The Exchanges

Q there are arguments to say, okay, fund it with debt. Who cares? You'll pay it back. Everything's growing well. Um, but I, I actually will, we'll turn it to you and, and, and hear your perspective on why debt is such an issue here. We, we've just started to see debt make its way into this conversation. So how, why is it a problem and how concerned should we be?

A So we have to go back to finance one-on-one, right? There's certain things we, we finance through equity, through ownership, and there's certain things we finance through debt, through an obligation to pay down interest over time. And as a society, for the longest time, we've had those two pieces in their right place, right? So debt is when I have a predictable cash flow and an asset or and or an asset that can back that loan, and then it makes sense for me to exchange capital now for future cash flows to the lender. So again, the conditions are an asset that is long standing that can back the loan, And or predictable cash flows to support the loan payments, right? That's why we have a mortgage. A mortgage is an example of both, right? A mortgage is, wait a second. If I, if I stop paying my mortgage payments, the bank owns the house. And since they only lend me 80% of the value of the house, even if the value of the house goes down a little bit, they'll be fine. And they have an access to my income, which is relatively predictable, even on Wall Street. And so they know that I'll pay my, my mortgage payment. That's, that's a loan that should be there, right? We use equity for investing in more speculative things for when we want to grow, and we want to own that growth, but we're not sure about what the cash flow is going to be. That's, that's how a normal economy functions. When…

AI assessment note: “When you start confusing the two, you get yourself in trouble.”

Q You can't trust, you can't trust them because you just don't, how do they know?

A Exactly. So, so one, AI may turn out as well as we expect, but it may not. And two, OpenAI is not in a vacuum. They're competing. Part of the reason they're overpromising and creating this too big to fail and, and fake it till you make it and getting everybody else to have skin in the game. Part of the reason they're doing that It's because they know they're competing with Meta, and with Google, and with Elon, people that have a lot more resources than they do. So for them to say, oh, we're gonna have a hundred billion dollars of revenue by 2027, which Sam Altman just did, is completely disingenuous. He has no idea. He's competing against much bigger, more powerful companies that have technology that's at least as good as his. So, so lending money based on that is, is dangerous because again, these GPUs, you're building a data center, you're renting out GPUs, and right now maybe you're renting out a GPU for four dollars an hour, and maybe that way the business makes sense. But these GPUs keep getting so much better every year that that same GPU in just three years may be only renting out at 40 cents an hour, at which point the data center is literally worthless. Because that won't be enough to cover the expense of operating the data center. So this is where we get in trouble. When somebody underwriting a JP Morgan, a US bank or Mitsubishi bank ignores that. And to answer your q…

AI assessment note: “He has no idea. He's competing against much bigger, more powerful companies”

Q these companies say that these chips will depreciate over five or six years, but like you said, if the, if the NVIDIA chips get that much better, that much more quickly, um, we can have a much more accelerated depreciation making the data centers that they're investing billions in today. Worthless, as you put it. How do you evaluate Burry's critique of the situation? Sounds like you agree with him.

A He's spot on. He's spot on. By the way, Big Short is the story of how he was spot on, but he almost didn't make it, right? A lot of the movie is about how long it takes to play out, and you can be right, but if you're right too early, you don't make it. And the story is about him and the handful of people that did make it. There were a lot of people that were short the market for a long time and lost everything because they couldn't wait Long enough. He was just in a position to wait and he's spot on right now. And look, depreciation gets wonky. So let me just hit it at a high level because it is really important to this conversation, right? Depreciation is based on an accounting standard that helps companies say, well, how I have an asset. How long is it useful? How long can that asset generate revenue for me? And if it, if it can generate revenue for me over five years, Then I should take the cost of acquiring that asset and spread it over five years as an expense for accounting purposes, right? That's, that's what accounts are there to do. And these accounts spent time three to five years ago with companies like Microsoft and Amazon and said, you know what, based on where the technology is now, we're looking at these chips and it looks to us like they can generate revenue for you for about five or six years. And that's why we're going to allow you to depreciate that to exten…

AI assessment note: “He's spot on. He's spot on.”

Q is there, because these companies are writing the chip depreciation at six years, or maybe, you know, seven years, um, but they're not going to actually be doing anything, um, that, uh, effectively they're going to be overstating their, their profits. Uh, and, you know, smart, smart investors. Is he saying that smart investors will catch on and then think their valuations because of it or what's the risk there?

A That's exactly it. Is that all we're one account conversation away from having all these companies have to report much lower profits. And, you know, we use, uh, we use profit multiples to value companies. So if a company has to depreciate most of its assets, Over three years instead of five years, that means their profitability is going to go down proportionally. And, and we could have in, in, in, in a stylized case, the value of a company declined by 40% because an accountant said, you have to depreciate this over three years instead of five years. That's why this is very real. Sounds wonky, but this is very real. If you release a company's profitability by 40%, their value will go down by 40%.

AI assessment note: “That's exactly it. Is that all we're one account conversation away”

Q companies financing in debt. So they're, they're basically what they're, I mean, what they're saying is, You, you, uh, this is not acting like a rational, uh, uh, technology because A, everybody wants market share and B, um, yeah, they're, they're willing to spend, uh, to get there. And so what do you think about that? Is it, is this gonna be a persistent issue? How should we view this?

A Yes. Yes. Cause so here, here's the thing. You, who are the players in this game theory, right? It's meta, it's Google, it's Microsoft, it's Amazon. It's companies that are used to win or take all markets. And they think of all markets as being win or take all market, meaning if I don't win this market, I'll get none of it, or at least not enough of it that will be meaningful to me. So they are willing to do anything to win, which to the point of that means they'll be willing to lose money for a long period of time, so they have a chance to win. And what happens then is it's only the biggest, most deepest pocket player that can win because they, they can wait it out or at least Communicate to everybody else that they're willing to wait it out. So that's, that's where a company like OpenAI has no chance, because they can't make it through another year or two at this level of spending, so they certainly won't be able to outlast Google Meta and Microsoft in this game, right? So, and it explains a lot about Mr. Zuckerberg's behavior. Again, he's not just spending the money, he's telling us he's willing to spend anything to win. He's signaling to all the other players is I will not lose. So you can keep throwing money at this. I'll keep throwing money at it longer. And that is exactly where we're at, which is why we may have persistent losses for a while here, because these companie…

AI assessment note: “which is why we may have persistent losses for a while here”

Q really good point here, which is that there is insatiable demand for the products, and you do have public company CEOs like Lisa Sue, uh, who, like, have to have some rigor behind the things they say, talking about these major numbers, uh, and even companies like Anthropic, which are losing a lot of money Planning to get profitable in a few years. So what's your read on this Gil?

A There's a lot to unpack there. Uh, and the framework that I do it with is to say both things are true. So AI is the most revolutionary technology that we've had in a really long time, whether it's back to the internet or back to the industrial revolution, we'll only know in retrospect, but clearly the tools are very powerful and are getting better. All you need to know to do to know in order to realize that is just to use them. May ask CHI GPT to do things for you that are hard, that you would ask other people to do, whether it's summarizing, writing, giving you advice, and you see that not only is it incredibly capable, but it's much better than it was a year ago, and it's much better than the year before that. So yes, there is insatiable demand for this product. That is true. That's, there's a lot of healthy behavior around that capability, and the healthy behavior are reasonable, thoughtful business leaders like the ones at Microsoft, Amazon, and Google that are making sound investments in growing the capacity to deliver AI. And the reason they can make sound investments is that they have all the customers. They have all the business customers, And by extension of the relationships with OpenAI Anthropic, they have all the consumer relationships as well. And so when they make investments, they're using cash on their balance sheet. They have tremendous cash flow to back it up.…

AI assessment note: “and the framework that I do it with is to say both things are true.”