Aug 9, 2024 · 1h 25m · bg2-pod
Ep14. Public Market Volatility, AI Air Pocket, $GOOG Ruling | BG2 w/ Bill Gurley & Brad Gerstner · Bg2 Pod
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In this episode of BG², hosts Brad Gerstner and Bill Gurley analyze global public market volatility, five major macroeconomic risks, the AI infrastructure CapEx cycle, landmark Google antitrust rulings, and evolving startup regulatory dynamics.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Brad and Bill hold 99.9% of the talking time here. How this is scored →
Brad and Bill as informed peer 6.5 Guest teaching 1.5 Guest disagreement 1.5 Brad and Bill pushing back 2.1
speaking balance: gold is Brad and Bill, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 15:33 Gurley challenges tax drag premise on consumer spending
Gurley interrupts to challenge Gerstner's argument about the drag of tax hikes, asserting that wealthy recipients would not alter their consumption behavior.
Hardest push from Brad and Bill ▶ 25:53 Gurley rejects treating the Fed as an economic thermostatGurley pushes back against market obsession with rate cuts, pointing out that rate cuts into recessions have historically failed to rescue equity markets.
Biggest teaching moment ▶ 1:09:05 Gerstner educates on Gen AI engagement and retention decayGerstner walks through proprietary data demonstrating that generative AI apps show significantly lower retention and usage metrics than mainstream consumer applications.
Brad and Bill hold their own ▶ 1:19:52 Gurley exposes the tax and regulatory mechanics of take-undersGurley demonstrates deep structural expertise by laying out how Big Tech acqui-hires trigger double taxation via corporate licensing revenue before shareholder dividend distributions.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Brad and Bill as informed peer | Guest teaching | Guest disagreement | Brad and Bill pushing back | Why |
|---|---|---|---|---|---|---|
| Recent Market Volatility & Summer Pullback | 5 | 1 | 1 | 1 | The hosts set up the episode by framing recent market pullbacks against historical parallels like 1987. Gurley outlines index drops and the shift in correlation before asking Gerstner to provide macro perspective. | |
| Exposure Management & 'Units of Risk' Framework | 6 | 1 | 1 | 2 | Gerstner breaks down his units of risk framework and portfolio skew adjustments from early 2023 to summer 2024. Gurley prompts clarifications and reinforces the valuation reality check on tech multiples. | |
| Overview of Five Macro Market Forces | 6 | 1 | 1 | 2 | Gerstner categorizes five macro forces creating a toxic brew of uncertainty, while Gurley clarifies corporate versus personal tax nuances and oil shock transmission mechanisms. | |
| Macro Force #1: Election & Impending Tax Increases | 5 | 2 | 2 | 3 | Gerstner explains the automatic sunset of individual tax cuts and its 150 billion dollar drag on GDP. Gurley pushes back gently, questioning whether tax increases on high earners genuinely diminish marginal consumption. | |
| Macro Force #2: Recession Signals & Economic Slowing | 6 | 2 | 1 | 2 | Both hosts analyze recession indicators, from Wayfair and Airbnb softness to the Sahm rule being triggered. Gurley adds data points regarding Disney theme park guidance and consumer expenditure patterns. | |
| Monetary Policy, Restrictiveness & Rate Cut Outlook | 7 | 2 | 2 | 3 | Gerstner analyzes monetary restrictiveness using 10-year TIPS and Fed funds spreads. Gurley pushes back against the market treating the Fed as a magical thermostat, citing 2000-2001 rate cut lags and structural deficits. | |
| Macro Force #3: AI Air Pocket & Big Tech CapEx | 8 | 2 | 2 | 3 | Gerstner reviews Mag Seven CapEx commitments while Gurley draws on his 1990s PC and hard-drive analyst experience to explain long lead-time supply gluts and incumbent pre-emption dynamics. | |
| Macro Force #4: The Japanese Yen Carry Trade Unwind | 6 | 1 | 1 | 2 | Gerstner details the mechanics of the 20 trillion dollar yen carry trade unwind following the Bank of Japan rate hike. Gurley prompts background on why rates stayed depressed for 17 years. | |
| Macro Force #5 & Tail Risks: Geopolitical Conflict & Risk Management | 6 | 1 | 1 | 1 | Gerstner explores geopolitical tail risks and the rationale for lowering portfolio risk at market highs. Gurley agrees with the market reflexivity dynamic, noting there is no sympathy line for blown-up arbitrageurs. | |
| Landmark Google Antitrust Ruling & Market Implications | 8 | 2 | 2 | 3 | Gurley dissects the Judge Mehta antitrust ruling against Google, analyzing Section 2 Sherman Act precedents and Ben Thompson's analysis, while proposing a novel antitrust standard for one-sided corporate partnership contracts. | |
| AI Product Engagement, Retention & SearchGPT | 7 | 2 | 2 | 3 | Gerstner presents usage data showing Gen AI apps suffering from lower WAU/MAU and 30-day retention compared to legacy social platforms. Gurley notes the distortion of mixing paid and free tiers while discussing Google's asset advantages. | |
| 'Take-Under' Deals in AI Startups (Inflection & Character.ai) | 8 | 2 | 2 | 2 | Gurley coins the term 'take-under' for regulatory-evading acqui-hires like Inflection and Character.ai. He provides detailed insight into the two-step corporate IP licensing and double taxation mechanics. | |
| Silicon Valley Politics & FTC Regulatory Environment | 6 | 1 | 2 | 1 | Gerstner closes the show by critiquing Lina Khan and FTC antitrust enforcement for forcing startups into convoluted deal structures instead of natural creative destruction. |
Statements from this episode (32)
Gurley: Venture investors must study public markets as they are the ultimate buyers
“I've often said that the public markets are the buyers. Of private companies, and you got to know them. You got to know them. You got to study them. You got to know what they want to buy.”
Gerstner: Summer 2024 market pullback is a healthy consolidation
“So, you know, I put what's happened this week and what's happened over the course of the last month in kind of run of the mill, healthy consolidation of these big gains that we had in these six quarters.”
Gerstner: Altimeter cut directional market exposure from 9 to 3 units of risk
“So we had much lower units of risk. What's that mean? It means we sell some of our longs, or we put edges on, or we add to our short positions so that our net exposure directionally to the market, right, is three units of risk, not the nine units of risk that …”
Gurley: SaaS at 6x revenue is not automatically cheap as industries mature
“I hear people say oh my God, SAS is super cheap at six times revenue. And I'm like, you know, I've worked, I've seen industries mature where, where six ain't a stopping point, you know? And of course, you got to move on to net income and earnings and cashflow …”
Gerstner: Expiring individual tax cuts represent $150B annually, or 60 bps of US GDP
“The individual tax cuts, which included increasing the child tax credit and the standard deduction it's all, it's worth about a hundred and fifty billion dollars a year to put it in perspective, right? That's about 60 basis points on US GDP.”
Gerstner: Expiration of Trump individual tax cuts will create a short-term market headwind
“If those tax cuts go away, you have to assume that will be a headwind, at least in the short term for the markets.”
Gerstner: Downturns in travel and entertainment spending signal severe consumer strain
“Airbnb and Disney and the cruise lines and the airlines start seeing downticks, now you know that the consumer is really getting pressured. So there is no doubt.”
Gerstner: Only 48% of S&P companies beat revenue, lowest since Q3 2019
“If you just look at the companies that have reported in the S&P, 80% of companies have now reported. 48% of them had a positive revenue beat. Now that sounds like a lot, but it's the lowest level since the third quarter of 2019.”
Gerstner: The Fed may be late to cut rates to head off recession
“I think it's reasonable that they may be late to reduce interest rates to head off a recession.”
Gerstner predicts the Fed will cut interest rates in mid-September 2024
“I think within the Fed, they know that the balance of power between concern over inflation and jobs has shifted, so I expect that on schedule in 30 days I think it's mid-September, you're gonna get a rate cut.”
Gerstner: Rate cuts preceding recession fears historically cause market selloffs
“But remember, historically, rate cuts that are preceding a recession or fears about a recession are oftentimes sold, right? It doesn't cause the market to go up. It actually causes the market to go down.”
Gurley: Clinton capital gains tax cuts fueled the dot-com bubble
“After the famous quote about irrational exuberance from Alan Greenspan, the Clinton administration actually lowered capital gains tax rates, which fed into that problem. Probably shouldn't have, should have been raising them.”
Gerstner: Big Four Tech to Spend $220B on CapEx in 2024
“If you look at the big four, they're gonna spend two hundred and twenty billion this year on CapEx, you know.”
Gerstner: Nvidia Consensus Data Center Revenue Is $136B in 2024, $166B in 2025
“So this year they're expected to do about a hundred and thirty six billion of data center revenues. Next year, that goes to a hundred and sixty six billion.”
Gurley: Big Tech Is Aggressively Undermining OpenAI and Anthropic Fundraising
“One of the objective functions may be just precisely to make it more difficult for OpenAI or Anthropic to raise, you know, ten billion dollars that they need to fund the next two model builds.”
Gurley: AI Will Not Replace All Software or Cause Mass Unemployment
“I don't think this replaces all software. I don't think people are going to be sitting around jobless and need UBI. I don't think You know, I don't think that, that all software just goes away. Someone said that this is the new operating system. I don't think …”
Gerstner: Half of $20T yen carry trade unwound in two days
“And you had 20 trillion of these trades at play, according to JP Morgan. I think in the first two days, half of those trades they estimated got unwound.”
Gerstner: Stock Market Is Not Justified Being 10-15% Above January 2024 Levels
“This market could give up a hundred percent of the gains that we've had year to date, which would mean you'd still have another 10 to 15% down in the market, and that just takes you back to where you were on January one, and so you have to ask yourself, as an …”
Gerstner: When Asset Prices Are High, Investors Should Reduce Risk Rather Than Exit
“When prices are high in venture, you know, you don't just stop doing venture. Right? But you do less. And you wait for the really great stuff. And when prices are high in the public markets, you don't necessarily step out of the markets altogether, but you jus…”
Gurley: 100% Bing Revenue Share Would Earn Apple Less Than Google Deal
“So the reality is that Google's monetization is so much better than anyone else that's out there that I don't think there's a deal you can do with Bing that will create that amount of net income for Apple. So there's no, like, Apple's not mad about this deal. …”
Gurley: 80% to 90% of Users Will Pick Google on Choice Screens
“If they're forced to do the search and Apple's somehow cut out of the economics, and then Google ends up making more money, because I think the consumers are going to choose 80 or 90% Google.”
Gurley: Ability to Impose One-Sided Deal Terms Should Be Monopoly Test
“I've often said that I, that the federal government should Have a new test for a monopoly, and I, and this is very self-centered bias to someone who's been a venture capitalist working with small companies for a long time, but for over the course of the years,…”
Gerstner: Generative AI apps show around 40% weekly engagement
“If you look at these generative AI apps, character tops out at about 64%, but if you look at Claude, Gemini, ChatGPT, they're about 40%. So much lower engagement you know, than you know, internet consumer apps.”
Gerstner predicts SearchGPT will not reach one billion users
“I would say that search GPT I don't think is going to be the product that gets up to a billion users, and it reminds me, it takes me all the way back to a conversation you and I had maybe in episode four Which is what is going to be the next, you know, GPT mom…”
Gurley: Google possesses the best asset stack for personal AI assistants
“When I think about the personal assistant side, having the assets of Gmail Docs, spreadsheets, and Android, you know, and I actually ran into Samir Samadhi runs Android the other day, and I had this discussion with him. It's the best set of assets. Like, if yo…”
Gerstner: Current AI consumer products cannot dislodge Google
“What's clear to me is that the current State of the consumer product. It's not enough to dislodge Google.”
Gerstner: Altimeter passed on Character.ai due to unsustainable CapEx requirements
“I would say that we looked at both inflection and character. We really liked what we saw at character. We wanted to be involved in it, but it was really hard to underwrite it for exactly this reason. We said the most likely outcome is that they're going to be …”
Gurley: AI startup 'take-unders' are structured primarily to evade antitrust regulators
“One, it is almost certainly the case that this, the primary reason that these funky transactions are happening are, let's just call them non-standard is precisely to avoid federal Regulatory scrutiny.”
Gurley: AI pseudo-acquisition licensing deals carry severe double taxation risk
“Two, as I understand it, there is a substantial double taxation risk, and if this is not the case, it's the thing I'd love for someone to educate me on, but the way the money makes it from the Mag-Seven to the investors, I think is two-step. One, the money is …”
Gerstner: Silicon Valley Politically Unites Against FTC Chair Lina Khan
“This seems to be the one thing that both sides in Silicon Valley agree on bill. Which is, you know, Lena Khan and the regulatory environment that has been created that causes, you know, these companies to have to do these legal gymnastics in order to do acquis…”
Gerstner: Blocking Big Tech From Small M&A Harms the Country
“We need to get back to a place where, you know, Microsoft and Google can go buy, you know, a company that's de minimis relative to their size. You know, Amazon can buy vacuum cleaner company, you know, iRobot without, you know phalanxes of lawyers and having t…”