Michael Burry Says This Is The Top — Is It?

Say you're an aspiring pop star, how do you know if your song's a hit? It's getting harder to tell. I think that something is going on where the machinery of popularity has changed under a feat, and we don't really know why or what it means. This week on Explanage Me, how to avoid being a flop. Find new episodes, Sundays, wherever you get your podcasts. Welcome to Profty Markets. I'm Ed Elson. It is August 6th. Let's check in on yesterday's market vitals. The major indices were mixed after a series of highs, more on that in a second. Brent Crude was relatively stable. Treasure yields were flat, and finally, Google shares fell nearly 4% on news that DeepMind's chief scientist is leaving, and its CEO, Dennis Hassabes, is stepping aside. Okay. What's happening? The S&P 500 just hit another record. The fresh intraday high yesterday followed Tuesday's performance, in which the index rose nearly 2% to its first record close since June. The Nasdaq also gained nearly 3% that day, and the Dow crossed 54,000 for the first time. Across the markets, it seems as though investors have shaken off the AI anxieties that have defined much of the past month. But someone isn't buying it, and that is Michael Burry. In a note on Tuesday, the investor who called the 2008 crash said he's sticking with his bets against Nvidia, and Micron, and Tesla, and Palantir, and the semiconductor index. He said, "I continue to believe it is possible. We are near a major top," adding that we could see, quote, "a 1987 type 4." Now investors are left wondering who's right, the bears or the bulls. Here to discuss, we're speaking with Steve Eisman, the legendary big short investor, and host of the real Eisman playbook, Steve. Thank you for joining us on Prof. E. Markets. You are one of the other guys who called the 2008 crash. One of the other guys in that movie. I'll be on our tombstones. There's no question about it. Exactly. I mean, what do you make of this market right now? Because I thought we were all worried about AI, worried about the debt, worried about the reliance on a handful of AI labs, but we're sitting at record highs. So what is the market actually telling us right now? Number one, the U.S. economy is very strong. All the banks reported mid-month in July, and the credit statistics were as benign as they possibly could be. So there's no credit issues in the U.S. economy overall. It's a strong M&A cycle. The IPO calendar is not bad, and there's no question there's still a K-shaped economy. But if you look at the numbers of visa and mastercard, the overall payment volumes are quite robust. Where you do see things like the K-shaped economy would be like in a company like Proctor and Gamble, who has no revenue growth. But that's not what's driving the economy. Right now, things are fine. There's no one, despite all the hysteria about AI is going to destroy every single job on planet Earth. The employment numbers are still very, very strong. I think that's why the market keeps going higher, because things are just okay. Now, I do think that the AI story has gotten a lot more complicated. If you and I were sitting here a year ago, you'd be hard-pressed to find anyone who had anything negative to say. Maybe someone like Gary Marcus, who has been on my show, but he's probably been on your show as well. I love Gary. Gary has a lot to say, and it's all great, but Gary was like July of last year. Gary Marcus was like the only person on planet Earth who had anything they could have to say about AI. Now, you have Ed Zittron as well, but if you compare this to '08, so Michael and I both had the same thesis, which was underwriting, mortgage-underwriting standards have deteriorated dramatically. Then what was good about the thesis was every single month, the securitization data came out showing credit quality and billions upon billions of mortgages. You could actually see the deterioration every single month. You had a data set that was incredibly robust, that came out every single month, and said to you, you're right. You had this reinforcement. If you're going to construct a negative AI story, well, you don't have a securitization database. It's going to help you. What's the negative story? Let me tell you what I think is potentially the negative story, but it's not here yet. What's made the AI story more complicated is the following. Number one, there's no question that the business is much more capital intensive than anybody possibly could have imagined. Companies like Microsoft and Google and Amazon, companies who once threw off cash like it was water, have negative cash. So that's a big change. Now, that doesn't mean that these companies are on the verge of anything bad. It just means that the dynamics of their business has really shifted. They're investing massively. Whether they'll get great returns, we don't know yet, but that's one big change. I think the other major change is that the LLM agente AI business, which is really anthropic and open AI, and really just a few other people, doesn't seem to have any moats around it, because people switch from models to models. Now you have the open and models from China, which are much cheaper, and people seem to be switching to, and so maybe they'll be a price war, maybe not. Where I think the chick in the arm of potentially is, I read this report that basically said something like 70% of Amazon and Googles and Microsoft's AI CapEx businesses are from open AI and anthropic. So if, I hear this, this is what I'm looking for, if a massive price war broke out because of the Chinese models, and open AI and anthropic got in big trouble, that would unwind a lot of the AI trade, because then open AI and anthropic would not be able to spend as much, which would mean that fewer chips would be bought, you could figure out the rest. But until that happens, these companies keep spending money like it's water, so Nvidia is going to report on, I think August 26th, I mean, it has to have a good quarter, how could it not have a good quarter when Amazon is spending $225 billion this year on CapEx? So until we see real weakness, I think, out of open AI and anthropic, I'm not on Burry's side. Well, this is very interesting, because as you mentioned, we're seeing more numbers on the reliance on open AI and anthropic, at least among the big tech companies. Just today, Bloomberg reporting in their own analysis that 70% of Microsoft's AI revenue is coming from open AI, a company which, of course, Microsoft had invested in. So I think it's a fair thing to say that Microsoft is investing money in open AI and the money is coming back to them in the form of their AI revenue, which literally is most of their entire AI business. You brought up an important point, you know, if we see a price war come into play, if anything goes wrong for open AI and anthropic, both of whom are losing billions of dollars, then the whole thing unwinds. Losing billions is a euphemism. If only they were just losing billions, losing a lot more than that. So I mean, the question to me is, how likely is that if? To me, it's quite likely at this point. To me, it seems as though the signs are going in that direction and at the very least, I would expect the likelihood of that if to be priced into some extent. But when I see the S&P trading at record highs, markets don't work that way. Okay. I mean, you know, the news is still, the economy is still good. If there is a price war, the market is going to get a half to have head over the head by a two by four, because it's been a bull market for so long and everybody just buys every dip. In other words, it's purely reactive at this moment versus proactive and predicting what might happen. It's not going to be proactive at all. You know, Michael is trying to anticipate God bless. He's got more guts at this point than me because I just think it's, for me, it's premature. I'm waiting if it does happen, and I mean, you think it's very likely, and I wouldn't necessarily disagree, but it could be a year from now. So that's the thing, I mean, if it's two months from now, that's one thing. If it's a year from now, then all these companies are going to be spending money like they've been spending money, and it's the same story. So assuming that anthropic and open AI do get into trouble, the operative question, the real question is, wait, how long is it going to take? And I don't think anybody, I certainly don't have an answer to that question, and I don't think anybody else has an answer to that question at this point. To what extent do you think that other investors on Wall Street, to what extent do you think the market is asking the question? Agree with you that no one has an answer, I don't have an answer, you don't have an answer. And you and I seem to be asking that question at the very least, which is instilling a little bit of a sense of hesitancy or at least anxiety around the whole ecosystem. Do you think that people are asking the question, or is it the numbers are just too exciting no one cares? I wish I could answer that question, it'd be nice if we could all get all the investors in a room and do a group therapy, and then we could have an answer. I could survey. Otherwise, you know, I don't know, I just don't know, I mean, one thing that I'm even a little surprised about is the fact, I thought that when the 10 year climbed above 4.5%, that could be a demarcation line, and it hasn't, you know, if the market's going to get a correction because of rates, I think the 10 years got to go probably above 5. So it's definitely a bull market, you know, things get shaken off. I mean, I'm surprised by the fact that I thought that is the numbers last week were halacious, just awful, and the stock has, you know, went down for one day and climbed back up. Which part of their numbers were you most concerned about in the spending? Two sets. So one was 28% revenue growth, which is fine, 55% expense growth, and then 785 million in free cash flow, which is basically nothing. You know, a company like I was describing before, that used to throw off cash like it was water, now has no free cash flow. None. And the other thing, you know, when you dig into the numbers, which was interesting, is the depreciation of the chips is starting to hurt. I think it was something like 6 billion in the quarter up from like 4 billion, maybe three months ago. I could be off, but not by that much. But what's starting to happen is all that a cap X, which went on the balance sheet, is now starting to roll through the income statement. And that's going to be a weight on them for years. If you had to think about how this will play out over the next several months or so, I mean, Barry is saying, this is the top, or he's saying, it's possible that this is the top. I don't know how he could say that. I mean, I mean, you could say it, but I don't really know how you could say it. I mean, there's no, it's again, it's not like subprime when we had the securitization data where he and I both had this again, securitization data. There's no, he doesn't have a data point that you and I don't have. So if he had some evidence that there was a price war breaking out between Antfabrik and OpenAI and the Chinese models, I'd say, okay, you know, that's a very important data point and he's got a point. But otherwise, I just think he's, you know, with all due respect to him, the thing is just putting a finger in the air and saying, okay, let's give it a shot. And maybe we're right. But I don't think he has any data that he could point to. I mean, look, like I said, bank credit quality was great, employment data is very strong. You know, what data point can you point to right now that would say, this is it. What would you want to see if you were to call a top in that regard? What would you be needing to see? You hinted at it with some of the pricing days of, yeah, again, I need a price war. I need a price war in the LLM world until we don't get, until we have that, it keeps going up. Until we have that, things just continue to, I think, go on kind of the way they have. All right. Steve Iseman, host of the real Iseman playbook, Steve, we always appreciate your perspective. Thank you so much. It was a pleasure to see you again. After the break, an update on tariffs and Iran. For even more markets insights, you can subscribe to my weekly newsletter, simply put apps, simply put.proftymedia.com. Support for the show comes from Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky and let's be real. Lots of firms through a couple flashy funds, you're aware and call it a day, but not Vanguard. Vanguard's bond line up is built around institutional quality. And institutional quality isn't just a tagline, it's a commitment to delivering the kind of investment solutions that your clients deserve. That means access to more than 80 bond funds actively managed by a global team, although there are 200 sector specialists, analysts and traders. 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So like any good millennial, I have a love-hate relationship with Gen Z. It's the phenomenon rattling millennials. They just look at you. They want something bigger themselves, lifestyles of priority, motivation is being inspired. But regardless of how you feel about Gen Z, it's undeniable that they're changing national politics. Generations Z is increasingly showing less loyalty to traditional political parties. Many now more likely to identify as independent. So what is going on with the kids? I think the biggest misconception about Gen Z's politics right now is that all of a sudden they're all socialists. That is just not the case. They are embracing candidates who are offering new bold ideas in the absence of those ideas from establishment Democrats. This week on America actually, Gen Z researcher Rachel Jemphazle joins us to separate Gen Z fact versus fiction. It's not rocket science and this is, you know, I keep saying like, young voters aren't that complicated after all. It's pretty simple. Catch us every Saturday on YouTube or wherever you get your podcast. We're back with Profty Markets. In the war with Iran and new tariffs, global supply chains are facing major upheaval. Yesterday, Iran and Oman agreed to a new route for ships transiting the Strait of Hamuz and are closing in on a deal, but Iran says it won't open the straight until the US lifts its blockade of the weekend President Trump pulled back from quote, the biggest attacks since World War II in order to give diplomacy another try. He warned that the latest negotiations are quote, the last chance to end the war. At the same time, the Trump administration has injected fresh uncertainty into global trade. At the end of July, Trump invoked Section 301 of the Trade Act of 1974 to impose sweeping new tariffs on 60 economies covering 99% of US imports. On Monday, 25 states sued to block them arguing the administration is using Section 301 to replace the IEPA tariffs. Of course, those are the tariffs that the Supreme Court struck down earlier this year. So we wanted to get a better understanding as to what is actually going on here and how everything is affecting global supply chains. So who better to speak to than Ryan Peterson, CEO and founder of Flexport, Ryan, thank you so much for joining us. It's been a while since we lost charted. I just want to make sure everyone understands your expertise. You run a logistics firm. You have a really good insight into how supply chains are moving around the world when it comes to freight and of course This is what is largely being affected by tariffs and by the war in Iran and both are on again off again I can't get an understanding as to what is actually happening What is happening? What do you read? I think your summer is pretty good. It's it is confusing because it's on again off again There's been The Iran war especially is just like really difficult to understand. We've had so many different peace deals and Last chance is already that it's hard to really get a sense for like how that's going to play out by predictive powers on that or not not that great on the tariffs piece Also, we have quite a bit of uncertainty although I would argue a little bit more than we had Before these section three of one tariffs came out because Well, they're going to go they are going to go and get challenged as you mentioned the states doing there's a lot of other lawsuits as well The section three of one tariffs have a longer track record of surviving these lawsuits and there's a bit more process behind them Iepo is kind of like Of really blanket authority that the as the president interpreted it where he could just wake up On the wrong side of the bed and somebody pissed him off and just like throw a tariff at a country and Section three of one requires a lot more process and they've gone through that process. They've created these Commerce Department. Excuse me. It's done these studies to say this or that country the sector. It's been a lot more detail a lot more thoughtfulness. Let's call it So they're more likely to stand. I thought Iepa was always a little bit on most people thought it was on pretty shaky ground so That's a bit on this side of things It's a whirlwind if you're if you're out there as an employer export or trying to deal with all this Yeah, how does it affect freight and logistics if you have a tariff regime and you don't really know what's going to happen the next day and then say it does happen like does that mean that suddenly You're paying those tariffs is there a lag time to what extent is the confusion of all of this actually impact the movement of goods Around the globe it is about the uncertainty and it's about the the rapid changes as well as high rates now I'd probably like separate those the last year we had both right like high Really high at some point tariff rates. I forget it was like a hundred and forty five percent on China for like a few weeks And they remain pretty high on China, but So there's the high rates piece, but they're much lower now Even these sections 301 or either like 10 percent or 12 and a half percent depending on the country and that's kind of a manageable Rate is what importers are saying like if it stays there and it's stable and predictable then They're pretty good um last year you had both you had both high rates and a lot of unpredictability. So In 2025 there were 52 no 53 changes to the tariff code in 52 weeks Now throughout the year. So it was like complete chaos Some of these things were implemented with no notice. In fact, this one was done with almost no notice because Section 122 ended on July 24th at midnight and this one kicked in at 12.01 a.m And they announced it just a few hours before that. So for a little planning time Um, and the way that manifested itself was just like a lot of mistakes were made Um, that companies filed the wrong paid the wrong amount filed the wrong Duty amount then when it comes to getting refunds have like struggle to get their you know They got the refund because the Supreme Court and those have started to flow Out of the 166 billion of refund that's owed from the IEPA tariff 122 billion are in process right now Um, I don't actually have to figure from the government about what's been paid But there's a lot in that 122 bucket that aren't getting paid out or a heavily delayed In part because it was so difficult to comply that if you filed wrong You're not yes, you'll get a refund, but you have to go through this whole legal process to first correct your entry Uh, and then you can get a refund so people are definitely dealing with the repercussions of like not having their Data organized not having filed correctly. I think it's one place You know plugged for my own company where we've as being a technology company and having Databases for managing this it's giving us a real leg up and helping companies get it right Well, this is what I was going to ask you about is the tariff refund process. I mean we we know from US customs and their reporting Which they had to give over to the courts because of all of the lawsuits is that apparently the administration has issued a hundred billion dollars in tariff refunds Since the Supreme Court ruling but to to your point This is one of the things that you guys specialize in you actually have a tariff refund calculated out people figure out How to pay the tariffs or get the tariff money back and and actually Recover those refunds. I mean Where are we in the refund process? It sounds like it's a little bit of a shit show, but maybe that's too aggressive Well, I'll get the government some credit here. I actually thought they've done a pretty good job. They built this system called Cape Which is a sort of an attachment or a module on top of The primary technology system of the of customs of customs border protection and they shipped it in just about Two months or so two or three months that it took them to build it Which in the scheme of government building technologies like quite a feat actually if you go back and see The government technology system for customs is called ace automated commercial environment And it was like this 10 to 15-year debacle To deliver the piece of software. So for them adding a module that says high stakes and complexes like refunding You know 100 billion 166 billion In just a few months is to my view as a technologist like pretty it's pretty good I'm kind of impressed um where the problems are coming about are actually Less because of customs it was actually because of shortcuts that the broker the customs brokerage and the importing Community these businesses took too many shortcuts. So like when you're filing especially where you see the pain right now where people are not getting refunds Because you said it was a hundred billion. I hadn't seen that sample. Yeah, that sounds about right The 122 have been filed for and then there's 44 or so 42 billion more Somewhere around there that are um not yet eligible. They're they're going to be a later um process for those types of refunds But so there's still 20 billion that have been filed for and have not been refunded and what those are Is a lot of that is stealing aluminum where people made a mistake. So there's these stealing aluminum duties that were unique in the U.S. Customs landscape Historically you would only need to know if three things to know how much customs due to you owed It was the value of the goods what country of origin are they from And their HS code the classification of this of the code if you had those three things you spit out a duty You know how much you're owed now with the steel and aluminum duties that Trump put in last year you now have to know of that It's not enough to know the classification of the goods. You got to know of this object What percent of the value is steel and aluminum? And then you need to know the country of smelt Where was that steel and aluminum made or cast or smell depending on how it was made? So companies didn't have that data and if they did they were not very good at like breaking it out in a way That could be stored and could be audited and so a lot of them kind of faked it What they would do is say well, okay, it's 25% and there's this field when you're it's pretty technical So forgive me forgive me audience out there if I bore you on this But there's a field where you transmit the duty amount that's owed And a lot of people just put the number in there and sent it To the government and they might have got it right in terms of the duty amount owed But they were supposed to break out the percent aluminum And you only pay so the steel and aluminum duties You're only supposed to pay that higher duty amount on the valuation on the percent of the goods that's made of steel and aluminum But these people that didn't even fat finger it. They were just short-cutting it So now when you go to get a refund you can't get a refund on that entry until you go back and clean up the process And so just like a good example of like honestly the stuff's not hard if you have a good database in place And you understand the rules You can do it, but it's a new field it took a lot of the customs workers community still has it been able to add this database field To their software system. So it's kind of you're seeing the pain of an industry that just has an embrace technology It's just fascinating though to hear all of the complications and Yeah, I guess all of the details technically are boring But what it tells me is that we have invented so much such a Incredible network of complexity and I don't see what we've even done it for I mean This isn't to collect tariffs. This is to give tariffs back This is to undo all of the complexity that was originally put in place in the first place I think that's actually a really good point is that in some level there's this compliance burden That is as high as the tariff burden. I think the direction you're gonna go the direction things seem to be going in the US But also in Europe and other areas is they the governments want way more data about what's crossing borders They want to know in that seal and aluminum example where these sub what is it made of not just the overall classification of the products But like what percent of that product is steel and aluminum? Where is that from and you're gonna get to a point where what they want is they want to know that for every item What is this thing made of where is each of those sub components coming from and modest supply chains are incredibly interlinked complex global structures So like keeping up with all of that for a company's really hard because you buy something You buy an object and you put a component you put it in your product, but that component has sub components that come from from different countries. You don't know. Where now tracing this back to tier one, tier two, tier three suppliers, I mentioned it's not just the United States. I mean, these regulations are increasing. Europe now requires, when you import wood, you have to be able to show the GPS coordinates of where the tree was grown. So they can for anti-D4 station. I mean, I think that's a noble cause, but you now need to be able to show where was the tree grown and then you need to receipt from the trucker to show that this truck did, in fact, pick the goods up at that forest and bring it to the sawmill. And they want to see that leg monitored. And so that's the trend of where things are going. And importers and exporters need to get ahead of this with good database technology to track it all. And you want that database to be networked so that other people can contribute and add to it, et cetera. So I think, I mean, from a flexboard standpoint, it's like positioning our, we feel like we've made the right best technology wise to help people manage this. But it is a kind of, as a kind of a free market guy, it's a, I can see the burden that this puts on companies and there comes a point when you're like government, like, maybe you should just charge me a couple percent more tariff and not make me do all that stuff. Like, what is it you're trying to achieve? It's not obvious. So you're just getting in our own way with ever more complexity and no real purpose. It seems like from my perspective, I'm gonna have to let you go in a moment. But before I do, I just need to get your views on what's going on in the straight-of-a-moose. Is it closed? Is it open? If so, how open? What do we actually know? - I want the container shipping side of things. It's pretty much, you can call it closed. It was like one or two transits a day and it was at peak, it was almost a hundred. So it's really not, but very, very little container shipping is happening there. Tankers also way, way down, although they're more tankers transiting than container ships, I guess, more valuable to those economies. It's kind of a, from my world is container shipping, but in the container shipping world, it's sort of a backwater. Although, Jabba always the ninth-largest container port in the world that's in Dubai, or it was before this war. It's basically that way because it's a transshipment hub, like lots of ships bring containers there to be, you think of a hub for a hub spoke network. And that traffic is all moved elsewhere. They're doing the route, those transshipments elsewhere, lot in India. And of course, they're all routing around Africa. The Red Sea has been closed since, really since December of 2023. The almost all container ships are routing around this other tip of Africa rather than going to Red Sea because of the Houthis, which are in a Ron Link to kind of proxy groups. So there's no end in sight to this. I think, hopefully there's a peace deal, but even that, I'm not sure that it gives enough reassurance because we've had these fits and starts. We've had peace deals. And then the next day you've had ships get attacked. So I don't know that that's going to call them the insurance markets. It's costing about 10 to 15% of the value of the ship, just to ensure it for one voyage through. And you think about that. It basically turns you, you know, it's hard. I don't even know how they underwrote that policy, to be honest, because I don't even know what's the odds of a ship getting hit. Is it 10% or not? I mean, it's a pretty catastrophic event. Obviously, and it's not just the ship that gets lost all that cargo, you might have a $200 million ship with a billion dollars of the merchandise on it. They can go under. Ryan Peterson is the CEO and founder of Flexport Ryan. Always appreciate your time. It's official. The AI boom has become almost entirely dependent on open AI, as we discussed, new reporting from Bloomberg confirms that roughly 70% of Microsoft's AI revenue came from just one company last year, that company was, you guessed it, open AI. This would be concerning enough if it were just Microsoft, but it isn't. Berkeley's estimates that 75% of Amazon's AI revenue is coming from open AI and anthropic. UBS estimates that 30% of Google's cloud revenue comes from open AI and anthropic. And if we were to convert that to AI-specific revenue, well, then it would be roughly 75% as well. In other words, if open AI and anthropic didn't exist, Big Tech wouldn't really have an AI business at all. And the reason that's bad is because Big Tech has literally bet the farm on one thing and one thing only, and that is AI. Now, you might tell me who cares, because open AI and anthropic do exist, so everything's fine. To which I would respond, yes, they do exist for now. Because keep in mind, open AI lost $21 billion last year. And as for anthropic, we don't know, but our estimates put that number at roughly $11 billion. So the only way these two companies stay alive is if they continue to be subsidized by someone else. And who is that someone else right now? Answer Big Tech. The more you dig in to the economics of AI, the more you realize that it is a house of courts. And that doesn't mean that it is going to collapse. But it does mean that in order to not collapse, nothing can go wrong. (upbeat music) 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 Shalon, Chris Nodon here, and Meersal Vario. 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 and tune in tomorrow for our conversation with the one and only Professor Aswath DeModerin.