Prof G Markets: GameStop & Market Manipulation + Is AI Becoming a Bubble, and Is Nvidia Safe?

24:29I'm on the board of a company. I know the earnings are going to be great. And the day before the earnings, I'll go out and buy stock. I have an edge over public investors that's insider trading. That's an easy one. Market manipulation is if, Ed, you were to announce that you're buying, you're going to put a bid in at$12 a share for Warner Brothers tomorrow, and you are a Carl icon and you have some credibility doing that, and then you buy the shares, it runs up, you sell the share, and it comes out that you actually had no intention of buying the stock, that's market manipulation. In this instance, I think it'd be a pretty serious leap legally to say that a picture of a guy leaning forward is saying to the market, I'm doing something.

25:14I mean, this is a tough one. I guess the argument they would make is that it's clear you're about to go in and buy the stock. I don't know. I think this would be a really tough one. I think this is free expression. He doesn't have any material inside information. Is he trying to manipulate the market? We don't know when he bought, when he sold. He's basically just saying, I think he would say he's trying to draw attention to the stock again or he's thinking about getting involved. And that's his right as a consumer to buy shares and sell shares when he wants. They'd have to make the connection that he's trying to fool or mislead people such that he can profit off of false statements.

25:51I think this would be a really tough one. It gets into intention and state of mind, which would be really difficult to prove. And also, to a certain extent, it's sort of buyer beware. The people who buy a stock at$60 in a company whose underlying fundamentals don't justify that price, and then they lose money. Is a jury really going to feel sorry for them? I mean, it's tough. It sounds like a lot of what you're saying, I'm trying to figure out why you believe that this is okay as opposed to other pump and dump schemes. And it sounds like a lot of it has to do with, one, he didn't lie about anything.

26:30So he's not misinforming anyone. And two, it sounds like a lot of your belief has to do with the fact that he's not an insider, that he's not actually inside the company. so he kind of has a right as an outsider on the company to sort of say whatever he wants. Would that be the right characterization? Basically, almost every person who goes on CNBC is pumping. They're talking up or talking down a stock based on their own financial interests. Some are independent analysts, but a lot of them own stock. When Keith Rabois went on CNBC and started spreading misinformation about Opendoor, that wasn't true.

27:10And to her credit, Deirdre Bolson fact-checked him real time and said, no, this company is not profitable. You can't say that. And he threw a fit. And he started saying she was stupid or crazy. In my view, that is closer to securities fraud, given he obviously has a financial interest in the company. And my guess is he's been selling like crazy since it peaked whenever two years ago. My guess is that's much closer to securities fraud than a guy putting out a sketch of someone leaning forward. I think this is a tough one. Just to finish out this scenario, I mean, assuming he bought the options beforehand and then he posted the photo and then he sold, that would assume or that would, I think a jury would say, okay, this wasn't just a benign photo.

27:58There was clearly intent there. He knew that he was going to profit off of it. And I think the argument to criminalize this would be that it generally erodes our faith in markets. If a dude who has all of this internet power can become a centimillionaire overnight, just because he's associated with GameStop and he has a large megaphone on his Twitter platform, and he takes that stock up by$3 billion in 24 hours, it's sort of a signal to the rest of us investors that, you know, the market isn't totally serious and it can be manipulated and controlled by random guys in their basement. Do you think that that's enough?

28:39That's enough of a case to argue for criminalizing? I don't because if somebody claims they're about to put in a bid at$14 a share for a stock that's trading at eight, it goes to 12 and it ends up they weren't sincere and didn't have. I think that Elon Musk stating that he was taking his company private at$420 and that funding was secured, I think that is securities fraud. He is claiming that he has the capital lined up to take a company private at$420 a share and the stock popped and he got wealthier. And then the people who believed him and tried to pile into the stock thinking they were going to make money, that he was telling the truth, later found out he did not have funding secured.

29:23I think that is securities fraud. If this guy says, so let's take the leap. He's saying, I am buying the stock. Okay. And he thinks that because I am buying the stock, that it's about to ignite a rally that's going to go up. He's not lying. I mean, you'd have first off we don't know we don't know if he's sold right as far as we know he kept buying thinking that him the roaring kid being back would take this thing to a hundred bucks a share so i don't i think this is a really i think this is really a tough one the the what you're trying to make is the leap that a drawing of him being interested again in a stock would naturally take it up and he knew that and then the other assumption is is that when the greater fool theory kicked in, he got out.

30:12Well, again, I think you're going to have to show harm to people who were fooled. And it's like, well, you saw what happened before. You saw the stock go up. You saw it go down again. There's no underlying dynamics here. There was no tangible offer to take this company private or anything that would indicate it was worth more, that the intrinsic value had gone up, but only that this person was interested again. and we don't know if he ever sold. As far as we know, he's still, we don't know if he bought and we don't know if he sold. And even if he did, I'll use you as an example. You go on CNBC and you say, I'm really interested in AT &T and the stock pops and you see the stock pop and it goes down and they go, well, you just said you were interested to see the stock pop.

30:55Is that market manipulation? I don't think it is. Yeah, it's a tough one and I don't have the answer. Just a larger question on meme stocks. I mean, this idea of meme stocks is new. It was kind of a pandemic era phenomenon. It began because of the GameStop saga and this guy, Roran Kitty. In fact, that's when we invented the word meme stock back in 2021. At the time, it seemed sort of like a one-time event. It sort of came and went. But since then, we've seen lots more of it. We've seen AMC, BlackBerry, Bed Bath & Beyond, Truth Social. now GameStop again, this keeps on happening. Do you think meme stocks are just a permanent feature of capital markets today?

31:42Do you think they're sort of here to stay? I think the idea, the financialization of everything and the politicization of everything combined with access to phones and real-time trading, 24 hours, or they're talking about taking the markets to 24 hours, the lack of friction to buy and sell stocks, yeah, I do you think it's here to stay? Because as long as there's markets, there's going to be people trying to create hysteria or create momentum around those markets such that they can profit. And the question is, do they have insider information or are they manipulating the market to their own benefit?

32:19And then the term market manipulation is going to take on sort of what you're saying is it needs to go further downstream and maybe have new inclusion of new activities potentially around what is market manipulation. But then the question, if you were to find this guy guilty of market manipulation than anyone going on CNBC. What you're essentially saying is if they had more influence, they would be accused of market manipulation. But because no one really gives a shit what they think and they can't move the markets, they're not guilty of market manipulation. So his guilt is a function of his authority and his power.

32:51So I think that's a really tough case to make. I think meme stocks are here to stay. And I think what people are looking for here, I don't think we should infantilize the people buying new stocks. I think if they look at the stock chart here and they know anything or they've seen the movie Dumb Money, they know this is gambling. They know they're there. This is a pyramid scheme, right? It's fun. Someone's going to get hurt. Someone's going to get hurt. This is this is bungee jumping at night when the instructor isn't around and no one's tested the ropes and everyone's on X. It's probably it's probably a lot of fun and it could be amazing, but there's a really good chance someone's going to get hurt.

33:27And they know this. These folks are skydiving without a backup parachute. I mean, the markets are, you are in the most volatile stock ever. You're in a stock that's going up 100 % and getting cut by 50 % the next day. It's just unlikely you're going to have a lot of widows up there saying, I didn't know I invested my pension in this. It's like, well, really? You didn't know? So I think this is what it is. It's gambling. Some people will make money. Some people will lose money. I don't see how you stop it. When do you decide a stock is a meme company? Is NVIDIA a meme stock? He's throwing big events, and people are excited about the future, and they're talking about the future, and they're talking about the future of AI and how it's going to be the next big thing.

34:11And he's talking about biology and how basically he's saying NVIDIA, that his chips are going to start to cure disease. That's effectively what he's saying now, that the biggest opportunity for AI is in biology. Well, okay, that sends the stock up beyond an irrational level. And my guess is he's selling. Is he guilty of market manipulation? So I just don't see how you could go there. I think the SEC would rather say, anyone who files a plaintiff's lawsuit is like, we can't wait to get those shareholders on the stand and have them tell the sob story of how they thought they were going to make a bunch of easy money on a movie theater stock, but they feel like they were taken.

34:45I just don't think that. I mean, it's like these people would make for these people would be worse witnesses or less credible witnesses and Stormy Daniels and Michael Cohen. They would be less sympathetic witnesses than Michael Cohen. He used to tell people I would I'm going to kill you. It's going to be sad what I'm going to do to you when he was working for Donald Trump. Just a final question on meme stocks. I mean, you say this is here to stay. A lot of this feels pretty silly, like Roaring Kitty, GameStop, AMC. it feels like, you know, we're talking about dumb stuff. I mean, the movie was called Dumb Money.

35:18Do you think, though, that this is the kind of thing that all investors need to start educating themselves on, meme stocks? And just to draw this out into a hypothetical, say you are looking for a new wealth manager or a new investment advisor, would you consider it a basic requirement that he or she understands meme stocks? They understand the dynamics of meme stocks. that can more or less identify the relevant trends in meme stock world. If you ask your financial advisor, would you ever invest me or anyone else in a meme stock? And he says yes, then you've got the wrong financial advisor. And also, just keep in mind, if you want to invest in a meme stock, have at it.

35:58Just keep in mind you're gambling. So look at it as how much money would you take down to the casino? And assume you're going to lose most or all of it. And if it's fun, and I do think it's fun, then fine. But be clear, you're not investing. You're not investing. And any financial advisor that would ever invest in a meme stock outside of buying a huge basket of stocks that might include a meme stock because they're investing in mid or small cap companies should not be your financial advisor. We'll be right back after the break with a look at a new deal between Elon Musk's AI startup and Oracle.

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38:11We're back with Profit Markets. Elon Musk's artificial intelligence startup, XAI, is negotiating a$10 billion deal to rent cloud servers from Oracle. Oracle shares rose more than 5 % after the information reported that potential deal. While negotiations progress, XAI is also finalizing a$6 billion equity funding round. But the company will need even more capital than that if a deal is struck and if XAI becomes one of Oracle's largest customers. Scott, another AI startup partnering up with another big tech company on cloud. We've discussed OpenAI with Microsoft, Anthropic with Amazon, now XAI with Oracle.

38:52What are your initial thoughts on this story? You said this, that everything is becoming, basically every big tech company is converging and becoming the same company offering compute. And what's interesting is that Oracle's trying to squeeze itself or it's desperately wants to be part of the cool kids club. It wants to be one of the magnificent seven. And Larry Ellison is, he's probably, he's one of the most, I don't wanna call him underrated, but he's sort of the quiet billionaire in the background. I know that he is Elon Musk's mentor, but that doesn't in any way diminish a$10 billion deal.

39:24I think the big winner here is Oracle because Oracle is getting a$10 billion deal from XAI. and we're still not entirely sure if XAI is going to be able to carve out a unique positioning. My understanding is that so far Elon is playing catch up and has basically come out with GPT-2. He hasn't been able to really do anything here that's of the ilk or the quality of his efforts in other categories that he's playing catch up. But the big winner here, hands down, we don't know if XAI is going to work. What we do know is that Oracle with a$10 billion contract, that that's very good for Oracle shareholders because it doesn't matter if XAI works.

40:03The story sort of reminds me of this famous statistic from, I think it was around 2018, which I think you talked about a lot, which is that startups spend roughly 40 cents of every VC dollar on Google, Facebook, and Amazon. Specifically, those 40 cents are going towards ads. Now, I don't know if that stat is still true. It's from a long time ago. It probably isn't. But here we have a very similar dynamic, only this one's far more exaggerated because, you know, XAI is raising$6 billion. It plans to spend $10 billion on Oracle, which means in this case, 100 % of the venture funding is going directly to the big tech company, which is Oracle here.

40:44But it could be any cloud company. It could be Microsoft, could be Amazon, it could be Google. And we know all these other AI startups that have very similar deals with those companies. So my question to you, do you think we're about to witness the same thing here with cloud and AI? And perhaps do you think it's going to be on an even larger scale than before? It's just staggering. I was reading that the amount of money that has been spent in R &D, mostly around cloud-based AI-driven applications here across the Magnificent Seven is$200 billion, just across the Magnificent Seven, which is equivalent to half of all R &D across all industries in all of Europe.

41:23And that just struck me as, oh my God. So one of two things is happening. Either AI is about to be the biggest bubble in history or a small number of companies are the only ones that are well-capitalized enough to pull this off and are gonna run away with it. It's funny, I do meet people, a lot of people here in London, I've met several people from Cambridge who love to come up and say, you realize that AI was invented at Cambridge. And I'm like, well, smell you boss. how come you didn't make any money off of it? It's just like, okay. Yeah, the unwashed masses in San Francisco have made hundreds of billions, but you can tell people that you invented it?

42:00I mean, wow. I mean, it's just so... And I also had someone in Hamburg claim that AI was invented in Germany. I'm like, really? Well, guten Tag. Well, farfen Nugen for you. I'm kind of blown away by it. I'm starting to believe that an AI bubble is beginning to form because what happens if the expectations around what you can do with AI at your Fortune 5000 company that makes cardboard boxes or supply materials or textiles, if the AI dream doesn't live up to your hopes to revolutionize your business and you begin reducing your spend. And the first quarter that comes out that shows that sort of medium and large-sized businesses are cutting back their spend on AI, wow, that could be really ugly around these companies.

42:51Yeah, I mean, I wanted to ask you about that because, you know, one read of this news is, wow, AI demand is growing. But another read would be that things are getting super frothy. I mean,$10 billion is so much money, and it feels as though the only reason they're really doing it is to just follow the pack. Anthropik signed a deal with Amazon. OpenAI signed one with Microsoft. Oh, we should sign one with Oracle. Now, when we discussed this earlier this week, you said that this kind of reminded you of Cisco in the late 90s and the early 2000s. Tell us why Cisco comes to mind here. Well, we got very excited around the internet.

43:25There was a Netscape browser, then there was Internet Explorer, and it was clear that the internet was going to be huge. But then somebody realized that Aardvark Pet, which was my e-commerce pet supply company that I started thinking that there needed to be something, a Williams-Sonoma of pet stores online. My idea, true story. Half a million dollars, built the website, sold it. Nine months later for$3 million to Petopia. You were, I think, probably, my God, I don't think, were you even born then? Yeah, you were like maybe two or three years old. Anyways, when we all realized that this wasn't happening as quickly as we were hoping, that there were a lot of companies that just weren't selling anything, or if they were selling things.

44:07They were basically buying consumers. They were buying a Furby for$300 for Cybershop and selling it for$99, or they were selling a 70-pound bag of dog food that cost$100 to deliver for$19.99, pets.com. And everyone said, okay, the internet might work or e-commerce might work, but it's definitely not going to work anytime soon. The unit economics here are shitty. And all the front-end B2C stuff crashed. But people still thought, okay, but the internet is not going anywhere. So what do we do? Well, we can invest in B2C. Let's find B2B. And they started investing in these ridiculous B2B platforms.

44:45ICG was one of them that was going to figure out a way for people who are purchasing supplies in the drinks or the chemicals industry to meet online. And that was a total fucking jazz hands ridiculousness. And that thing crashed. Everyone's like, well, okay, B2C is not working. B2B is not working or living up to our expectations. What do we do? And like, well, we still believe in the internet. Let's invest in infrastructure. And everyone piled into Cisco, which became the most valuable company in the world in the late 90s. What people forget is it's similar to Amazon between 1999 and 2001. Cisco and Amazon shed 90 % of their market value.

45:27Now they came back. Amazon came ripping back. Cisco never really fully recovered. It came back, but never, never touched those same highs again. Amazon came back and more, was one of the winners that got through kind of the valley of death, if you will. So the question here is the same thing forming. Do we have the same level of excitement that we had in, say, 97, 98? And then when it appears that every company may not spend tens of millions of dollars to use AI to change the way they do business in any industry, and these companies report for the first time that their fairly scant, mediocre revenues to date actually are flatlining or even declining, you could see the mother of all.

46:09You could hear a pop that is a sonic boom. AI infrastructure investments,$200 billion, up more than 35%, valuations from the AI boom, 120 times the estimated$20 billion in revenue that Gen AI will add in 2024. Now, what's that multiple, the combined market value of Alphabet, Amazon, and Microsoft has increased$2.5 trillion. So you have$2.5 trillion in increased value during the AI boom, but the increase in revenue has only been$20 billion. So the market has valued the$20 billion increase in AI revenues at$2.5 trillion or 120 times revenues. The big three cloud providers traded an average P of 38, which is significantly higher than the broader S &P at 23.

46:57In October of 2022, public AI hardware companies were worth about one and a half trillion. Today, they're worth about five trillion. And NVIDIA has accounted for 57 % of this increase. So if I had bigger balls, I think I would probably create a basket of AI companies and think about shorting them because - Big claim. Well, this is beginning to feel like 1998. 98. And the problem is when guys like me say something is overvalued, that means it usually runs up another 30 or 70%. And then I throw in the towel and then it crashes. It's very hard to time the markets. But I mean, just as we, I do learn a lot on this show, just as we're talking about this and I'm reading these numbers, I've been here before.

47:41This is literally 26 years ago. This is 1998, where we know AI is going to endure. We know AI is going to have a big impact, but it hasn't gotten so far out in front of its skis from a valuation standpoint. Just a vibe question. What were people saying about Cisco back then? Because, you know, what we're saying, oh, potentially AI is a bubble. That's not new. A lot of people have said that. I'm pretty sure we've kind of had that conversation several months ago. For some reason, no one's saying it that much today. It seems like I and everyone else in financial media have been like, oh no, AI is legit.

48:20It's here to stay. But was anyone sort of wondering about Cisco? Oh, maybe this is a bubble. Maybe this is getting out over its skis. Or was it just everyone just bought in unequivocally? It was the safe bet. I remember my roommate, my junior year in college, Mike Vogt, smart guy. And I remember him talking to him when I was an entrepreneur. And he's like, I'm not smart enough to figure out which internet company is going to win or lose. So I just put all my money in Cisco. Because that's infrastructure. So essentially, everyone just thought it was their default safe bet. Invest in the steel in the ground.

48:56Invest in the pipes. Sounds like NVIDIA, no? That sounds like that's NVIDIA. You're learning. You're learning. That's exactly right. This is feeling. That's the correct question. Is NVIDIA the Cisco of 2024? That's the correct question. And the thing that makes me believe that it might be is no one is saying that. It's the same universal chorus right now. Everyone's barking up the same tree. And that is the infrastructure plays, the few cloud providers are kind of a can't lose proposition, which means they could get cut in half really easily. Now, the thing about the biggest players is they have very diversified businesses and incredible business lines that diversify them, or they give them other cash flows from other things.

49:47But that, I mean, the number, I just want to repeat it again because it's so staggering. the AI offerings from the big, kind of the biggest players, Alphabet, Amazon, and Microsoft, their total revenue from those generative AI applications is$20 billion. And yet their market capitalizations have increased$2.5 trillion. To me, that just, it does feel like we're headed towards bubble land.

50:18All right, let's take a look at the week ahead. We'll see earnings from Target, Lowe's, and NVIDIA. We'll also see the minutes from the Federal Reserve's May meeting. Do you have any predictions for us? Yeah, that NVIDIA is going to blow away its earnings just based on everything I just said. It's just when a quote-unquote, I'm not calling myself an expert, but when a talking head like me says it's beginning to look bubbly, that's when the market's about to scream another 30 % or 40%. So that's my prediction, that despite the fact I think a bubble is forming, NVIDIA is absolutely going to blow away its numbers.

50:53You are advocating for the inverse Galloway as we speak. I think it's in the money, though. I think the inverse Galloway index is actually, no one tracks it anymore because, unfortunately, all the companies I said were going to crash have crashed. But anyways, but here's the thing. It's not how many GPUs they sold. It's whether or not those GPUs are going to be able to justify the investment that these companies are making buying the GPUs. There's no doubt about it that the promise has never been stronger. What we're going to see over the next 6, 12, 24 months is when Nestle gets talked into by their chief strategy officer buying$38 million in GPUs from NVIDIA, claiming that this will help us figure out a way to source the milk that we put in our chocolates and how to organize our personnel and our supply chain and come up with better copy and figure out where we need people and where we don't, and the quickest way for our trucks to deliver powdered, concentrated milk, if that shit doesn't pay off, if all of a sudden someone raises their hand and goes, you know what?

51:56And I remember this. I remember this in 1998 when we launched, whenever it was, we launched WilliamSonoma.com and we said, this is going to be big one day, but guess what? Our sales are ridiculously low on.com and our stocks doubled in the anticipation that WilliamSonoma.com would be bigger than WilliamSonoma. And it's not panning out that way. I think we're in for that moment. Yeah. It's like all the sales are B2B, but we haven't tested any of this shit out on the consumer. Like all those AI startups, like who knows what their sales are going to look like. But you know that right now they are buying a shit ton of H100s and renting them out so that they can just bring it to us.

52:34But, you know, I am yet to use AI or pay for AI on a daily basis. I think it's a great point. Just to give you a sense, the revenue so far garnered from artificial intelligence applications is only slightly greater than the revenue of Subway. That's crazy. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producers are Jennifer Sanchez and Alison Weiss. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network.

53:15Join us on Thursday for our conversation with Josh Brown, only on the Prof G Markets feed.

53:41As the world turns, and the dark flies, and la, la, la, la, la.

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