Big Short Investor Explains How the AI Bubble Will Burst

Steve Eisman

Let’s just imagine that OpenAI fails. Could happen.

Speaker 2

The host of the Real Eisman Playbook podcast.

Steve Eisman

I don’t know about you, but I know that I don’t have $100 billion to spend on building data centers.

Speaker 3

You may know our next guest from The Big Short.

Speaker 4

Your character.

Steve Eisman

You had to work that in there, didn’t you? I did have to.

Speaker 5

Do you like being described that way?

Steve Eisman

I think it’s going to be on my tombstone. The whole United States of America would go into a recession overnight. Oh, yikes. Okay.

Speaker 4

Mr. Anders.

Steve Eisman

I’d have said you’re out of your mind. Yeah. You’re insane.

Speaker 6

against my programming to impersonate a deity.

Steve Eisman

This industry, despite all the hundreds of billions of dollars that’s been spent on it, has…

Speaker 5

Joining us right now is Steve Eisenman.

Speaker 3

Let’s bring in Steve Eisenman.

Speaker 4

Steve, welcome back. You are known for spotting a bubble before anyone else does. Michael Lewis wrote a whole book on it. So my first question to you is where on earth are we in AI right now?

Steve Eisman

There was a great movie with Sean Connery where he played this, I can’t remember the name, Finding Forrester. And I remember the young character asks him a very complicated question. And his response is, as he’s eating soup, he goes, it’s not exactly a soup question.

It’s a complicated question. I never forgot that line. I thought it was one of the best lines in the history of movies.

It’s not a soup question.

Speaker 7

Not exactly a soup question, is it?

Steve Eisman

This is how I look at it. The concentration risks here are awe-inspiring. You know, so if you take a step back and someone said to me, “Why don’t you analyze this software company?”

Forget about what it does. It’s a software company. An established software company.

And if it turned out that the company had thousands of customers, that would be great. If it turned out the company only had two customers, you’d say, “I don’t want to invest in that because if something bad happens to one of those customers, this company is dead. There’s something of that going on in the whole AI story.

So let’s start just with NVIDIA. So NVIDIA, God bless them. And I own the stock.

Okay. When they reported a few weeks ago, I think the revenue growth was like, it was like 110%. It’s a lot.

So let’s just, let’s just take a step back just for a second and say to ourselves, wait a minute, the largest company on planet earth just had, forget about earnings growth, which was great too. Just revenue, revenue growth of over a hundred percent. Like that’s insane.

So that would say the AI story is great until you read the 10Q, which came out that night. And I’m going to impress your viewers by saying, if you look at it and they go to note seven. Oh,

Speaker 4

okay. Okay. Yeah.

Steve Eisman

Note seven says that 70% of NVIDIA’s accounts receivable as of the end of July came from five customers. Warning flag. Not the end of the world.

Warning flag. Now let’s go to the hyperscalers. You’re talking about Google, Meta, Amazon, Microsoft.

And let’s throw Oracle in for good measure. Massive companies spending massive amounts of money by buying NVIDIA’s chips and everything else under the sun. 70% of their AI revenue, which equals something like 25% to 30% of their entire cloud revenue, comes solely from Anthropic and Open AI.

Speaker 4

Right.

Steve Eisman

Let me just say it again so your viewers get it. If you look at, leave out Oracle for a second, Microsoft, Amazon, Google, 70% of their AI revenue, which is equivalent to 25 to 30% of their total cloud revenue, is just from Anthropik and OpenAI. If you go to Oracle, Oracle puts out a data point called RPO, which is basically a form of backlog. When they reported earnings last year in October for their August quarter, their RPO went from like 150 billion to like 400 billion in three months.

Speaker 4

It was a massive jump.

Steve Eisman

It was a massive jump. I mean, people went insane. Yes. And the stock went crazy. It went from 230 to 330, like in two days.

Speaker 4

Yep.

Steve Eisman

And then some of the sell site analysts were very good, who did some digging, came out with reports that said 50% of that RPO is just from OpenAI. Now, today, Oracle is over 600 billion, and it’s still like 50% is from OpenAI. Basically, 50% of future revenue of Oracle is from a company that loses money like crazy.

Speaker 4

Well, that’s what I was going to ask you. Maybe you can explain how this works. But from my perspective, I don’t understand where this money is coming from.

Steve Eisman

We’re coming to that. Okay. Let me just finish the chain.

Yeah. So now we come all the way now to Ork, to Anthropic and OpenAI. And my view is the entire chain from NVIDIA to the hyperscalers all the way down, the whole chain rests on the future health and growth of Anthropic and OpenAI because they’re creating the commitments to the hyperscalers.

If they don’t grow and have the money to pay for those commitments, well, then the whole chain slows.

Speaker 4

Yeah.

Steve Eisman

So that’s the risk. I would say between the two, probably OpenAI is the weaker entity, but it’s not clear. Because we really don’t have enough numbers.

The only thing we do know, because the Wall Street Journal reported this, so I’m assuming it’s true. OpenAI had something like $6.5 billion in revenue in the second quarter of this year. Anthropic was at $11 plus.

Speaker 4

But this is just revenue.

Steve Eisman

Just revenue. Okay. OpenAI lost something, had costs of something like $12 billion.

So the way the math worked was in three months, OpenAI’s revenue went up a billion, and its cost went up $3 billion, which we like to say is upside down. You want the reverse, not the former. They want the other way to go.

Great business model. And their revenue grew 18% in three months, Whereas Anthropics revenue grew over 100% in three months. So they’re the weaker company at this point.

That could change. My only point is that this whole industry makes me nervous because let’s just imagine that OpenAI fails. Could happen.

The whole United States of America would go into a recession overnight. Now, eventually, there’ll be a lot more diversification and there’ll be a lot more companies. But that’s going to take time.

So, you know, within the next year or so those companies have got to stay healthy. That’s where I think we are

Speaker 4

So there’s a concentration risk.

Steve Eisman

It’s massive concentration risk

Speaker 4

And that brings me to the to the question I was asking before my understanding is that well We just spoke about these open AI and anthropic and not making money. They’re losing money. Oh,

Steve Eisman

excuse me To say that they’re losing money would be kind They bleed money.

Speaker 4

What’s the nicest way? They lose a lot of money We’re pre-profit. Something like that.

Steve Eisman

They make money if you exclude all costs. Yeah, exactly. That’s how they like to think about it.

Speaker 4

We should start reporting that metric. Yes,

Steve Eisman

we should.

Speaker 4

So where does the money come from?

Steve Eisman

Well, that’s actually a very interesting question. I had thought that most of the money was coming from venture capital. And that happens to be not true. Most of the company is coming from Amazon, Google, Microsoft, and NVIDIA investing in these companies and SoftBank.

Speaker 4

Okay. So taking equity stakes in the Taking

Steve Eisman

equity stakes. They raise capital and those guys have ponied up money. Whether they want to continue to pony up money, I don’t know.

Speaker 4

That sounds like a circle. It sounds like money or commitments are going one way and then commitments are coming back the other way. Yeah,

Steve Eisman

it does have that tendency, does it?

Speaker 4

This kind of reminds me of the, it’s actually a scene from the big short with your character.

Steve Eisman

You had to work that in there, didn’t you?

Speaker 4

I did have to work. I remember he’s saying, oh, it’s kind of like CDO A, and then they put parts of that into CDO B. Right. Those two you put into CDO C.

Steve Eisman

There’s some similarities. But in their defense, there is a circularity to the financing. But as long as Anthropic and OpenAI keep growing very, very rapidly and people keep giving them money, the chain will hold.

It’s if one of those two companies really messes up and people pull money or don’t want to invest anymore, that’s when the chain doesn’t hold. That’s where the concentration risk problem comes in. If I had said, instead of 70% of hyperscaler AI revenue comes from Anthropic and OpenAI, If that number had been 10%, we’d be having an entirely different conversation because clearly there are a lot more customers out there of size.

Speaker 4

So that brings me to another argument that I’ve heard you make on your podcast and with your guests.

Steve Eisman

Let’s just plug that podcast for a second. Call it the Realizement Playbook.

Speaker 4

Realizement Playbook. Yeah, absolutely. It’s very, very good.

And it’s gaining a lot of traction. Thank you. I think it comes down to the authenticity of it.

Steve Eisman

Well, I appreciate that.

Speaker 4

I really enjoy it. I think it’s very, very high quality.

Steve Eisman

My wife and I work on it every day.

Speaker 4

Both of you guys. I didn’t realize.

Steve Eisman

So my wife is my partner. Oh, right. Okay.

And so she does, God bless her, all the editing. Oh, really? This is to give you an insight into things.

So I am a very linear thinker, which the way I would define it is one, two, three, four, five conclusion.

Speaker 4

Got it.

Steve Eisman

And too often I write that way. so I’ll write I’ll do we have this thing called the weekly wrap which we put out Friday where I sum up the week and too often when I write it I’ll I’ll I’ll do one two three four five six and and Valerie my wife who’s who’s the editor will always say you buried the lead again yeah and she’ll flip it okay and so because she says you know most people never get to the bottom you know people get your conclusions at the bottom and it takes 10 minutes to get to the bottom. So she edits it and she runs the business.

Speaker 4

Right. Okay. That’s cool. I didn’t know that.

That’s a little behind the scenes. I like that. Okay.

Back to AI train of thought before I forget my train of thought again. So going on from what you’re saying, if something happens to open AI or Anthropic, that’s where the problems could be at this moment in time, when we’ve got the concentration risk. How do you see things like DeepSeek’s new model or Kimmy, what is it called now?

Kimmy K3.

Steve Eisman

Best name in the biz. Kimmy K3.

Speaker 4

I like that.

Steve Eisman

So this is where the industry has, I think, real business weakness. Leave aside concentration of risk. That’s its own risk.

Here’s the business risk. There was something going on for a while, which is called token maxing, which is where, for lack of a better term, I work for a company and I’m a software engineer. And I’ve been told by management, you’re to use AI 24-7, whether you need it or not.

Just do it. Just do it. But what happened was last year, OpenAI and Anthropic were dramatically undercharging for their services.

Then they raised prices because they were so undercharging for the cost of tokens, it was killing them. So they increased the prices so that the customer was bearing more of the cost of the token.

Speaker 4

So you get people in. Once you got people in, raise the price. Raise the price.

Steve Eisman

Uber, I think, blew through its entire AI budget in like three or four months.

Speaker 4

Oh, yikes. Okay. Okay.

Steve Eisman

And then this was some other company that I read about spent $500 million before they even knew they had spent $500 million. So what’s happened is people have gotten a lot more cost conscious. Token maxing has gone away and people are using these open weight models a lot more. You don’t need a Cadillac for everything.

So people will use Anthropic and OpenAI’s models only for the super important tasks. Everything else, they’ll use Kimmy K3 or whatever. So what I like to say about this is that this industry, despite all the hundreds of billions of dollars that’s been spent on it, has no moats.

There are no moats. You know, Google, with its search, until very, very recently, that was a moat. I mean, everybody used Google.

90% of the planet Earth used Google, and no one would even think about it. Because it was just better and nobody could approach it. You know, here, one day it’s Gemini, one day it’s ChatGPT, another day it’s Claude.

They just rotate. And so, well, we’ll come to it about my conspiracy theory about the end of the world.

Speaker 4

Conspiracy theory. All right.

Steve Eisman

So this dovetails into my conspiracy theory. So as all your viewers know, the world’s going to end.

Speaker 4

At some point it has to.

Steve Eisman

At some point it has to. Maybe it could be 5 billion years from now, or it could be in a couple of weeks.

Speaker 4

CNBC and Wall Street Journal, I think it’s next week.

Steve Eisman

I think this entire AI is going to end the world is a complete subterfuge.

Speaker 4

Okay.

Steve Eisman

And what I think is really going on is that these companies are nervous. They’re nervous that token maxing has ended. They’re nervous that there are no moats.

They’re nervous that these Chinese open-weight models are taking massive market share. So they’re manufacturing a hysteria, which what they’re hoping for is for the government to come in and regulate the industry. And they think that they could manipulate that regulation to create a duopoly.

That the regulation will create the moats. The regulation will say no Chinese AI models. There’s too big a risk.

And then all of a sudden there’s a moat that didn’t exist before. A legal barrier. That’s what I think is actually happening here.

Speaker 4

So you think that’s the reason behind, because I’ve noticed Elon, he’s always talking about it. But recently the Anthropic CEO, Dario.

Steve Eisman

And they’re also talking about slowing down. Yep, slowing down. And that cannot be taken seriously because if you really, really, really, if I was Dario Modi And I really, really, really thought that my product is dangerous and I really need to slow down. I postponed my IPO. You’d have to postpone your IPO.

Speaker 4

You could just do, take the steps.

Steve Eisman

Take a step back and, you know, I’ll fix what we need to fix and we’ll come back. Are they postponing their IPO? No. You know, Elon Musk had a very funny quote the other day where I think he did on X where he said something like I’m gonna paraphrase. I don’t have the quiz. This is some messed up 4d chess Where you’re saying that that your products gonna end.

Oh, and by the way, how much can I allocate to you for the IPO? You know, seriously, I I take people seriously when they put them their money at risk,

Speaker 4

right?

Steve Eisman

You know, this statement about a slowdown is just all part of this hysteria that they’re trying to manufacture.

Speaker 4

Right. So they’re aware that there may not be moats. And it kind of, for those that don’t know, explain what you, what you mean.

We’re talking moats specifically in, not hyperscale, in the LLM providers. Yes. Because they’re, I guess they’re still.

Steve Eisman

The hyperscalers have moats. Okay. Can you explain?

So what’s a moat? Yeah. Your grocery store doesn’t have a moat because somebody could open up a grocery store across the street tomorrow.

But there are some businesses that have real moats around them.

Speaker 4

Like a competitive advantage.

Steve Eisman

But it’s a competitive advantage that is eternal or at least very long lasting. Like NVIDIA makes GPUs. Well, nobody else really makes GPUs.

That’s a moat. Certain software companies have you know when if your salesforce or service now Which were our two massive software companies your product is embedded in the companies that you service like like yeah those companies that use your product They’ve used it for so long. They can’t function without your product how to switch away Try and get to try and switch out of that is brutal.

Yep. That’s a moat. There’s no Hyperscala, what’s the moat?

Well, I don’t know about you, but I know that I don’t have $100 billion to spend on building data centers.

Speaker 4

Okay.

Steve Eisman

You just don’t have it.

Speaker 4

So there is some moat in simply the size.

Steve Eisman

So just in terms of size and money, I mean, there are only certain companies that can actually build data centers. They’re just that expensive. LLMs, the creation of the models is expensive, but there’s so much competition and there’s no loyalty.

Like, you know, if you’re a software developer and you’re using Claude, if tomorrow another LLM shows up that’s better than Claude, you’ll switch. You’re not stuck. That’s the problem with the LLM model.

Speaker 4

Gotcha. So there’s no moats in LLMs.

Steve Eisman

Yes.

Speaker 4

Hyperscalers, I guess they have diversified business models.

Steve Eisman

And they have moats. But they’re dependent upon the LLMs in their cloud businesses. That’s their weakness right now.

Speaker 4

So, okay, so there’s kind of an argument for hyperscalers for and against having a moat. You kind of, in some ways, there’s the scale and the cost and the barrier to entry moat of the investment. And then there’s also the dependency on the people that are buying.

Steve Eisman

That have no moats. Yes. That’s the problem.

Speaker 4

Interesting. Okay.

Steve Eisman

And the other problem with the hyperscalers, this may be temporary, but then again, maybe it’s not, is Microsoft, Amazon, Google, three, four years ago and way prior to that. These companies were incredibly profitable, but even more importantly, they just threw off cash like crazy. I mean, so much cash, they didn’t even know what to do with it. So they just bought back stock because they literally didn’t have enough investments to pour back into their own businesses. Today, because of the incredible amount of money that they’re spending on these data centers, their cash flow is gone.

Speaker 4

I noticed that.

Steve Eisman

And in some cases, negative.

Speaker 4

Negative now. Yeah. Yeah. Very little.

Steve Eisman

I mean, Google raised equity capital, $85 billion. I mean, if you had said to me two years ago that, hey, Steve, I’m going to make a prediction. Google, which hasn’t raised capital since it went public, is going to raise $85 billion, not in debt, in equity capital.

I’d have said, you’re out of your mind. You’re insane. Like, what are you talking about?

They create $85 billion in cash, like overnight. Like, what would possess them to raise equity capital? Well, world changed.

Speaker 4

It’s a very dramatic shift. I feel, you know, as an investor that’s held Google for probably eight years, the company that I hold now is very different to the company. And that’s an interesting point.

We’ve seen the market get a little bit jittery with the amount of spending that’s happening. It could be a payoff. Maybe there’s not.

Steve Eisman

By the way, let me just jump in for a second. Let’s go back to Oracle. Okay.

Because after that, I didn’t finish. After Oracle, every people said that 50% of Oracle’s RPO, the backlog, is from OpenAI. The stock, which had gone from 230 to 330, over the next two, three months, went to 200.

And today, it’s 150. And what’s fascinating, fascinating, is Oracle just reported. And the numbers were pretty good.

And the stock was up 4% or 5% after hours and was up 7% at the open and closed down on day. And there was no news. So I don’t have like a news explanation.

Like nothing happened. But clearly people are very nervous about Oracle because Oracle got downgraded and its debt rating is like BBB by S&P. Which is like I think maybe just one level above junk. So people are nervous about Oracle and how much debt they have.

Speaker 4

Well, it seems investors are nervous about all of these hyperscalers now that are investing literally hundreds of billions. Hundreds. Hundreds of billions.

Right. It’s just, it’s insane. It’s staggering.

Yeah.

Steve Eisman

The numbers are just so big. I think the number that I heard this year is that if you just look at the hyperscalers, they will spend $700 billion on AI CapEx this year. It’s like, that’s such a huge number. It’s hard to even get your mind around it. It’s so enormous.

Speaker 4

I’m interested in your perspective on what Michael Burry has been saying, where he’s concerned that the data centers are taking too long to come online. They’re buying so many chips. His opinion is the chips become obsolete way faster than the depreciation schedules.

Steve Eisman

I understand his argument. So let me give it its due first. What he pointed out last year, I think in November, was that the hyperscalers had changed the depreciation schedule of the chips from three to four years to like five to six years.

And if you did like a cal, I can’t remember exactly what the calculation, but it’s an enormous increase in profitability just from the change of that accounting. Because by changing, right, it’s like, click, by changing your depreciation schedule from three to four years to five to six years, by definition, your depreciation expense, which you report, is going to be lower, all other things being equal. He also said that, you know, there’s so many new chips coming that they become obsolete.

Where I think he’s wrong for the moment is that there is such demand for chips right now that there’s still huge demand for the older chips whose price has gone up with all the other chips.

Speaker 4

Right.

Steve Eisman

So I think with all due respect to Michael, I think his argument is too academic.

Speaker 4

Okay.

Steve Eisman

Like put this way, if AI succeeds because Anthropic and OpenAI, you know, grow like crazy and the hyperscalers do well, et cetera, et cetera, it’s not going to matter if the depreciation schedule changed from three to four years to five to six years. Right. At the same time, if open AI fails and the whole chain goes in reverse, we’ll have a massive correction, which has nothing to do with the depreciation schedule. I don’t, I mean, I think what he’s, deep down, what he’s just trying to point out is maybe there’s something wrong here. But I don’t think the thing that he’s pointing to as being wrong is what’s going to, is important enough.

Speaker 4

Right. There’s bigger factors at play in both directions.

Steve Eisman

Much bigger factors.

Speaker 4

Okay, interesting. So we’ve spoken about no moats. We’ve spoken about China coming in, potentially being competition.

Another headwind that I’ve been trying to wrap my head around more is the power element as well. Because this is another one of those big things that we’re talking about earnings and chips and this and that. But when I started to look at power, I think it was Elon Musk’s interview with The Economist that opened my eyes up to it.

He said, China has a chip problem. The US has a power problem.

Steve Eisman

He’s right.

Speaker 4

However, in his view, China can solve its chip problem. It might take some time. But a harder one to solve is the power problem because power is physical infrastructure. It takes a long time.

Steve Eisman

Correct.

Speaker 4

I don’t know if I have the expertise or the understanding to know how big of a restraint or a bottleneck power in the United States is actually going to be.

Steve Eisman

Get in line. Nobody knows. Right.

I mean, I keep looking. You know, there are people who say that things are slow. There are other people who say that things are fine.

I can’t I can’t nail it down yet,

Speaker 4

right? Okay,

Steve Eisman

I mean I do know that the companies that are involved with power Are doing great like G even over for all the stocks gone nuts, you know, I’ll pat myself a little bit on the back I bought that stock really early, but I bought it because the cell side analysts I’m very friendly with told me I should buy it. I took a flyer on it. Yeah, but um

Speaker 4

For those that don’t know G even over tell me. So let me tell you this is very interesting.

Steve Eisman

So used to be composed basically of three massive divisions. Healthcare, aerospace, where they basically make the jet engines for planes and then they service them. And then call it energy. If you ever saw a jet engine and looked at a gas turbine, which is what goes into a utility that creates electricity, they look exactly the same. It’s just that the gas turbine is much bigger.

Speaker 4

Yes.

Steve Eisman

But it’s basically the same technology. So the energy division of GE makes gas turbines. They have all this electrical equipment that they sell.

And then they have a wind division, which does terribly. Now, this will show you how fast the world can change. The energy division was created when, I think, around 2015 or so, GE bought a company in Europe called Alstom.

Now, Alstom was an energy company that also created gas turbines. And GE had a business that created gas turbine, so they pushed them together. Just in time for the entire gas turbine business to fall apart.

Speaker 4

Right.

Steve Eisman

And this is why Jeff Immelt, who was the CEO of GE, finally lost his job. Because that was like enough already. So eventually, all three divisions got spun out.

So there’s GE Healthcare. I think its symbol is GEH. And there’s the Energy Division, which is called GE Vernova, which is GEV.

And then there’s GE which is the aerospace division gotcha a year before G even over got spun out so that would have been like 2023 maybe or 2022 if you were to read sell side reports upon about the industry the energy business was so bad That they ascribe negative value to G to to verno negative value that it was worth negative Think of when one guy wrote it was worth negative $3 billion in terms of the sum of the parts analysis. Now, what’s happened is even prior to the whole data center thing, electrical production in the United States finally started to increase for the first time like in 15 years. Now, Ed, on top of that, the data centers, and you’re talking about U.S.

electricity growing 3% to 4% per year. Now, that may not sound like such a huge number, but 3% to 4% off of the base of the United States is the equivalent of like two large cities.

Speaker 4

Okay, it’s a lot.

Steve Eisman

It’s huge. Yeah. You know, a company like GE for Nova has backlogged like 2035. That’s how crazy things are.

Speaker 4

Because this is how these data centers are being powered. It’s with these gas turbines, right?

Steve Eisman

Mostly.

Speaker 4

Mostly.

Steve Eisman

And there’s some alternatives. People are talking about nuclear. And there’s a company called Bloom Energy, which makes its own little turbine that you could hook up to a data center. But most of it’s going to be through gas turbines.

Speaker 4

Well, that’s what Elon had to do with the Colossus data center that he built in Memphis. The grid was too slow. It was not ready. So he ended up getting 35 of the portable gas turbines.

Steve Eisman

Right. And hooked it up. He hooked it up.

Speaker 4

He created his own mini power center on site. Exactly. Okay. So most of G.I. Vinova is these.

Steve Eisman

Well, it’s the gas turbines. It’s all the electrical. I mean, think about it.

I mean, there’s, you know, you’re not just, when you’re building a new utility plant, it ain’t just turbine. There’s all this other electrical equipment that’s got to get hooked up. They make that too.

And the wind business will always, I think, be a crappy business. Okay. And that, so what?

Speaker 4

Right. Okay. Very interesting.

Very interesting. But you would say the thing to look out for in G. Vanova’s case is the gas turbines. Is that the core of that?

Yeah.

Steve Eisman

I mean, that’s the core. And then you would just want to look at the orders.

Speaker 4

Yes.

Steve Eisman

Which I think in the last quarter, we’re up like 85%. Yes. Something insane.

Speaker 4

I mean,

Steve Eisman

there’s those gas turbines like in the room that we’re in. It’s like five of these rooms combined is how big these things are. They’re huge. I mean, it takes years to build them.

Speaker 4

Yes. Well, that’s what I was going to say. I think I read something that their backlog is stretching out to past 2030 or something. Yes, it is. Which is just.

Steve Eisman

Well, because people want to line it up as much as they can.

Speaker 4

But is that even more of an argument for this power problem? If people are making orders now, we want these turbines now. Hang on, well, we’ve got 2030.

Steve Eisman

I just don’t know. I really don’t know. I don’t have enough information.

Speaker 4

I can’t remember who it was that you interviewed, the man that knew it was about power, but I found that was a really good interview. I might leave it linked on screen right now, but I thought that was a really, really good explanation. Okay, so we’ve covered a lot of headwinds when it comes to AI.

I think you went on the record saying that if you try and predict what’s going to happen, you’re a fool. So don’t try and predict it. I think there are a lot of people out there that feel compelled to look at these AI plays, to look into the realm of AI.

If someone comes to you and says, oh, look, Steve, I really got to get in on AI somehow. What are some of the maybe safer ways to play AI? And what would you say are the high risk ways to play AI?

Talking about just investing in stocks.

Steve Eisman

I mean, I would play, I wouldn’t invest in an LLM. Because I just think, as I said, there’s no moat. I would not. Oh, I would not. Because there are no moats.

Speaker 4

Yeah, that makes sense.

Steve Eisman

I might be a little wary of the hyperscalers at this point, just because their businesses have, they’ve lost all their cash flow. But I would be looking at the companies that are getting that cash flow.

Speaker 4

Right.

Steve Eisman

So, you know, that would be NVIDIA. You know, maybe you’d want to own Micron, GE Vinova, Arista Network, Cisco. And then if you want to get into the industrial side, you could talk about like an Eaton, which is an electrification company. That’s what I would look at.

Speaker 4

So it’s more picks and shovels.

Steve Eisman

Picks and shovels.

Speaker 4

Right. As opposed to the flashy software side.

Steve Eisman

Right.

Speaker 4

Okay.

Steve Eisman

The software, you know, the whole software industry, I mean, I’m sure you’ve heard the word saspocalypse.

Speaker 4

I have.

Steve Eisman

And all I know is there will be software companies that will have problems. Because, you know, take this new agentic AI muse, I think it’s called, that meta put out. You know, if I want to book a flight, I say to my muse, oh, that’s good. I say to my muse, I want to book a flight to Miami. on such and such a date book me in the best hotel in Brickell and it goes and does it well how does it do it it goes on all the travel sites and finds the best price and books it well that kind of makes the travel sites worth less because you’re not going to bookings or Travelocity or whatever directly anymore you’re not their customer anymore your ai you’re ai my ai agent’s my customer and he does the work and the sidebar ads don’t work so stuff like that i think stuff in the payment world could get dicey but on the other hand you know software that’s deeply embedded in enterprises is probably well

Speaker 4

that’s what i was going to ask you it sounds like the most important thing to look at is the

Steve Eisman

switching mode and how how resilient how resilient is it okay i mean you know for bookings what’s the switching mode. I go on the bookings website and I book a trip. So now I don’t go on the bookings website.

My agentic AI finds just the best deal. So that kind of makes the travel online companies worth less, I think. It’s a little early, but I think that’s a possibility.

Speaker 4

Yeah. Okay. So I guess another argument that I’ve heard, I’m interested to hear your overarching thoughts on this around AI is people are very fast to liken it to 1999, a tech bubble 2.0. You know, that’s what the media will say.

Steve Eisman

Right.

Speaker 4

I’m very interested in what your thoughts are on this. I have my own opinion, but I’m interested to hear what you think. We’re in the same setup, new technology, speculation in financial markets, similar setup. Is it different this time? Is there anything fundamentally different?

Steve Eisman

I don’t know if it’s different or not. I think it’s too early. I mean, if open AI or an anthropic fail, you’ll have a real correction.

And then the next generation of people will come up and pick up the pieces. I don’t know if that’s going to happen or not. I just don’t know.

Speaker 4

Fair enough. Going back to the investing argument, I’m actually interested because I didn’t ask you last time and I had some subscribers that are interested in understanding how you actually go about your investing, not what stocks you’re picking or anything like that. But when it comes to the real Eisenman playbook, what is the real Eisenman playbook? How do you analyze companies?

Do you stick within a circle of confidence? Do you go down rabbit holes? Do you look at certain financial metrics that you really love to see or not? Well,

Steve Eisman

a couple of things. I’m very story oriented story okay I am not a quote-unquote value player I think okay you know stocks are cheap they’re probably cheap for a reason you know I

Speaker 4

can’t see you being someone that will grossly overpay for something either I

Steve Eisman

see you as a person I mean I would have loved to have owned Palantir but I won’t buy it now because it’s so expensive yeah so story but very story story of a Irrational.

Speaker 4

Okay. Is there anything, are there any kind of metrics on your checklist or anything that you love to look at that might be a red flag? I’m just interested to see like what you really look for. Is a moat like a must have for you?

Steve Eisman

Not necessarily. I like a moat. That’s why I own Moody’s, for example. That’s why I own Visa. But it’s not a complete requirement. So no.

Speaker 4

Is there anything that you particularly hate to see in a company? What are some things that will instantly turn you off?

Steve Eisman

Management selling stock.

Speaker 4

Okay.

Steve Eisman

I generally don’t like cyclical companies.

Speaker 4

Okay.

Steve Eisman

Because then you’re just predicting the economy. I mean, there are exceptions, but I like companies that have a real story with real growth tailwinds. Right. That’s what I like.

Speaker 4

Okay, interesting. Hey, do you mind if I finish off by asking you some questions from the audience? Sure.

Is that all right? All right. I had a quick screen, but I might have forgotten some.

All right. Oh, this is a really interesting one. I did want to get your opinion on this.

US debt. This is such an interesting topic and it’s very, very, very highly covered. So it’s at $40 trillion now.

The average interest rate on it has gone from 1.77% in 2020 to 3.45% today. The interest expense has risen from $523 billion a year to now $1.22 trillion. Is that something investors need to be genuinely worried about?

Is there a real risk of a debt spiral in the future?

Steve Eisman

I mean, all the things being equal, I wish the deficit was smaller.

Speaker 4

Yep.

Steve Eisman

I have my doubts about a debt spiral. Number one, we are the reserve currency of the world. But maybe even more importantly, US treasuries are the financial system of planet Earth.

So just for example, banks all over the world do something called repos, where they lend to each other overnight. They do it through overnight treasuries. So as long as the U.S. Treasury is the backbone of the financial system of the world, I tend not to worry about the deficit too much, although I’d like it to be smaller.

If there was an alternative, we’d be in trouble.

Speaker 4

Okay.

Steve Eisman

But there is no alternative at this point.

Speaker 4

Let me ask you this. The Fed just raised rates for the first time in three years. Are rates likely to be a showstopper for the market and in particular the AI narrative?

Steve Eisman

The rate to look at is the 10-year. It’s the long-term rates, not the short-term rates that the Fed does because that’s what people borrow.

Speaker 4

Okay.

Steve Eisman

The Fed funds rate is the rate at which the Fed lends to banks overnight.

Speaker 4

Okay.

Steve Eisman

You don’t have access to that. Neither do I.

Speaker 4

Put that to the side.

Steve Eisman

Yeah. So just today, for example, the markets rallied because despite the Fed raising rates, the 10-year yield went down. I’m getting the feeling that 5% is sort of the Rubicon for the market. And as long as we’re below that, we’ll probably be OK. But if something were to happen and we blow through that, I think we get a correction.

Speaker 4

OK. Because it’s around? That’s just my guess.

Steve Eisman

I actually thought originally the number was 4.5%, and I was wrong. OK. But five feels more right.

Speaker 4

Do you know where it is now? It’s around there.

Steve Eisman

It’s 4.98.

Speaker 4

4.98, okay.

Steve Eisman

But it was over 5% yesterday. Yes. And it’s come back down. People are watching every tick.

Speaker 4

Yes, interesting. I’m interested to hear Steve’s thoughts on, here we go, rising yields of long-term treasuries. Is Scott Besson’s buyback plan really designed to increase liquidity in older long-term bonds? Or is the government trying to manipulate long interest rates to ease their interest problem?

Steve Eisman

The latter. He’s trying to buy long-term treasuries to bring rates down to ease The cost of money for the United States of America He’s failed miserably at this point You know rates are higher than when he made his announcement I have a suspicion that he’s gonna come with something else because well he announced six billion Six billion is nothing. It’s a 40 trillion dollar deficit.

Speaker 4

That’s that was my thought.

Steve Eisman

So I I don’t think he’s an idiot So I think he’s gonna come with something else. What else that is. I don’t know.

Speaker 4

Okay So a different plan of attack to do the same thing. Yes. Okay. Okay I’ve always been skeptical about precious metals But Steve’s recent discussion with Porter Collins and Vincent Daniel made me second-guess that I would like to know if he has any Conflicting feelings about precious metals or is he still firmly opposed to the asset class?

Steve Eisman

I’m not opposed, but I’ve never owned it

Speaker 4

Yep,

Steve Eisman

I’ve never owned it. It’s not something that has ever really enticed me one way or the other

Speaker 4

Similar thinking to Warren Buffett. It just sits there and looks shiny.

Steve Eisman

It does nothing.

Speaker 4

It does nothing. It’s not productive

Steve Eisman

It has value because people say it has value.

Speaker 4

Okay,

Steve Eisman

that’s all so it doesn’t pay you an interest rate

Speaker 4

Similar argument I’m guessing to Bitcoin and anything else that sits there. Oh, definitely baseball cards blah blah blah

Steve Eisman

Whatever sits there Bitcoin is worse Bitcoin is worse.

Speaker 4

Yeah

Steve Eisman

Bitcoin is worse because it trades inversely to its own thesis.

Speaker 4

Yes, I have noticed that that is quite strange

Steve Eisman

So for those for your viewers what I mean by this explain what I mean by that is people like if you went to a bit coiner and you said dude Why do you want Bitcoin? The answer you would invariably get is that that fear currency, which is government currencies have been debased Inflation is coming and you want to hedge against this. So buy Bitcoin. Okay, that Sounds reasonable. The problem is that if that were the case on days where people worry about inflation Rates are going up and the stock market goes is down Bitcoin should be up and on days where Nasdaq is up like crazy and rates are down Bitcoin should be down But it does the opposite So so you know you you say that Bitcoin is gonna go up one because when the sky is blue And then the sky is blue and it goes down, you know, why do I own it? You have no thesis It seems to be just a speculative asset just like it’s a way to speculate about speculating

Speaker 4

Speculate about speculating. I like that. All right. Let me ask you this.

Dear Steve, you seem to be very much centered on the US stock market. Have you ever tried to broaden your investing or trading horizon geographically? Do you have any interesting companies held outside the US?

Steve Eisman

Great question. When I used to run my hedge funds, I used to invest overseas. And I found that there was no night and there was no day.

Speaker 4

Okay.

Steve Eisman

So for the last many, many years, all I do is the US and I’m perfectly happy. There’s plenty to do in the US. I don’t feel the need to invest overseas.

Speaker 4

Fair enough. Plenty of opportunities here. I like it.

What’s his view on when all these wars would end? I guess particularly the Iran war. Do you see inflation coming down anytime soon?

Steve Eisman

I have no more insight into the war than anyone else. So I can’t answer the question.

Speaker 4

Fair enough. Well, I think that is just about all we’ve got. Is there one more?

Is there one or a set of numerical indicators, whether related to interest rates or inflation or unemployment or otherwise, that Steve could see as being the tipping point for to take its medicine with cutting benefits or wash spiking rates up or whatever he thinks that medicine might be. I’ve seen it said that oil will rise until stocks fall, meaning that the US won’t get out of Iran until stocks really take a beating. But this is a much broader question about getting the debt back well under control.

I guess we kind of touched on that with the 10-year.

Steve Eisman

All I would say is that’s a total political question. And there’s no political appetite in Washington right now to cut the deficit a dollar by either side.

Speaker 4

We’ll see where that goes. I think that’s just about how we finished our last interview. I was like, on that cheery note.

So again, on that cheery note, Steve, thank you very much for coming on. For those that don’t know, well, we talked about it earlier, but the Real Iceman Playbook is what you’re currently working on. That’s your podcast.

Can you tell us a little bit more? What can people expect from that?

Steve Eisman

It’s week. So one is an interview. And then the other one is a market wrap, where on Friday, I put out like a summary of the whole week. And then if you’re willing to pay for the paywall on Substack, we do an additional podcast, which is sometimes an interview. This week was part one of two-part master lecture of how to analyze banks.

Speaker 4

All right. Yeah.

Steve Eisman

So if anybody, whoever, but you have to subscribe.

Speaker 4

Okay. I will subscribe. No free lunch. No free lunch there. city here.

Steve Eisman

But if you want to know how to analyze banks, that’s where you should go.

Speaker 4

Awesome. Steve, thank you very much. Thank you very much. Appreciate it. Great.

Steve Eisman

Bye.

Speaker 7

Yes. You’re the man now, dog.