Apple Just Declared War On OpenAI

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1:49Money market matters. If money is evil, then that building is hell. The show goes on! The folks in there have watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. It is July 14th. Let's check in on yesterday's market vitals. The major indices fell after the US and Iran clashed over the weekend. Brent crude rose as President Trump resumed the Strait of Hormuz blockade and proposed a 20 % toll on cargo. More on that later. That sent treasury yields rising as well as traders priced in higher inflation. On Calci, the odds of a rate hike before year end hit 67%. Meanwhile, SK Hynix led a global chip sell-off.

2:35We will get to that later too. And finally, SpaceX shares dropped another 4%, nearing their IPO price of$135 per share. OK, what else is happening? Apple is suing OpenAI. The iPhone maker filed suit in federal court on Friday, accusing OpenAI of stealing trade secrets to build their own hardware business. Apple claims that hardware business is now, quote, rotten to its core by its illegal reliance on misappropriated trade secrets. Apple also alleges that OpenAI pushed job candidates to reveal confidential information during interviews. The company is seeking damages, asking the court to bar OpenAI from using its trade secrets and to force the company to return its confidential materials.

3:25OpenAI responded in a statement saying, quote, we have no interest in other companies' trade secrets. This drama comes just as OpenAI prepares to launch its first hardware device and, of course, gears up for one of the most anticipated IPOs in history. joining us to discuss this drama we're speaking with alex kantrowitz author of the big technology newsletter and host of the big technology podcast alex thank you for joining me the the statement that really jumped out at me in this lawsuit is the one that i mentioned the statement by apple that open ai's hardware business is rotten to its core that's pretty intense language makes me think that this lawsuit is a big deal, but I don't know.

4:12What do you make of it? Yeah, well, Apple, first of all, really sees the threat coming from OpenAI. If you think about where OpenAI sits, of course, like it's working to expand an enterprise, but it hasn't given up on consumer. And where they're focusing in consumer are these bi-directional voice models. So instead of you taking a turn and the AI taking a turn to talk, it's a model that can listen and talk at the same time, which is going to make much more natural speech And of course, that's the way that Siri is accessed by people is through conversations. So Apple certainly sees that OpenAI is developing a technology that could threaten its business.

4:50Of course, OpenAI has a billion users of ChatGPT, according to some third parties. And so if you unleash that, you know, with all those users and maybe build your own device, that could be the thing that cuts off Apple's growth. So there was a great Wall Street Journal article today talking about how Apple has gone thermonuclear on companies coming for its business in the past. And of course, the most prime example is the Android makers in previous years. So this could be a replay of that for sure. It's not to say that Apple doesn't have a case against OpenAI. If you look at the filing, it seems like OpenAI is basically dead to rights on this one, where Apple has some of the most sloppily collected corporate espionage in the history of business on behalf of OpenAI, where OpenAI basically did some of this trade secret ceiling on Apple computers, which Apple was able to see.

5:41So they definitely have a case against OpenAI. But because OpenAI is a threat to Apple in this way, to get to your original question, I expect this to be a fierce battle. I don't think Apple is interested in settling. I think they'll try to take it all the way through to get to a judge ruling, which includes some pretty painful discovery for OpenAI. And we're just getting started here. I guess the big question for OpenAI is, is this going to be harmful to their business? Is this going to be a real problem? Or is it kind of sort of background noise? I mean, they've got this. They've got a lot of other lawsuits in the pipeline, these safety and wrongful death lawsuits, these copyright lawsuits, lawsuits coming in from various state attorneys general.

6:30I mean, a lot of people are firing off lawsuits at this company. And now one of the most valuable companies in the world with one of the largest balance sheets in the world is doing the same thing. I mean, you have to think at some point this is going to be a real problem if they have to figure out how to grow the business. And at the same time, they're spending I don't know how many, many dollars on fighting these lawsuits. Is this not going to be a real problem? Yeah, I think it will be a real problem. So I would say, first of all, the good news for OpenAI or the bad news, depending on how you want to look at it, is this hardware business isn't a real business yet.

7:09Right. So it's not like Apple is going to stop them in their tracks and they lose a billion dollar business unit right away. But that being said, they do have great hopes for it. And because it's not a full business yet, and it's so early on, if it's up to the judge and the judge says, hey, you know what, OpenAI, you can't use any of those Apple trade secrets that you took, it could cause OpenAI to sort of unwind this hardware production to maybe the very beginning if the judge sees it fit. So this is something like, you know, OpenAI has been talking a lot about this device. And when you think about the company going to IPO, which you mentioned at the top, obviously that's going to be something that it's going to talk to public market investors about the potential for it to actually make a lot of money based off of these devices.

7:53So if that has to roll back from the beginning, that's going to be pretty damaging to its IPO case. And the one other thing I'll point out is, isn't it interesting that seemingly every partner that OpenAI partners up with comes back at it like this? Of course, it was partners with Apple with the Chachibuti integration to Siri, partners with Elon Musk at the very beginning. Now Elon, of course, hates them, partners with Microsoft, now Satya Nadella seemingly every other day, has a Twitter essay about how it's wrong to work with OpenAI, and the list goes on. So you need friends in business, and that might be the thing that hurts OpenAI more than any of the legal action is the fact that one by one, it seems to be alienating its partners.

8:36Yeah, it's a really interesting point. It seems that if there's one enemy that everyone has decided to hate on in Silicon Valley right now, it does appear to be OpenAI on literally all angles. And I guess you have to ask the question of what does that ultimately do to the business? What does that do in terms of their ability to fundraise, especially with the IPO coming up? It seems like the answer is it's not going to do anything good. I assume maybe your belief is that the outcome of this specifically, I mean, if this lawsuit kind kind of trends in the direction that it appears it will, would be that maybe they will just cancel this hardware product and this hardware business.

9:16Is that kind of how this ends if Apple wins? Yeah, there's a range of possibilities here from like the complete cancellation to like having to like go back to the drawing board to the judge saying basically opening out you did wrong, but, you know, slap on the wrist because it was just like one employee and one executive that's, you know, involved but tangentially evolved And we can't really prove even with discovery that you've copied any Apple IP. So there's a wide range of possibilities here. One more thing that I would say about this is that it's almost an indictment on the company's hardware efforts that it would bring in.

9:54It's brought in 400 former Apple folks. And that they've been so, I feel like they've been so reliant on using the Apple way for so long that they can't think out of the box. And if you're building a technology, a new technology based off of this novel native invention, which is generative AI, do you really want to have people who are like so kind of lost on their own that they have to go back into the old Apple roadmap documents to kind of point their way towards the direction? Or do you want people in there thinking from the very beginning of what this device can be, regardless of what Apple's built in the past?

10:29If it was up to me, I'd kind of want the second group of people who would say, we got this technology. We don't want to bolt it onto anything new. Where do we go from there? But it doesn't seem like that's the direction OpenAI has gone. Yeah, and literally starting with Johnny I, who's the legendary product designer over at Apple. They bring him in and they take a bunch of Apple employees along with him. I want to just shift gears for a moment and talk about Meta because there's been some really interesting developments over at Meta. The stock surged 15 % last week. It was up 6 % on Friday alone because they launched this new AI model called MuseSpark 1.1.

11:07People are excited about it. They were talking a lot about it. And also, crucially, one of the main goals is that it's going to be a lot cheaper than a lot of the other models, which puts a lot of pressure on OpenAI, a lot of pressure on Anthropic. Meta was considered one of the AI losers as recently as like two weeks ago. Seems that the market has kind of flipped on this. And I know that you actually interviewed Meta's CTO last week. So just as we wrap, I'd love to get your thoughts on what's going on with Meta and how investors have kind of changed tune on that stock. Yeah, right. Add Meta to the group of folks that are attacking OpenAI.

11:44Of course, they've come out with this new model, 25 % cheaper in some cases than the frontier models that companies like OpenAI offer. One thing, it's also a testament to OpenAI's business that all these companies are coming after them because clearly they've built something. But on the meta front in particular, it's hard to say whether to view them as a winner or a loser right now. Yes, the market went up last week for – or the meta stock price went up last week. But it's really kind of tough to pull apart exactly what the reason was. Now, maybe it is because they finally built this model that's doing well on the benchmarks.

12:17They've done that before. But my hunch is that it's probably because these rumors that they might start licensing some of their excess compute were sort of confirmed by Zuckerberg. And the market has been sort of wary of Meta's continual spending for a long time now, first on reality labs to make VR goggles and mixed reality glasses, and now on this AI build out with very little to show for it. And so this may be sort of a short-term market reaction saying, well, you know, you've spent all this money. You haven't delivered much. At least give me some profit by licensing out your XS compute for like very high margins.

12:56And that's, I think, what we're seeing here. What do you think is the direction for Meta's AI business? Because there was obviously those headlines that they're going to sell their XS compute. and that phrase excess compute was striking because all we've heard about is how there's no excess compute because there's so much demand. But the reason that it appeared they were doing that is because they realized that building their own internal AI wasn't quite working out. Those were some of the rumors that we heard. That was in part of the reporting. And then they come out and they release this new AI model and it makes you think, oh, maybe they are really focusing a lot of effort on their internal AI.

13:38Maybe this is a thing that they're doing. The two stories seem to be at odds with each other. I guess I'd be interested to get your views on which one is the more credible story or which one is more accurate. It's interesting. Zuckerberg said that there's a chance that they'll sell some of this compute, but he didn't want to call it excess compute, which is weird because I would say if you're going to sell stuff that you're not using for a higher price than you bought it for. It's like the definition of selling your excess. But anyway, I won't get into an argument with him on that. Look, ultimately, you have to separate the model, which like they've released an impressive model, and the product.

14:17Because ultimately, you can use just a certain amount of compute for training. But the area where you're going to use the most compute is for inference, people actually using your product. And for Meta, it just doesn't seem like that product that they've created so far has been used enough to merit having all those data centers, which is why they've kind of expressed this openness to sell it. So ultimately for Meta, great job building the model. The model's become somewhat of a commodity now. No one's really cracked consumer AI. I mean, even open AI is, while not giving up on it, you know, is really, you know, has eyes for enterprise more than consumer right now.

14:55And so, you know, if Meta can't crack it, despite the fact that it like knows a lot about you, knows your interests, has all this data, has all this compute, has all these engineers, then who will? And for the time being, you know, it's not going to be able to really make use of all those data centers. It built in anticipation of the demand for this product taking off until it's able to figure this out. All right. Alex Kantrowitz is author of the Big Technology Newsletter and host of the Big Technology Podcast. Alex, thank you so much for joining us. We appreciate your time. Thanks so much, Ed.

15:27After the break, how Korea's stock market turned into a casino. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

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17:21We're back with ProfG Markets. South Korea is home to the hottest trade in the world, and it might be spiraling out of control. At its peak last month, the Kospi, South Korea stock market, was up nearly 100 % on the year, making it the best performing major index on the planet. That rally has been supercharged by a financial product beloved by retail traders, and that is the single stock leveraged ETF. Since launching in late May, 16 of these ETFs, all tracking Samsung and SK Hynix, Korea's largest membership manufacturers, have tripled in size to more than$9 billion. Today, those ETFs and the two stocks they track account for over 70 % of all trading volume in Korea.

18:11But now, cracks are beginning to form. Yesterday, SK Hynix plunged more than 15 % in Korea on investor worries that the trip trade may be overcrowded. That sent the KOSPI down 9%, forcing regulators to pause trading across the entire index. And this volatility closely follows Friday's listing of SK Hynix shares on the Nasdaq. The company's American shares fell 9 % yesterday too, and it took other memory stocks like Micron, SanDisk, and Western Digital down as well. So here to tell us how Korean markets got hooked on leverage and what it all means for investors around the world. We're speaking with Luke Kawa, head of markets at Sherwood News.

18:56Luke, good to see you. Thank you for joining me here. So much in this story because it's a confluence of all of the things that investors are so excited about right now. You've got memory chips going up and then coming swinging back down. Also, the leverage ETFs, which seem to be kind of turbocharging both the upswings and the downswings. I mean, let's just start with SK Hynix for a moment because it fell 15 percent yesterday, its biggest single day drop ever, one of the most important stocks in the stock market right now. What do we know about why that happened? Why did it take such a tumble?

19:34In terms of fundamental news, again, I don't think there's too, too much here to point to. And that's probably the most concerning point of it all, right? When you have a situation like this, I go back and I think, well, two months ago, three months ago, when this thing was going up 6%, 7 % every day, did we stop and ask, hey, what's the reason why this is happening? I don't think we did fairly often. You don't tend to do that in the good times. And so what was happening during that, as we know now, and as you've touched on is that this trade was getting built up by more and more leveraged exposure.

20:08And in fact, if you look at South Korean markets, you had a combination of both taking out margin loans to then buy a leveraged product. That's leverage squared, man. So when you have that situation happening and you have the stocks have whether it's a technical catalyst to reverse or a fundamental catalyst to reverse, I don't start asking why is this happening? I start saying, you know, yeah, big moves make sense. given the volatility you had on the way up and the leverage that we know was in the trade. So the movements that you're describing here, it sounds a lot like a meme stock. I mean, no fundamental news, nothing actually happening that should trigger such a violent downswing, just leverage, retail trading, excitement and then not excitement vibes, essentially.

20:56Is that basically what is driving one of the most valuable companies in the world right now? I would say, you know, yes and no, because the difference between this and, you know, say, you know, a pure meme stock move is this has so much fundamentals behind it. If you look at the earnings revisions that memory stocks have had, the, you know, the amount of pricing power they've been able to demonstrate, the way their profitability has increased, and the way that they still look optically, if you're using just kind of a naive forward price to earnings ratio, cheap. These stocks have had a much better fundamental, quote unquote, reason to go up than others have.

21:32I think the problem is, to a certain extent, stories get sufficiently well understood and a confluence of factors, whether that's Micron being kind of unable to hold the big gains it saw post earnings, whether that's kind of simply the fact that we went from the best quarter for semiconductors ever to now a period of time where, you know, as a calendar flips, that's often a catalyst to just based on position weighting change things up a little. I think what you have here is just more a recognition that the ways in which we choose to get exposure to the market has a heavy, heavy influence on the market itself.

22:10You can call it the tail wagging the dog, or you can say it's just the tools we use define us. So I just want to dive into these leveraged ETFs for a moment, which, by the way, Korea's regulators are not very happy about. They're pretty worried about it. One of their top regulators said that he, quote, should have laid down to protest the launch of leveraged ETFs by any means necessary. So clearly a lot of people think this is a problem. Why do they think that it's a problem? And just backing up, what actually are leveraged ETFs? So in its most basic form, it's right there in the name in that you're buying a product that will advertise itself as delivering 2x, let's say, the daily return of the instrument it's tracking.

22:58So for instance, in this case, SK Hynix. What is actually being done in this case is usually that the ETF provider will have a total return swap with a bank in which the bank agrees to effectively, you know, warehouse a lot of that exposure and be the one that is making a lot of the changes, the incremental changes kind of on the back end in terms of boosting its exposure or lowering it, depending on what the shares do on that day. But effectively, it is an agreement that this return will be delivered during big up markets. What you will see is then there's kind of a need to be buying and feeding as it is going up and then selling when it's going down.

23:39So it's incredibly pro-cyclical. And this is why you get a lot of talk, chatter, well-deserved. I think Dean Kurnut at Macro Risk Advisors has been someone that's flagged this very well about the rebalancing activity of these products is one thing that enhances a lot of these swings and the volatility that we've seen. One also interesting thing that I think has come up in these products is just the idea that we're using them so much that it's actually impacted equity funding costs. So you kind of, for instance, you saw at about the time of the SpaceX IPO and as assets under management in these products was really ramping up, equity funding costs were rising.

24:20It was just becoming difficult to meet all this demand for leveraged products. It was about this time that you also saw some of these big funds switch from using total return swaps and say, hey, we're going to use a little more in terms of options and in terms of being able to try and replicate that 2x return, that introduces kind of another source of drag. But what that really was is that was a big bell ringing saying, hey, the system cannot accommodate all this demand for leverage on semiconductors, and in particular, these memory stocks. Yeah, just looking at Samsung and SK Hynix, they now make up more than half of the Korean stock market's entire market cap.

24:58And those ETFs are accounting for, as I said, 70 % of the trading value. one of the lawmakers in South Korea has said that the KOSPI, their entire stock market, has, quote, turned into a casino. And those numbers make me think that's pretty fair. And it doesn't seem, I mean, it doesn't inspire a lot of confidence as an investor. Would you agree with that characterization of the Korean stock market at this point? Hey, I would agree that almost every stock market, look at the U.S., more and more, the stock market is where we go to make long-term bets, supposedly, about the future of American companies.

25:41And we increasingly do this using options with four days to expiry. So I don't think the casino culture is something we can lay simply at South Korea's feet. It's probably something that would most often be laid at the American market's feet. Beyond that, it has a long history in Japan, too, with very active retail traders playing with leverage. The human desire to make money quickly is not something that shares any one nationality. That's something that we can definitely unite on. All right. Luke Kawa is head of markets at Sherwood News. Luke, thank you for joining us. My pleasure. Thank you for having me.