... in the recent Raging Moderates with Scott Galloway and Jessica Tarlov
Basically, America has made an "all in" bet on AI. Incestuous, circular deals are artificially inflating the indexes. It could keep giving trump cover for a long time -- or could come crashing down.
Rough transcript of sections I found interesting:
28:57 Essentially, America is a giant bet on AI right now. And I continue to believe that the most dangerous metric ever invented was the NASDAQ and the Dow and the S&P indexes. Because the S&P being up 14%, I believe, has provided cloud cover for Trump’s actions. And that is, America has become so much about stuff, specifically, your ability to acquire stuff versus character versus family versus patriotism. That as long as the markets continue to go up and people are under the impression that they are going to have more money, and can access cheap calories and access Netflix -- that if the market is up 14%, that must mean the president on the whole is doing something right.
29:38 And essentially, the reason the market is up 14% is that 75% plus of the market's gains come from 10 companies led by NVIDIA. And now Jensen is implementing a series of circular, kind of incestuous deals that feel very like a late stage 99 to me. If the market has been down 14%, I believe that Trump wouldn't have the cloud cover to go into Portland...
30:53 Jensen Huang (NVIDIA), Sam Altman (OpenAI), Satya Nadella (Microsoft), and the continued march of the magnificent 10 is the cloud cover for the administration...
34.11 Around AI, there's this notion of fragility and what makes a robust economy. And essentially, it comes back to diversification. So the fast-food industry is a robust industry. If McDonald's goes out of business -- the biggest player -- you’re going to have no problem getting a lot of calories for a fairly low price.
34:28 The banking industry in the United States is not robust. If JP Morgan has some rogue trader in Singapore who figures out a way to bypass all compliance in their pursuit of returns, and Jamie Diamond calls Trump and says, "Oh gosh, you're not going to believe this. Some rogue 28-year-old has put us under and we need a bailout." They're too big to fail at this point. That means the U.S. banking sector is probably not that robust. Some people would argue that when Silicon Valley Bank went under the market was fine. It was resilient. I would argue that it's probably not that robust.
35:04 And what we have now is an economy that is looking increasingly fragile because you have 10 companies representing 40% of S&P by value. The S&P represents 50% of the total market value capitalization. I'm writing about it this week for my No Mercey, No Malice newsletter.
And I think this is how the end begins. And that is all these circular deals.
So, NVIDIA invests 100 billion in Open AI with the agreement they're going to take that 100 billion and invest it back in NVIDIA chips. 100 billion in incremental business to NVIDIA creates 55 billion in operating margin -- they have 55 points of operating margin, or 55 billion in earnings times a PE of 50. That's like a 1.4 trillion technical increase in notional valuation off of a hundred billion dollar investment.
AOL was pulling this sleight-of-hand back in the late 90s, investing in ecommerce companies in exchange for them spending all that money on AOL, such that they could continue to report growth that justified what was an exceptional artificially inflated valuation. This is late-stage 99 circular deals.
36.11 There's an amazing graph put together by Bloomberg showing that these deals have now become very popular. So, what happens here, the string or the rope that gets pulled is there's more research; there are more reports from big companies saying the adoption layer, if you will, is not taking off the way we thought. That is, companies that have signed up for AI made huge investments, but they're not seeing the ROI they had expected. So, if they announce a pullback in spending, NVIDIA gets cut in half -- and effectively, if you have the magnificent 10 cut in half. The magnificent 10 could get cut in half -- they still wouldn't look cheap, but that would be a 20% decline in the value of the S&P, and a 10% decline in the total market cap of all stocks globally. And that would disproportionally -- I don't want to say hurt, because they are pretty resilient -- but it would disproportionally affect the top 10% who are now responsible for 50% of consumer spending. Which again, see above, makes a fragile or anti-resilient economy.
37:14 And the thing about rich people is that when they make money, it's great because they can spend a lot more because of the effect of the stock market. But the downside is that wealthy people can take their spending down 20%, 30%, 40%. Middle class homes can't take their spending down that much because they are spending money on essentials.
37:32 But if the wealthy all feel less wealthy because they wake up and the market is down 20% and some of the tech is down 40%, they can take their spending down 30 or 40%, which would immediately take us into a recession, or a global recession.
37:48 So, I think that we have what is becoming an increasingly concentrated economy, and an increasingly fragile or anti-resilient economy again. And again, I come back to the statement that America has become a gigantic bet on AI and it's fueling the markets. It's fueling cloud cover from trump.
38:07 And I want to be clear. When guys like me are saying we are on the precipice of a bubble popping, that usually means the market’s going to go up another 20 or 30% in the next two years. This is not financial advice, because this is a political show, but what I am actually doing with my own personal finances is I'm rotating out of U.S. and tech stocks into European and Latin American stock. So, you always want to be in the market. You want to be in low-cost funds. But America is the largest economy in the world right now. I think it is accurate to say it's a bet on AI and the sustained crazy, frothy market valuations. I definitely think we could see a significant draw-down here that would have global implications.
More about the entire podcast in this post.
https://www.democraticunderground.com/100220733959
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