25-Year Old AI Hedge Fund Prodigy Wiped Out & Jersey Mike’s Goes Public

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0:32Mitch Gagliardi:Good morning for Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, Jersey Mike's goes public and plots a global takeover.

0:39Jacob Cohen:Then a 25-year-old AI prodigy flew too close to the sun and lost his hedge fund billions. It's Friday, July 31st. Let's ride.

0:56Mitch Gagliardi:What links would you go to to snack a job interview? Over in San Francisco, you might need to get a tattoo of the company's logo. The AI startup Lemon Lime has been catching heat following a stunt at a recent networking party. If you get a company tattoo from an artist that we brought to the event, you'll get a job interview immediately. Co-founder Jordan Zietz wrote the concept was, quote, to meet exceptional people and find out which of them are just as crazy as we are. People thought they were crazy, all right, blasting it as a symbol of Orwellian Silicon Valley culture. after realizing this was maybe not the best idea.

1:30Mitch Gagliardi:Zeetz apologized, calling it reckless and poor judgment.

1:34Jacob Cohen:You can't be doing this with a company that is just so clearly on the trend of the moment. Lemonline creates AI agents and automations for companies. So I kind of get why you're pulling these insane stunts to try and hire. Your company does what every single other company in Silicon Valley does right now. This is probably not a good time to mention that a couple of years ago, a guy also got a morning brew tattoo on his calf, but that was completely voluntary. And he just loved the newsletter and maybe coffee as well. We will not be requesting any of you listening get a tattoo to show your MBD support.

2:09Jacob Cohen:A simple like and subscribe will do. And now a word from our sponsor, Anthropic, the team behind Claude.

2:15Mitch Gagliardi:We asked for your questions about AI and the MBD audience was not shy. There were questions about losing control of AI, workforce disruption, and a lot more. And it's opened up a lot of really important conversations.

2:27Jacob Cohen:Anthropic, the public benefit corporation behind Claude, heard questions like these in more than 120 ,000 interviews about people's hopes and fears around AI.

2:36Mitch Gagliardi:Anthropic's not trying to gloss over these tough questions because their goal is to make sure AI actually works out well for people.

2:41Jacob Cohen:They publish real research on these kinds of questions, even when it's uncomfortable.

2:45Mitch Gagliardi:So if you've got your own hard questions about AI, head to claude.ai.mbd to submit it to Anthropic and explore how they are answering them. That's C-L-A-U-D-E dot A-I slash M-B-D. The United States of America is becoming the United States of data centers. That's the takeaway from yesterday's GDP report, which revealed a sturdy American economy in the second quarter, underpinned by booming investments in A-I infrastructure. The headline number 1.5 percent, which is how fast the economy grew at an annualized pace. On the surface, it's a disappointing number. It's lower than economic growth in the first quarter, 2.1%, and lower than expectations heading in.

3:24Mitch Gagliardi:But dig a little deeper, and you'll find more positive signs. For one, business investment is very strong, up 8.4%, as companies shelled out for computers, chips, and other equipment related to the AI build-out. In fact, here's a crazy stat. Ernie Tedeschi, the chief economist at Stripe, estimated that more than half of real GDP growth can be attributed to gross computer spending, which includes spending on computers, data centers, and other things adjacent to AI. And it's this spending on computers that also dragged down GDP. GDP is defined as the total value of the goods and services made inside the United States, but many of the chips and equipment needed to make data centers are produced outside the country.

4:01Mitch Gagliardi:In other words, they're imports. And when imports outweigh exports, as they did because of all this AI investment, it weighs down on that GDP number. In total, trade subtracted more than one percentage point from headline GDP growth. Toby, there are threats to the economy, particularly those higher energy prices from the war in Iran. But for now, it's fair to characterize the economy in Kevin Warsh's words as resilient.

4:23Jacob Cohen:You are seeing a split economy emerging. On the one side, there is consumer spending, which accounts for 70 percent of GDP. That's our favorite thing to say because it is true. And there were growth there. I mean, accelerating 3.2 percent up from 0.5 percent in the first quarter, that shows signs of a healthy consumer. And then you have the AI side of the economy, which is absolutely ripping right now and maybe making things look better than they actually are because the consumer side, although it came in strong, is losing some momentum. We are seeing spending slow a little bit. We are seeing some savings cushions shrink.

5:01Jacob Cohen:A lot of that consumer spending was boosted by tax returns in that quarter, and those are running dry. Energy costs are going up. Tariff costs are continuing to bite into it. So if you start to see that side losing momentum, then the economy is truly just business investment. It's truly just that AI build out. And as you mentioned, it has its drawbacks when it comes to you got to import a lot of this stuff. So two sides of the economy right now, both are looking strong, but one is losing a little bit momentum.

5:29Mitch Gagliardi:Let's talk about why it may be losing a little bit momentum. That's because inflation is still way above the Fed's 2 % target. It has been for five years now. Alongside the GDP report, we do get an inflation report, the PCE inflation rate, which is the Fed's preferred gauge. We talk a lot about the CPI report. The Fed prefers this PCE report. We got that yesterday. And it was somewhat good. Inflation did cool from 4.1 % in May down to 3.7 % in June. And why that's a very important number, not just for your wallet, is because chairman of the Fed, Kevin Warsh, is looking at that. And he just had this big press conference and Fed meeting in which he held rates steady.

6:11Mitch Gagliardi:Investors are looking to the next couple of meetings, which will get more inflation reports to see whether the stubbornly high inflation will cause the Fed to eventually hike rates.

6:19Jacob Cohen:One thing that does not contribute to the economy, but is just kind of indicative of the moment that we're in right now is corporate America, which continues to absolutely crush it despite all of these pressures, despite the Iran war, despite energy costs going up. Stock indexes are up this year. I know it feels very volatile recently, but S &P 500 net profit margins are on pace to reach 16%. That would be the highest since tracking began back in 2009. So right now, businesses feel very good. Like they have healthy balance sheets. They're making a lot of investments in the economy. Again, it's just how is the consumer going to hold up?

6:57Jacob Cohen:If inflation does start to ease, maybe the consumer is feeling pretty good. but there are headwinds and that's kind of like the big thing when you talk about the economy you're really talking about the health of the consumer that's where all eyes are looking moving on it's stock the week dog the week time the segment where we pick one stock that falls for ai slop and one stock that has good media literacy i won the pre-show game of jeopardy so i get to go first and since it's been a little raining this week and i'm feeling pessimistic i'm starting with our dog the week which is situational awareness a hedge fund that just went from being up more than 430 % to getting liquidated.

7:33Jacob Cohen:Situational Awareness is the AI-focused fund founded by the 25-year-old AI wonder kid, Leopold Ashbrenner. Ashbrenner is a former OpenAI researcher who graduated from Columbia as valedictorian at 19, joined OpenAI, but was fired in 2024 following a dispute over sharing internal information. After leaving, he published a 165-page manifesto called Situational Awareness, arguing that AI would require a massive build-out of chips, memory, data centers, and electricity. Then he built a hedge fund around that thesis, and for a while, it worked spectacularly. Situational awareness made huge bets on companies supplying the AI build-out, Bloom Energy, Micron, Sandisk, Nebiusk, and SK Hynix, while also betting against traditional software companies like Adobe.

8:20Jacob Cohen:It was reportedly up 439 % through the first half of the year, and had swelled to over$45 billion. until suddenly both sides of that trade went against it. Four of its biggest holdings, CoreWeave, Micron, Sandisk, and Nebius, dropped at least 35 % this month. At the same time, its software shorts moved sharply higher. The true issue, though, was that situational awareness was heavily levered, borrowing money to enhance its position so when things went south, they really went south. The fund got margin called and was forced to sell nearly its entire stock portfolio. The story doesn't end there, though, and it's mad dash for cash situational awareness put its entire book up for sale shopping both its long and short positions around rumors swirled that a large investment firm was interested and by midday it was revealed that none other than ken griffin citadel was the opportunistic party involved the timing couldn't have been better for citadel and worse for leopold nearly every name situational awareness had exposure to bounce back in a big way yesterday neil this feels like a plot from industry it's

9:22Mitch Gagliardi:always Ken Griffin, isn't it? Whenever you hear about a company needing to fire sale its assets, and then there's another company that's anonymous, at least for a few hours, that's scooping them up at bargain basement prices. It's always Ken Griffin in Citadel. I mean, this happened with Enron. The day Enron filed for bankruptcy, he flew down a bunch of Citadel employees, scooped up their quant research team, and then built that into a huge commodity trading business worth about$30 billion. Whenever there's a copy of the U.S. Constitution that's bought by an anonymous bidder. It's always Ken Griffin.

9:54Mitch Gagliardi:He just always seems to be there to take the treats out of 25-year-old hands who seem to be a little over their skis.

10:02Jacob Cohen:And the reason you get over your skis in this line of work is that you go down the leverage path. Again, leverage is great when things are going well. It absolutely magnifies all your gains, but it turns really ugly when things go south. Steve Cohen, who's another famous hedge fund manager gave a good interview answer about leverage. He said, uh, you're going to lose money. I think three, the three things is liquidity, leverage, and concentration. Those are the three rules. If you're in illiquid stuff, that's a problem. If you're using too much leverage, that's a problem. And if you're too concentrated, that's a problem.

10:34Jacob Cohen:That's basically the exact playbook that Leopold was running here at situational awareness. He was illiquid because he's got a huge stake in anthropic. That is one of his crown jewels of his portfolio. So that's not easy to move when you're in a liquidity crunch like this. You're way concentrated. He was very, he piled into these highly volatile, uh, AI adjacent names. So not a large breadth of different, you know, thesis was playing out within his portfolio. And then there's the leverage piece where he was borrowing money to, you know, make all of these swings bigger and smaller. So Steve Cohen would say, I gave you the playbook.

11:09Jacob Cohen:You just ignored it. And this is why you blew up.

11:12Mitch Gagliardi:His ascent was astonishing, though, just as much as this downfall. And let's say he's 25. He probably has a long career left, even though this is a bit of a black mark. So he came out of Columbia, worked at OpenAI, got fired, actually worked at FTX's philanthropic arm. So he's kind of like the Forrest Gump of AI and tech. And then he got investment for his hedge fund from really the monstars of AI in San Francisco. Patrick and John Collison, the Stripe co-founders, Daniel Gross and Nat Friedman. And even he got investments early from Jane Street, which is this secretive hedge fund in New York that's not known for allocating capital to outside managers.

11:53Mitch Gagliardi:So he got for some reason, everyone kind of believed in his thesis. He yoloed into this idea that artificial general intelligence is coming before 2030. and should that happen and you play it out on the back of the napkin map in terms of what this might mean for productivity, for the requirements for data centers and memory and servers and all of that, it's like exponential, exponential, exponential returns. And that was his core thesis. It got Silicon Valley talking and he put his cards on the table and at least for one month, he got wiped out. It was working.

12:28Jacob Cohen:That's like the crazy part. I mean, being up 439 % through the first half of the year, he was being tossed around as another name that like Warren Buffett esque figure. And every time you're compared to Warren Buffett, it always ends poorly. We've seen that play out, but even still after everything that just happened, the fund is still up about 80 % year to date. So this is probably not the last we're going to hear of them, even though his public equity portfolio is mostly in Ken Griffin's hands. Now he still has that anthropic stake. It's still very valuable when and if they go public, it will probably lead to another boondoggle for him.

13:04Jacob Cohen:So it's not the last we've seen of young Leopold, that's for sure.

13:08Mitch Gagliardi:But there is a lot of shot. There was so much shot in Freud yesterday because this is a guy who had no investment experience. He'd never managed a portfolio before, and he had all these big names throwing money to him. He got a little bit larger than life. A lot of people hailed him as the next AI profit. And then thanks to this downfall, a lot of folks were saying, I told you so. Okay, my stock of the week is Jersey Mike's, which much like Snooki, has risen from the Jersey Shore to big city stardom. Yesterday, the subchain went public in one of the biggest restaurant IPOs ever. Trading under the ticker JMKE, it fell 6 % on its first trading day after going public at a valuation of$7.3 billion.

13:47Mitch Gagliardi:For decades, Jersey Mike's was a family establishment owned by founder Peter Cancro, but that all changed last year when it was acquired by the private equity giant, Blackstone. Over the ensuing 18 months, Blackstone got busy turning this family biz into a corporate Goliath that wouldn't wilt under the bright lights of Wall Street, installing a veteran CEO, adding experienced food players to its board and trimming the fat when it came to expenses. What's emerged is a lean meat submachine on a mission to bring its freshly sliced sandwich gospel to more corners of the world. In its IPO filing, Jersey Mike said it planned to expand to 15 ,000 restaurants up from the 3 ,300 it had at the end of March.

14:22Mitch Gagliardi:International markets form a key part of that strategy with 400 restaurants slated to open in the UK and Ireland for a start. Toby, I'm just happy for Danny DeVito.

14:31Jacob Cohen:The Blackstone of this all is so interesting because Jersey Mike's was a family owned business. Blackstone came in and saw that a lot of members of Cancro's family was still on the corporate payroll. Nine members were taking a paycheck from Jersey Mike. So they kind of said, all right, we're ushering in this new era of professionalism. You guys are seeing the door. And then they also tinkered with the menu, which when you hear P.E. tinkering with a beloved sandwich chain, you figure it's not going to end well. But they kind of popped off here. One thing that they brought in was the first hot Italian sub.

15:08Jacob Cohen:I have had it from Jersey Mike's. It's quite delicious. They also brought back a chicken salad promotion. They're trying to broaden the chain's appeal across more markets. So there's also been a uglier side where people on social media have been sharing images of their sandwiches and saying, look at how they're skimping on me. This is private equities playbook playing out in front of our eyes. But you have to give them some credit. Anybody who says, let's make a hot Italian sub, that's a pretty good idea.

15:35Mitch Gagliardi:So the bull case for Jersey Mike's is that it's going to become the next subway, right? So U.S. sales have more than tripled in the past couple of years. They're basically worth as much as Subway. Subway was just bought for$9.4 billion. And, you know, Jersey Mike's after this IPO is not too far off. Subway has 30 ,000 restaurants globally. It's become this global chain. That's exactly what Jersey Mike's wants to do now that it went public. So they're growing fast. People generally think of them as high quality, and they are on the expansion route. The bear case is that restaurants, it's just a tough market over there.

16:12Mitch Gagliardi:The restaurants index is down 0.5 % this year. That's well underperforming. The S &P 500, 6.9 % advance. Restaurants seem to go up and down with the times. The consumer, as we mentioned in the first story, is tight right now. So this is a volatile market for restaurants broadly, and that's what Jersey Mike's is going into. That's just their industry.

16:33Jacob Cohen:One thing that Jersey Mike's thinks is their competitive advantage is that their customers skew a little higher income. That is what their CEO said, which has insulated the company from some of that consumer pressure that we have been feeling. So maybe they're feeling okay because their ace in the hole is they just have a richer customer base that seems to withstand economic pressure a little better than maybe the typical customer that goes to a subway. All right, we're going to take a quick break and come back with what Tim Cook said on his last earnings call right after this. Every day, shareholders meet to discuss important matters about the companies you invest in.