Prof G Markets: Bitcoin’s Rally, Elon’s xAI Fundraising, and Alaska Airlines Acquires Hawaiian

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0:42Visit sierra.ai to learn more. This week's number, 80. That's the percentage of Yale undergraduates who received A's or A-minuses last year. True story, my girlfriend in college asked for a picture of my penis as she said it was a perfect specimen for her class. The bad news? The class was microbiology.

1:11The cheap penis jokes never get old, Ed. They never get old. The market, the demand for these types of jokes, Ed, it's limitless. It's limitless. Catherine and Claire aren't laughing. Usually they laugh at the dirty stuff. That means this isn't very good. You've got to remember it's 8 in the morning over here. That might be the reason. It's 8 in the morning, really? That's right. You went to Princeton, right, Ed? I did. And what colleges did you think about other than Princeton? A bunch. That's illuminating. That's why people tune in. Well, I'm trying to understand what you're getting at. UVA, USC, Harvard.

1:47You said USC? Why were you interested in USC? Just curious. It just seemed cool, and California seemed cool. You're half right. California's cool. I did not apply to UCLA, if that's what you're getting at. Why are you asking me this question? I don't know. I just want to know more about you. I just want to feel closer to you. You just want to get to know me. Okay, that's very nice of you. Enough of that. I try and invest in our relationship and I'm rebuffed. You're literally like every girl I met in college since then. Every girl I met before, during, and after college. It's like, why are you asking me that question?

2:17Anyways, thanks for the trauma. I realize I'm not worthy of love, Ed. Anyways, get to the headlines. Get to the headlines. Let's start with our weekly review of Market Vitals.

2:33The dollar rose. Bitcoin hit its highest level since April 2022. More on that later. And the yield on 10-year treasuries dropped. Shifting to the headlines. US job openings in October fell to their lowest level since March 2021. That data suggests the labor market is cooling and the economy may be closer to a soft landing. India's stock market value hit$4 trillion for the first time ever. Companies in the world's fifth largest equity market have added$1 trillion in value in less than three years. Uber was selected to join the S &P 500 later this month. Shares rose more than 2%. SEC chair Gary Gensler warned companies against AI washing, in other words, making false claims about AI to drum up hype.

3:16Gensler likened the trend to greenwashing when companies make false representations about sustainability. Google launched its most advanced AI model to date called Gemini. The company expects Gemini to power its consumer apps and smartphones and serve as a true competitor to OpenAI's GPT models. And finally, the Supreme Court heard arguments for Moore versus the United States, a case that could reshape the US tax code. A question is whether or not the government has the power to tax unrealized income. And if the Supreme Court decides the government does not hold that power, that ruling could preemptively block future efforts to tax the nation's wealthiest individuals with a wealth tax.

3:54Scott, any thoughts on this? U.S. job openings, that's good. It felt like the most, I don't know, the stickiest part of inflation was wage growth. And I love when Congress likes to get the Fed or someone to admit that, yeah, we want more job openings such that the whole nation doesn't register in inflation and decide to engage in revolution. So that, look, that's probably good news. It hurts some people, but it's good news. India, I think, is the – essentially, people are turning east to the Near East, I guess, and they're looking at India for the same type of disco party that China registered through the aughts.

4:31India's key stock benchmark, the Nifty Fifty, has increased 15 % year-to-date, while the Hang Seng, Hong Kong's benchmark, has decreased 16%. Also this year, India surpassed China to become the most populous nation. We talked about that. Uber joins the S &P 500. Look, we've said it, and I wasn't a fan of Uber for a long time. Uber is one of the best managed companies in America right now. Multiple revenue sources, cut costs while maintaining revenue growth, really good acquisition. To be included in the S &P 500, you have to have a market cap of at least$14.5 billion. The majority of your shares have to be publicly traded, and you have to demonstrate cumulatively positive earnings over the previous four quarters, and you must have been a public company for at least a year.

5:12So Google and Gemini, it just sort of, it's very strange. Google supposedly was the kind of the laboratory for a lot of the AI technology that's being leveraged now by other players. It just feels like Google has gotten blown by here, but you never want to count them out. And given their interface and their ability to bundle, you got to think that Google is going to be a player here. What are your thoughts, Ed? Well, did you watch the release video for Gemini yet? I didn't. It's pretty impressive. I mean, And the thing that people are saying about it is that it's the best multimodal LLM. And what that means is that you can provide multiple inputs.

5:48In this case, they're showing it images or actually just a video of a guy drawing things. And then you see Gemini basically understanding and describing. I see you placing a piece of paper on the table. I see a squiggly line. The contour lines are smooth and flowing with no sharp angles or jagged edges. It looks like a bird to me. I look at this, I'm like, this is the first real product that Google has produced in terms of AI that isn't just playing catch-up with ChatGPT. The one other thing that I thought was noteworthy is that you look at the paper for Gemini and Sergey Brin is credited as a core contributor to the product.

6:31And according to one employee, he was showing up every day to HQ and helping working on the product. And, you know, this might be Google's best product, I think, since Google. So I think, you know, when people talk about the power of having a technical founder, the power of founder authority, Sergey Brin showing up to Gemini is sort of case in point. Before we move on, do you have any final thoughts on the AI washing that Gary Gans has talked about? Look, it makes sense, but I don't know how you would enforce that and be the arbiter of it. It feels a little like, you know, it wasn't Williams-Sonoma in 1998.

7:05It was, they changed the name to williamsonoma.com, right? They just, I don't know if you remember that, but everyone said add.com to your name and it'll increase the value of your company by 20 or 30%. So I think we're getting smarter. You know, there's so many people are talking about AI and AI driven and every business plan you see that you're pitched to in the world of venture is something to do with AI. but I think this is up to the media and up to smart investors. I don't know how you enforce nomenclature and say that you're misleading people on something that could be as broadly interpreted as AI.

7:41What do you think? Yeah, I'm just glad that he brought it up because as you say, it's just a cheap way to boost the stock price. I mean, for one, mentions of AI on earnings calls have tripled this year. But the main example that comes to mind for me is BuzzFeed, which I don't know if you remember, but they announced that they were going to start using AI to generate articles. It was simply just a product announcement. And then the stock tripled. And now I looked at the stock, nine months later, it's fallen more than 90%. And it's actually worth less than it was before they made that announcement, because it was basically just all talk, no action.

8:18So I think, yeah, I think Gary Gunz has got his finger on the pulse here. and the real question is as you have just mentioned how do you actually enforce this it hasn't really worked with greenwashing as we wrote in no mercy this week greenwashing incidents are up around 80 percent this year despite the fact that regulators are talking about it so yeah it's unclear how it would work with ai washing either and that's what he has to figure out you're probably right there probably is no way to figure it out other than investors should realize if a company says we're going to start using ai it doesn't mean they're that changed the world?

8:50I would argue, I think we've hit peak AI and you brought up something interesting and that is Buzzfeed, that their stock tripled because about a year ago, I think there was a sense that AI could replace journalists. And I would argue that so far it's been more a lesson in how AI does not replace journalists. It can make them more productive. And I think journalists and editors are using it just as we attempted to prove it, that headline from the Wall Street Journal about Apple and Goldman parting ways. But the Supreme Court case is actually, you know, it's the boring stuff that actually has an impact.

9:22And this is both boring and probably, you know, could potentially have a big impact. The case is from the early 2000s, a couple invested$40 ,000 in a friend's business in India. In exchange, they received 13 % ownership in the firm, a firm called Kassan Craft. They never received any payments or dividends from their stake. And then in 2018, they were charged almost 15K in taxes on their stake based on the historical revenue of Kassan Craft. They paid the bill and then they sued for a refund. The crux of the argument is that the 16th Amendment says Congress, open quote, shall have power to lay and collect taxes on incomes from whatever source derived.

9:58And they're arguing this was an income as it was never realized. And the government's argument is this happens all the time. That partners at law firms or hedge funds, for example, pay taxes on their business income, whether or not they actually get the cash. I guess it's really a function of how liquid or how close to cash something becomes, whereas the line, if you will, it has big implications. If the Supreme Court rules in favor of the Moors, that would imply that a lot of current U.S. tax practices are unconstitutional. If they rule against the Moors, that could strengthen arguments around implementing a billionaire tax.

10:33We're spending, at least in the U.S., we're spending about$7 trillion, and we're taking in, in terms of tax receipts, around$5 trillion and we're up to about 32 or 33 in terms of our national debt. It's just not sustainable. So the question is, where are we going to get the money? And entitlements seem to be a bit, you know, kind of the third rail. No one wants to talk about that. And then you have interest on the debt, which is something we, you know, can't control. As a matter of fact, it's exploded. We'll spend more on interest on the national debt this year than on our military. It's like, well, are you going to raise taxes or cut spending?

11:07The answer is yes. We're going to have to do both. So the question is, well, who are you going to raise taxes on? It's going to be very difficult to push through tax increases on lower mental income homes. There's been so much aggregation of wealth at the top. The number of billionaires has come from 500 to 2 ,500. You know, everything from carried interest tax loopholes to capital gains. I think capital gains tax should be eliminated. And that is everyone should pay. The top tax rate for anyone should be, I think, 37.8 or whatever it is on current income. And there shouldn't be a 22.8 % tax. It just doesn't – I mean, again, it's nothing – tax structure is nothing but a transfer of wealth from you to me.

11:45Specifically, you make all your money in current income and probably pay a greater tax rate than I do because I get the majority of my income from investment. And the whole point of a society is to move people towards prosperity, not to put them in quicksand as they try to crawl towards prosperity. When you have higher taxes on younger people trying to establish economic security, you're just creating more and more friction such that fewer people get to the metal stand. But once they do get to the metal stand, they get not only the gold medal, they get the bronze and the silver. They get to collect everything.

12:14You know, America is just a different world for the wealthy than it is for the poor. That was a mouthful. We'll be right back after the break with a look at Bitcoin.

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13:58Other Bitcoin ETFs already exist, but they only track futures contracts tied to Bitcoin. This would be the first US Bitcoin ETF that invests in Bitcoin directly. And as hopes have grown for SEC approval, the cryptocurrency's value has increased 160 % year to date. Scott, what do you make of this Bitcoin ETF? And specifically, why is it having such a profound effect on the price of Bitcoin? The belief here, I believe, is this will create a broader on-ramp. People know how to buy stocks on Schwab.com and on Robinhood, so the ability to very easily from their phone buy these assets probably is going to expand the market, increase demand, and it makes sense that the price would go up.

14:40Also, it's a bit of a good housekeeping seal of approval to have an ETF around this. This has been just staggering. You know, the asset class of the year definitely would be crypto because of its comeback, its resurgence. By the way, I lost a shit ton of money writing calls against Coinbase, Ed, just so you know. It's one of the best performing stocks of the year, yeah. I think it's almost quadrupled. So anyways, you know, beware, beware. the dog gets it. The dog was hit by a car. I'm a little jittery right now. But you made a lot of money on the FTX claims, right? Can you take us through how that went down?

15:17I haven't yet because it hasn't been recognized. So don't try and tax me, Ed. But I, yeah, so earlier in the year, you know, occasionally I get it right. Occasionally I slip and fall on something right. I bought about$3 million worth of claims against a bankrupt FTX and some against Celsius, and basically just did an analysis, looked at their assets that would eventually be distributed by the court administrator or the administrator overseeing the case. They have a bunch of cryptocurrencies, including Bitcoin and Ethereum. But what I was really excited about is they, in addition, they have a lot of cash, but they made a$500 million investment in Anthropic about two years ago, which I would imagine is worth somewhere between $3 and$5 billion now.

15:58So I kind of added it all up and it came to about$8 billion against$9 billion in claims. So what is that? That's about 88 % take a billion away for court and lawyer fees or administrative and legal fees at seven of nine. So that's like 70. I'm projecting a 77 % recovery rate. So I thought being able to buy these things at 25 cents on the dollar was a good deal. So I bought a bunch of these claims at 25 cents on the dollar. And last week out of the blue, I got an offer for the whole portfolio at 60 cents on the dollar. And I'm not selling, I'm going to hold in. I actually now, Ed, I think it's going to be, I think the claimants are going to recover more than a hundred cents on the dollar.

16:37And some of this is luck, you know, see above Bitcoin has skyrocketed, right? Yeah. I mean, I think, I think it's the ETF. I think that you've got these big, large asset managers like BlackRock that are basically lending these companies credibility and they're lending crypto credibility. The thing I think we should note is that, yeah, I think a lot of people are going to be looking at these numbers. let's say, oh my god, Coinbase is up 300%, Riot Platform's up 200%, MicroStrategy up 250%. Let's just remind ourselves that nothing has actually changed about Bitcoin. I mean, this rally isn't happening because of any sort of fundamental value shift.

17:16It's happening because BlackRock is creating an ETF and lending it credibility. So it's the exact same speculative dynamic we've seen for years where people say, oh, this guy likes it and I respect him, so maybe I should like it too. And you could argue that's meaningful, but personally, I don't see how that's any different from how SoftBank lent WeWork credibility in 2017. It's basically just an endorsement by a guy, except that by making the endorsement, the endorser also makes a shit ton of money collecting fees. But I don't see how this is a game changer. I certainly don't see how it warrants a doubling in value for Bitcoin.

17:55I think you have to acknowledge, though, that Bitcoin and Ethereum look as if they've established themselves as viable stores of value. It does feel as if they're going to be enduring. I think it's fair to say that it's a store of value. Here's a question. Do you buy gold? Do you have any interest in gold? None whatsoever. Why not? Gold for me seems very 80s and seems very doomsday, although I do buy rough cut gems and shut them up my ass. But that's more for recreation than really anything to do with financing that's just a good time that's the real store value okay uh i don't know where that was going i don't know where that was going um yeah i don't i don't buy gold i find the whole thing kind of funny uh it feels very like you know like putting shit under your mattress kind of thing i don't although you want to hear my gold story yeah so my mom's best friend was a woman named Carson Evans.

18:45And Carson was this beautiful, entertaining, funny, like one of those personalities you were just drawn to. I remember it was the first woman I remember ever thinking, wow, I like her. I think she's really pretty. I don't know if you remember the first woman you had a crush on when you were a kid. Anyways, for me, that was Carson Evans. And she was married to Charlie Evans, a really wonderful man who was like a player. He owned a printing business that printed greeting cards. And they had a home in the Hollywood Hills. And I'd go up there and they'd have with my mom and they'd have entertainers and cool people drinking and partying.

19:19And I remember thinking, these are just the coolest people in the world. Anyways, Charlie lost his business. He became severely depressed and was hospitalized with depression. And when he got out, Carson, you know, not great timing, told him she was leaving him and he went into his garage and got some antique shotguns and shot himself in the chest and killed himself. And Carson went on to become addicted to, this is a really nice story. Carson went on to become addicted to painkillers. And I stayed sort of involved in Carson's life. She helped take care of my mom with me when my mom was dying.

19:54Anyways, Carson gave me her, I was the sole benefactor, beneficiary in her will. And someone called me and said, do you know Carson Evans? The coroner's office in San Diego called me about 15 years ago and said, do you know a woman named Carson Evans? I said, of course, said she's passed away. There's a safe here. She didn't have any money, but there's a safe and everything in it is yours. So they went and they cut open the safe and in it was a belt of 15 Indian head$5 gold coins. And I guess they're worth about 10 or 15 grand each. So this belt was worth around 200 grand or something. And I thought, I don't know what to do here.

20:32I'm going to hide it. And so I hid it in a chest of drawers somewhere. Long story, a little bit shorter, my closest friend was going through a divorce. And so I said, I have all this furniture. Do you want it? And I shipped it out to him. And then I realized about two years later that I had put the gold belt in one of the drawers of a chest I had shipped to him. And so I called him and said, have you seen this kind of tacky belt with a bunch of gold coins on it? He's like, oh yeah. And I'm like, well, where is it? And he said, well, actually it's at the Costa Mesa or the newport beach junior high school right now and i'm like what do you mean he's like well my my youngest son nick has been wearing it every day to school because he thinks it makes him look like a rapper did you get it back i do have it i think i've lost it again so you took it from the kid oh fuck yeah uh like send that shit back but yeah if the apocalypse comes if ai does in fact decide we all need to make paper clips and the humans should be destroyed you'll be at my house looking for one of those Indian head gold coins that will trade beef and barley and guns.

21:37What I'm learning from that story is that we're not great custodians of our own assets. Like you just sort of misplaced where you put the gold coins, then it ended up being on the waist of some kid at some high school. And that's usually what happens. I mean, there's all this stuff about, you know, you should self-custody. You can't trust anyone to hold your assets for you. You can't trust these banks. They're going to lose your money. It's like, actually, you can't really trust yourself. It's very likely that you're going to lose your money, that you're going to invest in the wrong place, that you're going to just lose this stuff.

22:08You're going to forget your password. You're not going to know where you put your assets. You have to really, really trust yourself. If you want to make the case that we should all be holding on to our own assets, then we should just get rid of the banks that do it for us. So let me get this, Ed. The lesson you take away from my only male role model shooting himself in the chest with a shotgun is around the self-custody of stores of value. That's what you take away from this? I'm just trying to make this show educational, Is that what they teach you at Princeton, to be this cold? To be this cold?

22:45Alaska Airlines agreed to acquire Hawaiian Airlines for$1.9 billion in cash and debt. Alaska will pay$18 per share, a 270 % premium to Hawaiian's last closing price before the announcement. Hawaiian stock nearly tripled on the news, though it remained below the purchase price. Meanwhile, Alaska's stock dropped around 15%. According to Alaska's CFO, the two airlines only overlap on 12 routes, or 3 % of their total seats. At the same time, the combined companies would control more than 50 % of the Hawaiian market. Scott, thoughts on this acquisition? The lesson I take away from it is the specific crowds out of the general.

23:22Globally, carriers are set to generate a record$23.3 billion this year. That's more than double what trade groups expected in June and a near quintupling of the outlook at the start of this year. Despite a resurgence in travel, U.S. airlines have lagged the S &P 500 year-to-date. The S &P is up 18%. Delta is up 17%. United up 7%. American up 4%. Southwest down 17%. Alaska down 18%. JetBlue down 29%. And Hawaii pre-merger was down 53 % for the year. And after the announcement, the stock is up 33 % year-to-date. I feel as if I know a lot about airlines just by virtue of the fact that I've been molesting the earth for the better part of the last 30 years.

24:03I spend 180 days a year on the road. And I find that there are few industries that have progressed as slowly or innovated less than the airline industry. I don't think the food's much different, the way you get onboard, deboard. I just find it, and not only that, the foreign airlines are just so much better, mostly because they're subsidized, because they seem as branding events, Qatar Airlines, Emirates, Singapore. But it takes longer to get from New York to Dallas now than it did 50 years ago, which is why I invested in Boom Supersonic, because I want to get to Dallas in like an hour and a half.

24:37I'm not sure why I want to go to Dallas, but if I did, I'd want to be there in 90 minutes. But so I just find the airline industry, for whatever reason, really hasn't innovated a great deal. I mean, I guess they've embraced some digital, but the experience, I mean, it's strange. I remember flying in the 70s with my father, and if I'd go with him on a business trip, we'd get to go business class. And business on some of these airlines, it was just so sexy. They had couches. I mean, the industry was probably losing a shit ton of money. But it was, I remember going on planes, at least the wide body planes where they had, it felt like you were in a lounge.