, which is the next piece, their training cost is likely more than $30 billion right now, absolutely. But that's like saying startup companies that have 80% gross margins but are spending a lot on R&D and sales may not be profitable either. Let's wear OpenAI's in the cycle. The good news is that the training costs are actually not ramping up faster than revenue. And part of it is that we're starting to train models that are so big that you can only spend so much, you can only have a cluster big enough. So OpenAI may not be profitable, is probably not profitable right now, on an overall basis. But it is profitable on a gross margin basis, meaning how much revenue are they getting? Considering how much they have to spend on compute. And again, I'd say we're guessing that on a net basis, that's more like 80% on a gross basis, more like 60%. Those are still pretty healthy margins for a company that didn't exist a few years ago and is still growing very fast. Given the size of their training costs though, don't you think that in a way, the only thing we should care about is the overall profitability picture? I mean, it just seems like this is a different kind of company, where the expenditures of the training are just so enormous and yes, it's long term. And yes, for any other startup, you might not include that in the gross margin calculation. But I guess the overall profitability picture seems to be quite important here, because it's not clear that those training costs will significantly go down in the near future, or if they'll have to go away. That's right, because for Anthropic and OpenAI to continue to have this level of growth and this level of profitability, their models are going to have to get better. And therefore, they are going to have to spend a lot on training. So it is completely speculative, where they will ever become completely profitable on an overall basis, meaning including the pay-up to the hyperstiles, the cost of compute, and the training. That's why, as Anthropic goes public, it's going to be highly speculative, because let's not also forget that AI right now, a lot of this spend by consumers and companies is on these two companies, that's not going to be the case forever. There's going to be a whole application layer that gets applied on top of these companies that's going to go to other companies, mostly to hyperscalers. And then there's going to be a really big part of the market that goes to less expensive models, open-way models, open-source models. So their market is not necessarily going to continue to grow at the same rate, their addressable market, their ability to grow is very much in question. I'm completely on board with that, but what I would argue is that that revenue to the application layer, that revenue to other models, that revenue based on open-source will continue to come into the system and fund the investments, even if it's not Anthropic and OpenAI, that are the winner-take-all that they look like right now. I seem to hear in the conversation a lot, especially online, that OpenAI and Anthropic are fine. I think where I land on this is they still seem very speculative. They are unique in that they are one and a half trillion dollar, two trillion dollar start-ups. Start-ups have a very high failure rate. We're okay with start-ups losing money because we know that they are extremely risky investments and therefore they might fail. They might go out of business. Whereas the way I view those two companies, it sounds like we agree that that probability is significantly higher than any other company that we usually talk about in public markets, but your view is the ecosystem itself will be sustainable with or without them and therefore we shouldn't be too worried about some of the companies higher up the chain, the supply chain companies, i.e. the chip companies. That's right, because when we use an open-weight model-open-source model, we're still using GPUs, CPUs, and memory. It doesn't matter. Whether hosting in a data center, whether hosting it on premise, whether it's on the device, we're still using GPUs, CPU, and memory. Really doesn't matter which model it is, but I do think it is important that you're underlining that these two investments are highly speculative. I do think that there's reasons to believe why they can be successful like any other start-up. It's really about the team that they have. They have some of the most talented people in the world that are building these AI tools and they continue to find new impressive breakthroughs. I do think that even in a longer-term outlook, it's likely that they will have the high end of the market. The most potent tokens, the ones used for the most mission-critical systems are still likely to come from the front here, which these two companies dominate and Google is kind of an also ran, but the overall spend on AI is likely to be far broader than these two companies and it may end up being far bigger than these two companies. Just looking at the valuations of some of these chip companies, I was taking a look and I was, this happens a lot when I look at the chip stocks, I'm surprised that they're actually quite cheap at least on a forward earnings basis, just looking at, you know, SK Hynex, which has gotten battered trading at three and a half times forward earnings, Samsung at 3.7 micron at five. There are some other companies that seem, frankly, just overvalued. I was just looking at AMD at 51 times. What is your, what is your sense of valuations in the chip sector? And to what extent do you think investors are really pricing in the possibility of some sort of significant correctional crash? Yeah, there's a huge dislocation here. The market is up two mines. There's three or four companies that it's treating as if the cycle is already over. You mentioned them. SK Hynex, Micron, and Vidya Broadcom. Those are trading at 18 times and four to five times respectively, where much of the semi-complex is still trading at 30, 40, 50 times. So the market is saying, yeah, for every other chip company, we believe the cycle is going through 2030. For those four now, the cycle is already over. It makes no sense. Because if the cycle continues to 2030, those four companies will grab most of the profit. Not just will continue to grow, they'll get most of the profit. So it's a big dislocation. Part of it has to do with trading. Part of it has to do with law of large numbers, but realistically speaking, that's where the opportunities are, are with those four companies as opposed to the other chip companies that have smaller roles than the ecosystem. And yet the market is valuing them as if the AI cycle will definitely continue through 2030. One company that you have flagged as sort of unsustainable, at least from a financial standpoint. I thought of you when I saw this as core weave because their debt is undergoing a huge sell-off right now. Their unsecured notes are now yielding 15%. What is going on with core weave right now? What does this tell us about the company? And what does this tell us about the larger AI build out? There's a lot that goes into core weave and why it's a poster child for the risks here, right? And I would say that if the AI cycle sputters, or certainly if it doesn't, or if it turns over, core is going to be the worst the first to go. The equity value is going to be zero. And the reason is that it's a poster child for bad behavior, for borrowing and very high rates to build a speculative asset. Again, we're continuing. This is a speculative investment, a speculative asset, and they're borrowing at 9% to fund that. And the returns they're getting are around 1% right now. And at best, they're guiding they're going to get to 4% or 5%. So I like to, since you have some individual investor viewers, this is like an individual investor taking a margin loan at 9% to buy trajectories that yield 5%. That's destruction of value. That's the essence of core weave. If things don't go well, they will not be able to make their interest payments. They're going to get wiped out. Before we end, can I just get a list of the names you like and the names you don't like in this sector right now, because I think this has been very informative and helpful. Yeah, in semi land, we talked about the ones we like. So it's primarily micron, Nvidia, some extent, Broadcom and SK high next in software. There's a group of companies that are doing phenomenally well and they're going to keep doing well. You got Palantir, Snowflake, DataDog, Shopify, Fraubstrike, extraordinarily good companies that are all benefiting from AI tools getting better. They're adding more and more value, they have accelerating growth. They performed well recently, but there are going to be much bigger companies down the road. And the names you don't like, Pro-Wave. That's a good one. Yeah, C3 AI, Cerebrus, the fakers. Okay. We appreciate that. Gil Luria is Head of Technology Research at DA David Sen. Gil, really appreciate your time. Thank you. Thank you. The White House has asked Kimberly Gilfoyle to resign as the US Ambassador to Greece. This comes after the Wall Street Journal reported that she had solicited $100,000 from a wealthy Trump donor in exchange for access to the president. Messages reveal that Gilfoyle had promised to be his "Trump ride or die forever and ever" and that she even pledged to lobby the IRS and the Justice Department on his behalf. In exchange, he helped to bankroll a lavish lifestyle that included private jet trips to luxury resorts. After announcing that she had been asked to resign, the new White House Press Secretary Katie Zacharyer wished the Ambassador well, calling her a "wonderful asset" to the team. Yes, aside from the lies, the corruption and the bribery, I am sure she was wonderful. The good news is that, at the very least, the White House appears to be doing something about this corruption. I wouldn't have been that surprised if they had just denied the report called it fake news or simply ignored it. Instead, they did acknowledge it and they politely asked her to leave. It's a low bar, I know, but it is a bar nonetheless. The question now, though, is if they will do anything about all of the other corruption scandals that have gone unaccounted for? Will they do anything, for example, about Tom Homan, who accepted $50,000 in exchange for his promise to help win government contracts, meanwhile, he is still running the government's deportation program? Will they do anything about Howard Lutnik, who negotiated a $1.6 billion federal financing deal for a Kazakhstan mining project, which his sons ended up collecting fees on through his investment firm, Count of its Gerald? Will they do anything about Jared Kushner, who actively steered America's Middle East foreign policy, including the decision to go to war with Iran, while also soliciting money for his private fund from Middle Eastern governments and sovereign wealth funds, or Eric and Don Jr., who invested in 15 private companies right before they inked more than $3 billion worth of federal contracts, or, of course, Trump himself, who traded $220 million in stocks in the first three months of the year, while also selling Wall Street early access to his social media posts. Will any of these people be held accountable at all? Or will it just be gimbale gilfoil? Because the truth is that the corruption that gilfoil engaged in as ambassador actually pales in comparison to the corruption that we're seeing across the rest of the government. And perhaps that is why they asked her to resign. Perhaps this is their way of saying see, we dealt with it. We don't like the corruption either. Meanwhile, nothing has been done about all of the other corruption we've seen. And even though misgilfoil should probably go to jail, you can also bet that she will be just fine. The White House expects us to just not along and ignore the corruption that we keep on witnessing every day, every week. But we are keeping the receipts. And until someone ends up accountable, until someone ends up behind bars, I'm sorry, but we will not move on. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalan, Cristina Donahue, and Mies Alvario, and our social producer is Jake McPherson. Thank you for listening to Profty Markets from Profty Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.