Ep14. Public Market Volatility, AI Air Pocket, $GOOG Ruling

00:00:00.000 | The idea that we're going to go through this phase shift

00:00:03.600 | with CapEx and revenues perfectly

00:00:06.320 | aligned and perfectly matched, it

00:00:08.680 | would be the first major phase shift we went through

00:00:11.000 | where that's the case.

00:00:11.920 | Hey, Bill, good to see you.

00:00:25.640 | Great to see you.

00:00:26.800 | So much for a smooth, nice exit to the summer.

00:00:29.800 | I mean, what a week.

00:00:31.360 | Been a rough summer.

00:00:32.920 | I mean, it reminds me of this video going around

00:00:35.760 | with Peter Lynch in it, you know?

00:00:37.560 | It's 1987.

00:00:38.720 | He's managing the Magellan Fund.

00:00:40.540 | I think it has like $12 billion in it.

00:00:43.240 | He finally-- his wife convinces him

00:00:45.040 | to go away to play a couple of days of golf in Ireland, right?

00:00:48.280 | Yeah, yeah.

00:00:48.800 | And it's hard to actually keep track of the market in '87.

00:00:52.480 | He says in two days, his fund goes from $12 billion

00:00:55.720 | to $8 billion.

00:00:57.320 | He's like, I took two days.

00:01:00.360 | And he lost 30% of the value in his fund.

00:01:03.000 | Oh, rough, rough.

00:01:04.680 | I don't think it's been that bad.

00:01:06.120 | But it's been bad.

00:01:07.040 | It's been, you know, a lot of stocks

00:01:09.720 | have been reset pretty dramatically here.

00:01:13.040 | And one thing that I thought would be great

00:01:17.360 | to talk about today is just to spend a lot of time

00:01:19.720 | on these public markets.

00:01:20.800 | This is a world you live in every day.

00:01:23.040 | I did participate, I had a brief career

00:01:26.040 | as a Southside analyst arguably three decades ago.

00:01:29.880 | So I consider myself more of a sideline player

00:01:34.120 | to the public markets.

00:01:35.040 | But I do pay attention.

00:01:36.120 | I've often said that the public markets are

00:01:38.560 | the buyers of private companies.

00:01:40.880 | And you got to know them.

00:01:41.920 | You got to know them.

00:01:42.640 | You got to study them.

00:01:43.400 | You got to know what they want to buy.

00:01:44.980 | So I do pay attention.

00:01:46.080 | But let's focus it your way.

00:01:49.160 | So just to run down some numbers, S&P down 8%,

00:01:53.320 | which wiped out $4 trillion.

00:01:55.080 | The QQQ down 11%.

00:01:58.520 | There were three worst days since March of 2020.

00:02:01.880 | Max Seven's down a trillion dollars.

00:02:04.480 | Crypto, which you kind of would have thought maybe

00:02:07.680 | would have rallied with what's going on, didn't.

00:02:11.200 | It traded down in sympathy.

00:02:13.520 | And we've seen this a bit where you hope for it

00:02:17.480 | to be uncorrelated.

00:02:18.440 | And then, oh shit, it's correlated.

00:02:20.200 | And then everyone's talking about Buffett jumping out

00:02:23.320 | of his Apple position.

00:02:24.440 | So you did speak about taking risk off

00:02:29.680 | at the beginning of the summer.

00:02:31.960 | And it looks like that was a smart move.

00:02:34.360 | Congratulations.

00:02:35.600 | But tell us what you think you're seeing out there

00:02:39.720 | and how people should put all this in perspective.

00:02:42.480 | I think that's the key.

00:02:44.320 | This is not 1987.

00:02:46.040 | In fact, we've seen this big bounce back

00:02:47.840 | the last couple of days.

00:02:49.400 | And while we've been having these big gyrations,

00:02:52.000 | if you just put it in context, since Q1 of 2023--

00:02:56.280 | remember, when everybody was really

00:02:57.920 | nervous at the start of '23 about Mike Wilson's

00:03:00.520 | hard landing.

00:03:01.360 | So that's just six quarters ago, right

00:03:04.560 | after chat GPT hit the screens.

00:03:07.200 | Stocks are up 60%.

00:03:09.120 | I mean, that's a huge move in six quarters.

00:03:11.640 | And the Qs were up nearly 80% at their peak in July.

00:03:16.040 | Many individual stocks have more than doubled, like Nvidia.

00:03:20.320 | So I put what's happened this week

00:03:23.000 | and what's happened over the course of the last month

00:03:25.640 | in kind of run-of-the-mill, healthy consolidation

00:03:30.320 | of these big gains that we had in these six quarters.

00:03:33.640 | But what I said at the beginning of summer,

00:03:36.080 | we're active managers, right?

00:03:37.760 | So I live with one foot in the venture markets,

00:03:40.640 | where we think about five or 10-year time horizons.

00:03:43.440 | But in the public markets, we have

00:03:45.040 | to think about risk-reward every day.

00:03:47.840 | And as stocks have run up, it has

00:03:50.560 | been accompanied by what we think

00:03:52.360 | is a deterioration in some of the conditions, right?

00:03:55.520 | So this means the skew has gone from very positive

00:03:59.560 | at the start of 2023, when everybody was nervous,

00:04:02.600 | to a little more negative by the beginning of the summer.

00:04:08.320 | And just like when you and I are playing in a game,

00:04:11.280 | our house game of poker, when the skew gets more negative,

00:04:14.160 | when cards get turned over, when our probabilities

00:04:16.920 | of winning dissipate, we've got to reduce the bet size.

00:04:20.760 | So I talked a couple of weeks ago

00:04:23.080 | about reducing units of risk.

00:04:25.040 | And I got some questions online about that.

00:04:28.160 | So here's a really simplified depiction

00:04:31.480 | of how we were thinking of things in January of 2023

00:04:36.400 | and how we were thinking of things

00:04:38.600 | at the start of July in 2024, right?

00:04:41.960 | So as you can see on this chart, at the beginning of '23,

00:04:45.440 | we looked at it. Prices were in the toilet.

00:04:47.440 | So you started with really low prices.

00:04:49.800 | We expected big earnings beats because consensus

00:04:52.920 | was really beaten down.

00:04:54.160 | People were super negative on where earnings would come in.

00:04:57.400 | And we expected there to be rate cuts, which

00:04:59.800 | would be further stimulatory of the economy.

00:05:02.760 | So we looked at it just, again, very simplistically.

00:05:05.200 | We said, hey, we think there's an 80% chance

00:05:08.080 | that the names that we like in technology

00:05:10.480 | can be up a lot because we expected big earnings beats.

00:05:13.720 | So up 50%.

00:05:16.000 | But the future is unknown.

00:05:17.600 | So there could have been a hard landing.

00:05:19.240 | So we said, oh, there's a 20% chance the market can be down.

00:05:22.440 | But it's already down so much that we think,

00:05:24.480 | let's call it down 10%.

00:05:26.360 | And when we looked at that skew, that's

00:05:28.240 | what I would call highly positive skew, right?

00:05:31.080 | It's like 5 to 1 or 4 to 1 risk reward.

00:05:34.080 | We put on 9 units of risk.

00:05:36.320 | So what's 9 units of risk?

00:05:37.760 | Well, let's assume--

00:05:38.600 | Yeah, what is 9 units of risk?

00:05:40.680 | So let's say that you're managing $5 billion

00:05:43.520 | of public equities.

00:05:45.600 | 9 units of risk would be that you have 4 and 1/2 billion

00:05:50.040 | of that risk directionally long the market, right?

00:05:54.040 | So that could either be that your longs are more than 100%

00:05:59.280 | and you have some shorts on.

00:06:00.760 | Or let's just keep it simple here

00:06:02.600 | and say that you have 95% of your cash invested

00:06:05.920 | or 90% of your cash invested and 4 and 1/2 billion

00:06:10.000 | directionally long the market, OK?

00:06:12.920 | Now, as the chart depicts, by the beginning of this summer,

00:06:19.080 | we were worried about a variety of things, the first of which

00:06:22.640 | is prices had just gone up a lot, Bill, right?

00:06:25.360 | We were at all-time highs.

00:06:27.680 | And the moves had been fairly parabolic in a lot of the names

00:06:31.840 | that you and I talked about.

00:06:33.200 | And we had talked on this pod about concerns

00:06:35.200 | over an AI air pocket.

00:06:36.560 | And people were pointing out that NVIDIA was up multiples

00:06:39.800 | in a very short period of time.

00:06:41.680 | So we looked at it.

00:06:42.440 | We said we got high prices.

00:06:44.360 | We've got an upcoming election where

00:06:46.920 | there's going to be some real binary things at play,

00:06:50.680 | including higher taxes, which we think would

00:06:53.880 | be a negative for the market.

00:06:55.960 | We started to see our earnings expectations, which were just

00:06:59.600 | in line with consensus.

00:07:01.160 | Or in some cases, we expected misses to occur, OK?

00:07:05.200 | And we were increasingly concerned

00:07:07.040 | about the prospect of a recession

00:07:08.840 | because we started to pick up these signs of slowing

00:07:12.080 | in the economy.

00:07:13.080 | And then you and I had talked a lot about this AI air pocket.

00:07:15.720 | So by the beginning of the summer,

00:07:17.320 | we said there's no longer an 80% chance of a 50% upside,

00:07:20.920 | like we saw at the beginning of '23.

00:07:23.200 | Now there's an 80% chance that we could have a 10% to 20%

00:07:27.560 | downside, right?

00:07:29.080 | Yeah, yeah.

00:07:30.040 | And the move up, the 20% chance, was like, wow,

00:07:33.400 | we're at all-time highs.

00:07:34.560 | We could see this squeeze a little bit higher.

00:07:36.600 | But between here and the election,

00:07:38.640 | we think the probability of going much higher

00:07:40.800 | is fairly low.

00:07:42.080 | So we had much lower units of risk.

00:07:44.320 | What's that mean?

00:07:45.040 | It means we sell some of our longs, or we put edges on,

00:07:48.000 | or we add to our short positions,

00:07:50.080 | so that our net exposure directionally to the market

00:07:54.200 | is three units of risk, not the nine units of risk

00:07:57.480 | that we had had on earlier.

00:07:59.160 | So that's really what I was saying in a simplified way,

00:08:04.120 | that we tend to have longer holding periods.

00:08:06.920 | We hold things about three years in the public markets.

00:08:09.320 | Obviously, in the venture markets,

00:08:11.080 | we're holding things 10 years.

00:08:12.960 | But that doesn't mean that you buy and go to sleep.

00:08:15.360 | Just like in a poker game, you got

00:08:17.400 | to watch when things change.

00:08:19.400 | They don't change every day.

00:08:21.160 | But over the course of the last six quarters,

00:08:23.240 | that risk-reward has indeed changed.

00:08:25.400 | Yeah, and I mean, the Nasdaq shot up about 33%

00:08:28.800 | in that window from January to the first week of July.

00:08:33.280 | And I think a lot of the people in Silicon Valley

00:08:37.400 | didn't really feel that, because they may still

00:08:40.240 | be anchoring on some of these multiples from two years ago.

00:08:44.440 | And so when I hear people say, oh, my god,

00:08:49.040 | SaaS is super cheap at six times revenue.

00:08:51.360 | And I'm like, you know, I've seen industries mature

00:08:55.320 | where six ain't a stopping point.

00:08:58.720 | And of course, you got to move on to net income and earnings

00:09:04.280 | and cash flow and get out of this revenue mindset.

00:09:07.240 | But anyway, yeah, so I think you timed that exactly right.

00:09:11.800 | And obviously, now we're looking at all of these new issues

00:09:17.120 | that have come to the table.

00:09:19.360 | What do you think are the key issues that have been changing?

00:09:22.000 | And how do we want to think about each and every one of them?

00:09:25.440 | Well, first, as price goes up, mathematically,

00:09:28.280 | risk-reward gets worse, unless we're taking up our numbers.

00:09:32.320 | So the first problem is our numbers stopped going up a lot.

00:09:36.200 | And so price really matters.

00:09:40.040 | In 2023, we kept revising those numbers up.

00:09:42.840 | And in 2024, the numbers didn't go up a lot.

00:09:46.280 | And so we're much more in line with consensus.

00:09:48.280 | But in addition to that, we see five forces really at play.

00:09:53.480 | We've been focused on three, and then two more

00:09:55.600 | came into play over the course of the past six to eight weeks.

00:09:58.760 | But the five forces we've been thinking about, Bill,

00:10:01.560 | number one is taxes, right?

00:10:03.400 | We got this election coming up.

00:10:04.720 | And remember, depending upon who wins the election,

00:10:08.000 | we have the potential of an automatic tax increase in 2025.

00:10:12.080 | It's the expiration of the personal income tax reductions

00:10:16.080 | from the Trump tax cuts.

00:10:17.760 | And if that happens--

00:10:18.720 | You're talking about personal income taxes, not

00:10:22.320 | corporate taxes.

00:10:23.400 | Right, we can dive into that in a sec.

00:10:25.440 | Number two, we're worried about earnings misses or just

00:10:29.080 | skinny beats and general slowing in the economy, right?

00:10:33.520 | So this is things like consumer delinquencies.

00:10:36.280 | Number three was a concern about this AI air pocket,

00:10:40.200 | that prices had come up so much, expectations

00:10:42.880 | had come up so much.

00:10:44.840 | Would we have, as Satya said to us a few weeks ago,

00:10:49.640 | this mismatch between CapEx and when the actual revenues start

00:10:54.120 | to come in?

00:10:54.960 | And then just in the last few weeks,

00:10:59.040 | we had two more geopolitical factors emerge.

00:11:02.120 | One was around this huge Japanese carry trade

00:11:05.000 | unwind, which we can dive into a little bit.

00:11:07.280 | And then the last one was just this expanding saber rattling

00:11:11.040 | in the Middle East, potential of an expansion

00:11:14.120 | of the conflict with Iran.

00:11:16.920 | All of these things creates a bit of a toxic brew.

00:11:21.000 | And of course, the future is unknown.

00:11:23.760 | A bunch of these things could break positive,

00:11:26.320 | but it means that there's more uncertainty in the world.

00:11:29.240 | And when that uncertainty goes up,

00:11:31.040 | the discount rate, the margin of safety

00:11:33.000 | you need on your portfolio goes up.

00:11:36.160 | And that means that the multiples on these stocks

00:11:38.480 | come down.

00:11:39.360 | So those are really the things that we've

00:11:42.440 | been paying attention to, in addition, obviously,

00:11:45.480 | to what companies we expect to do best,

00:11:47.440 | which ones we expect to underperform.

00:11:50.000 | And that's what causes us to modulate

00:11:52.480 | from nine units of risk to three units of risk.

00:11:55.240 | And these are all things that change, right?

00:11:57.240 | There's a perception-- there's obviously

00:11:59.800 | been a perception shift on the election, which

00:12:01.920 | can affect something there.

00:12:04.000 | There was a general perception that the soft landing

00:12:07.480 | was stuck, using the Olympic metaphor.

00:12:12.360 | And so that's a change, if we're thinking about a recession

00:12:17.480 | again.

00:12:18.800 | The AI shift, we've talked a lot about.

00:12:20.800 | The Japan carry trade kind of came out of nowhere.

00:12:23.280 | So we'll dive into that.

00:12:24.960 | And then on the Iran issue, and just to clarify for people,

00:12:29.720 | I mean, obviously, any war is bad, obviously.

00:12:32.400 | And it can lead to a lot of horrible things

00:12:36.120 | for citizens and people.

00:12:38.520 | I think one of the reasons you're bringing up

00:12:40.360 | relative to the US markets is because it

00:12:42.680 | could cause an oil shock.

00:12:44.680 | And that could impact oil prices, which obviously

00:12:47.200 | has a huge impact on the economy.

00:12:48.840 | Is that correct?

00:12:49.760 | Yeah, certainly, certainly.

00:12:51.200 | OK, cool.

00:12:52.320 | Well, let's take them one by one and dive in.

00:12:54.840 | Why don't you start with the tax thing?

00:12:57.400 | Well, so we talked about this, I think,

00:13:00.480 | on episode 11 or something.

00:13:04.320 | The tax situation we're facing going into this election

00:13:07.400 | is a very different situation than we've had

00:13:10.240 | in prior presidential elections, right?

00:13:12.080 | There's always debates in presidential elections

00:13:14.640 | about higher taxes, lower taxes.

00:13:16.520 | And of course, we never know whether or not

00:13:19.040 | they'll actually follow through on those promises,

00:13:21.120 | whether or not those things will happen.

00:13:23.120 | But in this situation, we have tax cuts

00:13:26.160 | that automatically are set to revert back to prior levels,

00:13:29.680 | right?

00:13:30.360 | So remember, the corporate tax cuts

00:13:32.760 | were made permanent when they were passed,

00:13:35.800 | brought the corporate tax rate from 35% down to 21%.

00:13:40.120 | So if a new administration came in,

00:13:43.240 | let's say the Harris administration came in

00:13:45.320 | and they wanted to raise corporate taxes,

00:13:47.160 | they would have to get that through Congress,

00:13:49.000 | which would be a very difficult thing to do, right?

00:13:52.080 | Given the fact that we expect to continue

00:13:53.920 | to have divided government.

00:13:55.360 | But the individual tax cuts,

00:13:57.680 | which included increasing the child tax credit

00:14:00.160 | and the standard deduction,

00:14:02.680 | it's worth about $150 billion a year,

00:14:06.280 | to put it in perspective, right?

00:14:08.040 | That's about 60 basis points on US GDP.

00:14:11.320 | And we're talking about the marginal federal income tax.

00:14:16.520 | Correct, so this is everybody's rates came down under Trump.

00:14:20.880 | We also increased the standard deduction.

00:14:23.080 | We increased the child tax credit.

00:14:24.880 | And think about that.

00:14:25.840 | That's like pushing $150 billion

00:14:28.680 | of consumer firepower into the economy.

00:14:32.080 | Now, you know, there's a lot of debate

00:14:34.520 | about whether we can afford this as a country,

00:14:37.080 | you know, whether it actually gets spent

00:14:39.040 | and added to GDP or saved, whether it's fair.

00:14:41.880 | I'm making a different point, right?

00:14:43.800 | Set aside what you think politically,

00:14:46.280 | but from a market perspective,

00:14:48.720 | if taxes were to go up by $150 billion a year,

00:14:52.200 | this is a big risk to the market.

00:14:54.040 | And the market seems to currently be saying

00:14:57.240 | the likelihood, right?

00:14:58.640 | We know what the betting markets are saying.

00:15:00.480 | They're saying Kamala is now favored

00:15:03.560 | to win the election by a slight amount, right?

00:15:06.520 | And as the probability of her winning has gone up,

00:15:09.080 | the market has gotten more concerned

00:15:11.600 | about these tax increases, right?

00:15:14.280 | And some people have estimated

00:15:16.120 | that the tax decreases from the Trump tax cuts

00:15:20.400 | contributed to about 20% of the gains in the S&P 500.

00:15:25.000 | So whatever your number is,

00:15:27.480 | if those tax cuts go away,

00:15:29.200 | you have to assume that will be a headwind,

00:15:31.440 | at least in the short term for the markets.

00:15:33.880 | Can you not make an argument?

00:15:35.400 | I mean, depending on exactly who is impacted

00:15:40.000 | as to whether or not those taxes

00:15:42.520 | come out of discretionary money

00:15:45.880 | that would be available to spend.

00:15:47.600 | Yeah, no, I--

00:15:50.000 | I'm just saying for an ultra wealthy person,

00:15:51.760 | it's not gonna matter.

00:15:52.800 | It's not gonna affect your spending.

00:15:54.600 | Of course.

00:15:55.440 | And so, like, that's what I was saying at the start.

00:15:57.760 | There's some debate, right?

00:15:59.200 | We know if the tax cuts were $150 billion,

00:16:02.120 | it's unlikely that all $150 billion of that

00:16:05.320 | was stimulatory, right?

00:16:06.440 | Because some people just put it into increased savings.

00:16:09.440 | But we know when you look at the bulk of the people

00:16:12.280 | who are recipients of those tax cuts, right,

00:16:15.840 | they've spent down their COVID stimulus checks, right?

00:16:19.280 | They've increased their credit cards, right?

00:16:21.720 | And whatever incremental take-home pay they got

00:16:25.560 | as a result of these tax cuts is being spent.

00:16:27.920 | So that had to have some stimulatory effect

00:16:30.240 | on the economy. Gotcha.

00:16:31.160 | Okay, let's dive into the next one,

00:16:32.840 | which I think is the one that's,

00:16:34.880 | for me at least, most interesting, which is,

00:16:37.400 | and you know, 'cause I've been very outspoken,

00:16:40.400 | I try and avoid macro at all costs.

00:16:42.440 | So this is an awkward--

00:16:45.080 | You're feeling very uncomfortable today.

00:16:46.760 | Yes, it's an awkward journey for me.

00:16:48.360 | But, you know, just out listening to the ethos,

00:16:53.360 | and it did appear that the common point of view

00:16:59.240 | was that a soft landing had been achieved

00:17:01.760 | or that it was gonna be achieved.

00:17:03.640 | And there was a lot of, you know, high fives and ta-da's

00:17:06.720 | and I told you so's.

00:17:08.360 | And so to take, to reconsider that

00:17:10.920 | and take that off the table is a big deal.

00:17:12.880 | So what are you seeing out there

00:17:15.800 | and what's causing people to use the recession word again?

00:17:20.000 | Yeah, no, I think you're spot on, right?

00:17:22.440 | I mean, right?

00:17:23.680 | The markets were at all time high, Bill, in July.

00:17:26.840 | So, I mean, I think that's telling you, I don't know,

00:17:28.800 | that there was an 80% chance of a soft landing.

00:17:31.640 | Now we started to get some data coming in

00:17:36.760 | that suggested maybe the economy was softening faster,

00:17:41.560 | getting softer, faster than people think.

00:17:43.840 | So for example, the Wayfair CEO, you know,

00:17:46.440 | Wayfair is a company that provides cheap home furnishings.

00:17:49.760 | We know that housing is under pressure

00:17:51.840 | because interest rates remain very high.

00:17:54.160 | You know, the CEO came out and said,

00:17:55.640 | "Customers remain cautious in their spending on the home

00:17:58.920 | and our credit card data suggests

00:18:00.760 | that the category correction now mirrors the magnitude

00:18:04.320 | of the peak to trough decline

00:18:06.400 | the home furnishing space experienced

00:18:08.680 | during the great financial crisis."

00:18:11.200 | Right, that's pretty extraordinary, right?

00:18:13.320 | You have the CEO of a home furnishing company saying,

00:18:16.680 | "This looks like it did in 2008."

00:18:20.080 | Right, Airbnb is another--

00:18:22.080 | Go ahead. Yeah, go ahead.

00:18:23.000 | Airbnb reported just last night, you know,

00:18:26.080 | they talked about some softness, you know,

00:18:29.040 | that they're seeing.

00:18:29.920 | Jamie Dimon was just on CNBC on the flip side

00:18:33.520 | and he said, "Listen, my expectation all year

00:18:36.080 | is that there was a 30, 35% chance

00:18:38.320 | that we're gonna have a soft landing."

00:18:39.840 | And my view remains the same today.

00:18:41.760 | But I think Jamie was probably

00:18:43.640 | in the more conservative camp.

00:18:44.960 | The market was pricing in an 80% chance of a soft landing.

00:18:48.480 | He was at 30 or 35% chance.

00:18:51.000 | And I think that's probably where the market

00:18:54.280 | is beginning to price it.

00:18:56.040 | And on top of that, so we have about 80% of the companies--

00:18:59.600 | Let me ask you a quick question

00:19:01.200 | while you're on that topic.

00:19:03.520 | So I also saw Disney gave soft guidance

00:19:07.120 | on the theme park business

00:19:08.520 | and Universal had said the exact same thing.

00:19:13.200 | So, you know, I know you used to be very focused

00:19:17.280 | on the travel sector.

00:19:18.360 | When you look at theme park revenue

00:19:21.400 | and you look at Airbnb revenue,

00:19:23.200 | what does it tell you when the consumer's

00:19:26.360 | having second thoughts about those types of expenditures?

00:19:29.440 | Right, well, the first thing they do is,

00:19:31.760 | you know, when things are starting to get tight

00:19:34.320 | is you defer your couch.

00:19:35.960 | And that's what Wayfair's seeing.

00:19:37.640 | The second thing you do is you defer your family trip.

00:19:40.520 | Right? Yeah.

00:19:41.360 | You hold onto that family trip

00:19:43.120 | because that's the most important thing

00:19:44.520 | you do during the year.

00:19:45.840 | But when Airbnb and Disney and the cruise lines

00:19:48.600 | and the airlines start seeing down ticks,

00:19:50.840 | now you know that the consumer

00:19:52.520 | is really getting pressured.

00:19:54.040 | So there is no doubt-- Have you seen that?

00:19:56.200 | So it's not just the theme parks and Airbnb

00:19:58.720 | you're seeing it with other-- No, this is--

00:20:00.280 | We're hearing this across the board in travel.

00:20:02.560 | We're seeing it in employments, air ticket prices.

00:20:05.920 | Again, not at a level that should cause one

00:20:08.240 | to think we're in a recession or panic,

00:20:10.440 | but undoubtedly in my mind, we're slowing.

00:20:13.400 | And if you just look at the companies

00:20:15.000 | that have reported in the S&P,

00:20:16.680 | 80% of companies have now reported.

00:20:19.160 | 48% of them had a positive revenue beat.

00:20:22.000 | Now that sounds like a lot,

00:20:23.920 | but it's the lowest level since the third quarter of 2019.

00:20:28.120 | And remember, this is a trailing indicator.

00:20:30.000 | This is what happened over the course

00:20:31.840 | of the last three months.

00:20:32.840 | So again, that's another thing

00:20:35.120 | I think we ought to pay attention to.

00:20:36.440 | And then of course, our jobs report have come in weak.

00:20:41.200 | The jolts, which is the job openings, are below trend.

00:20:45.320 | And that trend has been in place for quite a while.

00:20:48.480 | And then the unemployment rate has been climbing.

00:20:54.480 | Most recently, 4.3%.

00:20:57.440 | Many economists think, in fact,

00:20:58.840 | I was talking with a former chairman

00:21:00.880 | of the Council of Economic Advisors last night.

00:21:03.240 | They think this is the best indicator

00:21:05.240 | of a pending recession.

00:21:06.400 | There's something known as the SOM rule.

00:21:08.800 | We'll put it in the notes.

00:21:10.320 | But they said, according to the SOM rule,

00:21:12.880 | a recession is almost always underway

00:21:16.120 | if the three-month average unemployment rate

00:21:18.640 | rises by half a percentage point

00:21:21.000 | from its low of the past year.

00:21:22.600 | And that's exactly what's happened.

00:21:24.080 | So a lot of chatter on Twitter

00:21:25.880 | about how the SOM rule has been triggered.

00:21:29.440 | So there's good reason to think

00:21:31.960 | that there's a lot of slowing going on.

00:21:34.720 | There's a lot of debate as to whether or not

00:21:36.800 | this is just the healthy slowing

00:21:38.520 | that Jerome Powell needed to engineer

00:21:40.640 | to bring inflation down.

00:21:42.600 | But, you know, there is a saying

00:21:45.040 | that the Fed has caused 10 of the last eight recessions.

00:21:48.680 | You know, that they have post-traumatic stress.

00:21:52.560 | They were late to get in front of inflation

00:21:56.240 | in June of 2021.

00:21:58.000 | They were late to increase rates.

00:22:00.400 | And so I think it's reasonable

00:22:02.480 | that they may be late to reduce interest rates

00:22:05.200 | to head off a recession.

00:22:07.080 | And do you expect them to do something quickly?

00:22:10.560 | There was talk this week of like an emergency cut,

00:22:13.120 | although I think that's waned.

00:22:15.040 | Yeah, I mean, listen,

00:22:17.440 | I think it's important to realize first

00:22:20.560 | that the Fed is at a multi-decade high

00:22:24.280 | in terms of its level of restrictiveness in the economy.

00:22:26.880 | So what do I mean by that?

00:22:28.840 | Well, the Fed funds rate is at 5.5%, right?

00:22:32.520 | The 10-year is at 4%.

00:22:34.120 | So the market-based mechanism

00:22:36.320 | for saying where rates are going to be

00:22:38.200 | is 150 basis points lower

00:22:40.640 | than where the Fed funds rate is.

00:22:41.920 | Another way of looking at this is the 10-year tips, right?

00:22:46.040 | We've talked about this before.

00:22:47.640 | It's a bit of an esoteric thing,

00:22:49.040 | but it's currently at 1.8%,

00:22:51.520 | and 50 basis points is viewed as neutral.

00:22:54.280 | So this is kind of highly restrictive.

00:22:56.720 | And the way to think about this

00:22:58.800 | is this is the amount you have to be compensated

00:23:01.200 | over the interest rate

00:23:04.600 | in order to bear the risk of inflation.

00:23:08.040 | So the measure of economic restrictiveness is high,

00:23:12.560 | and inflation is coming down.

00:23:16.240 | In fact, the last inflation print was 3%.

00:23:20.880 | CPI gets reported again next week.

00:23:23.080 | We expect that to be,

00:23:24.400 | the market expects that to be around 2.9%.

00:23:27.760 | So I think there's very little doubt

00:23:31.160 | the Fed is going to cut rates.

00:23:33.160 | The market is saying now

00:23:35.280 | that there is a very high probability,

00:23:38.920 | we'll put this chart in,

00:23:40.640 | that we're going to have 125 basis points

00:23:43.400 | to 150 basis points of rate cuts

00:23:46.560 | over the course of the next four to five months.

00:23:48.720 | Now, to put this in perspective, Bill,

00:23:50.760 | that just gets us back to neutral, right?

00:23:53.640 | This is not some, oh my God, we're in a recession.

00:23:56.400 | This is just saying we're no longer

00:23:58.840 | as worried about inflation.

00:24:00.440 | We're more worried about jobs.

00:24:02.240 | We have a dual mandate.

00:24:03.560 | And so we're going to get back closer to neutral.

00:24:07.280 | I would actually point you,

00:24:08.480 | there was a really great interview this week

00:24:10.520 | with Chicago Fed President Goolsbee.

00:24:14.280 | Thinks perhaps that the Fed

00:24:15.800 | is already behind the curve on this.

00:24:17.960 | When he was asked whether they would do an emergency cut,

00:24:20.800 | and I think the emergency cut is off the table,

00:24:23.360 | but he said this.

00:24:24.880 | He said, "I have been saying to you

00:24:27.080 | "that we have been in a very restrictive stance.

00:24:29.840 | "The real Fed funds rate is at its peak for this cycle.

00:24:33.440 | "And we should only have that restrictiveness in place

00:24:36.560 | "if there's a fear of overheating

00:24:39.000 | "and the data is weakening

00:24:40.920 | "so it does not look like there's any fear of overheating."

00:24:44.560 | And then he went on to say, "While weaker than expected,

00:24:47.680 | "we're not yet in a recession,

00:24:49.520 | "but we need to be forward-looking.

00:24:51.000 | "There are other cautionary indicators.

00:24:53.680 | "Consumer delinquencies are rising.

00:24:55.960 | "Small business defaults are rising.

00:24:58.400 | "They are at worrisome levels,

00:25:01.240 | "though the domestic purchases seem steady."

00:25:03.600 | So I think within the Fed,

00:25:05.480 | they know that the balance of power

00:25:07.640 | between concern over inflation and jobs has shifted.

00:25:11.920 | So I expect that on schedule in 30 days,

00:25:15.800 | I think it's mid-September,

00:25:17.960 | you're gonna get a rate cut.

00:25:19.200 | The market's saying it's gonna be 50 basis points

00:25:21.440 | followed by a few other rate cuts.

00:25:23.280 | That sounds right to me.

00:25:27.000 | But Jeremy Siegel was on Squawk Box

00:25:29.600 | calling for an emergency 75 basis point rate cut

00:25:33.040 | followed by another 75 basis points.

00:25:36.000 | And listen, I think that that would probably

00:25:38.360 | spook the market worse than if they just stay the course here

00:25:43.280 | because that would suggest the economy's falling off a cliff

00:25:46.000 | and I don't see evidence that it's falling off a cliff.

00:25:48.000 | And so the interpretation is worse

00:25:50.120 | than the value of the action, if you will, the signaling.

00:25:55.120 | You know, the whole Fed thing

00:25:57.400 | is kind of like intriguing to me

00:26:01.520 | 'cause the world starts talking about it

00:26:04.080 | like it's a thermostat.

00:26:05.960 | Oh, honey, it's hot in here.

00:26:07.240 | Can you turn it down?

00:26:08.920 | As if it's the one thing that's always gonna fix the market

00:26:12.320 | and there's 40,000 other variables out there, right?

00:26:15.840 | Like if you, you know, it looks like both parties

00:26:20.000 | that are running for the White House

00:26:22.320 | want to do isolationism and fight globalism.

00:26:27.400 | That's inflationary.

00:26:29.360 | Right.

00:26:30.200 | There's been, you know, a massive overspending

00:26:35.040 | by the last three or four administrations

00:26:37.360 | and so national, you know, debt's higher

00:26:40.120 | than it's ever been.

00:26:40.960 | That's a problem.

00:26:42.400 | Like who's to say that even if the Fed does cut,

00:26:46.200 | we're gonna see just like an immediate,

00:26:49.080 | okay, we're fine.

00:26:50.280 | Like the doctor gave you a shot and you're okay.

00:26:52.720 | We got used to, or maybe addicted to rate cuts

00:26:56.600 | and every time rates would go down

00:26:57.960 | and kind of bail out the markets and markets would go up.

00:27:00.760 | But remember, historically rate cuts

00:27:03.840 | that are preceding a recession or fears about a recession

00:27:07.920 | are oftentimes sold, right?

00:27:10.280 | It doesn't cause the market to go up.

00:27:11.680 | Actually it causes the market to go down.

00:27:13.640 | You know, our team was looking at some data in 2019.

00:27:17.600 | In 2018, there was fear about the economy slowing.

00:27:20.600 | The Fed starts cutting rates at the beginning of 2019

00:27:24.800 | and the market was down big, right?

00:27:27.760 | It was down big because it thought

00:27:28.960 | we were heading into a recession.

00:27:30.520 | So it took probably six months for the market

00:27:34.520 | to rebound from that.

00:27:35.760 | And a much worse version of this happened in 2001

00:27:39.960 | that you and I remember well, right?

00:27:41.960 | The Fed continued to raise rates in May of 2000,

00:27:45.480 | worried about the dot-com boom

00:27:47.360 | and that the market was overheating,

00:27:48.800 | but they were way behind the curve.

00:27:50.880 | And we all saw the economy really slowing down

00:27:54.080 | and signs of the dot-com bubble bursting.

00:27:57.520 | They were late to the game.

00:27:58.800 | By the time they started cutting rates

00:28:00.480 | in the beginning of 2001,

00:28:02.280 | it was clear they were behind

00:28:03.880 | that the economy was cascading into a recession

00:28:06.280 | and the NASDAQ was down over 20%.

00:28:08.560 | And so I don't think, you know, as market participants,

00:28:13.560 | when we're weighing all the risk reward here,

00:28:16.240 | we're not sitting here saying,

00:28:17.560 | "Oh, the Fed's gonna cut rates."

00:28:18.960 | And that in and of itself, you know, fends off a recession.

00:28:22.520 | We need to make sure that we continue

00:28:24.000 | to see earnings come in strong.

00:28:27.080 | - You know, that one, that particular situation,

00:28:29.720 | there's one thing that people seem

00:28:32.640 | to have a really hard time remembering.

00:28:34.080 | After the famous quote about irrational exuberance

00:28:38.440 | from Alan Greenspan,

00:28:39.960 | the Clinton administration actually lowered

00:28:42.000 | capital gains tax rates, which fed into that problem.

00:28:45.320 | And probably shouldn't have, should have been raising them.

00:28:48.840 | Anyway, so let me ask you this question.

00:28:53.600 | Once again, macro bill here.

00:28:55.680 | - Yeah.

00:28:56.520 | - What are the chances that you get probably

00:29:01.640 | the worst situation of all where the Fed cuts

00:29:05.720 | and nothing positive happens?

00:29:08.280 | Like there's no positive impact to growth.

00:29:10.600 | Is that a possibility in this case?

00:29:13.240 | - Yeah, I mean, listen,

00:29:14.800 | I think the market's already doing the Fed's job, right?

00:29:17.560 | Remember that a lot of variable rate debt

00:29:20.440 | is priced off of where the tenure is.

00:29:22.680 | And the tenure has already, you know, come down.

00:29:25.120 | So people's mortgage, you know,

00:29:27.040 | you can already go get a cheaper mortgage.

00:29:28.880 | You can, your credit card debt

00:29:30.280 | is already coming down, et cetera.

00:29:32.080 | So this is the dynamic.

00:29:33.280 | - And the marginal impact of the Fed lowering

00:29:35.960 | to those long-term rates is not gonna be that big,

00:29:39.240 | is what you're saying.

00:29:40.200 | - Correct, I don't expect it to be that big,

00:29:42.360 | but it does signal directionally, right?

00:29:45.440 | That the market is right.

00:29:47.440 | Remember, the market will ultimately adjust

00:29:49.400 | to where the Fed is.

00:29:51.280 | So the Fed, it's not to say that the Fed funds rate

00:29:54.520 | is, you know, is not important.

00:29:57.000 | I would say this, what's far more important

00:29:59.760 | about whether we end the year higher or lower

00:30:02.680 | is not whether the Fed cuts rates.

00:30:04.840 | It's what is the economic growth?

00:30:06.680 | What is the unemployment?

00:30:08.240 | What is the CPI?

00:30:09.560 | What's really going on in the underlying economy?

00:30:12.480 | And again, just again, telescoping out here.

00:30:15.800 | So you have this concern about taxes.

00:30:17.480 | We're not gonna know the answer to that

00:30:19.440 | until after the election.

00:30:21.120 | You got this concern about recession.

00:30:23.640 | You know, the Fed can cut rates in September.

00:30:26.000 | That doesn't make that concern go away.

00:30:27.720 | That concern is still gonna be out there

00:30:29.640 | until we see additional inputs on economic growth,

00:30:34.640 | you know, come in.

00:30:36.120 | And then of course, this third one that, you know,

00:30:38.120 | we were talking about, Bill,

00:30:39.600 | which is just concerns over this AI air pocket,

00:30:43.360 | which you've been beating the drum on.

00:30:46.040 | - Okay, yeah.

00:30:47.320 | Well, I mean, look, I think to a certain extent,

00:30:49.960 | that's played out, right?

00:30:51.360 | I mean, we've seen most of the stocks

00:30:54.720 | that you would have called AI stocks,

00:30:57.640 | Nvidia being the most obvious,

00:30:59.640 | but I think the Mag 7, a lot of them are exposed to this.

00:31:04.320 | They've all come in, right?

00:31:05.680 | And so you and I had the discussion, you know,

00:31:09.240 | we've been having it all summer,

00:31:10.400 | but then the Goldman thing came out

00:31:12.120 | and the Sequoia thing came out

00:31:14.200 | and then the stocks retreated.

00:31:16.240 | So could you make the argument

00:31:19.040 | that that bubble's been popped already?

00:31:21.440 | - Well, you know, again, like I said at the beginning,

00:31:23.840 | I think these are healthy consolidations, right?

00:31:27.360 | Like what you don't want,

00:31:28.480 | what a bubble is made of is when everybody believes

00:31:32.080 | when there's no talk about an air pocket

00:31:34.440 | and when stocks just, you know,

00:31:36.240 | elevate to ridiculous multiples.

00:31:38.840 | I think here, you know,

00:31:39.680 | you've seen Nvidia come down from 140

00:31:41.720 | to I think it bottomed at 100 or 95 bucks.

00:31:44.280 | It's probably at 105 today.

00:31:46.840 | And so, but we did learn some things

00:31:48.880 | in the earnings reports of the last two weeks, Bill,

00:31:51.280 | that I think we should call out

00:31:53.000 | in terms of what Meta said, what Google said,

00:31:55.800 | what Microsoft said about their CapEx

00:31:59.920 | and about AI spending.

00:32:01.880 | Here's some charts from my partner, Freda Duan.

00:32:04.720 | And if you look at the big four,

00:32:07.440 | they're gonna spend 220 billion this year on CapEx,

00:32:11.240 | you know?

00:32:12.520 | And if you look at their statements on these calls, right?

00:32:16.360 | Sundar said, "It's more dangerous to underspend

00:32:20.040 | "than to overspend," right?

00:32:22.240 | Satya said, "There's still capacity constrained,

00:32:25.280 | "so they need to continue to make these investments."

00:32:28.040 | So I think in the short run,

00:32:30.680 | all of these companies, Meta said basically the same,

00:32:34.640 | Amazon the same,

00:32:35.600 | they're gonna keep the hammer down on CapEx

00:32:38.280 | because they're seeing the return,

00:32:40.120 | they're capacity constrained,

00:32:41.480 | and they're worried about not making the investments, right?

00:32:45.600 | So if you compare this to the quarterly

00:32:47.920 | and the annual expectations

00:32:49.480 | we took people through on the pod for NVIDIA, right?

00:32:52.680 | Here's this chart.

00:32:54.040 | We talked about this $2 billion that's gotta get,

00:32:57.760 | or $2 trillion that Jensen said would likely be spent

00:33:01.920 | between now and 2028 on data center build-out.

00:33:06.560 | And, you know, the green line,

00:33:08.040 | descending line in the middle, right?

00:33:09.920 | This is if you just take the consensus numbers for NVIDIA

00:33:13.920 | and what that means for their share of the market

00:33:17.560 | over this period of time.

00:33:18.760 | So the consensus numbers,

00:33:20.080 | while NVIDIA's numbers continue to go up a lot, right?

00:33:24.080 | And they're gonna report in two weeks here.

00:33:26.840 | But if we look at NVIDIA's quarterly expectations

00:33:29.560 | or their annual expectations,

00:33:31.840 | so this year they're expected to do

00:33:34.200 | about 136 billion of data center revenues.

00:33:37.520 | Next year, that goes to 166 billion.

00:33:40.720 | So up by about, you know, $30 billion.

00:33:42.960 | Obviously the rate of growth is slowing a lot,

00:33:46.080 | but when you compare that to the statements

00:33:48.320 | out of the big four, you know,

00:33:51.000 | it certainly seems to foot, right?

00:33:52.760 | It seems that they're going to continue to spend.

00:33:55.600 | And I think the real question as to the air pocket now,

00:33:59.680 | right, like this could have been very different.

00:34:01.400 | They could have got on their earnings call, Bill,

00:34:03.080 | and they could have said we're pulling back on CapEx

00:34:05.160 | 'cause we're not seeing the return, okay?

00:34:07.040 | None of them said that.

00:34:07.960 | They all said the opposite.

00:34:09.680 | But I think the question that remains out there

00:34:12.880 | is whether they're going to see the revenue

00:34:15.840 | on the other side of the equation, right,

00:34:18.600 | to justify that return.

00:34:20.080 | And they've all cautioned us

00:34:22.920 | that they expect that there may be a lag

00:34:26.480 | between these two things.

00:34:28.320 | You know, what was interesting,

00:34:29.600 | the CFOs of Microsoft and Meta, Amy and Susan,

00:34:34.040 | were quick to point out

00:34:35.280 | that if the revenues don't materialize,

00:34:38.240 | that they don't actually have to build out

00:34:40.360 | the data center shells, right, that they're acquiring.

00:34:43.720 | They said these are 15-year long-lived assets.

00:34:46.720 | And so we have flexibility in how, you know,

00:34:50.120 | we manage those assets.

00:34:52.160 | Yeah.

00:34:53.000 | And obviously Meta has other uses for internal use

00:34:55.760 | and could redeploy those things.

00:34:57.600 | And cool.

00:34:59.920 | Well, I have three thoughts about this, you know,

00:35:03.720 | and one of them does go back 30 years

00:35:06.320 | to when I was a sell-side analyst.

00:35:08.080 | And I followed the PC industry through,

00:35:11.400 | really through a te-day,

00:35:12.640 | like the big growth years of the PC industry.

00:35:16.400 | And PC demand and growth was overestimated

00:35:21.080 | and underestimated five different times, you know,

00:35:24.720 | where you would have these cycles.

00:35:27.600 | And it was interesting 'cause a lot of the commodities

00:35:32.600 | would become in short supply.

00:35:34.640 | So DRAM was one and hard drives.

00:35:38.280 | Hard drives were this really interesting wild market

00:35:41.760 | where you would have boom-bust cycles and shortages.

00:35:45.160 | And they were always,

00:35:47.160 | they're almost always out of step with reality.

00:35:51.320 | And I remember there's just this bizarre thing

00:35:54.560 | where you had to buy hard drive companies

00:35:58.000 | when their PE was the highest,

00:36:00.000 | because that was actually when everyone had

00:36:02.880 | the worst view possible of their earnings possibility.

00:36:06.440 | Right, right, right.

00:36:07.280 | And then you literally sold it when the PE was the lowest

00:36:11.760 | because the net income was at a peak high.

00:36:14.200 | Anyway, one of the reasons that happens,

00:36:16.680 | one of the reasons why that's so out of whack

00:36:19.040 | is that bringing capacity on to build a hard drive

00:36:23.400 | or a DRAM is slow.

00:36:25.400 | It's not an overnight process.

00:36:27.480 | And the one thing I would say about these data centers,

00:36:30.480 | and I was just kind of, my brain was triggered on that

00:36:34.000 | from something I read on Twitter this morning

00:36:36.800 | where someone was literally walking through

00:36:39.120 | the steps you have to go to to acquire land,

00:36:41.960 | to get electricians on board, to do all these things.

00:36:45.200 | And whenever you have this kind of really long cycle time

00:36:50.200 | to actually bring up incremental capacity,

00:36:52.960 | it's easier to miss supply and demand.

00:36:57.520 | And so, anyway, I think part of what's causing me

00:37:01.280 | to have a bit of anxiety is that fact.

00:37:04.080 | And I also think when people are talking about NVIDIA,

00:37:09.560 | they talk about data center growth as demand,

00:37:13.320 | but because everyone, the end users buying these things

00:37:16.840 | as a cloud service, I kind of am like,

00:37:19.080 | well, that's supply, that's not demand.

00:37:21.080 | Like people are aggressively growing supply.

00:37:23.680 | So I don't know, it's super interesting.

00:37:27.700 | I think from a venture's point of view,

00:37:30.780 | you're hopeful that there's so much demand for this stuff

00:37:34.380 | that they never catch up.

00:37:36.340 | - Exactly.

00:37:37.180 | - When I look at it from a,

00:37:39.620 | just from a neutral observer standpoint,

00:37:42.620 | though I do worry that you could get out over your skis.

00:37:45.860 | And then two other things I would add to that.

00:37:48.460 | This is one of the very first waves

00:37:51.260 | where the incumbents were eyes wide open

00:37:54.340 | at the beginning of the technology shift.

00:37:56.740 | If you go back and read "The Innovator's Dilemma",

00:38:01.060 | the reasons startup companies are able to come in

00:38:04.620 | and take shares often precisely because

00:38:08.060 | the incumbents are slow footed and aren't there.

00:38:10.500 | Here, they moved quick.

00:38:13.300 | I think Microsoft and Satya are just the poster child

00:38:16.540 | for this, like here's a company that's very,

00:38:19.300 | what, 35, 40 years old.

00:38:21.180 | And everyone thought had had its better days behind it.

00:38:27.180 | And they came in and moved fast and people loved it.

00:38:30.260 | And the stock was rewarded for it.

00:38:32.460 | And I even think their earnings

00:38:34.780 | have been positively impacted by it.

00:38:36.500 | And so that is, so they move big,

00:38:41.100 | they move fast and it worked.

00:38:43.580 | And so now I think that's in their psyche, right?

00:38:46.380 | And so that means they're gonna keep playing that game

00:38:50.460 | 'cause it's working.

00:38:51.300 | So that's another thing.

00:38:52.660 | And then lastly, and this is pure conjecture on my part.

00:38:57.340 | So I did not hear this from anybody.

00:38:59.580 | Everyone can just say Gurley's out on a limb here,

00:39:03.300 | but my reading the tea leaves,

00:39:06.820 | and this relates to the point I just made,

00:39:09.300 | is that they don't want the independent AI companies

00:39:14.300 | to take what they see as rightfully theirs.

00:39:19.220 | And we've been through a couple of waves here

00:39:23.180 | where capital availability's dramatically improved

00:39:26.820 | for private companies.

00:39:28.300 | And you and I lived through this with Uber

00:39:32.620 | and Division Fund and Masa and all the money

00:39:35.780 | and DoorDash got all, and it really perverted the market.

00:39:39.660 | And so now I think incumbents are aware

00:39:43.420 | that if companies get breakout potential,

00:39:47.100 | they can raise unlimited capital.

00:39:49.500 | And so to a certain extent, I think they're pushing back.

00:39:52.660 | They're saying, look, this is a game we're in.

00:39:55.860 | You look at Zuckerberg, like with the open source stuff,

00:39:59.420 | he's just being very aggressive.

00:40:01.820 | And I think one of the objective functions

00:40:05.300 | may be just precisely to make it more difficult

00:40:08.100 | for OpenAI or Anthropic to raise $10 billion

00:40:13.700 | that they need to fund the next two model builds.

00:40:16.940 | And now you've got people trying to project

00:40:20.420 | income statements and balance sheets of these companies

00:40:23.740 | and they're speculating about whether

00:40:26.060 | they might need to raise again or not.

00:40:27.660 | So I think all that's super interesting and unprecedented.

00:40:31.660 | - Very insightful.

00:40:33.420 | What's fair to say at this point, again,

00:40:36.780 | in the context of the risk-facing public markets,

00:40:41.220 | we were worried about the AI air pocket.

00:40:43.820 | It seems we've traversed the 2025 CapEx concern cycle.

00:40:48.820 | Like they are going to continue to spend.

00:40:52.580 | What we don't have insights into

00:40:54.740 | is that end user demand that you talk about.

00:40:57.980 | And I think it's really interesting why you say

00:41:00.460 | the bigs are gonna continue to spend.

00:41:02.500 | And in fact, some of these take-unders,

00:41:05.140 | the characters, the inflections, et cetera,

00:41:08.020 | certainly suggest that competing against the bigs.

00:41:12.740 | I mean, in the case of OpenAI and Anthropic,

00:41:15.580 | they partnered with them.

00:41:16.540 | They're owned a lot by Microsoft and Amazon

00:41:20.180 | at this point in time.

00:41:21.180 | So it's hard to find somebody who you think

00:41:24.980 | can go the distance at that scale that's truly independent.

00:41:28.700 | - And by the way, regardless of whether the investors

00:41:31.580 | got paid, maybe we can go deeper in that later

00:41:34.460 | on these take-under deals.

00:41:37.340 | It is a capitulation, no matter what.

00:41:39.820 | Like even if it were a normal M&A deal

00:41:42.980 | and it was at 3 billion and still a great return

00:41:45.540 | for investors, the founders are saying

00:41:48.380 | in the inflection case in Character AI,

00:41:51.340 | they're saying, "Hmm, not sure I wanna keep playing

00:41:55.260 | the independent game anymore."

00:41:57.340 | - Yeah, that may have just been very difficult

00:41:58.940 | to raise private capital in an up-around,

00:42:01.340 | you know, in this environment.

00:42:03.340 | I mean, because you know you're gonna have to go compete

00:42:06.340 | with Google, with Microsoft, with Meta,

00:42:08.980 | you know they're not gonna stop spending.

00:42:10.900 | And they have a printing press that's spitting out

00:42:13.060 | $10 billion bills in the back room.

00:42:15.940 | - Well, and they've got hundreds of billions

00:42:19.100 | sitting in cash anyway.

00:42:20.620 | - Exactly.

00:42:21.460 | - So yeah, and this, I think you brought this up

00:42:25.700 | or maybe we saw Satya talk about it.

00:42:27.460 | Like, okay, we're spending 50 billion a year on CapEx,

00:42:31.580 | but look at all this cash we got sitting around

00:42:33.780 | and the FTC says we can't do acquisitions,

00:42:36.780 | what are we supposed to do?

00:42:38.020 | Like, then that's another factor,

00:42:39.620 | maybe that's a fourth factor.

00:42:41.260 | - Yeah, three things you can do, Bill.

00:42:43.140 | You can buy your own stock, you can issue a dividend

00:42:45.580 | or you can buy NVIDIA chips.

00:42:47.900 | - They're doing, yeah, exactly.

00:42:49.900 | I think they're doing all three.

00:42:51.540 | Yeah, it'd be interesting, you know,

00:42:54.580 | there are obvious huge wins in AI.

00:42:59.180 | You know, we've already talked about Tesla

00:43:01.340 | and full self-driving.

00:43:02.220 | I think all the core AI opportunities,

00:43:06.220 | non-LLM where they've actually figured out

00:43:09.300 | how to go from A to B and get better

00:43:13.860 | at what you're doing through AI, those are fantastic.

00:43:16.820 | I think the language oriented things

00:43:20.380 | around customer service

00:43:21.900 | and where you're literally replacing the notion

00:43:25.260 | of someone either talking or doing a search.

00:43:28.420 | I know you're a big fan of Glean

00:43:30.420 | and that is a type of, I think I could restate

00:43:35.300 | that what it is is a super enhanced

00:43:38.580 | corporate search product that helps you find things

00:43:43.180 | that have been scattered around the organization.

00:43:45.940 | - Yeah, I think it's your enterprise assistant, right?

00:43:48.980 | I mean, Microsoft says they're capacity constrained

00:43:51.860 | because they got a lot of demand for co-pilot, right?

00:43:54.860 | And I think the real enterprise co-pilot, right?

00:43:58.260 | Glean has gone from enterprise search

00:43:59.900 | to being that enterprise assistant.

00:44:02.620 | I would say this, you and I have some debate about this,

00:44:05.500 | whether or not we're actually seeing the end user demand,

00:44:08.260 | whether or not the solutions are good enough

00:44:10.460 | to unlock that demand.

00:44:11.780 | I tend to be on the positive side of that question

00:44:14.940 | based on the companies we're seeing,

00:44:16.580 | based upon folks like Satya saying

00:44:19.820 | that we're capacity constrained.

00:44:22.220 | But I will also stipulate just as a risk factor

00:44:25.100 | in the public markets,

00:44:26.060 | the idea that we're going to go through this phase shift

00:44:29.660 | with CapEx and revenues perfectly aligned

00:44:32.940 | and perfectly matched, right?

00:44:34.620 | It would be the first major phase shift we've went through

00:44:37.060 | where that's the case.

00:44:38.380 | In the case of the internet,

00:44:40.340 | CapEx got way out ahead of early revenues.

00:44:43.340 | In the case of cloud, CapEx ahead of early revenues.

00:44:45.820 | Mobile, same thing.

00:44:47.180 | So in fact, I think what you're hearing out of these CEOs,

00:44:50.380 | once they're cautioning us, they're saying,

00:44:53.900 | there's going to be a period of time here

00:44:55.780 | where we have really high CapEx relative to our revenues,

00:44:59.260 | but it's the right bet to make

00:45:00.820 | when you look at a three to five year time horizon.

00:45:03.300 | And I would say on that dimension,

00:45:05.620 | each of those prior super cycles were underestimated

00:45:08.820 | when you looked at them three to five years out.

00:45:11.700 | Yeah.

00:45:12.540 | And just to put a nail in the point I was making,

00:45:17.100 | I see a ton of great use cases

00:45:20.500 | and I'm super excited about everything I've seen.

00:45:23.300 | There are statements that are continually made

00:45:28.260 | that I think are over the top.

00:45:30.380 | I don't think this replaces all software.

00:45:33.340 | I don't think people are going to be sitting around jobless

00:45:36.820 | and need UBI.

00:45:37.860 | I don't think that all software just goes away.

00:45:42.860 | Someone said that this is the new operating system.

00:45:47.100 | I don't think there's any proof of that.

00:45:48.460 | It doesn't know how to store data.

00:45:50.020 | It may get there, but anyway.

00:45:51.980 | So the hyperbole causes me a little bit

00:45:56.260 | of cognitive dissonance, it's the only thing.

00:45:59.180 | But I do see a lot of positive stuff.

00:46:01.100 | Let's move on.

00:46:02.420 | Explain to people what happened with the Japan carrier trade.

00:46:06.340 | Oh my God.

00:46:07.420 | I mean, the fact that you wake--

00:46:08.980 | Out of nowhere, right?

00:46:09.900 | You wake up--

00:46:11.100 | You show up on a Monday morning, exactly.

00:46:13.660 | I thought I had to worry about taxes and recession

00:46:16.740 | and AI air pocket.

00:46:18.820 | It wasn't on my bingo card.

00:46:20.860 | Maybe it should have been that we were going to have to

00:46:23.820 | be worried about a 13% drawdown in the Nikkei,

00:46:27.220 | its biggest one-day drop since 1987.

00:46:29.700 | Then we have a rip back the next day.

00:46:32.020 | Well, let's break down what happened here.

00:46:33.700 | First, let's remember the Japanese markets

00:46:36.380 | were really crowded, Bill.

00:46:38.740 | They hit an all-time high just three weeks ago.

00:46:41.060 | High prices always make for big drops, right?

00:46:45.740 | So there was a setup.

00:46:48.100 | But basically the market was down big

00:46:49.900 | since the Bank of Japan, so the Japanese Fed meeting,

00:46:54.060 | where they basically increased interest rates

00:46:56.900 | for the first time in 17 years.

00:46:59.020 | So why was this such a big deal?

00:47:00.900 | Well, there are great threads on Twitter about this.

00:47:02.940 | Zero Hedge has been basically live blogging the events.

00:47:07.020 | By the way, I think it's important

00:47:09.260 | before you go into what happened.

00:47:12.300 | Why were interest rates,

00:47:14.820 | why had they not done an interest rate increase

00:47:17.180 | in 17 years?

00:47:18.860 | And why did they feel they needed to?

00:47:22.740 | Right, I mean, so in Japan,

00:47:25.460 | you have a population that saves a lot,

00:47:29.420 | a population that's not growing a lot.

00:47:31.780 | And so they've been battling slow economic growth

00:47:35.420 | and deflation for the better part of 15 years.

00:47:38.460 | And for the last eight years,

00:47:40.020 | they've had negative interest rates, right?

00:47:42.180 | So that is just a way to force people into the risk pool

00:47:45.980 | to try to get people to take risk

00:47:47.900 | and get your economy going and to keep it from deflating.

00:47:51.580 | Remember, like in some ways, this is what,

00:47:53.740 | you know, we copied their experiment

00:47:55.380 | at the beginning of COVID.

00:47:56.460 | When everybody went into lockdown

00:47:57.940 | and wasn't taking any risk,

00:47:59.420 | we said, "We'll pay you to take risk."

00:48:01.140 | And we took interest rates negative.

00:48:02.900 | Well, they're systematically been doing that for eight years.

00:48:06.020 | Now it leads to one of these very interesting consequences,

00:48:09.700 | which is when you have negative rates,

00:48:11.180 | i.e. you're paying somebody to borrow money,

00:48:13.460 | that leads to what is called a carry trade.

00:48:17.420 | So there are estimates that up to $20 trillion of yen

00:48:21.580 | was borrowed, and then you invest that

00:48:24.620 | in rate-yielding assets around the world

00:48:27.300 | and you pocket the spread, right?

00:48:29.300 | So remember, just I think earlier this year,

00:48:31.260 | maybe it was late last year,

00:48:32.700 | Buffett borrowed $200 billion of yen-denominated currency.

00:48:37.700 | So it seems like a great idea,

00:48:41.260 | especially if you're getting paid to borrow in Japan.

00:48:44.020 | So there's no cost to borrow in Japan.

00:48:46.060 | Then you get paid to buy bonds in the US.

00:48:49.220 | But you need to make sure

00:48:50.900 | that things don't change quickly on you.

00:48:53.540 | So the predictability of the rate environment in Japan

00:48:57.300 | is key, it's absolutely essential.

00:49:00.180 | And what scared the hell out of people

00:49:02.060 | is out of left field,

00:49:03.540 | the Bank of Japan raises rates.

00:49:08.540 | And all of a sudden, these people

00:49:10.980 | who were effectively borrowing in Japanese yen,

00:49:14.780 | assuming that rates would stay low

00:49:16.660 | and investing in these higher yields,

00:49:18.220 | they had to unwind these trades.

00:49:20.740 | And you had 20 trillion of these trades at play,

00:49:23.660 | according to J.P. Morgan.

00:49:25.100 | I think in the first two days,

00:49:26.740 | half of those trades they estimated got unwound.

00:49:29.460 | That means they had to sell US bonds,

00:49:31.460 | they had to sell stocks around the world, et cetera.

00:49:33.740 | And of course, that causes this negative reflexivity

00:49:37.140 | because you already have concerns about recession

00:49:41.060 | and the other things we've talked about.

00:49:43.060 | So this just adds to that list of problems.

00:49:46.420 | Now, remember, part of the reason

00:49:48.620 | that you have this carry trade going on

00:49:51.620 | is the US has kept rates higher for longer.

00:49:54.620 | So it increases the spread.

00:49:56.500 | They're at zero or negative

00:49:58.940 | and our rates have been higher for longer.

00:50:00.900 | So that's led even more people

00:50:03.500 | to pig pile into this carry trade.

00:50:05.900 | But what was so shocking here,

00:50:08.540 | within 36 hours, right?

00:50:12.100 | It seems like the Bank of Japan capitulated.

00:50:14.940 | And overnight they reversed course

00:50:17.620 | and they said, we're just kidding,

00:50:19.100 | we're not gonna raise rates when the market is unstable.

00:50:22.340 | Now, what the hell does that mean?

00:50:23.500 | We're not gonna raise rates when the market is unstable.

00:50:25.620 | Well, you're the ones that destabilized it.

00:50:27.780 | So I guess that means, sorry, footfall,

00:50:30.220 | we're not gonna raise rates.

00:50:31.780 | But I think that, you know,

00:50:34.780 | most of the stock market contraction we saw here.

00:50:38.420 | So if you look at where the NASDAQ was trading before,

00:50:41.900 | you know, this all happened,

00:50:43.060 | I think it was like at 475, it dropped to 450

00:50:46.580 | and now we're basically back to 475 on the Q's.

00:50:50.100 | So basically it was one of these long tail events

00:50:54.100 | that reminded us there's risk in the world.

00:50:56.900 | And when you have a bunch of other buckets of risk,

00:50:59.540 | recession, slowing, AI air pocket,

00:51:02.100 | and then you throw one of these on,

00:51:03.780 | it can really be the trigger to light the fuse.

00:51:07.420 | Remind you, just a couple of weeks ago,

00:51:09.900 | I can't even believe, you know,

00:51:12.740 | that it happened at this point,

00:51:15.340 | but if that shot fired at Trump was one inch different,

00:51:20.340 | if Trump had been assassinated,

00:51:23.660 | can you imagine what would happen to the US markets?

00:51:26.620 | Yeah. Right?

00:51:27.460 | So when markets are at all time highs

00:51:29.020 | and you're just hanging out

00:51:30.500 | and there's not a lot of upside return

00:51:32.620 | and you got these other things you're concerned about,

00:51:34.820 | you gotta take down those units of risk

00:51:36.660 | because there are always things like this that can happen.

00:51:39.340 | Right?

00:51:40.180 | Take Iran into account, geopolitical risk.

00:51:42.740 | You know, we've come, the world has come to,

00:51:46.220 | I think, appreciate these skirmishes

00:51:48.700 | between Iran and Israel over the course of the last decade.

00:51:52.460 | And they never really amount to all that much.

00:51:55.460 | And so when the markets get concerned about it,

00:51:57.780 | it's generally a buying opportunity

00:51:59.940 | because they are generally short-lived, right?

00:52:03.140 | They keep each other in check.

00:52:04.860 | Could you imagine, let's assume tail risk this time.

00:52:09.100 | What if Iran really did something different?

00:52:11.620 | And now we've, you know, heard rumors of, you know,

00:52:15.220 | the Israeli leadership in nuclear proof bunkers.

00:52:18.260 | And they said, if you touch one of our civilian populations,

00:52:22.100 | we're gonna wipe out your nuclear capabilities, right?

00:52:25.340 | Like you could imagine, I'm not saying it's the base case,

00:52:28.660 | but you can imagine a scenario

00:52:30.300 | where this time it is in fact different.

00:52:32.620 | I think for all these reasons, Bill,

00:52:35.700 | that's why you're seeing, you know,

00:52:37.100 | the market's taking, you know,

00:52:38.620 | just a bit more cautionary position.

00:52:41.460 | And to be perfectly honest, it's not off the table.

00:52:44.980 | This market could give up 100% of the gains

00:52:48.300 | that we've had year to date,

00:52:49.940 | which would mean you'd still have another,

00:52:52.260 | you'd still have another 10 to 15% down in the market.

00:52:55.420 | And that just takes you back

00:52:56.620 | to where you were on January 1.

00:52:57.980 | And so you have to ask yourself,

00:52:59.340 | as an investor sitting here in August,

00:53:01.860 | is the world so much better than it was on January 1, right?

00:53:06.540 | That it has to be priced 10 to 15% higher.

00:53:09.540 | And the answer to that is no.

00:53:11.580 | You know, I have a very similar thought

00:53:14.260 | on the whole Japan carry trade thing,

00:53:16.500 | which is, you know, at the end of the day,

00:53:18.380 | it really shouldn't matter for American investors, right?

00:53:22.100 | This was an arbitrage thing that had been created

00:53:25.580 | by a systematic, you know, problem in Japan

00:53:29.580 | that was started with stagflation,

00:53:31.500 | but where they had a problem.

00:53:34.620 | I think the reason they had to raise rates

00:53:36.540 | is they had a problem that the currency was causing,

00:53:40.780 | and they felt like they had to defend it.

00:53:42.700 | And, you know, the consequent was all these arbiters,

00:53:46.180 | you know, got wiped out.

00:53:47.620 | But there's no sympathy line for arbiters, right?

00:53:50.180 | And even if the banks got in trouble

00:53:54.460 | and went to the government and said,

00:53:55.540 | "I need help because I had given loans to arbiters.

00:53:58.780 | "They're not gonna make hold."

00:53:59.940 | There's not gonna be a long sympathy line for that either.

00:54:03.660 | And, but I do think what happened

00:54:06.940 | is exactly what you're saying,

00:54:08.780 | which is people were nervous already.

00:54:11.580 | And so, like, you got your finger on the sell button,

00:54:15.340 | and then you wake up and you see this and said,

00:54:17.280 | "Shit, I should have sold last week."

00:54:19.180 | And you start pressing sell, right?

00:54:21.020 | Like, it becomes self-reinforcing,

00:54:23.220 | almost kind of like a reflexivity kind of thing.

00:54:25.940 | That's my non-informed take on what happened there.

00:54:29.380 | No, I mean, listen, when people are off sides,

00:54:32.660 | you know this hand in poker, right?

00:54:35.140 | Where you kind of limp in,

00:54:38.500 | maybe you have pocket sevens, right?

00:54:40.980 | And you got a little too much money at play,

00:54:44.100 | but you're feeling good.

00:54:45.460 | You've been winning the whole night,

00:54:47.020 | and so you're feeling a little swagger.

00:54:49.600 | That's kind of what a market is

00:54:50.940 | when it's at all-time highs, right?

00:54:52.820 | You're playing the hand a little too strong.

00:54:55.280 | And then the flop comes and somebody has you trapped,

00:54:58.140 | right, and now you're like, "Okay, I got this sunk cost.

00:55:00.400 | "Do I take it off the table?

00:55:01.560 | "Do I, you know, do I bluff?

00:55:03.240 | "Do I bet bigger?"

00:55:04.080 | And, you know, I think this is one of these situations

00:55:06.780 | where people were just caught off sides, right?

00:55:09.180 | They viewed this as very, very easy money,

00:55:12.460 | and it's easy money until it's not.

00:55:14.820 | And, you know, and so, you know,

00:55:17.580 | I put all of these things in the category

00:55:21.140 | of healthy, right, resets in the markets, right?

00:55:25.660 | I agree with that, I agree with that.

00:55:26.500 | And so, you know, I do think there are a series of events,

00:55:30.060 | like if we end up in a recession,

00:55:32.420 | if one of these situations,

00:55:33.900 | if Japan, you know, were to trigger something bigger,

00:55:38.900 | if the geopolitical events caused

00:55:41.740 | the price of oil to spike, right,

00:55:43.580 | all of those risks have to be taken into account,

00:55:47.560 | you know, particularly when stocks

00:55:49.320 | are at or near all-time highs.

00:55:50.720 | And that just means, again,

00:55:52.060 | it doesn't mean you get out of the game, right?

00:55:54.920 | Like when prices are high in venture,

00:55:57.180 | you know, you don't just stop doing venture,

00:56:00.020 | right, but you do less,

00:56:02.580 | and you wait for the really great stuff.

00:56:04.260 | And when prices are high in the public markets,

00:56:06.540 | you don't necessarily step out of the markets altogether,

00:56:09.340 | but you just do less.

00:56:10.340 | And that's how we think about it here.

00:56:11.860 | It's less or more, how many units of risk

00:56:13.860 | do you wanna have on at any one moment in time?

00:56:16.380 | And I do agree that of the topics you mentioned,

00:56:19.940 | the one that matters the most is the recession one,

00:56:23.100 | going forward, so we'll see what happens.

00:56:26.260 | Let's hit two more things before we wrap up.

00:56:29.620 | The first thing we should dive into

00:56:31.900 | is this Google decision that happened this week,

00:56:34.660 | which is pretty landmark decision.

00:56:37.140 | I think there've been pressure on a lot of the Mag 7,

00:56:42.140 | you know, from the government

00:56:43.860 | and questions about monopoly status.

00:56:46.140 | And, you know, having seen Google from, you know,

00:56:51.140 | I met with Sergey and Larry when there were 25 employees

00:56:53.740 | to today, I mean, kind of had a front row seat

00:56:56.700 | just to watch this amazing, you know,

00:56:59.180 | people have called it the best business model of all time.

00:57:02.060 | What do you take away from this decision

00:57:06.860 | and what do you think it's gonna mean for going forward?

00:57:09.660 | Well, I kinda wanna turn the tables on you

00:57:12.140 | and ask you that given how close you've been to it

00:57:14.620 | and how much you've thought about this,

00:57:16.300 | but first just like, let's talk about

00:57:18.140 | what the ruling in fact did.

00:57:19.700 | So, you know, it said that Google used unfair tactics

00:57:25.020 | to maintain itself as the default search engine

00:57:27.420 | on the iPhone over the last decade.

00:57:30.300 | And it said it did this mainly by negotiating

00:57:32.860 | lucrative deals worth over $25 billion per year

00:57:36.340 | to cement its position as the default search engine

00:57:40.060 | on the iPhone, which then led it to have superior data,

00:57:44.060 | which then led it to have superior conversion,

00:57:46.500 | which then led it to further cement its position.

00:57:49.540 | I think the current deal is set to run through 2026,

00:57:54.300 | but the court, I believe, has set September

00:57:57.340 | as a date to kind of work out a solution

00:58:00.700 | with Apple and Google that the judge

00:58:03.780 | will deem to comply with the ruling.

00:58:06.380 | So I guess the question I have for you is,

00:58:10.460 | you know, these guys negotiated a deal

00:58:12.340 | between the two of them.

00:58:14.380 | Google said, we'll pay you a bunch of money.

00:58:16.740 | Like, what do you think is the remedy?

00:58:19.460 | What do you think is a better alternative?

00:58:22.260 | You know, why can't they do a deal with Google?

00:58:25.300 | So to your last question, you and I had forwarded

00:58:28.820 | back and forth Ben Thompson's thoughts on this,

00:58:31.940 | and obviously super intelligent human being,

00:58:34.780 | Ben, with a massive mental capacity.

00:58:37.420 | And he wrote a piece, it's subscription,

00:58:42.060 | but we'll put a link to it.

00:58:43.800 | Maybe we'll get him some new subs.

00:58:45.740 | But he broke down the Sherman Act,

00:58:48.500 | which was what was the piece of regulatory law

00:58:53.020 | that was applied here.

00:58:54.420 | And section one of the Sherman Act says,

00:58:56.940 | if you're a monopoly, and I don't think there's anyone

00:59:00.300 | that questions, you know, Google's monopoly status,

00:59:03.780 | just 'cause market share, you know, north of 80, 90%.

00:59:07.500 | That's, and Ben makes a point of saying

00:59:11.020 | they earned it through innovation

00:59:12.500 | versus some type of underhanded tactic or a roll up.

00:59:16.220 | And I think that's fair too.

00:59:17.620 | Like, but the Sherman Act doesn't say

00:59:20.300 | that there's a fair monopoly and an unfair monopoly.

00:59:22.860 | It just says, are you a monopoly?

00:59:24.740 | And then section two says, you can't enter

00:59:27.980 | into partnership deals, basically,

00:59:32.420 | that reinforce that monopoly position.

00:59:35.300 | And so the judge, and Ben argues properly,

00:59:40.300 | looked at the Apple deal for the iPhone and said,

00:59:46.180 | you know, this violates section two.

00:59:48.620 | You're a monopoly and you're extending that monopoly

00:59:51.580 | with an exclusive deal.

00:59:53.500 | And so one thing I would back up and highlight for people,

00:59:58.260 | I think most people know this,

00:59:59.500 | but whatever the share is that Google's giving to Apple,

01:00:04.500 | let's say it's 30% or 40%, who knows, it might be 50.

01:00:10.740 | You know, it represents this massive amount

01:00:13.580 | of net income for Apple, right?

01:00:15.980 | What's the number?

01:00:16.940 | - It's 26 billion, I think, a year or two ago.

01:00:20.140 | - So the reality is that Google's monetization

01:00:25.100 | is so much better than anyone else that's out there

01:00:28.860 | that I don't think there's a deal you can do with Bing

01:00:32.500 | that will create that amount of net income for Apple.

01:00:35.620 | So there's no, like, Apple's not mad about this deal.

01:00:40.500 | They're very positively impacted by it.

01:00:43.420 | And so that's a huge irony because they're not,

01:00:48.420 | it's not a loss leader for Google

01:00:52.100 | where they're blocking someone out.

01:00:53.500 | It's a win-win for both parties

01:00:55.700 | because Google's so good at monetization on search

01:00:59.260 | that, like, I guess I'm making the argument

01:01:02.860 | if Bing gave them 100%,

01:01:05.260 | replacing them would cause Apple to have less money.

01:01:08.100 | - Oh, for sure, that's for sure the case.

01:01:10.420 | And what do you think the remedy is, Bill?

01:01:12.340 | I mean, is this just gonna end up in one of these,

01:01:15.700 | you know, and I saw a screenshot of this,

01:01:17.700 | these sloppy choices where, you know,

01:01:20.060 | the next time I open my iPhone, it says,

01:01:22.180 | "Choose what search engine you wanna use for this query."

01:01:26.620 | And it gives me a choice between Bing and DuckDuckGo

01:01:29.420 | and maybe now search GPT and maybe now Perplexity

01:01:33.740 | and maybe now Google, you know,

01:01:35.500 | is that gonna pop open every time?

01:01:37.380 | Do, you know, is it one and done?

01:01:40.700 | How do you think about that?

01:01:41.700 | And is that remedy enough?

01:01:42.900 | Like if the consumer chooses Google

01:01:45.740 | and Google just pays a rev share

01:01:47.420 | rather than, you know, boxing everybody out,

01:01:49.620 | do you think that remedy will be enough?

01:01:51.860 | - It could be, it could be a nothing burger.

01:01:53.820 | So let's say that Apple is forced

01:01:57.700 | to do the selection chart.

01:02:00.140 | Let's say Apple then tells every search engine

01:02:03.220 | in order to be a partner of us and in our search sort,

01:02:06.660 | we'll take 30% of whatever you earn.

01:02:10.900 | And then 90% of people choose Google.

01:02:14.900 | I think you're in the same spot.

01:02:16.300 | I think you end up in the same spot.

01:02:18.060 | - That's why I think,

01:02:19.580 | that's why I think this is a bit silly.

01:02:21.540 | Yeah, go ahead.

01:02:22.380 | - If they're forced to do the search

01:02:25.260 | and Apple somehow cut out of the economics

01:02:28.060 | and then Google ends up making more money

01:02:30.380 | because I think the consumers

01:02:31.780 | are gonna choose 80 or 90% Google.

01:02:34.940 | So yeah, I think there are remedies

01:02:36.740 | where it could be nothing.

01:02:38.620 | One thing that would be super interesting,

01:02:40.260 | I think there, I've often said that the federal government

01:02:45.260 | should have a new test for a monopoly.

01:02:49.060 | And this is a very self-centered bias

01:02:52.180 | to someone who's been a venture capitalist

01:02:54.300 | working with small companies for a long time.

01:02:57.180 | But over the course of the years,

01:03:00.620 | there've been many cases where I've been fortunate enough

01:03:04.340 | to work with a category leader in a vertical or something

01:03:07.500 | and you get invited in by Google and Apple sometimes,

01:03:11.380 | sometimes at their request to do a deal

01:03:15.180 | and you're presented with a set of terms

01:03:18.300 | that you would never consider

01:03:20.540 | with any other party out there.

01:03:23.020 | It's a completely one-sided deal.

01:03:26.020 | And I've often thought that should be a test for a monopoly.

01:03:29.620 | Like, are they able to negotiate deals

01:03:32.660 | that are, that would just be off the table

01:03:36.940 | with any other set of partners?

01:03:38.860 | 'Cause I do think it's a sign of strength.

01:03:41.780 | And I could even go further and say

01:03:44.340 | that it should qualify under the section two

01:03:48.100 | of the Sherman Act, because if the partnership deal

01:03:53.100 | results in the monopolist now having a new feature set

01:03:57.580 | because they were able to basically steal

01:03:59.780 | everything you've built through the terms of the deal,

01:04:02.780 | you've extended the monopoly through that practice.

01:04:07.580 | So that was one thing, I'm sure Jeremy Stoppelman

01:04:10.540 | would agree with, but I just.

01:04:12.180 | - That felt a little Yelp-like to me

01:04:16.260 | in terms of your concerns.

01:04:17.700 | I wasn't gonna out you, but.

01:04:19.740 | - No, not just Yelp though.

01:04:21.500 | I mean, yeah, yeah.

01:04:24.460 | - I mean, listen, I think it's a fine line, right?

01:04:27.140 | Michael Porter's five forces would make the argument

01:04:30.380 | that this is what businesses should try

01:04:32.540 | to achieve, which is enough market power

01:04:34.460 | that you can extract rents, commensurate

01:04:37.620 | with your market power.

01:04:38.820 | And so I don't think we wanna be casually

01:04:43.820 | undermining companies' ability to enter

01:04:47.500 | into commercial relationships, and those are gonna reflect

01:04:50.260 | different market power in the economy.

01:04:52.340 | But to your point, listen, I think there's

01:04:56.220 | a pretty easy remedy here.

01:04:58.340 | I think the remedy is gonna be consumer choice.

01:05:00.620 | I think the remedy is going to result

01:05:03.340 | in Google still getting 90% of the searches,

01:05:05.620 | but it may not, and the only reason it may not

01:05:09.420 | is because we are at this really disruptive moment

01:05:12.180 | with things like perplexity and search GPT.

01:05:14.660 | And so, listen, I'm happy to let them compete

01:05:18.060 | and to see where it all shakes out.

01:05:20.860 | And so speaking of, have you played with search GPT?

01:05:24.340 | - I have not, have you?

01:05:26.940 | - No, all I've seen are the screenshots,

01:05:29.900 | the videos, everything looks very perplexity-like to me.

01:05:34.760 | - Well, look, I mean, just-- - Go ahead.

01:05:38.900 | - I think it's worth stating.

01:05:40.020 | I think a lot of people know this,

01:05:41.860 | but I talked to a few people yesterday that didn't.

01:05:44.660 | I believe what happens at perplexity

01:05:47.580 | and why it's so much better when you're doing searches

01:05:50.860 | related to recent information,

01:05:53.460 | it's even good for the Olympics,

01:05:55.020 | I encourage people to use it,

01:05:56.720 | is that in the background,

01:05:59.620 | when you type a search into perplexity,

01:06:03.100 | they're doing a search against a Google-like database.

01:06:07.620 | They're doing the equivalent of a Google search,

01:06:10.260 | maybe, I don't know where they built that,

01:06:11.940 | maybe they partner with DuckDuckGo or whatever,

01:06:14.380 | and they then take the results of that search

01:06:18.300 | and stuff it through RAG into the context window

01:06:22.580 | and make it part of the prompt.

01:06:24.380 | And your result then is focused on those things,

01:06:29.380 | and so it can handle newness,

01:06:31.840 | which everyone knows the original AI models couldn't do

01:06:36.240 | because they weren't trained on it.

01:06:37.880 | And that's also why a lot of people are like,

01:06:40.960 | "Surprise, perplexity has links."

01:06:43.640 | Well, the reason they have links

01:06:44.760 | is 'cause of the process I just described.

01:06:46.960 | And so now, anyway, I think it's important

01:06:49.120 | for people to understand that now was,

01:06:50.920 | I think the difference between SearchGPT and ChatGPT

01:06:54.700 | is precisely that.

01:06:55.940 | They're now doing that same thing.

01:06:58.620 | Well, one of the things, a few weeks ago,

01:07:01.700 | you cast some doubt on the engagement metrics at OpenAI.

01:07:06.700 | I mentioned I was a little more bullish on OpenAI,

01:07:10.100 | but I wanted to do the work,

01:07:12.140 | so I had Apoorva on my team pull some metrics.

01:07:15.980 | And so I want to run through a few charts here

01:07:18.620 | about engagement and usage metrics

01:07:22.200 | that we're seeing on Gen AI apps

01:07:24.800 | compared to other consumer apps and enterprise apps,

01:07:27.640 | and get your reaction to this, Bill.

01:07:31.600 | So this first chart here is just weekly average users,

01:07:35.880 | monthly average users.

01:07:37.640 | And as you see, if you go to the far right on the chart,

01:07:40.960 | if you're like Spotify, Instagram, WhatsApp,

01:07:44.160 | they have engagement metrics well over 80%.

01:07:48.440 | If you look at these generative AI apps,

01:07:50.960 | character tops out at about 64%.

01:07:54.320 | But if you look at Claude, Gemini, ChatGPT,

01:07:57.080 | they're about 40%.

01:07:58.340 | So much lower engagement than internet consumer apps.

01:08:03.340 | Now, if you go to the next slide-

01:08:07.280 | And by the way, just so people understand,

01:08:10.700 | you're looking at, I guess, is this MAU over WHA?

01:08:17.980 | Yes.

01:08:18.820 | Oh, it's WAU over MAU, so weekly versus monthly.

01:08:23.140 | Okay, gotcha. Correct, correct.

01:08:24.660 | Now, if you go to the next slide, which this is,

01:08:28.100 | what does it take to get to a really big app?

01:08:31.940 | And if you go to the far right,

01:08:33.780 | for those apps that have over 80% engagement,

01:08:38.100 | they get to billions of users.

01:08:40.460 | But apps with much lower engagement,

01:08:42.620 | and this all stands to reason,

01:08:44.940 | those apps tend to cap out, right?

01:08:47.540 | At tens of millions, or maybe 100 million users, right?

01:08:52.540 | So the question we were debating is,

01:08:54.900 | can ChatGPT get to a billion users?

01:08:58.140 | And one of the early warning signs

01:09:01.340 | that you were talking about,

01:09:02.340 | this engagement doesn't look like

01:09:04.180 | it's the type of engagement that is commensurate

01:09:08.300 | with really growing your user base.

01:09:10.380 | So then we asked the question around retention, right?

01:09:14.460 | Which is, I think,

01:09:15.300 | what you had specifically mentioned before.

01:09:17.420 | So here's month one retention.

01:09:19.420 | So this is one month retention.

01:09:21.460 | Again, if you go to WhatsApp, Instagram,

01:09:23.740 | Chrome, et cetera, right?

01:09:25.740 | Retention metrics, super high, over 90% retention.

01:09:29.860 | And again, enterprise apps, like Gmail at 75%.

01:09:34.860 | But if you go to ChatGPT,

01:09:36.620 | it's the best of the Gen AI apps at about 65%.

01:09:41.500 | But you see that these Gen AI apps

01:09:44.740 | also have not only lower engagement,

01:09:47.580 | but they have lower retention.

01:09:49.500 | Yeah, and you're mixing paid and unpaid on this.

01:09:53.180 | So it's tricky, like you gotta be careful.

01:09:56.220 | Duolingo's paid, Tinder's paid, Spotify's paid,

01:10:00.500 | WhatsApp X aren't paid.

01:10:02.780 | So anyway, that can be tricky.

01:10:05.860 | I think what we're trying to drill down on is,

01:10:09.220 | and this should all stand to reason,

01:10:11.420 | but low engagement, lower retention,

01:10:15.020 | and lower usage as measured on this last chart

01:10:19.180 | by the minutes per week that these apps get used.

01:10:24.180 | And what it tells me is this, Bill,

01:10:26.900 | and I just wanted to get your reaction to this.

01:10:29.620 | I love ChatGPT, I love Perplexity,

01:10:34.220 | I love Claude, my team uses it all the time, right?

01:10:37.820 | It's a better version of search.

01:10:40.380 | But the truth of the matter is,

01:10:41.980 | Google's copied them pretty quickly.

01:10:44.940 | It hasn't led to massive share shift,

01:10:47.580 | and it hasn't led to a step function

01:10:50.020 | in engagement, retention, and usage.

01:10:52.860 | And so I would say that SearchGPT,

01:10:56.100 | I don't think is going to be the product

01:10:58.100 | that gets up to a billion users.

01:11:00.020 | And it reminds me, it takes me all the way back

01:11:02.140 | to a conversation you and I had maybe in episode four,

01:11:06.260 | which is what is going to be the next GPT moment.

01:11:11.060 | And it feels to me like AI-enabled search

01:11:15.220 | is not that moment.

01:11:16.540 | Maybe the moment is when we all have a personalized agent

01:11:21.140 | that has memory about us, that can track us over time,

01:11:23.900 | that really understands us, that can take actions.

01:11:26.660 | We've talked about this on the pod.

01:11:28.980 | But I think this data that we pulled together

01:11:31.300 | kind of confirms the point you made a few weeks ago,

01:11:34.660 | which is barring the launch of,

01:11:38.340 | I don't know whether it's Q* or some other product,

01:11:41.780 | that feels like it's really this personalized agent

01:11:44.260 | that's 100X better in terms of driving

01:11:47.020 | my personal productivity.

01:11:48.780 | I don't think we're seeing the metrics

01:11:51.300 | from ChatGPT and even SearchGPT

01:11:56.420 | that are going to lead to the breakout needed

01:11:58.740 | to get to that billion users.

01:12:00.820 | By the way, this will sound a bit rude,

01:12:03.140 | but while you were talking, I did several search,

01:12:05.500 | GPT searches, and it's exactly like perplexity.

01:12:09.140 | I think it's exactly what I described.

01:12:11.300 | I had it drilled down on the Kristin Faulkner race.

01:12:14.860 | I don't know if you got to see that.

01:12:16.060 | It was fantastic.

01:12:17.020 | - Yes.

01:12:17.860 | - The bike, this woman who apparently

01:12:20.180 | was briefly a venture capitalist,

01:12:22.140 | but the close she did was so brutal,

01:12:25.620 | like she accelerated when she caught him.

01:12:28.540 | Anyway, I just had to walk through all that.

01:12:30.740 | It lists the sources.

01:12:31.900 | It's very similar.

01:12:32.940 | I think there's some really big questions.

01:12:35.940 | The $20 thing, is that real or not?

01:12:39.260 | Feels tough.

01:12:41.140 | Like it feels tough.

01:12:42.460 | It feels like Google's gonna do it for free.

01:12:44.820 | Feels like perplexity's kind of caved

01:12:47.540 | and said they got to do it for free.

01:12:49.740 | We'll see, I think.

01:12:50.700 | But that's a big question because if you have

01:12:53.340 | to surround it with ads, it's a little different.

01:12:55.620 | And then the other key question,

01:12:57.780 | which we started talking about at the beginning

01:12:59.300 | of this podcast, is if it is free,

01:13:03.700 | is the alternative to Google in having less ad units

01:13:08.700 | on it just better?

01:13:11.660 | And so do you, even if Google can lay chase,

01:13:16.660 | is it a situation where the disruptor just doesn't make

01:13:21.980 | as much money and therefore that puts pressure

01:13:24.140 | on the incumbent?

01:13:24.980 | I still think that's a possibility.

01:13:28.860 | And I would pay the 20 not to have ads.

01:13:31.900 | There's a lot of questions about how big

01:13:33.860 | that universe of people is.

01:13:35.740 | I don't think it's the majority.

01:13:38.220 | And so anyway, yeah, it's interesting to watch.

01:13:41.180 | The one thing I would add to your one month

01:13:42.700 | retention numbers, the numbers I had done,

01:13:45.300 | and I don't know if the service I'm using allows me

01:13:47.540 | to repost it, I'll have to ask them.

01:13:49.900 | But they had 35% numbers for the 12 month retention,

01:13:54.740 | which is also pretty low and reinforces your point.

01:13:59.740 | The other thing I would, last thing I would say

01:14:02.900 | about this is, you know, I continue, you know,

01:14:06.340 | when you start talking about that personal assistant,

01:14:08.780 | I continue to think, you know, I think Apple's

01:14:13.020 | in a decent position, but I really think that Google has,

01:14:17.900 | and it's interesting 'cause I just talked about

01:14:19.860 | how Google may be disrupted negatively by this on search.

01:14:23.740 | But when I think about the personal assistant side,

01:14:26.620 | having the assets of Gmail, Docs, Spreadsheets, and Android,

01:14:31.620 | you know, and I actually ran into Samir Samad who runs

01:14:37.060 | Android the other day and I had this discussion with him.

01:14:39.820 | It's the best set of assets.

01:14:43.400 | Like if you could pull it all together,

01:14:46.100 | it's the best set of assets because they have their hands

01:14:50.260 | on the mobile product, they have their hands on the email,

01:14:53.340 | they have their hands on, you know,

01:14:55.100 | your docs and infrastructure.

01:14:56.980 | They have a product that competes with Slack and Teams.

01:15:00.260 | So, you know, could I, I could imagine if they perfect

01:15:04.260 | that integration with AI and what I like to call

01:15:07.500 | infinite memory or infinite recollection,

01:15:10.040 | people switching to their stack and to their phone

01:15:14.500 | because it's done so well.

01:15:16.140 | Like, and maybe I'm dreaming.

01:15:17.780 | - One big problem, Bill, one big problem, Bill.

01:15:19.820 | It's called execution.

01:15:21.460 | And Google's been fumbling the ball

01:15:23.260 | and, you know, on getting there.

01:15:26.100 | You know, they're going to be in the race.

01:15:27.660 | You know, I would say when it comes to agents,

01:15:30.260 | the person who I think has talked most eloquently about it

01:15:32.980 | is doing a ton of work is Zuckerberg at Meta.

01:15:36.100 | OpenAI is going to be in that race.

01:15:38.040 | My main point here is not like,

01:15:40.180 | we know all of these are going to be in the hunt, right?

01:15:43.080 | They have the capabilities to be in the hunt.

01:15:44.620 | Google may be advantaged from, you know,

01:15:47.100 | access to information and capabilities like you suggest.

01:15:51.040 | But what's clear to me is that the current state

01:15:54.060 | of the consumer product,

01:15:56.100 | it's not enough to dislodge Google.

01:15:58.140 | - And that could improve.

01:16:01.300 | I mean, the memory part could dramatically improve.

01:16:05.020 | And I've said this many times,

01:16:07.060 | I think the voice thing's really cool.

01:16:09.020 | I finally got the upgraded voice assistant on ChatGBT

01:16:14.020 | and I love playing with it.

01:16:15.980 | It's just so much fun and I'm sure it'll get better,

01:16:19.700 | but it does everything.

01:16:21.060 | I mean, you can just talk to it, you know,

01:16:23.120 | like you're sitting next to this incredible librarian.

01:16:28.120 | And it's fun to do it with other people around.

01:16:30.320 | People get a lot of kicks out of it.

01:16:31.840 | So we'll see what happens.

01:16:34.840 | I continue, so voice and memory are the two things

01:16:38.080 | that I think are the biggest and most exciting areas to add,

01:16:42.480 | but we'll see where it goes.

01:16:43.700 | Let's touch on one last topic before we part ways.

01:16:47.280 | We had yet another one of these odd transactions

01:16:52.180 | that I'm going, I wanted to brand it.

01:16:54.220 | So I'm going to throw out a phrase,

01:16:56.780 | a take under rather than a take over.

01:17:00.380 | And so we've had inflection

01:17:02.340 | and the one that just happened is Character AI,

01:17:05.020 | which had pretty interesting engagement numbers

01:17:08.460 | on your slide here.

01:17:10.140 | What's going on?

01:17:13.840 | I mean, like, what's your take on these transactions?

01:17:17.440 | There's now been enough of them that it's,

01:17:20.520 | I have to say it's a trend.

01:17:21.940 | Well, I mean, I think it's a combination of two things.

01:17:27.600 | Number one, I think from a company perspective,

01:17:30.760 | Noam Shazier is an incredible, you know,

01:17:34.700 | technologist, engineer, visionary, you know,

01:17:38.840 | was one of the authors on Attention Is All You Need.

01:17:41.880 | And he's building, you know, he raised capital,

01:17:43.980 | building a great business.

01:17:45.660 | You saw the engagement metrics, they're off the charts.

01:17:48.560 | But I imagine he's looking at the daunting amount

01:17:51.740 | of CapEx required, right?

01:17:54.220 | To continue to compete with Meta

01:17:55.900 | and continue to compete with Google.

01:17:58.260 | And, you know, that's a challenging slog, Bill.

01:18:01.740 | And so on the one hand, you have these founders

01:18:04.540 | who are saying, I need to have,

01:18:06.700 | I need to 10X my infrastack in order to go, you know,

01:18:10.980 | attract the best engineers to work on the best projects,

01:18:13.780 | et cetera.

01:18:14.620 | And that's a full-time job.

01:18:15.740 | And I'm not even sure you can get it done.

01:18:17.780 | On the other hand, Google and Microsoft and Meta,

01:18:20.980 | they're willing to pay super big money for talent,

01:18:25.380 | but they can't acquire companies

01:18:26.980 | because we know we have a regulatory environment

01:18:29.460 | in this country.

01:18:30.300 | We're doing outright acquisitions as hard.

01:18:32.420 | And so I think they've found this kind of third way

01:18:36.320 | that you describe.

01:18:37.260 | I don't exactly know how it works, Bill,

01:18:39.380 | to be perfectly honest, I haven't been

01:18:41.060 | in either of these deals.

01:18:42.460 | I would say that we looked at both inflection and character.

01:18:47.080 | We really liked what we saw at character.

01:18:49.420 | We wanted to be involved in it,

01:18:51.260 | but it was really hard to underwrite it

01:18:52.740 | for exactly this reason.

01:18:54.000 | We said the most likely outcome

01:18:55.880 | is that they're gonna be a seller to Google or to Meta

01:19:00.300 | because it's gonna be very hard to break out.

01:19:02.220 | Now, they're doing these deals.

01:19:04.720 | If it was just an outright sale of the business

01:19:06.820 | and you sold the business for 3X

01:19:08.620 | what the series A investors put into the business,

01:19:13.060 | I don't even think we'd be talking about this.

01:19:14.920 | We would say, it was a reasonable outcome

01:19:17.140 | and they're going on and gonna build something bigger

01:19:19.860 | and better at Google.

01:19:22.380 | I think what's interesting here

01:19:24.100 | is that these things are being structured,

01:19:26.160 | not as a straight up M&A in order to avoid perhaps

01:19:30.060 | some of the regulatory scrutiny.

01:19:32.020 | And so, I don't know, I ask you,

01:19:34.140 | I'm just not sure how they're structured or how they work,

01:19:37.820 | but the rumors, at least as reported by the information

01:19:42.700 | and some other places is that investors are earning

01:19:46.380 | two or 3X on their money in character.

01:19:49.660 | I'm just not sure exactly how it's structured.

01:19:52.260 | So, I'm not 100% sure either,

01:19:54.560 | and I've done quite a bit of research knocking on doors.

01:19:57.900 | And I also am not in one of those companies

01:20:01.840 | and so I don't have perfect information.

01:20:03.700 | And if anyone does, if anyone wants to reach out

01:20:07.100 | and chat with me about it and explain to me how it works,

01:20:09.420 | I'd love to hear it.

01:20:10.260 | But I did talk to a few attorneys

01:20:13.400 | that have been around the Valley for a long time.

01:20:15.500 | And I would state this,

01:20:16.900 | one, it is almost certainly the case that this,

01:20:21.100 | the primary reason that these funky transactions

01:20:24.800 | are happening or let's just call them non-standard

01:20:27.300 | is precisely to avoid federal regulatory scrutiny.

01:20:33.900 | And so, the minute that the Fed,

01:20:38.820 | the people in the Fed realize that's what's happening,

01:20:41.740 | they can start a process of laying chase,

01:20:44.080 | which might involve lawsuits,

01:20:45.420 | might involve pushing on Congress

01:20:47.780 | to write rules in a different way,

01:20:50.420 | but they can't stop it right away.

01:20:52.300 | And so, you're gonna,

01:20:53.460 | you'll probably continue to see this happen.

01:20:56.340 | It is, if it is an ARB,

01:20:58.300 | the people that wrote the original rules won't be happy.

01:21:02.860 | Let's just state that, like there's no reason they should.

01:21:05.860 | Two, as I understand it,

01:21:08.300 | there is a substantial double taxation risk.

01:21:12.040 | And if this is not the case,

01:21:13.820 | it's a thing I'd love for someone to educate me on.

01:21:17.020 | But the way the money makes it from the MagSeven

01:21:22.020 | to the investors, I think is two-step.

01:21:26.500 | One, the money is transferred to the startup

01:21:30.340 | as part of this massive license deal.

01:21:33.500 | And that's revenue for the company,

01:21:37.060 | which is exposed to corporate tax at that level.

01:21:40.740 | And then step two is either a stock buyback

01:21:44.540 | or a dividend distribution to the shareholders.

01:21:48.460 | And that two-step process,

01:21:50.220 | and then obviously that's taxable at a personal level.

01:21:53.180 | And so, that is, it seems like a sticky piece of this.

01:21:58.860 | And it means if someone truly is getting 2X

01:22:02.540 | back on their money,

01:22:03.780 | they'd have to, the MagSeven would be paying 3X

01:22:08.940 | or whatever, so that the taxes, you know--

01:22:12.540 | So it could net out that, yeah, net out the 2X.

01:22:15.780 | And I could, I mean, I'd love to hear how I'm wrong,

01:22:17.940 | or I'd love to actually have perfect visibility

01:22:21.540 | into how one of these things plays out.

01:22:23.300 | I continue to doubt that it's preferable

01:22:28.300 | for the venture investor to a traditional deal.

01:22:32.780 | It just seems a little too sloppy and messy,

01:22:35.220 | and this entity stays around.

01:22:39.020 | And people, it's funny, in all these PR releases,

01:22:42.100 | they try and posture as if this thing's gonna achieve

01:22:45.500 | great stuff after all the core people left.

01:22:49.220 | And that act of theater alone causes me

01:22:52.340 | to be a little skeptical of what's going on.

01:22:55.140 | Yeah, I mean, I don't know.

01:22:57.220 | I'd be surprised if this is the case with Character.

01:23:00.100 | I think they had options.

01:23:01.180 | I think they had other buyers of the business.

01:23:03.260 | So I'd be surprised if it didn't work out in a way

01:23:05.580 | that was reasonably positive for the investors

01:23:07.820 | and reasonably positive for the team.

01:23:09.620 | You know, frankly, I think it was a bit of a coup for Google

01:23:13.340 | to get Noam and his team back there.

01:23:15.180 | I mean-- No doubt about that.

01:23:16.500 | You saw these engagement metrics.

01:23:18.700 | They really are building.

01:23:20.140 | They have an eye to build something here

01:23:21.980 | that I think is important.

01:23:23.140 | So I, like you, I look forward to learning more about this.

01:23:27.580 | But, you know, it also--

01:23:28.740 | And if they fix Character and the things that I've read

01:23:32.780 | in the user forums and on Reddit

01:23:34.860 | is that it doesn't evolve with you.

01:23:38.780 | So it goes back to this memory issue

01:23:40.780 | and this kind of infinite recollection.

01:23:42.700 | But if they fix that, you know, this is a product

01:23:46.860 | that feels more at home at Meta than it does at Google.

01:23:49.780 | So it'd be a new front for Google, I think,

01:23:52.860 | if they were to make this work.

01:23:55.780 | You know, I would say, finally, Silicon Valley

01:24:00.020 | has been battling it out.

01:24:01.220 | We talked about it on the last episode.

01:24:05.500 | You know, Washington Post talks about,

01:24:07.540 | why is Silicon Valley all in the Trump category?

01:24:09.820 | Now we have VCs for Kamala, you know, and a long list there.

01:24:15.460 | You know, this seems to be the one thing

01:24:17.580 | that both sides in Silicon Valley

01:24:19.060 | agree on, Bill, which is, you know,

01:24:21.580 | LenaCon and the regulatory environment

01:24:25.780 | that has been created that causes, you know,

01:24:29.060 | these companies to have to do these legal gymnastics

01:24:32.020 | in order to do acquisitions of small teams

01:24:34.660 | and small companies.

01:24:35.540 | It just seems that it doesn't make a lot of sense.

01:24:39.340 | Part of the beauty of capitalism is creative destruction.

01:24:42.580 | Companies come and go.

01:24:43.660 | Companies get acquired.

01:24:44.980 | Teams move around.

01:24:46.420 | That's part of the dynamism of it all.

01:24:48.580 | So whoever is in this new administration,

01:24:53.300 | you know, I certainly hope that we enter into a new period

01:24:58.140 | where, you know, they're enforcing

01:24:59.780 | the stuff that's on the books, where monopolists are truly

01:25:02.980 | blocking out smaller competitors using their monopoly power.

01:25:06.900 | But we need to get back to a place

01:25:09.580 | where, you know, Microsoft and Google can go buy,

01:25:13.460 | you know, a company that's de minimis relative to their size.

01:25:17.620 | You know, Amazon can buy a vacuum cleaner company,

01:25:20.500 | you know, iRobot, without, you know,

01:25:24.260 | phalanxes of lawyers and having to come up

01:25:26.500 | with these creative structures.

01:25:27.660 | I can't see how this is in any way good for the country.

01:25:31.380 | - Yeah, understood.

01:25:32.460 | All right, sir.

01:25:33.300 | - All right, buddy.

01:25:34.140 | Great seeing you.

01:25:34.980 | - Thank you very much.

01:25:35.820 | Take care.

01:25:36.660 | - Yeah, we'll talk soon.

01:25:37.500 | Bye-bye. - Bye.

01:25:38.340 | (upbeat music)

01:25:46.980 | As a reminder to everybody, just our opinions,

Ep14. Public Market Volatility, AI Air Pocket, $GOOG Ruling | BG2 w/ Bill Gurley & Brad Gerstner

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