Too Situationally Aware to Fail

0:09Hello, and welcome to Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Bloomberg with Elizabeth Spiers of New York Times. Hello. With Emily Peck of Axios.

0:23Felix Salmon: Hello, hello. And we are going to talk about Leopold Aschenbrenner and situational awareness and the latest imploding hedge fund. We love this story. So much going on there. We are going to talk about crack spreads. If you don't know what a crack spread is, you should and you will find out. We are going to talk about quarterly reports. Are they a good thing or are they a bad thing? The SEC seems to want to make them optional. Should they be optional? Should they not? We will have a spirited debate. We have a Slate Plus segment on gas stations and whether it is worth driving out of your way to get cheaper gas.

0:58It's a fun one this week, so stay tuned. It's all coming up on Slate Money.

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1:38Felix Salmon: Watch HydroJug's story at advertising.amazon.com slash rising-stars.

1:46Felix Salmon: This episode is sponsored by HeyGen. If creating video content feels like a trade-off between looking professional and protecting your time, there's a new way to think about it. Hey Jen lets you turn a script, photo, or presentation into a polished video of you in minutes without setting up a camera or hiring a production team. Whether you're a financial advisor explaining market updates, an attorney answering common client questions, a real estate agent showcasing listings, or a creator growing your audience, it helps you stay visible without constantly filming new content. It's rated the number one AI video platform for small business on G2, trusted by more than 30 million people and 85 % of the Fortune 100, and supports over 175 languages.

2:37Felix Salmon: So your message can reach audiences wherever they are. Here's the wild part. Record yourself for just 15 seconds and Hey Jen builds an AI avatar that makes professional videos for you on demand. So you can post everywhere your audience is as yourself without filming every time. Your first three videos are free at heyjen.com slash pod. That's H-E-Y-G-E-N dot com slash P-O-D.

3:09Okay, so we need to start with the gloriously named Leopold Aschenbrenner, because whenever someone named Leopold Aschenbrenner is in the news, obviously we need to talk about it. Elizabeth, who is Leopold Aschenbrenner?

3:24Elizabeth Spiers: He is a 24-year-old hedge fund manager who, until recently, was running an AI-focused hedge fund that had, I believe,$20 billion under management. Now he's running an AI-focused hedge fund that has$10 billion under management. I think at the peak, it was like$45 billion. This guy has an astonishing risk appetite, is pretty clear. But yeah, he graduated from Colombia. His parents are German. He goes straight to...

3:55Felix Salmon: Say what age he was when he graduated Colombia. Oh, yeah, at the age of 19. And he was valedictorian, apparently. And he goes straight to work for Sam Bachman-Fried at FTX, which is obviously a great idea. And he's running, like, the effective altruism chapter of Columbia, and then he does that kind of stuff at FTX for a hot minute, and then FTX implodes. He goes to work for OpenAI because, of course, he does. Leaves under a little bit of a cloud, but manages to write, like, a 165-page essay called situational awareness which i do need to quote from the beginning of because it is so it is so glorious he says right now there are perhaps a few hundred people most of them in san francisco and the ai labs that have situational awareness through whatever peculiar forces of fate, I have found myself among them.

4:55Elizabeth Spiers: A characteristic humility for, you know, Silicon Valley people, although he's, I suppose, the East Coast. He then ends by saying, sure, going all in leveraged long NVIDIA in early 2023 has been great and all, but the burdens of history are heavy. I would not choose this. So basically, this is 150 pages of, you know, AI superintelligence is coming and no one really appreciates this except for me and 200 other people in the Bay Area. He takes this 150-page essay, which kind of goes viral, especially in Silicon Valley, and does the obvious thing, which is turn it into a hedge fund. which is basically this is an investment this was an essay about ai but now it's an investment thesis and we can all make lots of money if we can see ai coming before anyone else he raises i think about five billion dollars for the hedge fund and then turns it into 45 billion dollars because he is actually early to the ai trade he is he he makes massive leverage bets not just on NVIDIA, but also on SK Hynix, on a company called Bloom, on Sandisk.

6:09He's quite good at identifying who the hot stocks are. And to be honest, he has$45 billion, or at least 20, 30, a constantly rising number of dollars, which he is then borrowing against to buy more of those stocks. And we saw this bit with Bill Wang, with Archegos, right? If you have gazillions of dollars and you are pouring them aggressively into relatively small stocks, those stock prices go up. And so you actually wind up moving the market with your buys. And everyone else, because this is, you know, the dumbest timeline, everyone else sees the stocks going up and they pile in after you. And it becomes like this self-fulfilling prophecy and he starts making enormous amounts of money.

6:54But as we saw with Bill Hwang at Archaegos, you know, that amount of leverage can bite you in the ass extremely quickly, which is exactly what happened. And then this week, you know, all of the stocks that he had been pushing upwards started going down. Then he started facing margin calls and things started looking a bit hairy for him until his fairy godfather, Ken Griffin, bailed him out.

7:19Felix Salmon: Do you have a question for the group, Felix? Sure. Sure. So my first question is, Emily, how much do you think that the smart money on Wall Street, by which I mean Ken Griffin and his friends, were like super aware of Ashen Brennan and his positions and just like totally orchestrated a pain trade to make him lose as much money as quickly as possible? Yeah, this is the fun intrigue bit that I like. So I guess Ashton Brenner's hedge fund was eight people. Only half had any investing experience. Ashton Brenner himself doesn't have any investing experience. But as we learned from his 165-page manifesto, he has a lot of confidence.

8:05Felix Salmon: He went for it. Okay. And so he did something that I know from television is maybe a bad idea. He wrote a letter to investors basically saying he made a lot of mistakes in the past month, lost a lot of money. The Wall Street Journal had the details on this. Tipping his hand. We're in trouble. That was like the between the lines of the letter. And after that, it was like, it seems like it was indeed game on because then that's got to catch Ken at Citadel's attention and the attention of Wall Street. Oh, hedge fund in trouble. There's a sale and the sale is on stocks. These stocks aren't doing very well right now, but probably will do well going forward.

8:48I will put that in a stronger position. It's not that there's a sale on stocks and they're cheap and so I should buy them. I think there is a massively leveraged position in these stocks that needs to be unwound. And so there's a forced seller. And so what I should do is short those stocks because they are going to go down and that is going to push the stock price down even further, increase the pain on situational awareness and you get this vicious cycle, which just causes this massive crash in the stock price. And then eventually you just need to wait until you see the whites of their eyes. And when he is absolutely forced to sell absolutely everything at any price at all, that's when you buy.

9:28Felix Salmon: Yes, and that seems to be what happened. And I just want to add two more fun things, which is Citadel, Ken Griffin's firm, put out this analysis. I think it was Tuesday. I don't remember saying they think the Federal Reserve is going to hike rates, which was surprising. Some people maybe thought that, but no other note said anything like that. It got a lot of attention. And it made people even more nervous and increased sort of volatility and downward vibes just everywhere. So some people are like, he did it on purpose. He was thinking six chess moves ahead. That somehow was going to give him more leverage over situational awareness, which I think is funny.

10:04Felix Salmon: Also, this dude Leopold is getting married this weekend. So some people are also saying that Ken Griffin swooped in and was like, don't you want this all just taken care of super easily before you head off to get married? And that made him, you know, want to do this deal even more. And did you say what the deal was that Citadel came in and bought all of its stock? And then immediately that Ashton Brenner is like basically wiped out of his entire public equities portfolio and he sold all of his stonks. Then two minutes later, they all bounce back up again. You know, the Korean stock market, which he was very heavily invested in, goes up 20 % in one day.

10:42The whole thing is just like batshit.

10:44Felix Salmon: The whole stock market went back up. The whole stock market went back up. And what this reminds me of very much is, do you remember Fab Fabrice Touré in France? You know, the rogue trader at Sokjen who blew up. And like everyone thought that the stock market was imploding. But it wasn't the stock market that was imploding. It was just this rogue trader who was imploding. And the Federal Reserve came out and did an emergency rate cut in response to the stock market, when in fact, it was just like, you know, a crazy guy at stock gen who'd got out over his skis. And this kind of reminds me of that the minute that the, you know, overexposed hedge fund trader person, you know, basically throws in the towel and says, okay, I'm out, then everything bounces up.

11:29But the thing that interests me is that if you just look at the headlines, Ken Griffin, who is running a bank, Citadel Securities, bought, you know, however many like 10 billion plus dollars worth of stock in a sort of job lot at a discount at a fire sale, which means, you know, because he's a bank that now Ken Griffin, you would imagine, is going to have to sell all of this stock. And the market, because it's reading all of the headlines, knows that Ken Griffin is going to have to sell all of this stock. And so you would imagine the stock would continue to go down because there's still this overhang of stock that is owned by Ken Griffin.

12:11But that didn't happen. The stock market went up. How do you explain that? Well, one way to explain that is to say that maybe Ken Griffin doesn't have to sell all of the stock because he was short. that he had shorted all of that stock against Ashenbrenner, and then he was just covering his short when he rescued.

12:30Elizabeth Spiers: There are a couple of things going on here. I don't really think that it was some coordinated move against Ashenbrenner. Oh, I totally think it was. This is Ken Griffin doing what he normally does. This is sort of his MO. I do think that he sincerely believed that we were going to get a rate hike, which if Kevin Warsh were not the head of the Fed, I think a lot of people would have thought we were getting a rate hike. The second thing is just that he bought the portfolio at a discount, So Ken Griffin is going to make money unless you really think the entire sector is going to tank, which I don't think anybody believes that.

13:00Elizabeth Spiers: And that's why Ashenburn are still in a pretty sweet position. He's held on to his Anthropic stake, which Anthropic is expected to go public shortly. He's still managing$10 billion. He has not changed the composition of the fund as far as we know. It is still a directional bet on the future of AI. And it's not, as far as we can tell, hedged either, because even the short positions in the fund are betting against software stocks based on the thesis that AI is just going to wipe them out. So as far as I can tell, Ashenbritter is still sitting pretty. Ken Griffin's going to make money off of the stake that he bought.

13:35Elizabeth Spiers: And I don't think that you have to sort of feel conspiratorial about it to see this as a potential outcome. I think, if anything, Ashton Berner kind of did what I think a rational fund manager with a fund that had that composition would do if they started getting margin goals, which is let Ken Griffin buy a stake and hold on to that anthropic stake. I've watched a lot of people blow up over the years. This is something that happens relatively regularly on Wall Street is that some hedge fund somewhere blows up. and 99 times out of 100 when a hedge fund blows up there are one or more people on the other side of that trade who make an absolute fortune and most of the time that's ken griffith the reason why i'm pretty sure that there was a targeted attack on situational awareness's actual holdings rather than just a broad sell-off in chip stocks, is if you look at the letter that Aschenbrenner sent to his investors this week, he, this is I'm quoting Bloomberg here, compared the dynamics facing his fund to a, quote, bank run and said the fund saw, quote, adverse trading in names publicly associated with us.

14:52In other words, the market in general knew what stocks he was long and specifically targeted those stocks to sell.

15:04Elizabeth Spiers: Also, I want to just read this other quote from Ashton Brenner from the early stages of the fund where he was giving an interview to the Financial Times and he says, obviously not blowing up is sort of like task number one and number two or whatever. So I need to mention this actually. There's this wonderful unrelated, there is a line in paul krugman's email on friday morning where he's talking about kevin washington fed he says the fed funds rate has little direct economic significance since nobody making important investments relies on overnight money ashen brenner was relying on overnight money that's exactly what he was doing he was he was borrowing money overnight from his prime brokers and pouring it all into ai stocks and being like the ai stocks are going to go up a lot and that's going to be more than enough for me to pay back the overnight funds that i'm borrowing from my prime brokers whoops the thing that struck most people when this when the headlines first appeared is that apparently situational awareness whether it's 45 billion dollars whatever had eight employees.

16:14I am going to go out on a limb here. I don't know this for absolute certain, but I just can't imagine how it would be any other way if you only have eight employees. I'm pretty sure that he had no traders. I think this was a$45 billion hedge fund with zero traders and that all of his trading was done by his prime brokers. And if he just, if he wanted to buy or sell stocks, he would just phone up his prime broker at Morgan Stanley or whoever, and be like, I want to buy this. I want, you know, can you put money into this? Can you take money out of that? And that he, and that if you are trading relatively obscure, illiquid stocks like Blue Manage or whatever, without a trader who is just thinking all day, every day about risk management, like, what the fuck?

17:03You know, you need, you can't be that big of a hedge fund and not have your own traders. It's insane.

17:08Felix Salmon: Do you think he was relying on AI to do some work. His thesis now is sort of conventional wisdom, really, that AI is going to do a lot of work and you can have a small company with only a few employees because the miracle of AI is there for you. Maybe this is the failure of that thesis too.

17:29Elizabeth Spiers: I think it's also, he is essentially running a long fund. I don't think he, and the composition of his portfolio, it's not like he's managing, I think, that many positions in that many companies. He's really just betting on some of the bigger AI stars and heavily concentrated in NVIDIA. So if he's not going in and out of the stock that much, it does seem weird if he had no traders, but I think he doesn't need to build the operation on the back of a trading operation. I'm saying that if you have a leveraged $20 billion public equity bet, there's a huge amount of trading that you need to do on a day-to-day basis to be able to roll over those loans, manage your derivatives exposure, manage the stock exposure.

18:17When you buy the stock, you want to buy in such a way that it doesn't move the price too much, or maybe you don't. Maybe you want to buy in such a way that it moves the price a lot so that everyone piles in after you you know obviously he is selling you know he is exiting positions when he wants to rotate into another stock that he thinks is going to do even better and when you're exiting the position you definitely don't want to move the stock down too much there's a lot of just real sort of block and tackle sort of trading that you need to do even when you have a long only fund i think that's

18:52Elizabeth Spiers: assuming though that he's doing a lot of rebalancing i think his whole shtick is that he's not he's you know, he's taking these giant positions and just accumulating and holding on to them. He's making an entirely unhedged sector bet. You can be 100 % long AI, but if you're doing that in a leveraged basis, you still have a lot of positions that you need to manage. You can't just kind of, you know, take your brokerage account, put it all in SK Hynix and then go to the beach. That is not what he was doing.

19:22Felix Salmon: So the borrowing in the leveraged hedge fund is from the Fed, like that's Fed overnight reserves. It's not, I don't know why. It's not from the Fed. It's from the prime broker. It's from like Morgan Stanley. So Morgan Stanley goes and like borrows money every day and like makes it all make sense. Morgan Stanley is lending Ash and Brenner money against his own portfolio, basically. What they're saying is we will lend you up to 50 % of the value of your portfolio to go off and buy stock. Okay. Or maybe more.

19:50Elizabeth Spiers: So when the stocks go down, they issue margin calls.

19:53Felix Salmon: Right.

19:53Elizabeth Spiers: Yeah.

19:54Felix Salmon: So then, okay, so I'm just trying to connect it back to the Federal Reserve. So this week, everyone was like, the price of that money, the Fed funds rate is about to maybe go up. And then Citadel was like, it's totally going up. So then the bankers were like, oh. The amount that Ashenbrenner had to pay in daily interest on that money that he was borrowing would go up. Because the short-term rates were going up in anticipation of maybe the Fed raising rates already, or the bankers? Or even just like the people who understood what Aish and Brenner were doing were saying like, this guy can barely make his interest payments as it is.

20:33If the Fed fund rates goes up, then he's definitely not going to be able to make his interest payments and therefore he's going to have to sell. And Elizabeth, to your point, like this is why you can't just go to the beach when you're running a leveraged long fund because none of these equities are paying dividends, right? None of them are cash flowing. So you need to pay interest on that debt somehow. And so you need to raise cash by selling something in order to just pay interest on your margin loans.

21:03Felix Salmon: When do you pay the interest? Every day? Every week? So that is done by negotiation with your prime broker, right? Fascinating. So if your stocks are going up a lot, then they will be happy to capitalize the interest and just be like, oh, we'll just add it to the amount you owe. but if the stocks go down they're like no you need to make that interest payment okay and can you relate this back to i think my colleague at axios markets please subscribe matt phillips had a story recently a few months ago i don't know about the increasing amount of margin debt in just overall in the market more there's more borrowing going on to buy stocks right now i assume is that how much is that how much of that is leopold ashenbrenner It's a good question.

21:52Elizabeth Spiers: Like where the borrowing is concentrated, what kind of stocks are people buying? I don't know. That's a good question. I was asking. I think it's pretty much like the Matt Phillips thesis was that it was largely retail. Yeah. So it's the kind of stocks that retail gets into, which, you know, a lot of retail is into the AI trade. A lot of retail is also just into the, you know, buying like broad ETFs that they think are going to go up and they want to make leverage bets on that.

22:27Felix Salmon: Right. There's all these leveraged ETFs now. That's driving what drove the South Korean market. And yeah, there's a lot of like embedded leverage inside some of the ETFs. Yeah. The leverage appears in a lot of different places. I would quibble a little bit with Matt's thesis that the amount of leverage in the stock market is high. I think it's higher. I still think on an absolute level, it's still pretty low. Yes, it's higher. I think he would agree. That was what, I mean, his chart and data show. Don't mess with my co-writer. I guess one question I did have is two questions. Is this a significant moment in the AI boom?

23:03Felix Salmon: Because it seems like it's not. It's going to be a blip. Others would say, no, this is a significant moment. The Times said, this is an Archegos moment. And I was like, what's an Archegos moment? And then they reminded me. I know what happened. You just talked about it also. But like, why did it matter systemically? And then I was like, oh, yeah, a bank in Europe failed. Who cares? So I was like, maybe this doesn't matter either. Like, actually, New York Times, your point is that it doesn't matter. Because if some European bank goes bust, then I, as a selfish American, doesn't really care very much.

23:38It looks a little bit like an FTX moment to me. You know, everything did go down a lot in crypto when FTX went bust, but then it bounced back up again before it fell again. So, you know, right now it looks like we're having a bounce back up. We don't know how. It's basically impossible to come up with fair value for any of these stocks. It's a little bit like valuing crypto in that way. You just kind of, it's worth whatever someone's willing to pay for it. And so, yeah, you just sort of play in this casino and you make money or you lose money. The difference between the AI casino and the crypto casino is that the AI casino, I think, is systemically dangerous if it bursts in a way that crypto was not.

24:25Like crypto, you had like, you know, a trillion dollars of crypto or something all held in the hands of Rose who could afford to lose it. But, you know, when you have the AI economy and all of these, you know, mega caps, which are worth like$4 trillion each, all pouring huge amounts of money into AI, not just, you know, into stocks, but into the real economy and data centers, which are like basically accounting for 100 % of GDP growth right now. and you know we've talked about this a lot then yeah if that narrative fails then we could be in a world of pain that narrative has not failed the failure of situational awareness has not killed that narrative and as elizabeth points out situational awareness has not actually failed it's still it's still going it's he's still up 50 for the year like you know your guy will be fine and a lot of the schadenfreude that we saw earlier in the week about haha look at this 25 year old kid who just blew up yeah i mean like his risk management wasn't great but it was good enough that he was you know that he's lived to fight another day he's still up 80 over the year which

25:37Felix Salmon: is i was his mother i would be so proud i'd be velling i'd be just so proud he's gonna get some great wedding presents he's gonna be fine oh he's gonna have a great wedding good for him yeah

25:59Felix Salmon: This episode is sponsored by Hey Jen. If creating video content feels like a trade-off between looking professional and protecting your time, there's a new way to think about it. Hey Jen lets you turn a script, photo, or presentation into a polished video of you in minutes without setting up a camera or hiring a production team. Whether you're a financial advisor explaining market updates, an attorney answering common client questions, a real estate agent showcasing listings, or a creator growing your audience, it helps you stay visible without constantly filming new content. It's rated the number one AI video platform for small business on G2, trusted by more than 30 million people and 85 % of the Fortune 100, and supports over 175 languages.

26:51Felix Salmon: So your message can reach audiences wherever they are. Here's the wild part. Record yourself for just 15 seconds and Hey Jen builds an AI avatar that makes professional videos for you on demand. So you can post everywhere your audience is as yourself without filming every time. Your first three videos are free at heyjen.com slash pod. That's H-E-Y-G-E-N dot com slash P-O-D.

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28:36Elizabeth Spiers: These statements have not been evaluated by the Food and Drug Administration.

28:38Felix Salmon: This product is not intended to diagnose, treat, cure, or prevent any disease.

28:47Okay, let's talk about the more real world and grounded part of the market, rather than AI stocks, which just, you know, invent a number and that's what they're worth. Oil prices. Everyone, we have talked many times on this show about there's been a massive war in the Middle East going on for almost six months now. and if you had told anyone there's going to be a massive war in the Middle East going on for six months, and the Strait of Hormuz is going to be effectively closed for six months, where's oil going to be? Everyone would say it would be like$150,$200 a barrel, something enormous. It's not, and we have talked a lot about the strange phenomenon of oil prices being lower than you would think, given the war, but if you then look at diesel prices, they are through the fucking roof, and it turns out that the price of gasoline and the price of diesel in particular is really has gone up a lot much more than the price of oil would suggest and the difference between the price of diesel and the price of oil is measured by a wonderful thing called the crack spread so the big thing that seems to have happened is that even though oil prices haven't gone up the price of refining that oil into diesel in particular has gone up enormously.

30:13And Elizabeth, do you have a theory for why?

30:17Elizabeth Spiers: Well, there's some global pressure because Ukrainian drone strikes have really hammered Russian refineries. So that's sort of cut off some of the supply for refined oil. And, you know, the Strait of Hormuz is still affecting everything on a macro level. I think those are the two biggest problems. The drone strikes are absolutely on Russian oil refining capacity are a huge part of the story. I don't think that the closure of the Strait of Hormuz has much effect on crack spreads.

30:46Felix Salmon: The war, though, has knocked out a few refineries in the Middle East, and that's not helping either. Yeah. So refinery capacity is down globally. Refineries, there have been American refineries that have been running at greater than 100 % capacity, which is kind of wonderful. I love it when that weirdness has happened.

31:06Elizabeth Spiers: I like that the American refineries are all up significantly. Their shares are up. But Phillips 66 is specifically up 66%. Yeah, they're doing quite well, but they're not doing as they're not. One of the interesting things is their share price is up. People expect them to make more money because this squeeze is not going away anytime soon. So far, it hasn't shown up quite as much in profits as you might think. you know who's making money from this is archer daniels midland when you do a bunch of refining what you need to buy are these little sort of green credits in america like believe it or not we still have these like green laws saying that if you're not going to put biofuels in your diesel then you need to sort of pay archer daniels midland for green corn fuel credits to make up for that And so ADM, just by not doing refining, but by growing corn is making lots of money.

32:01It's kind of wild.

32:02Felix Salmon: That's fun. I didn't know that. And then the other thing that is happening is that there's this sort of two to four week lag between crack spreads and fuel prices, gasoline prices. So crack spreads are now there like$65 a barrel. Like it's almost as much as a barrel of oil at this point. And the rising crack spreads have shown up in rising petrol prices, as Emily will attest, but not fully. And so the chances are that gasoline and especially diesel, but also gasoline prices are going to go up even more just to reflect how much it's costing to refine today. Have we talked about China and oil on this podcast yet?

32:49I'm not sure, but we can never do it too much because the reason, this is the number one reason why oil is not$200 a barrel is because Chinese oil imports have just fallen off a cliff, basically.

33:00Felix Salmon: Yeah, it's been really amazing. Like, I think it's safe to say, like, China wasn't like, we will come to the rescue of the global oil market by slashing our imports of oil and therefore keeping a lid on the price. But that is, in fact, what has happened. And it's like a remarkable flex of a power. I don't think people realize China sort of even had. I think there's been an assumption like, okay, yeah, they cut imports of oil, but at some point they're going to have to buy this stuff again. But as you said, it's been like six months and they're like, no, bro, we're good. We're cruising around in our EVs.

33:34We have like the largest installed solar capacity on the planet.

33:38Felix Salmon: We bought a lot when oil was cheap. We have a lot of reserves and companies have a lot of reserves. Government has a lot of reserves. They have a lot of power to direct people to train travel and away from airplanes. They have this amazing EV industry, this amazing solar panel industry. Like, they were ready.

33:58Elizabeth Spiers: It's almost like not opposing alternative energy is a good idea. Well, they have this thing called demand destruction. We've seen it a little bit in America. One of the reasons why gasoline prices have not risen as much as you might expect, given the rise in crack spreads, is that people are actually driving less and consuming less gasoline than they were.

34:19Felix Salmon: Well, you know, I bet people aren't talking about this as much, but remote work is definitely helping here. It's not the conversation it was a few years ago, but about 20%, I think it's 20 % of workers, can just stay home and not, you know, drive back and forth on a commute every day. Like there's less demand overall maybe for gas. I'm just, I'm making this up. I don't have cleaned in. No, no, I think that's absolutely correct. Correct. And so there is a little bit more elasticity there than maybe there used to be before the age of remote work. But I think what we've learned is there's a lot more elasticity in China.

34:50And that when China wants to reduce demand for gasoline, there's a bunch of little knobs and dials that it can twiddle. And it has done so extremely effectively. And no one really knew those existed until push came to church. Yeah.

35:04Felix Salmon: And it comes at a time when China's standing in the world. I talk like an article, to be sure. Comes at a time when China's standing in the world has overtaken the United States. Just like in public opinion polling, China's now - Is that something where if you put it in an Axios bullet point, it would be like situational awareness. China's standing in the world. I mean, I didn't bring this up earlier, but I had never actually heard the term situational awareness until Axios, but I'm sure it existed before then.

35:37Elizabeth Spiers: but um it's like a military term it is an official axios axiom if you ever wondered what those little things in bold are called when you read an axio story they're called axioms and they're like um you know the big picture and uh why it matters why it matters and from day one

35:55Felix Salmon: situational awareness has been on the list my editor the wonderful jeffrey kane suggested He was like, I really want to do situational awareness colon situational awareness hyperlinked when the story was breaking, which I thought was funny.

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38:36Let's move on. What's next? Quarterly reports. Oh my God! Yes! I love this story. that was written by a journalist I follow online named Emily Peck.

38:49Felix Salmon: That's me. That's you. Yeah. She's the best. So, Emily, what was your story? Let me see if I can remember. Oh, okay. This was a few days ago that I wrote this story. Okay, so President Trump wants to do away. He's like a few others, wants to do away with mandatory quarterly earnings reports from public companies. and the SEC was like, okay, we'll bite and propose a rule making them quarterly reports, optional. Companies, if they want under the rule, would be able to just report semi-annually twice a year plus an annual report. And they put out the proposal. And as part of the rulemaking process, as nerds will know, there's a public comment period so people can send in comments.

39:32Felix Salmon: Well, typically the public comment period is boring. Most people who write in are like lawyers, interested parties, you know, nothing too exciting with exceptions for sure. But at the SEC, a lot of institutional investors, pretty boring. But this time, no, no, no. The SEC received a flood of comments, hundreds of thousands, a new record high number of comments. And 99 % of these comments, according to this guy, wonderful professor that I talked to, accounting professor in Ohio, 99%, more than 99 % of these comments were like, no, do not do this. We want quarterly earnings reports. We forbid it.

40:16Felix Salmon: This cannot happen. And it's funny because when I told my daughter about this, because she was like, what are you working on? And I had to quarterly reporting. What's that? Public companies. Anyway, she was like, oh, well, no one wants it. So is it not going to happen? And the TLDR is, I don't know. It could still happen. These comments are not, it's not voting. It's not democracy. It doesn't matter.

40:38Elizabeth Spiers: I think it's still going to happen just because the Trump administration wants it. But what's interesting to me is the sort of retail reaction to it and that it's so strong. And I just want to read a piece of the R Wall Street bets comment that was submitted. It says, many of us learned what a 10Q was the hard way, which is to say we bought a stock, watched it fall 40 % on earnings release, and then read the filing to find out why. That is a stupid order of operations and we acknowledge it. But it's also the entire mechanism by which a generation of retail investors taught itself to read financial statements.

41:14Elizabeth Spiers: And the commission is now proposing to cut that mechanism in half. I think to the average person, this just looks like a push for less corporate transparency. And the institutional investors don't like it because you want more data rather than less. When I was an equity analyst, if somebody had given me daily reporting, it would have made my models better. But the retail reaction is kind of surprising. It's not surprising to me. I think it's almost axiomatic that investors won't like, right? And so what the SEC is saying and what the administration is saying is that we are trying to balance the interests of investors with the interests of companies.

41:55And companies do like this. And obviously, the number of companies, the number of public companies is dwarfed by the number of investors. So you're going to get 99 % of the comments are going to be like, no, because 99 % are going to be coming from investors. And to a first approximation, 100 % of investors are going to be opposed. That's true.

42:12Elizabeth Spiers: But it's not normal, I think, for this many retail investors to comment on any SEC. No, no, it's not normal at all. You're absolutely right. This has really touched a nerve because the investors don't really feel that they have any control over the companies. The companies are just going to do what the companies do. And all the investors can do is hope that the discipline of forced quarterly reporting will keep the companies more or less on a straight and narrow. And if the companies don't have to report every quarter, then they will have more freedom to do whatever the fuck they want, which already they have an astonishing amount of freedom to do whatever the fuck they want.

42:56And the investors are like, we're just investors and we want this not just for our sake, but also for the sake of imposing a certain amount of discipline on the companies. Yeah.

43:07Felix Salmon: And I think the only positive comments I saw were from the Chamber of Commerce, which represents companies. The Business Roundtable also speak a trade group that represents companies and Shell, which is also a company. But there were some interesting comments. There was one from the former Netflix CFO who had also run a company in Europe or UK, which doesn't have quarterly reporting requirements anymore. And he was like, I've been on both sides of it. Yeah, it's kind of a pain to have to do it, but it's really good. We need to do it. It keeps us disciplined, holds us to account all of this, which I thought was pretty interesting.

43:46Felix Salmon: And I guess the other thing I would say is the accounting professor, a great guy who I talked to who's tracking this using AI, blah, blah, blah. his explanation for why it touched such a nerve, not only for all the reasons Felix just said, but also because rule changes are usually really complex, overcomplicated, hard to understand, like kind of boring, maybe we would even say. But this one was like really easy to understand. Companies do this thing four times a year that you're all really familiar with, and we want to make it optional. Like that's easy to understand. And Motley Fool and Better markets advocacy group both urged their readers and followers to write in and gave them like suggested language and all of this.

44:31Felix Salmon: And those campaigns were like very successful. They got tens of thousands of like form letters and petitions to the SEC did because of all the confluence of like, we really care about this. We actually understand what it means kind of a thing. One of the interesting things about this is that assuming it goes through, in the first instance basically nothing will change every single company that you have heard of even shell will continue to do quarterly reporting you know shell i'm sure would like the option to move to twice a year but it's not going to exercise that option because all of its shareholders are just going to be like don't you fucking dare and on some level it still listens to the shareholders and it would probably put out for some kind of a boat and then the shareholders would be like, fuck no.

45:18And then it would say, okay, nevermind. As a general rule, most CEOs of most companies like to do things that make their stock price go up and don't like to do things that make their stock price go down. And any company that moves to reporting every other quarter, that move will make their stock price go down and therefore they are not likely to do it.

45:44Elizabeth Spiers: Also, it's just not a big regulatory burden. For a large company, it costs them around$198K, which is just a drop in the bucket even for administrative costs. So part of the rationale for doing this is that it's a kind of deregulation that reduced costs, but the costs are so insignificant in this case that I don't think anybody buys that rationale. Yeah.

46:07Felix Salmon: Although I guess, to be fair, the SEC has a initiative called Make IPOs Great Again. You can guess where the phrasing comes from. But part of making IPOs great again is making it easier for companies, private companies to file to go public. And the theory is if you reduce the amount of paperwork that's needed, the amount of stuff that you have to do for smaller companies, 198 ,000, I guess, theoretically, makes a difference. No, it is. It's meaningful. And that was where I was going with what I was saying. Existing public companies, 99 % of them will just keep on with quarterly earnings. But if you are anthropic, say, or some other hot company that is going public, or even a not very hot company that is going public, if you come out from day one and be like, remember when Google IPO'd and they were like, we're a different kind of company.

47:04Don't buy Google stock if you want a normal public company. We do things differently around here. And like 100%, they would have gone, oh, yeah, we're not going to report quarterly earnings because that's a distraction. And we are managing for the long term. And quarterly earnings just imply short-termism and managing quarterly earnings. And no one wants the managers to do that. We want the managers to care about the next 10 years, not the next three months. We've all heard these arguments, right? And you can absolutely believe that a company like Google, when it went public, would have been like, yeah.

47:39Elizabeth Spiers: I don't think so. Because if they are a small company, first of all, their cost is going to be way less than$198K. And also, if your company is so small that you can't afford to do quarterly reporting, you probably should not be going out to public markets. So it's sort of like there's a cost to going public. It's not a question of whether you can afford to. it's also just a question of whether you want to and if you can find a bunch remember that most ipos are oversubscribed right so if if you if you when you ipo if you're like i only want the kind of investors who are in this for the long term and who are you know who are buying my stock with a 10-year time horizon and not a three-month time horizon then those guys will be fine if there isn't quarterly reporting and fuck the rest of them and then you only sell to those people like you can understand the logic of a founder trying to sell into the public markets and being a little bit scared of this daily referendum on how his company is doing you know which is the stock price and being like well i you know this is a little way of making the markets just a tiny bit a little bit less scary for me i can definitely see people choosing that research though that says that that reducing reporting by that little, six months instead of three months, doesn't really change shareholders' orientation towards short-termism.

49:07Elizabeth Spiers: I think if you were really going to do long-termism, you would reduce reporting to annual. It's a marginal change, to be sure.

49:14Felix Salmon: Yeah, someone I talked to was like, if you really care about long-termism, you do every five years. And that's just completely unacceptable. No investor is going to wait around for information every five years. Like, that's just, it's not. Yeah. And I definitely believe that the majority of IPOs will also continue with quarterly reporting. I just think that the one place where we are going to see a significant number of companies opting to do twice a year reporting is going to be in the IPO market. I think assuming this rule goes through, we will see it first have effect in the IPO market. And I don't know how often we'll see it in the IPO market, but it will show up there before it shows up in the already existing companies.

50:03Felix Salmon: The one thing I would like to add is that this proposal to have less information from public companies fits into a larger pattern from, I think, lately from the White House of giving us just less information, less transparency on a lot of vectors. One thing I care about is people going hungry, for example, and the USDA, I think it was this year, said it would stop releasing a report tracking hunger because they were like, we already tracked that and other things. Okay. We have Mr. Washington, Mr. Washington, Kevin Warsh over at the Fed saying he's going to give us less information about what the Federal Reserve is doing.

50:47Felix Salmon: I just, there is something happening now where people are talking more than ever. We can go to AI and get all this information. You know, the CEOs and executives who are arguing for less reporting from companies are like, they say things like, CEOs talk all the time. You can turn on CNBC and see the CEOs of public companies. They're always communicating, but they're not saying, they're not giving you the actual information. You know what I mean? They're spinning you. We're in this massive, this moment of just overwhelming spin and a pullback on actual information is, I don't know, something to follow.

51:27Elizabeth Spiers: Well, it's this administration, information is an accountability mechanism. So reducing it on all fronts kind of increases the executive branch's power to sort of do whatever they want without the public kind of understanding what's happening.

51:42Felix Salmon: Yeah. The other example, I guess, is the Department of War, Defense, whatever we're calling it now, which they kicked the reporters out of the building and they're not giving them briefings. And we're in the middle of a war. Just saying. Just saying. Just saying. We need information, people. AI is not the answer. Well, you know where we get information? No. From the numbers round? From the numbers round.

52:19Okay, numbers round. Emily, what's your number?

52:23Felix Salmon: My number is$450 billion. You came up with that number very quickly for someone who didn't have a number. I came in not having a number. But luckily, I write stuff all the time. So I can just be like, what did I write? Oh, yeah. Yeah, this was$450 billion is the increase in market cap for Microsoft on Thursday, just one day. And it was, according to your friends at Bloomberg, Felix, the largest increase in market cap that a public company has had ever, beating out the likes of your NVIDIAs and such. This happened because its stock rose 16 % on Thursday, which is the biggest jump the company has had since 2008.

53:04Felix Salmon: and it's because of their quarterly earnings report. So I don't know why a company would want to get rid of such a thing. Investors really, really liked it. Microsoft makes a fuck ton of money on its cloud business and even more so right now because of AI. How many times have we said AI in this? Are you so sick of this? Aren't you so sick of it? Anyway, Microsoft makes a lot of money. Investors like companies that make a lot of money. They drove up the stock price. now Microsoft is worth a half trillion more in a day than it was the day before. I don't know. What goes up must come down. Maybe, maybe not.

53:38Felix Salmon: I don't know. It's a stock. Stocks only go up. They only go up. But I just want to say one more thing, which is I took, I was like going to write about it and I was like, what can I say that's funny about Microsoft? So then I wound up on YouTube watching Steve Ballmer run around. Developers, developers. Developers, developers sweating. And I was just like, what a company this Microsoft is. What a time we have had with it over the years. Just an incredible, like, you wouldn't think, like, we're in this, like, I don't know, third, fourth phase of technology, the internet software. And this company, it just keeps going.

54:12Felix Salmon: It's gone from, it was Windows, it was Bill Gates, that little nerd, then it was the sweaty guy, and now it's an AI giant. What an amazing, amazing company. We all like to talk about Anthropic and OpenAI and Sam Altman and Dario and like kids like this Ashenbrenner guy. But like they're all along up in Redmond making it rain. Is Satya Nadella the best CEO in Silicon Valley? Definitely. Yeah. Is he the best CEO that Microsoft has ever had? Definitely. Obviously. Yes. I don't know. Maybe you could argue Bill Gates was. but like he was so controversial and like Satya Nadella just like plugging along, just making oodles of cash.

54:54Felix Salmon: Like what could be better? Doesn't hot take very often as far as I'm like remembering? Like he doesn't have an AI manifesto. You know what I mean? I don't think he appears on the podcasts. Yeah. I don't think he goes on podcasts though. He could come on ours. I think I'd be fine with that. Yeah. He's just chill. He's not pictured usually. Is he pictured usually sitting behind, you know, with the other CEOs? at like White House events and stuff. I feel like... No, I haven't. I didn't see him at the inauguration. So, yeah. Even Tim Cook, I feel like such a... Tim Cook had bad earnings this week.

55:28Well, bad earnings in that the stock market didn't like them. Okay, I have a fun number this week, which is 353, which is obviously, this being Slate Money, a number about inbreeding in the saber-toothed tigers.

55:46Elizabeth Spiers: Go on. Which everyone is talking about. Everyone. Everyone's talking about this. It's the Schmokel analysis. So, you know when you go to the La Brea tar pits and there's all the saber-toothed tigers there? Totally, as you do. So, why are they there? Because they're trying to eat the camels or whatever that got stuck in the tar pits. Normally, a tiger would not try and go after a camel in a tar pit because there is an obvious risk that you, the tiger, will also get stuck in the tar pit and die. But if you have a spinal nerve tumor, then you can't really chase a camel. You kind of need the camel to be stuck in the tar pit before you can really catch the camel.

56:27And spinal nerve tumors are very rare. In the modern human population, less than one in 100 ,000 people has a spinal nerve tumor. But in the saber-toothed tiger population, there was like 353 saber-toothed tigers out of every 100 ,000 had a spinal nerve tumor. Why were these tumors so prevalent? Microplastics. In the saber-toothed...

56:55Felix Salmon: Black spatulas. No, it's inbreeding. Because they were going extinct and they were forced to inbreed. and then the inbreeding caused the tumors and then the tumors caused them to have to try and chase the camels in the tar pits rather than out where there wasn't tar. Damn. Well, Elizabeth, how are you going to beat this? Beat that, Elizabeth.

57:17Elizabeth Spiers: I know you will. My number is$54.99 and that's dollars. And that is how much you pay for a hardcover children's book from Imagitime where you can insert your child via AI in any sort of narratives that you want. But so boomers have been buying these AI slot children's books for their grandchildren. And this has become a sore spot for Gen Xers and millennials who have kids. There's also a service called Story Wonder Book that for$14.99, you can subscribe to it and it will create 20 fake stories. But according to the reporting from Wired, children don't like these books because they think that they're uninteresting and boring.

57:57Elizabeth Spiers: They're too verbose. They're not imaginative enough. so when i was a kid back in the 20th century my grandparents used to give me like personalized children's books where they would like you know this is the story of felix and his yeah see there though they had human writers and they would just substitute your name for whoever the main character what did these things do that those things didn't basically the grandparents like let's say the grandparents have hobbies that they like to do with their grandchildren you know they they have the AI make up some sort of narrative around that. So they don't really have any kind of character development that you have in actual children's books.

58:34Elizabeth Spiers: They don't have the kind of imaginative qualities. And the assumption behind it is that children will like these books because they're all narcissists who like to see their little names in a book, but they don't because they actually do like children's books for the stories and the characters and so on. But those things aren't dispositive, right? Like, if and when AI stories start becoming better stories, then will the children start liking them because they have their names in them? Probably. Possibly. I mean, this is why we're all calling this kind of content AI slop right now. Maybe at some point it'll be AI genius, but they're definitely not there yet.

59:11Elizabeth Spiers: But also another antidote that's kind of related to this. apparently the gen A's are now saying that's AI when they mean that's bullshit or that's fake, which that gives me hope.

59:23Felix Salmon: Did you guys read a friend of the pod, Kashmir Hill's piece? She looked into, there was an AI written biography of Kashmir Hill, New York times reporter. And then she like went deep and she found this guy who writes AI books, like several AI books every day. And she talked to him. And let me tell you, her article was so good that by the end I was like, should I be writing AI books? Because occasionally, occasionally he hits it. It's like a volume game. You write like 200 books and then one of them comes out during the holiday season and people buy it because it's like a sports book you can give to your uncle and father or whatever.

59:59Felix Salmon: And he makes like a few thousand dollars. Maybe this is not a bad idea. What do you think? Let us know. Yeah, I don't know. All of this reflexive rejection of AI-written books just because it's AI. No, I read some interesting things in that Cashmere Hill biography. And admittedly, they were all false. But, you know, these are niggles. Yeah, snooze. Who needs real information anymore when we have so much fake information? Exactly. Fake information is just as nutritious. It's powerful. Okay, I think that's it for us. this week. Thank you for listening to Slate Money. Thank you for emailing us on slatemoney at slate.com.

1:00:41Thank you to Jessamyn Molly for producing, and thank you for being a Slate Plus member. If you are, then you will delight in Emily Peck's stories of whether or not she goes out of her way to find cheap gasoline. That's coming up in Slate Plus. Otherwise, we will be back next week with more Slate Money.

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