Ep20. AI Scaling Laws, DOGE, FSD 13, Trump Markets | BG2 w/ Bill Gurley & Brad Gerstner

28:45And I could even imagine a communication network. The status of a traffic light, for example, should there's no need for that to be inferred. I mean, we're going to use how much compute to look at the light and determine whether it's red or green. That's a state machine. It's either red or green and that can be known. And so you could, as you build these intelligent systems, start to have the state of different things. And which could include road openings and road closures and construction work that's going on in traffic and all kind of other things that should be built into the system as well.

29:25So I do think that I do think a national kind of standard could be great. It could also be really bad. Like if you get over regulation in this massive stuff that ever in the incumbents might just use it to protect themselves. But my own belief is that you've got Waymo who's got the most cars running autonomously on the street right now. Tesla who's got all the advantages. You just talked about you've got Uber who's got this huge network of users. Unless certain who the next player is after those three that's got a strong argument right now. Oh, actually, that is in the US. Obviously, China has tons of autonomous driving products on the street as we speak.

30:15Let's talk about that because I think that's an interesting question. Kind of a market structure question that I've been thinking a lot about lately, Bill. Certainly on the public fund side of our business, right? When I have a disruption of this magnitude in an industry that's a multi trillion dollar industry that has 20, 30 different public players in the supply chain, OEMs, et cetera. Like I just start thinking who are the winners and who are the losers here, right? Exactly how it's feeling in 2008. You see the iPhone. You've got Nokia, you've got Motorola, you've got Blackberry, you've got all this stuff and you're like somebody's winning and somebody's losing.

30:56I remember my mother didn't understand the concept of shorting, right? And 2009, I tell her to buy Apple and to short Nokia and that was my kind of canonical example for her and it worked out okay. It actually went against her first, but then it worked out okay. Let's just talk about OEMs for a second. I think the consensus view in the world is that all these OEMs, so I'm talking the US OEMs, the Stellantis, the GMs, the Fords, the Europeans, the Volkswagen, the BMWs, the Mercedes, the Japanese, the Toyota's, et cetera, the Chinese, that FSD becomes a commodity and that they all end up with some version of it.

31:45Maybe there's one provider like Nvidia or mobile I or somebody else who's providing this capability into these cars and that, you know, think of that as maybe like this Android version that they're all going to, this box, they're going to plug in their cars and they're all going to go compete, you know, as though they were before with Tesla. That's one version of the world. The other version of the world is that this is a tectonic disruption that Tesla currently sells two million of the world's 80 million cars. But in the future, this isn't going to be about buying a car. This is going to be about a mode of transportation and that Tesla could end up restructuring the entire industry, end up being tens of millions of cars.

32:31You may only have two or three or four global players, which, you know, we have in a lot of other industries. And so the question I have for you is, do you, you know, what is your pattern recognition? Do you think that we're going to have all the same OEMs? They're all going to have some system. It's going to be basically commoditized. Or is this an extinction moment for some of these OEMs? Such a hard question. I mean, there are so many different ways this could play out. One of the things that I questioned in my mind is who's going to own these vehicles. And so, you know, on one hand, you have the way most situation where they own all the cars.

33:12But they also know what that means from a CapEx standpoint. And if you, if you look at the subtleties of the kind of the statements they've made in conjunction with Uber, they're at least going to experiment with some models where maybe they don't have to pay for all the cars or licensing their technology to the other OEMs that we talked about. And, and people I've heard Darra talk about that Uber talk about, you know, maybe, you know, large, you know, debt companies get behind and own these things like maybe the containers work on a in a rail yard, right? Like who owns these things? They move around but someone owns them, right?

33:51People lease them. So that's a big question, you know, and the Tesla argument is that they'll just be owned by the people that own the Tesla, which is, it's great from a Tesla doesn't have the CapEx burden, everybody else has because they've talked them into buying these cars. But what's percentage of people are going to lease out their car every day? That's what you guess. I have no idea what to put on that number. I mean, Airbnb does exist. So it's maybe not zero, but most of us still have our own house, right? So, what is it fall? I think, you know, my own hunch on that is that it's going to be a higher percentage, particularly as the price points on the cars fall, right?

34:35Now they're leasing cars for, you know, 200 bucks a month. And as those subscription prices fall, I think you're going to have a whole category of people who don't mind it all, right? Earning incremental revenues on their car. I imagine they've done internal survey work on this. And I think if you look at the places where bill they're likely to launch the robotaxi number one, it's going to be in market places where they have sufficient safety, right? So where they have a density of data that tells them they can put it in robotaxi mode and they won't have any problem. I think that could be somewhere like maybe the Bay Area somewhere like Austin.

35:10And then secondly, it's going to be a market where they have a lot of Teslas sitting on the sidelines. So they come seed it with 25 or 50 Teslas. But in both of these places, they happen to have Tesla factories. There are a lot of people with Teslas. And there are a lot of people who would drop them into the pool. So those will be good test markets. But if I think of a market bill like New York City, right? New York City seems to me to be a problem because there's massive demand for cars in New York City, but there aren't a lot of Teslas sitting around latent, right? They can be tapped into for supply.

35:41So I don't think it will work equally well in all markets, but I think it is a massive advantage. Remember out of there, I think they may have seven million cars on the road today, something like that, about two and a half million of those, I think are hardware four. And it's going to require hardware four in order to run all these cars. So, you know, we're really talking about a multi year undertaking. But if you said to me over under on, you know, middle of next year where we have evidence of a single market or two where Robotaxi is working, I think we will. I'm going to take the over on that.

36:15And that is a huge difference from where the world was 18 or 24 months ago. I just really don't know what percentage of people let their cargo out. You know, Turo exists. It's tiny. Like tiny compared to what we're talking about. It's a nice business, but that's where people let's. But everybody who wants a Tesla has Tesla app on their phone. And all they have to do is toggle says, yes, this time's a day. I just think if they make it easy enough, it could surprise us. But it comes back and it smells a little funny. You know, you, you, your wife says, honey, I really need you to go out to the drugstore right away.

36:55I've got this problem and you're like, I left the car. She's like, what? And then like, I just, Well, you know exactly what's going to happen here. The arbitrage is the same arbitrage you and I saw in Uber, right? You're going to have enterprising young people. They're going to go least four of these a month, 200 bucks. I could see that. I can see it. 200 bucks each. And they're going to be arming this whole system. I just think the marketplace will fill up. That makes more sense to me than then then yeah, some majority of humans letting their car go out. I have a harder time with that. And then just to this industry structure question, because I think this is one that's going to play out over the course of the next, you know, three, five years, you know, what's what are we going to be long and what are we going to be short?

37:43What do we think's going to really happen? I'm skeptical. I'm skeptical. You know, we've spent a lot of time looking at the Chinese manufacturers, you know, free to spend a lot of time in China. I'm skeptical on China. They don't have the sensors on the car. They don't have the data. We think models and access to the best chips are going to matter. Certainly they have advantages over non Chinese manufacturers, but I'm skeptical on the European manufacturers. I'm skeptical on the Japanese manufacturers. I could be wrong and I'm mentally flexible. The industry may end up looking exactly like the industry does today, but I think there is a path where this is that event, that extinction event, tectonic event that leads, takes us from 20 OEMs down to three or four.

38:29And if we sat here in five or six or seven years and we were on a path to three or four global auto makers, it wouldn't surprise me. Maybe we can have an expert on on the China thing. I've certainly seen videos online that suggest the waymo equivalents are already working in China. So that would be a data point. We could free to went and rode in every single one of them. I think there were 12. And she took videos in every car and sent it back to the team. And some of them were totally terrifying. Obviously anecdotal. Yeah, everybody from Huawei to buy due to DD to BYD, etc. has their version of it.

39:12And I think which is both waymo antest love ended up potentially licensing. And so that would be an interesting maybe that happens down the road between the historical incumbents and these two new companies. And whether that type of model plays out seems quite likely to me. Well, speaking of, speaking of Elon, Hey, real quick, one last thing that I forgot to mention on the national footprint. Yeah. It may be important if they're going to put that together, assuming that this is a issue that the country wants to support and wants to see leadership. And they may need to consider some type of insurance reform or in litigation limitations built into the whole thing.

40:05Because I do think that we have this huge problem in America where litigation is so rampant. And I can just imagine some lawyer in front of a jury talking about how the computer killed somebody and trying to extract tens or hundreds of millions of dollars. And that could that could be a real problem for the industry. So if they're going to consider all the other safety stuff, I think they should also think about liability limitations, especially on like just arbitrary jury awards and things like that. Well, I, you know, listen, I think that that's a perfect segue to talking about Doge and what's happening with this tectonic election we've just had.

40:52And I think those, those really big ambitious objectives, which frankly, we haven't seen a lot of, you know, we haven't seen a lot of ambitious efforts to reform. I think over the course of last few administrations, maybe both Republican and Democrat. The one thing about the current administration, it strikes me as a level of ambition that I don't know that I've seen, you know, in my lifetime bill. But one is the Department of Government Efficiency. So this is, you know, the unofficial government department, which is run by Vivek and Elon and is overseeing trying to reform government spending government regulations, frankly, reducing the size of the federal government with the overall objective of getting control of our national deficit and our national debt, which we all agree is pretty egregious.

41:46And one of the the videos I saw going around, I, you know, I saw several people tweeting it, including Elon was of somebody you and I, I think have a lot of affection for Milton Friedman. And this was Friedman opining in a very quick rapid fire interview of the 14 government agencies that existed at that moment in time, which he would abolish and which he would keep. And, you know, we'll roll it and put a clip in here. Keep them or abolish them. Department of Agriculture. By abolish. Gone. Department of Commerce. Abolish. Gone. Department of Defense. Keep. Keep it. Department of Education. Abolish.

42:29Gone. Energy. Abolish. How accepted energy ties in with the military. Well, then we shove it under defense. The little bit that handles the nuclear right. That ought to go under plutonium and so forth goes under defense, but we abolish the rest of it. But, you know, they asked him Department of Agriculture abolish. Commerce abolish. Education. Abolish. Etc. And I think in tweeting that, it kind of sets some boundary conditions, right, of a level of ambition that I don't think many people, they heard the words, but I don't think many people said, no, they're not really going to do their, they're not really serious about going after that.

43:09What do you expect out of the Department of Government Efficiency? And, you know, kind of, is the agenda going to be that ambitious? Or do you think it will hit the wall of some congressional reality? And maybe they're just setting the boundary way out there that they can negotiate back from. Well, first of all, I mean, I think if you extrapolate the growth of government, you know, two or three decades into the future, you know, we would get to a point where such a large percentage of the population worked for the government that you, it would, I mean, it would self -implote like and many people, very smart people have also highlighted that our debt is too large or the US country debt is too large.

43:59And the interest payments are now a huge part of the federal budget. And how can you possibly solve that if you don't shrink the size of government? Now, prior to the election, the papers said that both candidates were going to spend the same amount. So this kind of new department is, I think, you know, orthogonal to what most of the media thought Trump was going to do. I would add, I highly recommend everyone watch the two -hour interview between Lex Friedman and Malay from Argentina. I think a lot of this is being provoked by him. He was recently in town and hung out with the Dodge team, Doge team.

44:44If you take him at his word for what has been accomplished in Argentina in such a short window of time, six to nine months, it's pretty spectacular. And maybe it's important for someone to fact check that. But really remarkable, what can happen if you improve efficiency? And you know, things like we got rid of a ton of regulation around rent control and housing improve for everyone. And for me, like, that's like an of course, of course, that's what would happen. And so how do you tear this apart? We could simultaneously, if they're successful, see a reduction in government and an acceleration or a proliferation of growth because you find out government's getting in the way.

45:36As I've said on the past two or three podcasts, you know, Governor Shapiro in Pennsylvania keeps getting accolades for moving regulation out of the way. It's so ridiculous. Like, if that's, if that's what you get celebrated for, we should just rewrite regulation and get it off the books. And we know there are states that are more productive and are growing faster right now and are actually increasing their population because people can build things, they can build factories, they can build, you know, distribution center that everything can happen, they can build solar farms, you know, a lot faster.

46:16And so I do think it's super important. I really encourage people to watch the Malay thing. The part that's that's most interesting because I think the easy pushback is, oh, they'll never be able to get it to happen. Washington's too, you know, incont in scots, then you just can't move it or these people will protect themselves. The methodology that I'm going to assume was Elon's idea is basically to shine a flashlight on the idiocracy that exists and, you know, transparency can be a hell of a disinfectant. And while you and I have started this, I took a flash look at Twitter and Vivek just announced that he's going to pause his own podcast to launch a new podcast with Elon called Dozecast where they're going to give regular updates on the cost cutting and what they're going to do.

47:15And they're by the way, they've asked people to send in their favorite, you know, example of government waste. They're going to, they're going to talk about it. And I think when you highlight to the American population, really idiotic spend and they're going to get behind this thing. And so that's that's a that's a point here, you know, comes to this question of can they get it done, right? Can they get it done? And listen, there have been plenty of presidents Clinton, Reagan, etc. who've talked about getting government control, spending under control that talked about empowering the individual versus the state.

47:55And then they meet the Leviathan of Washington, maybe just a little background here on the executive powers. It relates to this. So there's this constitutional doctrine that we've been talking about an art thread, the doctrine of impoundment. And it's the ability of the executive branch to withhold or delay the spending of money appropriated by Congress, right? And this was a question as to whether or not the executive branch actually had this authority. Congress passed an act in 1974, the Empoundment Control Act, which basically said it restricted the the the president's ability to withhold funding, saying Congress is the one that allocates funding.

48:35If we allocate funding, then the executive branch has to implement the law has to spend the money. Now, notwithstanding that fact, there was a big and Trump won the Trump administration with held 391 million bucks in military aid to Ukraine that Congress had appropriated. And some argued that this violated the ICA. Now, why do I bring this up? I bring this up on the one hand because there is going to be a constitutional authority question here. But over the weekend, I talked to several members of Congress both in the Senate and in the House on on the budget committee. And I will tell you there is strong agreement.

49:14And it wasn't just from Republicans, right? There were people who were trying to figure out how they can support and interact with the Department of Government Efficiency on both sides of the aisle, right? And so I think that notwithstanding the ICA, if they can get Congress to cooperate, then there is no constitutional issue. And then the final one bill, which is the one that I think is the most powerful here here. At the end of the day, what we've seen time and time again, the power of Twitter, the power of X going directly to the people with your message, saying, here's what government's standing in the way of.

49:49Here's what we want to do. I think that's overwhelmingly powerful, shaming the government, right? Really into making what I think a lot of people will agree are logical cuts. And so I'm bullish. And you know, one of the things I keep hearing in the investment world is lots of people are trying to read between the lines, right? They're saying, well, what do you think the president really says or what do you think's really going to happen? And I said, stop trying to guess. Just listen to the words. After the election, Trump is literally recording on X reiterating exactly what he's going to do. People are tweeting about what the Department of Government Efficiency is going to do.

50:30You're going to have these doge casts. And I think that's exactly what they're going to attempt to do. And I think this is going to be once in a generation reset and the balance of power between the individual and the state. And frankly, for one, I think it's well needed. I hope it's successful. Certainly, there'll be some things they get wrong, just like anybody who takes on an ambitious project will get some things wrong. But I think you can just undo those. By the way, one of the things that's already come up is I think two of the largest departments in the country have failed audits for like three to five of the past years.

51:09Yes. A single company on our public markets fails an audit or has to change auditors as we recently saw a super micro. You get taken to the guy. What shit? How about that down 90%. Yes, yes, considered. It's considered a a faux pas of the worst kind. Like it is. And I've already seen interviews where someone's asking these department heads about these failed audits. And they're like saying it's okay. And so that's that should not be okay. Like the the the dollars are massive. These people work for the for the citizens of the country. And if they have an audit requirement, they should be meeting it.

51:56And you know, that that's I'm shocked to find out that that's true. Well, one thing I wanted to do I ran a quick exercise because I wanted to just see I've heard a lot of people say, oh, it's unachievable. You can't get the budget to balance in four years. This is and which I totally disagree with. So, you know, if you look at the federal revenues, they're about $5 .2 trillion or just over $5 trillion expected this year. Government spending seven trillion. So we basically have a $2 trillion deficit. That spending is up dramatically, by the way, from the four and a so in COVID, we just lost our mind and we've never regained our mind.

52:35So I just said, what's possible here? Like what would not even require draconian changes? If you just grow revenues from here at three to four percent over the course of the next four years, Bill. And you cut costs in the first year by five percent, second year by five percent, third year by two percent. So all that does is get you back to trend line from 2019. As though we increased spending three percent a year from 2019, the budget balances. It's tiny. These are tiny changes in cost. And I shared that with Vivekan Elon and they both had separate and independent reactions, which is not nearly ambitious enough, right?

53:16And here, here, like there's no reason in my mind that we can't do more. But what's encouraging to me and exciting to me and I think we'll be well received by the bond market is showing a four year plan just to get us to balance, right? Just like a company does show me the long -term boundary conditions. Tell me where you're trying to go. And then let's use the power of the bully pulpit, the power of empowerment to get people in line. I agree. It'll be interesting to watch. And once again, I would encourage people to watch. I'd say watch this because I think Malay is such a fascinating human. And I'd watch it on YouTube just seeing, see, it's facial expression.

53:57Although it's dubbed because they actually did the interview in Spanish, but he's a very unique individual. Like he was in a rock band. He obviously has studied the history of economics like no other. A disciple of Milton Friedman, which comes out in this thing. And you know, if like I said, if what he said is true about what's been accomplished, it may be the fastest impact a president of a country has ever had on the trajectory of that company, their country. And so, anyway, I'm going to agree with you. I'm in the optimistic camp. It's about time. There is zero doubt in my mind that making the government more efficient in our country would be very positive for everyone that lives here.

54:47So maybe just a quick market wrap. And then we'll bust out of here. I get a lot of questions. In fact, I'm doing CNBC tomorrow, Bill. And the question I get right now, like I always do in November, is what about next year? Right? And so people are beginning to, you know, everybody who's been in the market, we've had a really good year. Lots of our friends have had really good years. So now we're starting to play a little bit more lockdown poker, tax loss harvest, all the things that one does is you head into head into December of this year. And people start thinking about what is the portfolio that I want to start 2025 with.

55:26And so maybe just at a high level, what I would say is I always start with kind of just market backdrop. So let me give you a sense. At the end of 2022, remember how bad 22 was. Mike, Mike Wilson was saying we're going to have a hard landing. Larry Summers was saying interest rates are going to 7 to 8%. We had seen a tremendous sell off almost 30 % in the Nasdaq. So it felt really terrible. But the setup for 2023 was actually pretty good. Just reverting to the mean would be a pretty good year. Now we've had two pretty bullish years for technology. But we just had this historic election. So when I look at 25 here are the things I put on the pro side of the ledger, right?

56:14We're going to get lower taxes, right? Not only the extension of the tax cuts that we had 10 years ago, but it looks like we're going to get some additional tax cuts on top of that. The corporate rate may go even lower from 21 to 15. You may get adjustments down in the capital gains rate. You may see the reintroduction of assault. So a lot of tax stimulus. We're going to get less regulation like you and I just just discussed. Rates are headed lower. They may be going lower slower than we thought because the economy is doing well. But the Fed has tons of flexibility. Our growth is still high, right?

56:52GDP is still ripping. We see these corporate reports coming out. They're doing great. We have balanced employment, right? Employment's not so tight that you can't hire anybody, but our unemployment rate is still historical lows. And then we're early in this tech and infrastructure super cycle that you and I started the pod talking about. What's on the negative side? Well, it looks like we may get a lot of tariffs as we've seen how our let Nick now propose for commerce. He's advocated as has Trump. We need to level the plane field and then negotiate from there. So leveling the plane field is putting tariffs on a lot of products in a lot of countries that would that would presumably raise prices.

57:37We also see we're going to get reduced government spending. And remember, government spending is a key driver of economic growth. So you'll put stimulus in by way of tax cuts, but reduced spending. And then you got to all that against the fact that market multiples are near all time highs, right? So the S &P is trading at 24 times. I think the Nasdaqs closer to 29 times. So in my mind, it's not a recipe for an all in moment, right? Because there's not blood in the streets, right? We're closer to trumpets in the air than blood in the streets as Buffett would say. And he says sell when there are trumpets in the air.

58:15So it all comes down to top line growth and bottom line growth for next year. And when I look at that, there were two reports today that kind of stick out to me, right? On the one hand, we were short a little bit of target because we're worried about tariffs and we're worried about the retail consumer holding up, especially around, you know, these highly levered consumers when it comes to housewares and things that target as exposure to, they missed their numbers. They took down guidance. The stock was taken out to the wood shed down 25%. Right? And I saw some data that suggested order to delinquencies are on the rise.

58:54So that's right. Any concern about the consumer? For sure, I think that listen, we know that they've spent through all their stimulus money, right? That they're not getting the pay raises and all the overtime that they were a couple years ago. And we know that when you look at their credit, they're really spending a lot on credit now. And we see those that same data on auto delinquencies. And so if you just go through the things that Trump says he's going to do, right? Imposing tariffs is bad for retailers like target. So that's one side of the equation. Then on the other side, you have somebody like snowflake or Palo Alto report tonight and they beat earnings, but expectations are low.

59:34Snowflakes up 20 % in the after hours. So just think about those, that's spread trade targets down 20 snowflakes up 20. One has super high expectations, super high valuation, one has super low expectations. And in the case of a company like snowflake, there's massive room for efficiency, right? They're getting the efficiencies from AI. They can, they don't need to hire at the rate that they were hiring before. And they still just grew 29 % in the quarter. You know, so that's that's far from the massive deceleration that many people were projecting. And so I do think that the beneficiaries in technology, they're both beneficiaries of this top line growth, but also bottom line margin expansion.

1:00:14You know, I was looking back in preparation for this, for the pod was Satchel on Monday. Since he became CEO of Microsoft, the net income margin has expanded by a thousand basis points. Yeah. Right. Like if you look at the story of Microsoft over the last 10 years, revenue is doubled, but earnings have almost quadrupled because of the expansion of the earnings margin in that business. And that's what I think we're still going to see in technology. You know, and it's going to be accelerated with AI. So I head into next year, not all in, but I'm definitely constructive on the backdrop. I just think it's going to be a stock picker's market.

1:00:55It's going to be a bunch of stuff that you want to avoid. But you can find, you know, your 510 20 tech companies that are enjoying the tailwinds of AI and also enjoying the possibility of this margin expansion. I think they can continue to do reasonably well. So that's how we're positioned when I'm here and you say you can kind of have your take and eat it too. If you pick the right courses here, like even if the consumer has some struggles, if you've got your portfolio line in the right way, you're going to, you're going to be able to maneuver through that. Yeah. Another way of saying it, I don't expect a 25 % up year for a broad based index.

1:01:32You know, and if you look at it, I don't know where it is as of today. But there is one point in the year bill that if you took the top 10 tech companies out of the S &P, right? The S &P was not up 20, but it was actually down five. Right. And I think that's the type of dispersion that I think we're going to see again next year that there going to be a lot of winners, either as the result of changing government regulations, changing government policies, lower taxes, or as the result of this tech super cycle. But they're going to be a whole lot of losers, right? We just talked about the ones in FSD.

1:02:06It may very well be that this is terrible for a lot of, you know, OEMs, but really great for Tesla. We have to get to be see, I'll tell you as an investor and we could leave it on this. The rate of change has never been higher in technology. And the rate of change of this election is massive, right? The magnitude of the policy change is massive. You combine those two things. And let's just say we've been working overtime. Makes sense to me. One of the things we may want to talk about in the future is whether the Trump administration is going to lean into AI regulation as well, which could have implications for everyone around.

1:02:49Anyway, thanks so much, man. Good to catch up. Sorry, the sucks thing didn't happen, but we'll get it next time. We'll get her done on Monday. BG2 out.

1:03:07As a reminder to everybody, just our opinions, not investment advice.