Managing The Situation

0:00This is an iHeart Podcast. Guaranteed human. Financial growth begins long before the first investment. It comes from understanding what you're building toward, what's at stake, and what success looks like for you. At Oppenheimer, we bring bold thinking guided by the full strength of our expertise to put capital to work building and protecting wealth that lasts generations. Put the power of Oppenheimer thinking to work for you. Wealth Management, Capital Markets, Investment Banking. This is Jacob Goldstein from What's Your Problem? Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other.

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2:09This product is not intended to diagnose, treat, cure, or prevent any disease. CallZone Media. Hello and welcome to Better Offline. I'm your host, Ed Zitron.

2:25This week is monologue week, by which I mean I had a guest pull out last minute, and so you have to hear me talk about stuff. As ever, subscribe to the premium newsletter. There's a discount link in the notes. It means a lot to me. It's my main source of income, along with the podcast. And like and subscribe if you're on YouTube. Or toss me a glurt on Sloob if you're on Sloob. I'm also on Pwik and Dwork. Anyway, today I'm going to talk about a problem in basically every part of the world. Managing situations versus actually dealing with the complexities of the world itself. A couple weeks ago I wrote a piece called Hyperscale Normalization, inspired, as you may have guessed, by the Adam Curtis documentary, Hypernormalization, where he describes, and I quote, a world where, over the past 40 years, politicians, financiers, and technological utopians, rather than face up to the real complexities of the world, retreated.

3:18constructing what he calls a simpler version of the world in order to hang on to power, with the world going along with it because the simplicity was reassuring. It's a two and a half hour long documentary, but it comes down to a simple point, that we as a society manage problems rather than dealing with the messy and complex elements of the world around us, putting off problems again and again under the assumption that they'll disappear if we do so enough times. We use the system to manage these problems rather than actually eradicating them or dealing with the conditions. And of course, they never actually disappear.

3:52The problems actually compound. Let's take the subprime mortgage crisis, for example. While post-2008 financial regulations, Dodd-Frank and the now-weakened Volcker Rule theoretically helped curb some of the excesses that led to the great financial crisis, most of the people involved remained both wealthy and employed. blissfully unblackballed from the world of finance or indeed by the media in fact i can find nobody of that time in the media who was ousted or even really critiqued for how badly they fucked up while financial institutions and companies saw over 14 trillion dollars in bailouts only 46 billion dollars about 10 of the tarp plan focused on trying to save homeowners from foreclosure, and in the end, to quote a congressional panel from 2009, there was no evidence that the Treasury has used TARP funds to support the housing market by avoiding preventable foreclosures.

4:49Government funds were used to manage a systemic crisis by making sure the system survived, rather than building a better society, or fixing the system, or really doing anything more than the Dodd-Frank and Volcker-style stuff that really only slightly gnawed on the problems rather than chewing them up and eating them, because doing so, feeding the system money, cleaning up its messes, explaining away its successes, is easier than having any kind of vision or ideal to aspire to. Doing so strips out, to quote Curtis, the intractable complexities of the real world by creating a simpler one, one where the system works that progress always flows through following the course of, often poorly remembered, history and backing whatever the system trumpets that moment.

5:34Everything ultimately returns to a point where someone will say the system has worked this long and things always work out in the end, even if they really haven't done so. Because thinking of an alternative, even as you see proof point after proof point that the system is not functioning right and keeps having crises created, is near impossible due to the prominence of the dogma and confidence from those in power. the great financial crisis was managed by dropping interest rates to zero and bailing out banks and automakers and basically any systemic companies that would pose a risk to america or various societies rather than the people in the societies covid was managed by the loosest lockdown protocols possible giving businesses hundreds of billions of dollars via the paycheck protection program and just to be clear only for salaried salaried employees rather than contractors giving banks and financial institutions trillions of dollars via the very same systems that were used in the great financial crisis and basically doing absolutely nothing to fix the actual problems that covid kind of exposed the wealth inequality racial injustice discrimination these things mostly were just kind of pushed off to the side companies picked up dei as long as necessary to appease markets that believe there was actual social change without actually ingesting it At no point was the system itself significantly altered, such as creating Medicare for all or a social safety net or making price gouging illegal, which meant that the problems didn't really go away so much as they were managed The net result was that in 2021 the financial system got saturated with easy money, trillions of dollars of capital that made the rich richer and the poor poorer meanwhile corporations have been using supply chain crises in the specter of inflation to raise prices across the board though it became obvious that the real reason was sheer unabated greed with companies posting record profits to soak up the cash from a frothy society excited to be back in the real world a real world that had materially changed since the beginning of covid but no one really wanted to acknowledge that by the end of 2022 the federal reserve would raise interest rates by a dramatic 4.25%, leading to tens of thousands of people losing their jobs in the tech sector alone.

7:50And things have never really recovered. Regular people have spent years watching the price of goods increase due to inflation, even after those interest rate bumps, despite the fact that the increase in pricing was mostly driven by, get this, corporations raising prices. Yet some parts of the legacy media spent an alarming amount of time chiding their readers for thinking otherwise, even going against their own reporting as a means of providing balanced coverage, insisting again and again that the economy is good, contorting to prove that prices aren't actually higher, even as the companies like Pepsi boasted about literally raising their prices.

8:27In fact, the media spent years debating with itself whether price gouging was happening, despite years of proof that it was and actually continues to this day. The system, by which I mean the conjoined forces of the media, the markets and the American government, focused on aggressively forcing everything back to where it used to be, or at least making it look that way. When things were rough, it pumped money into the system. When things seemed too frothy, it made that money harder to come by, which ended up punishing regular people for the largest part. For the most part, regular people in general were punished for the excesses of the system itself.

9:03When they took advantage of remote work, job flexibility, and purchasing power, they were told they were lazy, that they were wrong, that this was temporary, and that in fact they were too greedy with what they were generously given, and indeed expected too much from society. The continued perpetuation of the system is always right ultimately led to the media near completely detaching from reality. A regular person experiencing aggressively worsening standards in their own lives would open the news only to be sneered at for feeling bad, mocked for questioning the numbers, told to sit down and shut up because the media and those that informed them knew better.

9:42After two years of hope and abundance, the world and the system itself attempted to revert everyone back to the before times, all without the veneer of prosperity or progress or, indeed, never going back. In other words, a regular person's form of reality was a confusing mess of social media, alternative media, mainstream media, and governments that seemed intent on saying that either everything was fine or that there was a specific thing to blame, usually a foreigner or some sort of listener or reader themselves, or really just people expecting too much. No critiques are levied at the system itself or the choices made by it or the way in which the media chooses to cover systemic movements, because to do so is considered either stupid, because the system always works, right, or hopeless, because the system is just so powerful.

10:43The world is transforming faster than ever, and standing still isn't an option. At Oppenheimer, we're working at the forefront of the innovation economy to invest where progress begins, finding opportunities that build and protect wealth for individuals and institutions that want a seat at the edge of tomorrow. Put the power of Oppenheimer Thinking to work for you. Wealth Management, Capital Markets, Investment Banking.

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13:05So what does this have to do with AI exactly? Okay, so I want you to think about how people defend the AI industry for a second. When you do that, it's all going to begin to make sense. If you talk about how OpenAI and Anthropic are losing tens of billions of dollars a year, you'll get told that Uber and Amazon Web Services lost a lot of money, Even though both of those services burned, what,$30 billion each? And in Amazon Web Services' case, it was$29.7 billion of total capex between the year it started in 2003 and the year it became profitable in 2015. Doesn't matter, though. Doesn't matter.

13:44The system's always right. If you say that generative AI's hallucinations make massive mistakes that make LLMs inherently untrustworthy, everyone will tell you it's the early days. If you say you're not finding use cases, you're castigated. You're told actually you need to use it more so that you can find it useful. This artificial intelligence is actually kind of stupid, but it's also super smart. You see, it's smart enough to do stuff if you make it do it, but not smart enough to actually help you in the way that we associate with software, or indeed, the memetic form of artificial intelligence.

14:21if you critique basically anything about generative ai you're given a shot of systemic apologia it's early it's just like the early days of the internet these are the smartest people in the world these are the richest and largest companies in the world and otherwise you need to shut the fuck up and trust the process because that's what's always worked even those who are anti-ai fall into the same systemic traps the amount of times i hear from people suggesting that this is a massive multi-trillion dollar data center build-up that's actually a big secret government surveillance program well those people are falling into the very same systemic thinking believing that because a bunch of money is being spent on illusory demand and circular financing that in fact the system isn't stupid that these companies aren't dumb that actually there's a big plan.

15:14The smart people running the system have a big secret plan. They don't, just want to be clear that they don't, but this is again convenient systemic thinking, because when you don't think in this way, well the real world seems kind of insane. Yet every systemic failure has come from a lack of any real plan, strategy or forethought. The great financial crisis happened because everybody assumed that the system had everything covered, that the financial institutions had hedged their bets correctly, that everybody made sure that these were high-quality investments, that anyone with an adjustable-rate mortgage would be able to refinance it or sell their ever-appreciating house.

15:54Mantra after mantra, based on a lack of curiosity and complete faith in the various systems that would eventually fail them, as they had failed before. We are watching the very same thing happen again with AI. Yesterday, the Financial Times reported that bankers for OpenAI and Anthropics IPOs were seeking investment-grade ratings for both companies, bushing agencies to rate two unprofitable, unsustainable companies as if they were, well, real companies. Per the FT, the argument is that the two companies' public listings would unlock vast amounts of liquidity and improve the health of their balance sheets, By which they mean, by giving them access to lots of debt, both OpenAI and Anthropic would be able to take on lots of debt.

16:39That's really it. This is a deeply dangerous way of managing two companies that will eventually run out of money. Anthropic and OpenAI will need hundreds of billions of dollars a year to meet their$1.3 trillion of compute commitments. And even if they're somehow rated investment grade. And by the way, S &P, Moody's, if you're listening, if you fucking do this, you deserve nothing but suffering. If any of you have any chance you hear this, fuck you guys. You're going to do it again, aren't you? But let's say they become investment grade. They're going to need so much debt. So much debt with onerously high interest because there'll be one rung above junk.

17:20which means that unless they magically find ways to become profitable and generate massive amounts of cash i don't see how they service the debt they're going to need and i must be clear their compute commitments open ai is expected to spend 750 billion dollars through 2030 how do they afford that they lose tens of billions of dollars a year i'm considered a firebrand for asking these questions. And these companies, like I said, have over$1.3 trillion in compute commitments, which means, like I said, they're going to own hundreds of billions of dollars of compute payments by 2030. An unbelievable sum that dwarfs the operating expenses of Meta at around$141 billion a year, and Microsoft at about$175 billion a year.

18:09In fact, based on the projections, since I'm pretty sure Anthropica OpenAI is going to spend more than those two numbers combined at some point. And when I say spend, intend to spend. They're going to need the money, which they don't have. Both companies are seeing growth decelerate, and 80 % of their enterprise revenues per ramp, as I discussed last week, come from the top 1 % of their customers, who are predominantly unprofitable AI startups that are subsidizing their users' AI token spend, meaning that for every dollar a user spends in subscriptions on these services, they're able to burn several dollars in AI tokens, with all that money flowing back to Anthropic and OpenAI, who are also supported by venture capital funding.

18:48The same venture capital funding that their customers need. Hmm. Any attempts to mark OpenAI or Anthropic as investment grade will simply delay the inevitable point at which they run out of money. This wouldn't have been the case if these AI labs were much smaller companies or at much smaller losses, or, to be specific, hadn't signed$1.3 trillion of commitments. Said commitments are also take-or-pay agreements that mean that regardless of whether they have the demand to actually need the data centers, Anthropoc and OpenAI will have to pay Amazon, Google, Microsoft Cerebris, CoreWeave, or any number of other providers once the capacity comes online.

19:26If they can afford it, that is. However you may feel about me or the greater AI bubble is immaterial to the fact that everything will seem like it's fine right up until somebody can't raise money and make a payment to either a Neo, Cloud, Hyperscaler, or AI lab. For this to keep working, AI startups must continue to be able to raise hundreds of billions of dollars every few months to make single-digit or tens of billions of dollars a month. All as Anthropic and OpenAI must also continue to raise tens or hundreds of billions of dollars to pay hyperscalers for computes so that they can, in addition to raising hundreds of billions of dollars of debt, spend that money on GPUs from NVIDIA and TPUs from Broadcom, who can only continue to make hundreds of billions of dollars a year in revenue as long as they can either provide justifications for lenders to keep issuing those hundreds of billions of dollars in debt or backstop the data sent as the debt will get spent on.

20:17In other words, the AI bubble is based on the whims of maybe a few hundred companies spending money on two companies to justify five companies spending money with one company, or two if you count Broadcom, which you don't have to if you don't want to. I don't like thinking about Broadcom or Hocktan very much. anyone who tells you not to worry about anthropic a company that loses billions of dollars a year if not tens of billions of dollars a year and has made 517 billion dollars in commute commitments is a con artist and anyone who prints a quote saying that you shouldn't have to think about it too hard or you shouldn't have to worry about it or that this is just like the dot-com bubble really doesn't give a shit about whether you live or die but that really is the current state of the tech industry.

21:02A death cult obsessed with growth, empowered by a media ecosystem obsessed with measuring and celebrating how much it's growing and what might grow it in the future. Always framed in the terms set by the rich and powerful. The failure of everyone here to meet this moment with clarity and purpose will lead to a market correction that dwarfs the dot-com bubble easily, exposing many of those involved as a phony, a fraud, an imbecile, a ghoul, a coward, or utterly impossibly ignorant. Anyway, I'll be back Friday with another monologue. I love you all.

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22:53Loved by high-growth startups like Granola, Modal, and Etched, Adio runs the work behind everyone. That's Adio, the agentic CRM, the intelligent system that never sleeps. Picks up leads at 2 a.m., catches renewals before they slip. Hands you the answer before you ask. Try Adio free at adio.com slash iHeart. That's adio.com slash iHeart.

23:19With LPL Financial, we provide the services to help push you forward. When it comes to your finances, your business, your future, the only question should be, what if you could? Paid advertisement, Anna Kendrick, is not a client of LPL Financial LLC and receives compensation to promote LPL. Investing involves risk, including potential loss of principal LPL Financial LLC member FINRA, SIPC. This is Jacob Goldstein from What's Your Problem? Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting.

23:47That's software overload. Odoo is the all-in-one platform that replaces them all. CRM, accounting, inventory, e-commerce, HR, fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you? Try Odoo for free at odoo.com. That's odoo.com. This is an iHeart Podcast. Guaranteed human.