Martin Shkreli Breaks Down the Collapse of Situational Awareness

0:00Let's bring in Martin Shkreli to break it down for us. I believe he's here. How are you doing, Martin? Good to see you again. Hey, guys. I'm doing great. How are you? Perfect. Perfect. How's your last 24 hours been? What's the last 24 hours been like for you?

0:14Martin Shkreli:It's been interesting. I do invest myself. So it's been probably one of the craziest months in Wall Street history. I was talking to some friends last night about long-term capital management, Amaranth, other famous liquidity-driven blowups. And this is up there. And, yeah, it's just a really crazy thing. We had heard rumors sort of mid-last week, and then they really started crystallizing last night. And this morning, obviously, sort of a fait accompli. And I actually think they did a wonderful job of keeping it relatively quiet. I think some players were already positioning, say, early in the week, Monday, Tuesday, looking to do what my old boss Kramer used to call shooting against a fund.

1:05Martin Shkreli:So if you know somebody has to liquidate, the best thing for you to do, unfortunately, sadly, Darwinian, is to go sell all the positions you have in common and go start shorting everything they have. and it accelerates the sort of downfall as quickly as you can. And this is a very common practice when these things happen. Certainly not something I had overlapped decisions with them, so certainly not something I would do, but no wide number of funds that were shorting all of these stocks, hoping to cause a panic and a crash. How do you trace back the start of this correction? Is it the war? Is it oil?

1:42Is it jitters around open source or just hyperscaler capbacks? There's so many different narratives around why the AI infrastructure trade, the bottleneck trade might be weakening. At the same time, it feels like there's some really solid progress and the models are progressing along pretty as expected. Yeah, you have the labs having some of the best months in business history of any companies ever. Yeah. But then all the infrastructure correcting. Yeah, none of that stuff matters.

2:16Martin Shkreli:The only thing that matters is the propensity of the buyer and seller to buy yourself. And what you had happen was the smart guys get in early, start buying, see the prices go up, buy some more. And then less smart guys take note and say, I want to do that. I want to be up 400 % this year too. Guys like me started buying right near the top. I was just like, hey, this is great. I love memory. I love bottlenecks.

2:47And then the weakest hands are buying at the top.

2:51Martin Shkreli:So they're also the first to sell, the first to panic. And it just creates this like, every bubble is sort of the same. You have this euphoria, this peak, and then everyone sort of panics at once. The fundamentals basically don't make a difference. I think they sort of drive the marginal buyer and seller, but 80 % or 90 % of the assets, shareholders don't change hands. It's that 5 % of the margin that's deciding the price. And if that 5 % is in the state where they're levered up 3x, or 4x, as we heard, SALP was a 4x levered fund, which is a lot of leverage. A 25 % drawdown takes you out of business.

3:31Martin Shkreli:Yeah. Interestingly, we heard that three firms were bidding on the assets. So Jane Street, Millennium and Citadel were sort of brought in in a closed circle sort of late Friday to bid on the remains of the firm. And we got offered a look at$100 million of Anthropik stock, which we were puzzled by. You know, sometimes you see these SPVs, sort of interest comes across here and there. And we thought that was interesting. I sort of raised my eyebrows, is that Leopold? Because sometimes when you want to sell$4 billion or something, you don't come out and say you want to sell$4 billion. You come out and you say you want to sell$100 million of it.

4:17Martin Shkreli:And usually a guy who wants to buy$100 is enough to buy$500 or more. And you sort of fill him out and say, here's$100. Okay, do you want$500 by any chance? And then your eyebrow starts to raise a little bit that you know maybe he's got even more um now of course this is a really odd situation so i we heard millennium did put in a bid uh citadel's bid was better you know i think ken wants to be the guy that everyone goes to when they're in trouble and that's the you know buffett is getting older this is not the kind of stuff buffett wants to do anyway um but you know citadel did this in the amaranth deal you know when amaranth blew up uh natural gas futures i think citadel took that portfolio and virtually every blow up in finance.

5:02Martin Shkreli:Well, you have Enron where they just rated all the talent. Yeah, they wanted to do an Enron as well. I think, yeah, they just sort of, Ken is a very smart guy, sort of shows up and says, you know, how can I, you know, how can I, you know, be a partner to the Goldman's and the Bank of America's when they need to get out, you know, of a really risky position, they basically take over the book, right? So if I'll give you sort of an example, and you're asking the question. So let's say, you know, you're at$45 billion, you know, to sort of try to trace this back. And you're, you know,$10 billion of that is in Anthropik, from what we understood.

5:40Martin Shkreli:So you have$30 billion of cash in your bank account. And running Forex Leverage means you have$120 billion gross market value. oh um so if your gmv drops i don't know 25 that doesn't sound so bad at 120 billion uh maybe that's you know i don't know uh 30 billion so you're down to 90 billion but that's not your equity so your equity drops from 35 billion to 5 billion yeah no no prime broker is going to let you keep 90 billion of gross market value because once you dip your equity below zero it's their loss not yours and they're not going to lose a penny after archegos and after these other kind of blow-ups and that's not their job and they kind of have the right to take over your portfolio which is sort of uh you know something i hope nobody ever has to experience but they basically call you in and say listen you know these are our our assets now you know we're we're going to decide what their what their disposition is going to be and the rumor is over the weekend he contacted expected about 10 parties to place Anthropic in an effort to shore up liquidity, selling the Anthropic stake for allegedly the offer was at 1.1 trillion equivalent market cap, which, you know, I think roughly where it's trading.

7:01Martin Shkreli:And, you know, it's unclear whether that was sold or half of it was sold. It's what we reported that half of it was sold. It's still a little unclear who bought that, what's happening exactly. But that's that's the best we've got. And then, you know, when it came to the public book, it does sound like, you know, the buyer of that book basically got a from what we were told, a three to four billion dollar instant markup. So they basically now have to work out of 3 to 4 billion, more than 3 to 4 billion, quite a lot more. But in essence, if they work out of these positions without disrupting the market, they'll have printed 3 to 4 billion on the trade, which is unusual and interesting trade, but really exciting.

7:50Martin Shkreli:One of the parties reached out to me last night, one of these three parties, interestingly, after my reporting, and they said that, in essence, it's some substance. Yes, Leopold flew a little too close to the sun, and your numbers are a little off. And I asked what direction, and they wouldn't confirm or deny. I received a lot of pushback on the reporting, to your point, privately and publicly, that it's not so bad. And that, you know, he's only down 30%. 30 % you can kind of live with. But also, if Anthropic hasn't changed its mark, that means you were down 60 in the public book. And if you're Forex levered, you know, that means you're sort of down 15 on the public book, which sounds too good to be true.

8:36Martin Shkreli:If you're trading these stocks, they were down like 15 % a day. Yeah. So we've also heard the other AI funds are hurting, maybe not as much as in trouble, but certainly hurting as well. Where does the fund go? He gives some good cover to all the funds that were effectively copy trading him. Oh, sure. Maybe even being more risk on and later to these positions because they're naturally just late if you're trying to copy trade someone. Trying to catch up. Yeah, you're trying to catch up. More leverage. You're coming into these trades way later. Do you recall, like, how did you process Ryan Jacob around the year 2000?

9:18Because you were at Kramer's firm, I believe you joined maybe right before the Ryan Internet Fund started collapsing.

9:29Martin Shkreli:Yeah, there was also the Amaranth Fund. There was a fund in the 60s called the Manhattan Fund that Warren Buffett criticized for being the go-go kind of lazy fund. It was run by a guy named Gerald Tsai. And so like every generation, you've seen the memes about Kathy, you know, every generation has it. You know, the guy that believes in that cycle and it goes balls to the walls on that cycle. And look, I have a lot of respect for somebody who's willing to do that. I used to tell a friend who kind of did the same thing. He followed this trade, but he was very early. So he had sort of Leopold-like numbers.

10:10Martin Shkreli:And he sort of did hedge at what sounds like close to the top. So sort of a miracle trader, best trader I know. And I joked with him. I said, you know, if Leopold sells at the top and turns short, like I will absolutely adulate him as the greatest of all time. It's just that, you know, usually when you're so spellbound by that narrative of whatever happening, in this case, AGI, you know, there are people out there that say, look, AGI is here slash coming when it comes. The entirety of finance is not relevant anymore. yeah you know we might as well just run it up and and kind of see the end of days this way and of course there's some guys sitting on a training desk at goldman sachs you're like these people it's just the stock market did you given given that leopold had had been at ftx right up until the the the the fall did you think that maybe as as risk on as he was like maybe he was like you know what i just i can't go through that again uh he wasn't necessarily he wasn't necessarily directly tied to any of this sort of nefarious activity at ftx but he did have to viscerally experience it and and i believe resign the day of the collapse and yeah uh i would i just would have expected to not like yeah to run it back like so quickly you would you would expect even like Like, you know, go and have a normal, you know, great career for a decade or whatever.

11:37Then maybe come back to leverage and be like, I'm ready to dance again.

11:41Martin Shkreli:There's a lot of questions. Like, one question is, what's his carry? You know, a lot of firms in the hedge fund industry, believe it or not, they have clawback provisions for carry. Like high watermark provisions, right? So you have to clear something? Everyone has a high watermark, but what's increasingly happened is a carry provision where you have to return the$2.20 you earned if you have a severe drawdown, which could actually end up being a tough situation. As you guys know, the fellow is getting married this weekend as well, which is a little bit of tragedy with a little bit of triumph mixed in.

12:18But obviously, you know, when this kind of thing happens— How common are those clawback clauses? Because you have to imagine in this fundraise, he had like massive, massive leverage. Demand was very high. Demand was very high. That feels like a term. The numbers were so good.

12:34Martin Shkreli:It's a more institutional thing. And speaking of which, obviously, the guy basically had no experience. And again, in times like this, nobody wants to gravedance. And I'm not doing that. But I had some institutional friends, one of the biggest fund of funds in New York, for example, who passed on Leopold basically laughed at him and said, you know, there's no way I could invest in this. And of course, you know, he goes on this tear, you know, makes like 20 X or whatever it was since inception and does fantastic. And he feels sort of sheepish, but ultimately, you know, somewhat vindicated after all of this.

13:08Martin Shkreli:So you did have a manager that had no experience, kind of a long only or extremely long biased, starts to do privates, which for many hedge funds is kind of the death knell. You know, when hedge funds put on their VC cap and try to do what those guys do, it often doesn't end well. And that goes back like, you know, 50 years basically of hedge fund history. And very few people have been able to do both. And the other thing I'd point out is we're going to see July numbers very soon here from quite a lot of hedge funds that I think were in the same trade. And so this is not just Leopold's$100 billion gross.

13:47Martin Shkreli:It's like that times maybe$5 or$10. And while the market's liquid, that's a lot of downward pressure in a few weeks. And it's amazing to see this all compressed in a month, whereas the dot-com bubble took three or four years to patiently go up and patiently go down. Seeing that compress instantly is interesting. What's going to happen next is really going to be fascinating. There's some theory out there that, you know, that we see all-time highs again now that all this liquidity is out. And there's other theories there that we actually were just having this nice big downtrend and that this liquidity pop will fade and we'll be back down further and further.

14:25Martin Shkreli:You know, nobody knows what will happen, but it's certainly, while you're right that, you know, the Anthropics and OpenAI's are having record business results, so is Microsoft and Google and Meta for that matter. there's still, I think, some more discerning questions about is this CapEx investment worth it? You know, they rewarded Microsoft for being prudent. They punished Meta and Google for not being prudent. So one wonders what the future will bring there. But yeah, about as crazy as things have gotten on Wall Street in many years, probably at least since FTX, and certainly crazier than the sort of Tiger SoftBank venture boom of 21.

15:02Martin Shkreli:and then, you know, really since then, the away insanity. So it's quite a spectacle. And I think, you know, no matter how much people want to learn the lesson of leverage over and over and over again, we all seem to repeat it. And, you know, it is what it is. But I think the Jane Citadel Millennium kind of like entire hedge fund complex sort of becoming this like shadow bank is quite interesting, you know, that like these guys are are sort of there to normally the banks would sort of take this on the chin but now that there's other folks who are like you know jane was an lp for example in the pond and reportedly was not interested in bidding uh which is fascinating may have taken the anthropic however um really unclear we're gonna learn more obviously as some days go on here but it's uh it's an unprecedented time and you know really an insane story that uh may just get more insane as we learn more.

15:58Is there a world where the fund continues? Because I'm just hearing the numbers and it's like, you know, up at 45 billion, the actual money into the fund was maybe 5 billion or something. If you sell the positions, there's a world where you wind up with like 10 billion in a bank account and the LPs are like, well, we gave you five, keep going, get back in the game.

16:22Martin Shkreli:I hope, I hope that's the case for the LPs who are awesome for the. the fund manager who obviously got quite a lot of whiplash. But, you know, at the end of the day, you know, there's this concept on the street, as you guys know, like, once there's blood in the water, like, these positions would go to zero. Like, we'll send Micron to$5, you know, just to liquidate this guy at three, right? Like, that's, you know, the craziest thing is, like, that's the nature of Wall Street when this happens. and there's a guy that has to sell 100 billion, you'll have a trillion dollars in front of him just like, you know, let's see this guy cry uncle.

16:59Martin Shkreli:And it's the saddest kind of most Machiavellian thing. But like he sort of had to blow up. You know, there's no other ending, sadly. Yeah. Because of the leverage level, it's just like one slight, you know, I remember my old boss who was a Tiger portfolio manager reminded me of the 2000 era where there's this very slight change in tone from one optical component supplier. And that's like him and his partner from Soros just decided to go like as short as they could. Because they knew ultimately these vulnerable hands were sort of sitting there. After the easy part of the bubble was over, you had this like, okay, what's next?

17:38Martin Shkreli:Things have to get a lot crazier. You saw Dworkesh's tweet. Things like that would have to sort of happen for there to be enough second derivative for somebody to be surprised. Yeah. You know, everyone knows AI is in this boom. Everyone knows chips are in this boom. What could possibly shock you to the upside? Not much. So if you hear any little like, you know, we're not going to spend as much, the whole shit hits the fan and it's just too heavy. So I actually wonder if we're, you know, if we're not in for a longer, more protracted decline. Things feel great today. You know, we have this huge boom, this relief rally.

18:13Martin Shkreli:A lot of the froth is out of the system. But, you know, what next? You know, I don't know that, you know, a patient and calm market is going to emerge because you had the hyperscalers and the big companies. They FOMO too. They FOMO just as hard as Leopold did. Right. If not harder. So this isn't just him. It's the whole world collectively saying, fuck, I got to I got to go all in and AI. And it's it's and who had the guts, you know, other than one man, Tim Cook in the back saying, do nothing. Yeah, the funny thing, we had been joking. We were joking in like Q4 when, prior to coding agents really starting to rip, OpenAI revenue growth had slowed a little bit and there was some jitters and a lot of this stuff wasn't you know, public at the time, but you could tell some of the kind of crossover types were like getting a little nervous, right?

19:14They kind of expected to have -

19:15Martin Shkreli:MAU, DAU numbers. Yeah, yeah. You know, yeah. And really plateaued. And then there was a correction. Like there was like briefly, you know, for a period, it was probably like eight weeks. It was like, okay, like, and then it started ripping again. And we were taking like a sort of a bit of a joking, like victory lap being like, cool, like ai corrected you know bubble popped now we're able to build back sustainably we're good from here on out it's smooth sailing no i completely i think the most unexpected thing is it would be if we saw brand new all-time highs for the entire thing i think almost everyone on wall street is skeptical this will happen which means is it has a chance yeah so you're saying there's a chance i Can you give me a little bit more insider baseball on what it takes to unwind a big position as a shareholder?

20:11Because a lot of people who are not inside the hedge fund world are sort of maybe confused around, okay, yeah, you own$50 million of a$1 billion chip stock. Can't you just dump that on retail? Can't you just like sell markets, sell that on E-Trade or Robin Hood? And in fact, it's much more complicated when you're at this level, even though it's public markets, there's not just a big button. Can you walk us through what it actually takes to like sell a big position when you're at that level?

20:48Martin Shkreli:Yeah, there's a lot that goes into it, interestingly. So the first is you have this advertisement system. So if you sell into the market, you can try that. and that's called selling into the screens. The screens are the numbers on your screen. Anybody could buy and sell, Robinhood, whatever. So you don't normally do that if you can help it. Selling on screens is at least somewhat quiet. You can just sort of trickle out. There's always this conspiracy that as I'm selling on the screens, there's some guy who can see my screen and he's like, this guy's got a BWAP market order to sell 10 million shares.

21:19Martin Shkreli:That's like, you know, I'm going to tell somebody. And that knowledge would be very, very powerful. And there's even some even crazier conspiracies out there that quants can actually use different, all kinds of insane ideas around what they can do to sort of sniff out that this is happening. So there's people that are scared of that. Then you can pick up the phone and this is the way you normally do it. And you call Goldman and you say, listen, I need to sell five million shares of Microsoft or something like that. And they say, hmm, should we take it or do we find a guy that wants to take it?

21:52Martin Shkreli:And they'll sort of try to decide. Now, Microsoft is easy. If you're trying to sell share in AI, a neocloud in Australia that nobody wants, that's a tough one. And you own like 10 days of volume. So if you try to hit the screens, you have 10 days of volume. You'd have to be the entire volume for 10 days before you'd be out. You'd probably take the stock down 50 % or more, and you don't want to do that. So you try to do this advertisement process, and you basically can post in the stock market that you're a seller of a stock. And you can post that your four-digit, what's called market maker ID.

22:28Martin Shkreli:And so Goldman's is GSEO. So GSEO would be a seller of, say, Nebius, which was one of his positions. And so you'd call up, you'd say, OK, Goldman, I'm a client too of Goldman. What do you got on Nebius? And the guy would say, listen, we got a pretty big seller here. you know and say how big you know half a million shares and he's like a lot bigger you know and so you'd say hmm okay because they have to advertise that you know they're working your order so they have to sort of tell people that there's a seller uh they're they kind of are trying to be coy about how big but they're not going to waste somebody's time either so the guy who's heard that there's a big seller well he might turn around he's not supposed to do this he sort of might turn around and say, you know, there's a huge seller of Nebius out there, and I'm just a little baby fish.

23:17Martin Shkreli:Maybe I could short 50 ,000 shares and get in front of this guy. If you're an actual interested buyer, you might also still be nervous because you'd say, well, if he's really got a ton of size, I might have to be judicious about how I step in. And so if you combine that with the sort of like pressure in the market and you add it all up, and then usually what you do is you'd have to say, oh, I know a guy that works there, and let's see if he's returning calls. And when you hit up the guy and he's not on Bloomberg, it's hard to reach, it's kind of like, well, it sounds like it could be them selling.

23:50Martin Shkreli:So it's not too many people that own that many shares of that security. So you look at the holders list and you're sort of like, who could it be selling 10 million shares? So you call Fidelity and they say, no, we're not selling. You call the next guy, no, we're not selling. Next guy's an ETF, next guy's an index fund. It's got to be him. And so if it's them and there's And then you start noticing all of their positions are down. It gets really hard. So ultimately, the bank decides because you might say, you know, I don't want to sell. The bank says, I don't care what you want. We're selling regardless.

24:22Martin Shkreli:And Goldman Sachs is not in the business of holding AI stocks. You know, we're going to sell at any price we can because our board would rather know for sure that we're down a billion and just take the rip the bandaid off than to wonder if we could lose 50. And so it's Goldman's position that we're just going to just cut this, cut the arm off right now before it metastasizes. And so they'll do a fire sale. And of course, Goldman's smart. They're going to reach out to a guy like Citadel or somebody else to place it carefully. But selling the whole portfolio in one shot was a very smart move. Now, again, we've heard the discount could have been as big as, you know, 20 to 50 percent, which is, you know, mouthwatering discount to buy, you know, some quality companies at.