Why a Doomsday AI Blog Wiped Out $300 Billion

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0:38Robert Armstrong:This is a paid sponsorship. Today's number, 13 million.

0:46Josh Brown:That's how many views a video of RFK Jr. jumping into a pool with jeans on received last week. The bizarre clip was designed to encourage Americans to, quote, get active, but it ultimately drove viewers to get therapy instead. Money market's mad. If money is evil, then that building is hell. The show goes on! The folks in there are watching show, show! Welcome to ProfG Markets. I'm Ed Elson. It is February 25th. Let's check in on yesterday's market vitals. The major indices all climbed as tech rallied out of Monday's sell-off. AMD led the way, climbing 9 % after Meta signed a multi-year deal to buy their chips.

1:34Josh Brown:Meta will also have the option to take a 10 % stake in the chipmaker over a period of time. Meta's stock was actually flat on the news. Meanwhile, gold declined and finally Bitcoin fell below$63 ,000. Okay, what else is happening? A new Substack piece has sent software stocks into yet another freefall. An article entitled The 2028 Global Intelligence Crisis, published by Citrini Research on Sunday, outlines a nightmare scenario, and that is what if AI leads us into a financial crisis. The premise is simple. By 2028, AI displacement has caused unemployment to hit 10%, spending plummets, the S &P slumps, and the economy becomes unrecognizable.

2:23Josh Brown:After this piece was released, the Dow fell as much as 2 % and software stocks fell 5%. So here to break down this Citrini research article and the chaos that ensued, we're speaking with Josh Brown, CEO at Rit Holtz and host of the Compound and Friends podcast. Josh, good to see you. I want to get your reaction to this Citrini Research blog post. This is like the second blog that's gone mega viral in three weeks related to AI and now we're seeing just crazy selling in the markets. Do you agree with the market's reaction? Are you as worried as other investors seem to be?

3:08Ed Elson:Not really, but I love the piece. I think it's fascinating. We have people submitting their creative writing projects like it's college and the market instantly starts repricing MasterCard and Visa by 10%. I think it's fucking hilarious. I think it was very well written and I appreciated that ability to like try to think two years ahead and all the knock-on effects the thing is I've seen this before and I'm not going to finish that sentence by saying I know how it turns out I just know it turns out differently than every single negative piling on top of each other without an offset in sight That is very rarely how these things end up.

3:59Ed Elson:And so I think it's important for us to think through the issues that Satrini raises. But I think it's highly unnecessary for us to all conclude, oh, yeah, it'll probably it'll probably shake out just like this. Every possible terrible externality will occur all at once and it'll be game over for the economy. Like, obviously, that's not the way these things play out.

4:26Josh Brown:Yeah, 100 % agree. It was so well written. It was so interesting. It carried through the whole narrative. It collected all of the details, all of the relevant details that we should be talking about. And then the part where it lost me was when the market decided to sell pretty much everything, or at least everything in software. Software was down 5%. You saw very big names falling. DoorDash fell as much as 6%. Sure, why not? because this guy wrote that AI would essentially replace it. What do you make of the actual argument of the piece, which is essentially that AI is going to be so incredible, so productive, that actually it's going to destroy our economy in all of these unexpected ways.

5:14Josh Brown:GDP will grow. There will be a lot of output, but the economy itself will be in a state of structural crisis.

5:22Ed Elson:This could only be written by someone who employs no people and has no customers and has never really been in business before. It's a it's a it's like a Gen Z slash millennial think piece written by very bright people, of course, who don't understand that the frictions in the economy are not just like these annoying things with a friendly face. the relationships in the real world are not just like, oh, here's a friction, but we put a salesperson in front of it and therefore it'll persist forever. Because the thing that business owners understand is that, and I don't mean business owners like I run a hedge fund, I sit in front of a Bloomberg all day.

6:08Ed Elson:I mean like people that actually run businesses where there is like face-to-face interaction. The thing that we all implicitly know is that, every business effectively is a solution to a problem. Yes. Even like the most abstract example, because the examples that are right at my fingertips, a hospital is a business and it's solving the problem of people being sick and wanting to get better. Okay, that's easy. What is the four seasons? It's a solution to a problem. People want to be entertained slash they want to travel to places, but they have the means and the standards that are high enough where a regular hotel won't do.

6:54Ed Elson:So if you think of businesses as just solutions to problems, which is really all they are, then what this piece is saying is that we're going to run out of problems. Right. Come on. In 100 ,000 years of the evolution of human society, do we ever actually run out of problems to solve? so this idea that um we're in a post-labor economy and people aren't going to have to work anymore because there's gonna be nothing for them to do like are we losing our collective minds there will always be problems to solve and every wave of technology solves old problems introduces new ones and this idea that we'll be able to just turn everything over to agents who will solve problems on our behalf okay i'll buy that a lot of what's going to happen is that great and you think we're just going to sit in a room quietly and read a book?

7:47Ed Elson:Right. No, we'll be out creating new problems. Think about a lawyer. The fundamental constraint of a lawyer filing lawsuits is he doesn't have enough associates to do the paperwork. What if that constraint were removed and utilizing agentic AI, he could file paperwork till his heart's content? Is he filing more or less lawsuits in that scenario? Right. Filing more. Obviously more. And more lawsuits means more people defending themselves against lawsuits. And you see how this I didn't come up with this. I didn't come up with this concept, but it's a very important one. Someone said in 1955, the work will expand to fit the time available.

8:33Ed Elson:Like the more time we have, the more work we will create for ourselves. And until you process that, you're not going to understand just how misguided these types of sci-fi writings really are. Yeah.

8:47Josh Brown:It seems to also say that this idea of friction, friction that we experience in our daily lives, is going to be just totally eliminated as a concept because of AI. Maybe we'll see it less in our daily lives, maybe a little bit. But even so, I mean, the friction's still being handled by someone. It's just being handled by an AI now. So that's still a business. That's still going to create value. That's still going to create a whole ecosystem and an economy around it.

9:15Ed Elson:And there were people who used to sit on an elevator all day and they would wear a uniform and a special cap. It was literally only the elevator guy could wear this cap. And he stood there and he pressed people's floors for them. He operated the elevator or maybe this is before buttons and he used a lever. Is anyone like what happened to all the good elevator operator jobs? There were trucks that drove around Brooklyn. They were knife sharpening trucks. They had the same bells as like an ice cream truck. And they would roll slowly through a neighborhood and all the women would come running out of their kitchens, aprons on with an armful of knives that needed sharpening.

9:55Ed Elson:And then the technology improved to the point where, hey, we don't actually need to sharpen knives. We throw them out and buy new ones. It's like, of course, we're going to have disruption and entire categories of jobs being lost. The thing that people are worried about is that they all happen at once. The more realistic scenario is that this rolls industry through industry. And as each industry sees lots of jobs be disrupted, it creates new ones in their wake. And look, I think what most people end up realizing is that AI is a better complement to experienced workers than it is a replacement.

10:34Ed Elson:doesn't mean no one gets replaced. It means the people that don't get replaced utilize AI and do bigger business. And that leads to more job creation in other areas of the economy. It happens every time. It'll happen this time. It'll be uncomfortable in certain pockets. Nobody's delusional about that.

10:56Josh Brown:And the timeframe is the question. It's like how many jobs will be replaced, displaced within a certain timeframe? how many of them in that time frame, that's going to be the disruption. But the idea that this has structurally changed the entire fabric of the universe, that's where I started to get lost. I do need to wrap us up here. I think a big piece of this, or at least something that is very interesting to me, is, again, the market's reaction to a blog that was posted on Substack by, as you call it, it was a think piece, by a very smart person who wrote a very interesting and creative article.

11:33Josh Brown:And it inspired incredible selling pressure, incredible value destruction, which to me says something about how investors are feeling right now. And something that you have described, you came up with this term, HALO, which stands for heavy assets, low obsolescence, which is the new type of company that investors seem to like right now, which is companies that have nothing to do with AI. AI won't even touch it. So before we go, could you just describe this halo term that's gotten pretty popular? Wall Street Journal wrote an article about it. It's your term. Just describe what that means and how investors feel right now.

12:11Ed Elson:So in early February, I was talking about the types of stocks that were on the 52-week high list. And what they all had in common was they have heavy assets on their balance sheets and they have low obsolescence risk. And it occurred to me that this was a reversal of the entire post-financial crisis period where we fetishized the opposite, asset-like businesses. We wanted companies with subscription revenue, ARR, very little cost of doing business, and almost no assets on their balance sheet. And now it's flipped. It's the reverse. You look at stocks like Anheuser-Busch, Coca-Cola, Pepsi. You cannot type, I want a Diet Coke into a prompt and have somebody else create that product.

12:57Ed Elson:It is not disruptable. Natural gas transmission lines, utilities, Caterpillar, Deere, most stocks that are related to heavy industry, in fact, completely halo. And there were some really fascinating examples inside of one industry. You could say Expedia is highly disruptable by AI. You can plan trips. You can book flights. You can have an agent that scours these airline websites and find the optimal trip for you, putting Expedia out of business. But within the same sector, there's Delta. Can you prompt yourself a fucking airplane? Obviously not. So this is a really interesting market. What this does, Ed, just to sum up, it throws out all these old paradigms that people think about in the stock market.

13:46Ed Elson:It crushes the growth versus value thing. That's now irrelevant. It gets rid of cyclical versus defensive. That's irrelevant, too. It even breaks the tech versus non-tech idea because certain tech stocks like Apple are extremely halo. You cannot get around the physical iPhone device. And chat GPT is probably just going to become a plug-in to the iOS ecosystem. So Apple is halo, while Adobe is not. So I think that that's a really important prism through which to view the stock market. And I think that dynamic will remain important throughout the rest of the year.

14:22Josh Brown:Absolutely. Lots more that we could discuss. I mean, again, my takeaway, people are very confused and very anxious right now. All of the paradigms that they've been following are just being thrown out the window. And it's very confusing to see which ones actually work. It's not supposed to be easy. If it were easy, everybody could do it. Get used to it. That's exactly right. Josh Brown, thanks very much for your time. Cheers, Ed. After the break, warning signs from Blue Owl. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

15:17Josh Brown:to building a matchmaking business, to becoming one of comedy's most exciting voices, her unconventional path has led her to Hulu comedy specials, sold-out tours with Amy Poehler and Tina Fey, and her memoir, This American Woman. Meanwhile, Zoya's been watching, learning, and carving out her own path as a young professional. Get ready for a hilarious and honest conversation about immigration, money, late-blooming success, and what it really means to build a big, authentic life on your own terms. Listen wherever you get your podcasts, or watch on youtube.com slash yourrichbff.

15:54Josh Brown:We're back with Prof G Markets. Blue Owl Capital is at the center of a new panic over private credit. In recent weeks, investors have attempted to pull their money from the asset manager. Those requests are driven in part by concerns over the company's exposure to software borrowers. Now, following the increased demand for withdrawals, blue owl is shutting the gates on one of its private credit funds investors will no longer be able to ask to withdraw their money every quarter instead the firm will sell assets and offer limited liquidity on a quarterly basis shares of blue owl plunged 10 on the news and the sell-off rippled across other alternative asset managers as well aries apollo and blackstone fell more than 5%.

16:40Josh Brown:So what exactly is Blue Owl and why is it preventing its investors from withdrawing cash? Here to help us answer these questions, we're speaking with Robert Armstrong, US Financial Commentator for the Financial Times. Rob, welcome back to Prof G Markets. I want to get into Blue Owl with you. I keep on seeing this name in the news. I kind of know what they do, but not really. Can you just start off for us? What is Blue Owl? Why should we even care about them? Blue Owl is a large, what would I call them?

17:22Robert Armstrong:Fixed income investor. So they run assorted funds that manage credit investments on behalf of investors in various different ways. and they're a big player in the space. They've been around for a long time and they've made a lot of money. So they're a meaningful player, especially in private credit, which is, of course, kind of the asset du jour of the last couple of years.

17:52Josh Brown:So talk a little bit about how it is the asset du jour, because I think that's a big piece of the story here. The reason why it probably matters to people is because private credit is suddenly a big deal and it used to not be.

18:05Robert Armstrong:It used to not be. And it's not so often that a new asset class kind of appears, right? The last, you know, private credit is now something that an institution say, you know, a respectable institution will have a private credit allocation in their portfolio. And that might not have been true three or four or five years ago. And, you know, you have to go back 30 years before that when kind of junk bonds became like this new asset class that people were getting into. And I think the magic of the asset class has two parts. one is that it is reputed to have fixed income like returns like the returns you might get from uh high yield bonds but with a little bump because you are lending to a special class of borrowers.

19:09Robert Armstrong:These funds are lending to borrowers who, for one reason or another, would like to avoid public markets. Either they want a bilateral relationship with their lender or their business is such that it's hard for larger markets to understand, or their cash flows are uneven, or for whatever reason, they don't want to be buffeted by the daily grind of the high-yield bond market. So they do a bilateral deal with a lender who charges them a little bit more. So let's say you were getting 8 % on your high yield bond part of your portfolio and institution. Maybe the private credit guy offers you 10, let's say.

19:55Robert Armstrong:I'm just kind of picking those up, but you got a little edge there. And that is called reaping an illiquidity premium, right you're not in the bond market you can trade in and out all the time you go to private credit in theory you get a couple more percentage points of yield but you're like locked into this fund for five years and everybody likes this extra yield everybody loves it so what we have here is this

20:21Josh Brown:massively growing asset class yes that is interesting to a lot of people for various reasons. One of them being they might not want to go to the public markets. That's for the borrowers. For the borrowers.

20:36Robert Armstrong:Borrowers like it because they don't want to.

20:37Josh Brown:For the borrowers. For the people who are lending the money, they're making a lot of money. Yeah.

20:41Robert Armstrong:There's another very important point, which is going to come up in this conversation, which I think I should mention. Please. Which is that the value of the funds that have these private loans in them are not marked to market every day. Yes. Right. They're marked every quarter or so, or however, very infrequently. And one of the things institutional investors love about this is that just because of the way the math works, this means that the returns from private credit look uncorrelated to public markets. and without boring you with the mathematics of portfolio construction, it's better to have an uncorrelated portfolio.

21:29Robert Armstrong:The returns from different things in your portfolio moving in different directions makes the whole thing, the return for the level of risk superior in an uncorrelated portfolio. Now, it may not really be uncorrelated. The appearance of uncorrelation is created by the fact that the thing isn't marked to market every day like your junk bond portfolio or your equity portfolio or whatever else. But that's a very important feature of why people like this product so much.

21:59Josh Brown:And I think this gets to the core of why this is important and perhaps could be a real problem and people are beginning to talk about this. And I think it all comes down to the name, which is private credit, which is you don't know what is really going on. You don't see, it's not mark to market. You don't see what's really happening. You don't see really the redemptions. You don't really see the performance of these investments. and this is now becoming a real issue, especially in the AI world, where Blue Owl has been a huge player, loaning out tons and tons of money to build all of these data centers.

22:45Josh Brown:And then we're posed with the question, it's like, well, we don't really know what all of that debt is. And the big question that investors have been worried about is how much debt is being used to build out this infrastructure. And this brings us to the conversation that we were speaking with Josh Brown on this. There was obviously the Citrini blog post that went absolutely haywire this week that brings up this issue of what AI and private credits association with AI could do to the private credit ecosystem and how much default we might see in this ecosystem. him so i mean a lot there there's a lot there if you could speak to all of it let me you've given

23:33Robert Armstrong:us a lot to think about let me complicate it even further the the the point there is two issues there one of them is with private credit that you need to try to keep separate one of the issues is lack of transparency how much do we know about the performance of the underlying loans uh with And how much do we know about what they are worth when they are not marked to market every day? And, you know, you might have greater or lesser transparency depending on the product. Liquidity is a separate issue, right? But the two kind of converge, right? Because when people get nervous, rightly or wrongly, you know, maybe this AI thing is really worth worrying about, but maybe it's not.