Ep9. GPT-4o, Astra, Multi Modal, China Tariffs, Tech Earnings | BG2 with Bill Gurley & Brad Gerstner

30:18Your margin of safety needs to be higher. So stocks come down not because people are like, oh my god, this is going to take it out tomorrow. But the fact of the matter is, dual lingo is valued on its next 10 years of cash flows. And people are simply saying, I have a little less visibility. This makes me a little bit scarier, uh, more scared that those subscription revenues that are going to do a lingo aren't going to be there. Or at least the level of confidence I had yesterday, right? Is lower today based on these things that I'm seeing. Yeah, it never reminds me of two two things. So one, um, I've talked into past about my good friend Michael Mubison.

30:56He wrote a paper 25 or 30 years ago about what he calls cap competitive advantage period. And he that competitive advantage period is how many years of cash flows into the future are embedded in this company stock price. And it's a measure of of how durable the Wall Street as a whole believes your business model is. It's almost a month measurement. And so you're absolutely right. If if there's a question about your strategic value, your multiple can come in big time. And that reminds me, the second thing I was going to say, which is a famous quote from a poker game long ago, multiple compression is a it's not fun.

31:44Uh, no, no, no doubt about it. You know, to say it in another way, and to give an example, people often ask me they're like, you know, Coca -Cola may have low single digit growth and trade at a higher multiple than a tech company that's also profitable and has a high rate of growth. And they're like, how could that possibly be? You know, doesn't the market isn't the market misprice? And I was like, no, because you know, back to cap market is saying that Coca -Cola is going to have those free cash flows, you know, forever. And what they're saying about this tech company is, it may have them forever or it may not, I'm just applying a much higher discount to that probability.

32:25And you and I have lived through this before. I remember vertical search engines when, you know, Google started pushing deeper into the verticals, right? All these companies that people love like TripAdvisor that absolutely got eviscerated. Because one day they showed up and Google was showing basically the content that previously like they had dominated it. So as a firm as an investment firm, as you know that on the public side, you know, we look at who's going to be disrupted. I think it, you know, this is the list of companies that we have that are potentially disrupted is as long as it's ever been.

33:01You know, we're coming out of this period of stasis. You know, where things didn't really change that much in consumer land, right? And so you, you know, that weren't sensible mobile, not sensible mobile. Yeah. And I was, you know, 10 years ago. One little piece of advice I give people that are thinking about this, you know, I've said from the beginning like LLM stands for large language models. So things that involve language are what this thing was designed for and what it's really great at, really great. And also reiterating something we said before that code is a subset of language that's actually more structured and therefore it's even better at that.

33:44I thought my very favorite demo from from both of these things was the one you showed in the video where someone just has their camera on a piece of code and ask for analysis of what's going on there. That is powerful. Like that is useful. That is high utility stuff. And we'll help people be more productive for sure. Well, one of the, one of the areas, you know, so I think what you were saying is if you're a, if you're in the business of language like duo, Lingo is then you kind of go, you, you move from the confident category to the less confident category because people start wondering about this disruption.

34:21I'll tell you a whole another category of companies bill that have moved into that bucket. It's all these BPO companies, business process, outsourcing businesses, right? So, you know, because remember, it's not just about language now, right? BPO companies woke up yesterday and they're like, oh my God, this is about voice. This is about call centers. This is about video in. This is about, you know, and so all of those modalities now call into question, the things that BPO companies do very well. And so that's the type of disruption that I think is going to be rolling thunder. You can't just look at where we are today.

34:58You have to look at the rate of innovation. The rate of innovation is the only thing that matters here. And I've never seen rate of innovation at this pace. And so I think that the surface area of disruption, the companies that are going to get disrupted potentially by this, and the market will discount it before it actually happens. But there's a long, long list of those companies. And I would just qualify one thing you just said. I think with language and code, this is already, you know, 10 out of 10 high alert. I think on business process automation, we think it's coming. I don't think it's at 10, you know, maybe the warning signals at 6.

35:38Like it hasn't been proven. It's going to run it over yet. And there's still some experimentation to ask. Yes. Yes. One other thing I want to hit on this topic, you know, coming out of this week on AI before before we move on is all about Washington, right? And there are two two things I think that we have additional information on as it pertains to Washington. One is on the regulation side. The other one is on the investment side. On the regulation side, I heard a good discussion with with our friends over at all in and and Sam on, you know, this idea we should regulate outputs instead of regulate inputs, right?

36:15The the idea that don't they shouldn't be in their mucking around with weights and everything else, but like a plane, you know, if you have a frontier level model, you should have to show it to them. They get to run it and they get to decide, does this meet whatever safety standards? When I was listening to that, they seemed to kind of galvanize around this regulate outputs regime. I was thinking about you. Does that really cross the line for you? Like is is regulate outputs a good enough standard for you? And then how do you really implement that? Yeah, I mean, it kind of depends, right? And how it's implemented.

36:51I think, you know, David Sacks had said there's laws already. So if you commit bank fraud with an AI model, you've committed bank fraud. You don't need an AI bank fraud law. The tool doesn't matter if you use a gun or an AI model, right? And so I do think that's a the type of attitude it can cause everyone to take a deep breath because I think the odds that any government in any country could get in this early and start messing around with inputs and be effective is near zero. And, you know, I think Yon also said, you know, these models have been out here for a couple of years, like where are all the crimes?

37:32You know, and it's another just take a deep breath moment. It turns out early this morning, there was a large 20 page document dropped by Schumer in the Senate, which I guess some people were waiting on. And I read through it. It wasn't that long. And if you're up for it, I'll tell you what's in there. Nothing. That's it. That to me is really interesting because that's less about regulation. And I think more about, you know, you know, government now deciding they want to invest a bunch of money in AI. So why don't you give us the breakdown? Yeah, I mean, that was my big headline surprise. So, well, actually, I'll just redo.

38:12It was broken into pieces supporting US innovation AI in the workforce, high impact uses of AI, elections in democracy, which was only two paragraphs, privacy and liability, transparency, explainability and intellectual property, and safeguarding against AI risk and national security. So those were the things. It was very high level. It didn't recommend any kind of legislation at this point. The big shocker for me was it recommended spending $32 million a year. And I didn't even know that was on the table. I thought we were trying to manage risk. I didn't know that the money needed to be handed out.

38:53Certainly, in my lifetime, and I think prior to my lifetime, there's never been a venture capital category that's attracted more money. So the irony that we would even need even more money is laughable to me. Now, it turns out if you dig into it, some of the money's more dark alike. Like they want it to drip into the DOD. They want it to drip into the military. They want it to drip into academia. But even with that said, let me put this in perspective, the NIH is 40 billion, a little over 40 billion. They'd like it to be 50. The National Science Foundation is 9 down from 10. So 49, you're going to start the AI foundation or our federation or whatever it is at institute at 32 billion a year.

39:44You're going to put it right below the institute of health and and 4x the National Science Foundation. It just seems a little overkill. You said that they were wanting to drip money into these things. Let me just remind you, Washington never drips anything. It is a flood. It is a fire hose. And I just think at a point where we're 38 trillion dollars in debt, where we, you know, now we're moving toward a trillion dollars in interest payments. You know, again, when we think about trade -offs, there are certain places we actually need money and there are other places that we don't. But it's like right now, it certainly feels like, you know, we're presented with a long menu of things that you can potentially order at the restaurant and they're just choosing all of them.

40:31And yeah, yeah, and it takes like the military, like I've never seen more of intercapital excitement about the military ever. Right. So I just wish they'd take a deep breath and gauge what's going on in the private markets. We're a wash in innovation and speculation and funding. And yeah, I don't think that's needed. Let me hit on three other things that are in there. Kind of interesting. They referred to some AI systems as quote, black boxes and said this may raise questions about whether companies with such systems are appropriately abiding by the laws. This is a bit of a turnabout because, you know, it's my belief based on everything I've read and seen that the proprietary model companies were in there begging for regulation and urging open source to be cut off at the knees.

41:24This looks like it rebounded in their faces and they're the ones and the academicians I've talked to have made this point that the open source ones are visible and transparent and these others aren't. So that second thing they talked about using AI to improve efficiency and government. The reason I chuckle is I think AI could be amazing at improving efficiency of government. I put a very low probability on them actually leaning into that, you know, malay style perhaps. You know, 15 % of the US workers, 45 million are government workers. There is unbelievable amount of opportunity. But I just, I really doubt the lean into it.

42:11And then the last thing and I think this is a huge positive, although I don't want to overstate it. There was a quote that related to improving immigration for high skilled STEM workers. Now all it said was the relative committees to consider legislation to improve. But it's nice to see that in there. That is something I think everyone in Silicon Valley has been reading for. No doubt here here. And I will say I was out there a couple of weeks ago, an event, you know, great event called the Hill Valley event. And there's never been more engagement between Silicon Valley and Washington, DC. And you know, I think it's proactive engagement on the issues that matter most.

42:56I hope it doesn't result in a flood of money because I think that the private markets are better at allocating those dollars and a new shift into industrial policy by the United States where government is picking winners and losers is a bad idea. I don't think that's where we're headed. I think Schumer and his colleagues on both sides of the aisle are thinking smart about this. Jay Obernolte, who's leading the task force in the House, thinking smart about this. So I left very optimistic about how I'm feeling about Washington, how they're seeing it. I don't think we're going to get a lot of regulation.

43:35I would be surprised if we see a lot of incremental dollars go into this. And, you know, from your mouth to God's ears on immigration and government efficiency. But while we're talking about Washington, I saw another tweet out of you this week that caught my eye. So I want to talk about it because there are some other news. And, you know, Biden, just a couple of days ago, tweeted, I just imposed a series of tariffs on goods made in China, 25 % on steel and aluminum, 50 % on semiconductors, 100 % on EVs, 50 % on solar panels. And, you know, quickly Twitter blew up because people posted his tweet from the then -senator Biden when Trump issued, you know, tariffs on China where Biden apparently tweeted, Trump doesn't get the basics.

44:24He thinks the tariffs are being paid by China. Any freshman econ student like my son could tell you that the American people are paying for the tariffs. The cash years at Target sees what see what going is going on. They know more about economics than Trump. So has something's changed here Bill? Like, do we have valid national security reasons today that we didn't have, you know, five or six years ago when it comes to imposing these obvious economic costs on American consumers? Well, look, I mean, I totally agree with Senator Joe Biden, who apparently is a different human than President Biden.

45:05And I don't know, I really don't know how the media doesn't contrast those two things and make a big deal about it. You know, my tweet was just highlighting that he said, well, he said two things. He said that I'm determining sure America leads the world in these categories, giving someone a head start doesn't make them faster at the 100 yard dash. It makes them slower. It makes them less competitive. Someone replied to my tweet and said that Germany was over in China and used the word fitness that it makes them more fit to have to be engaged in the competition on the field. And I mean, not only is there that element like you want to be competitive, right?

45:58But the other element is, you know, this is classic, you know, freshman economics. If someone's better at doing something than us, we should let them do it. We should buy it from them and we should send them what we're good at. Like, this is just, you know, deglobalization, highly inflationary and will make our companies less competitive, not more. And if any, you know, one thing I did when I saw this, it I encourage everyone who's interested in this topic to do, just go on YouTube and look at videos that were made at the recent China Auto Show. And these companies are creating more competitive products, not just on a V, not just on landed price point, but even on features consumer care about much bigger screens, more interesting features you've never seen before.

46:48It's it's abundantly clear that innovation is most alive and most well in the China auto industry and pulling up the these tariffs to help protect our companies won't make them stronger. It'll make them weaker by not exposing them to the reality on the field. It also didn't surprise me that Biden was surrounded by a bunch of people in union and church as he as he gave this as he announced this. By the way, one little, sorry to go on and on one little thing that I hate about the Biden tweets. And I don't think he's doing them. I think someone else is, he uses the word I all the time. Like what in what grade in school are you told if you work with a team, you should say we instead of I like it's so easy.

47:41Like this is just amateurish to use that that pronoun there. Well, I mean, what one of one of the things that you and I talked about before we launched the pod, we're not going to spend a lot of time on politics. But the intersection, the intersection of the political stuff with US free trade policy, US industrial policy with AI regulation, you know, and innovation goes to the very heart of what makes us competitive economically. And we are focused on what makes us competitive economically. And when I look at this, what I worry about bill is for 20 years, I mean, I think a lot of people forget the late 70s where we had a lot of protectionism in the United States.

48:22But we also had double digit interest rates and double digit inflation. The US economy was losing its way. You know, the Japanese automakers were ascendant. The European economies were stronger than the US economy. And then we had basically 30 years of unabated move toward free trade around the world. And the US led the way for global free trade. Right. And of course, one of the consequences we know of free trade is that it leads to dislocation. There are there are people in the United States who get dislocated because it is cheaper to produce, you know, things and so we had NAFTA and we had, you know, these trade wars, you know, that we resolved over those years.

49:07But we always seem to resolve them in the favor of free trade. And I just wonder if we're entering this new era, you know, a new era of the end of free trade, more de -globalization, the rise of US industrial policy where we're picking winners. What scares me is that seems to have supporters not only on the democratic side of the aisle, but it seems to have a bunch of supporters on the Republican side of the aisle, including, you know, President Trump and including a lot of people in Silicon Valley who on all other issues seem to be free marketers. But when it comes to these two issues, particularly as it pertains to China, they're quick to jump on the bandwagon.

49:48They say level the plane field with China, but it doesn't feel like that to me. It feels like we're the ones who are kind of leading the way on on de -globalization. Any big picture of thoughts on that? I mean, it feels to me like it will make us less productive. I'm glad you brought that up. I mean, that is the primary reason that this stuff matters to me. And I, you know, in my, in the speech I did on regulatory capture, I mentioned these two Matt Ridley books, How Innovation Works and the rational optimists. And the rational optimists walk through history and shows that rises in prosperity and standard of living are always tied to free trading and the free exchange of ideas.

50:32And if we start untangling those and moving away from those, and other countries have done this in the past, China once led as a global nation, pulled up the walls and fell precipitously, you know. And yeah, I think the whole vilification of China thinks misplaced personally. But I also, you know, when I think about human prosperity, I think we're, I think the world is small enough now where you have to think about that on a global basis. And it's unclear to me why, you know, a worker in Iowa needs 40 dollars an hour if there's a worker in Mexico that's willing to bust his ass for 15. Like, I don't necessarily understand that being a higher moral ground.

51:22Well, it certainly seems to me politically I understand why it exists. And again, like these disruptions are hard to deal with and we're going to have a lot of disruptions that come from AI. You're going to have a lot of people looking for more protectionism, a lot of people looking for more end to free trade. I think what's made as great as a country is we've resisted those things for the last three decades. We need to resist them into the future back to what you said. The greatest path forward is to be the world leaders in innovation. And that requires fitness with competing against the best starting at the same place on the starting line, not having unfair government imposed advantages.

52:03And so and by the way, and by the way, like, like one thing that people, I don't know, I think everybody listens to this podcast probably is aware of this. But you know, there've been quotes from, I think Mike Moritz, it's Koya where he's like, I've been hanging out and trying to and these people are amazing. They're hard working. They're smart. And I would say that's true. Like the time I've spent over there, I've adored the people are wonderful. There's certainly a smart and entrepreneurial as anyone I've met here. And so there's not, you know, I think hanging our hat on the fact that we're losing because their governance supporting it.

52:43Man, it maybe it's because they're really good. You know, they're really, really good at what they do. It just seems to me that we've won with trying over the last two decades. Okay, I'm the first to say if they're engaged in the various tactics, we ought to meet them where they are. But I think the middle ground here, we may have swung too far. And the middle ground should be the continuation of free trade and finding ways to work together. That's how you prevent wars and that's how you move humanity forward. Yeah. Let's wrap up with it with with the public market check. What's been on your mind lately, Brad, since we talked last?

53:23Well, you know, maybe we start just with the news out this morning because it's a segue or a bridge back to where we talked about before, which was what's happening with inflation and rates. So we had a CPI print out this morning bill CNBC said, you know, the CPI print came in quite dovish 20 basis points, sequential, cooling in the rate of change was the largest in several months. Retail sales came in pretty weak sales ex auto and gas came in pretty weak. So you still have inflation adjusted rents coming in pretty hot. So CPI gave us a little bit of a break. I think the 10 years down to to 435 this morning.

54:04In fact, you can look at this chart here that we have that shows the restrictiveness. So where interest rates compared to inflation? And, you know, we're really, you know, crossing this line right now. So the yellow line is the proxy fed funds rate. So this is like what the San Francisco Fed calculates as the actual interest rate paid by Americans. The black line is the 10 year. So you can see that the proxy fed funds rate went above inflation earlier this year. The actual interest rates going to go above the rate of inflation. The forecast we have in here is simply the consensus Morgan Stanley Goldman sex forecast for the balance of the year, which has been pretty accurate.

54:48So what is this, you know, tell me the backdrop around inflation continues to be constructive. We had a couple of months in there where I think people got scared. Larry Summers said, maybe the next rate move is up. Why does that matter so much bill? Because if people can earn, you know, just listen to the Berkshire halfway annual meeting. You know, Warren Buffett says, listen, I'm collecting my my interest payments every week. If I can earn 5 .4 % taking no risk, why would I take risks? So, you know, I still am in the camp that, you know, we're on a glide path. It's going to take a little bit longer.

55:25But I do suspect that rates are going to come down. Jay Powell said yesterday we're on hold for a couple more months. I think you're going to get a rate cut before the election. But I don't think the market actually needs a rate cut bill. What they need to know is that inflation is coming down and the Fed can give us a rate cut if they want to, right? That's the important point. And so I think that backdrop was important this morning. But I juxtapose that bill with what we've seen in this earning season. So we're almost through the earnings season. We knew coming into the earnings season that GDP had come in lighter than we had expected for the quarter.

56:03And now here's the update on earnings. So this first chart bill, this is the S &P earnings on a quarterly basis, the growth, if you back out the mag 7. So we know obviously we got this AI tailwind. So in the quarter, if you back out, you know, mag 7, we're coming in below expectations, right? You're actually seeing earnings shrink on a quarter of this quarter. That's quarter over quarter. Okay. Yep. And then if you look at the next chart, which is our quarterly performance of software companies versus consensus estimates. So there's a chart that jamming on my team makes. You can see in the quarter, a lot of the companies hit 98 % of software companies hit their guidance.

56:53But remember, they had reduced their guidance in previous quarters. So maybe the bar was just easier to get over. I think the prospective view is this next chart, which is guidance versus consensus estimates. So what are they saying about the future bill versus what consensus thought they were going to say about the future? And 54 % of software companies disappointed in the quarter. And that's the worst quarter. I think we've had since 2022 in terms of their view as to the future. And so I was, I did a little stint on CNBC last week. I said, you know, we've turned down our exposures a little bit, taken a little bit of our net exposure.

57:32So added to some shorts, taken some of our lungs down a little bit. People said, well, why did you do that? And I said, well, you know, look at the backdrop here. The NASDAQ this morning hit an all -time high. Right. And I always say to my team, all -time highs, those, that's the highest in a long, long time. Right. And the backdrop is that the economy's slowing earnings are coming in lighter than people expected. And AI is creating more disruption, creating more uncertainty than we expected. So, you know, this is a moment in time where I think that if you're an investor, you know, owning some of the companies that you think are real, you're really confident are going to continue to compound and benefit from AI, the Microsoft of the world, you know, the NVIDIAs of the world seems to me like a relatively safe place.

58:20Those earnings multiples don't seem to me to be too onerous, right, between 20 and 30 times earnings for, I think, 21 times for the, for the MAG -6 anyway. But I think you do have to look at whether you own retail names or, or a lot of other names that are not exposed to those trends. So long as we're going to have interest rates above the rate of inflation, be in this restrictive territory, the trend is down in terms of, you know, economic growth, which the government need, you know, J -PAL needed to manufacture slowing growth in order to get inflation down. But I think that's the backdrop. I don't think there's any, you know, fall off a cliff here.

59:04But I do think that we're in this situation, Bill, where, you know, where the Fed is probably at some point in time going to need to give us some relief on rates in order to keep economic growth in this, you know, kind of one and a half 2 % GDP range. Yeah, I hear you. And look, there's two other things that would cause me to share your opinion about being conservative at this moment in time, especially related to those things. One, Washington does not appear to be concerned about inflation, which means they're spending both that Ukraine is real, this new AI thing. Like they don't seem to be concerned about, about expanding the budget, which isn't helpful, obviously, on inflation.

59:47And then second, like it's a chaotic time. I mean, with, with, with colleges moving to the summer, we're losing kind of the craziness that was happening on campuses. But we do have this election coming up. We have one candidate in court, potentially going to jail. Like there could be quite a bit of social unrest in the next, you know, six months. And I think that causes you to want to be cautious also. Yeah, there's no doubt about it. And this is really just a question of units of risk that you want to have on the table at a given moment time. See, I have the NASDAQ at an all -time high. You have all those concerns that you lay out.

1:00:21And we were just in Vegas. And it's like we got a more cards turned over. And the fact of the matter is all the odds got a little worse for us. It's not to say that we're necessarily folding the hand and getting out of it all together. But we're not pushing all in either. I mean, this is just a time I think to have, you know, a portion of your stack working. And if the market happens to go against you because we have, you know, a bad event happen at the DNC convention in Chicago or because inflation bumps back up, because of all of this, you know, fiscal spending that you point out, then you're in a position to do something about it.

1:00:57And so this is it, you know, I always talked to our team just about less versus more. And we're in a moment time where maybe a little bit less makes sense. It's great to see you. Great conversation as always. Thanks for, thanks for making it happen. Take it easy.

1:01:18As a reminder to everybody, just our opinions, not investment advice.