The 10-year yield almost brushed against

4.8% and there is no question that at

some level of interest rates the market

will correct. The entire US economy

hinges on the success of AI. The amount

being spent is just so large that were

it to stop, the economy would go into a

recession almost immediately. I think

that open AI is potentially in trouble.

Things are not moving in the right

direction. So, I'm starting to think

that the demise of open AI could push

the US into an almost immediate

recession. It's not too early to think

about the ramifications of open AI

failing. So, let's think about it.

Hi, this is Steve Eisman. Welcome to the

weekly rap. This is for the week ending

Friday, September 4, but recorded

Thursday night, September 3. First, I

will take a moment to thank everyone who

has joined me on Substack and subscribe

to both free and premium. We'll be

increasing our premium prices on

September 7th at midnight to $20 per

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get the old pricing, subscribe now

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your rates will not change if you stay

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and receiving daily comments on the

market and economy, being part of a

thriving community, receiving an extra

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episodes, ad free, consider subscribing

before we raise the price on September

7th. Over the past several months, we've

gotten several requests from subscribers

to interview Ed Zitron, the Substack

newsletter writer, who is one of the

most famous critics of the entire AI

story. So, I'm pleased to announce that

this coming Wednesday, September 9, on

premium, we will post an interview with

Ed Zitron. Open AAI and Anthropic to

account for 48% of all of Google Cloud's

revenues next year, which is

>> that's huge,

>> bonkers. That's crazy. That means that

Google Cloud's growth is based on

whether these companies will pay them.

>> We had an incredible conversation and

covered every aspect of the AI story,

its strengths, weaknesses, the financial

shenanigans, and where and how it could

fail. So, please tune in. In this weekly

rap, I will discuss one, war, oil, and

interest rate news. Two, the

increasingly insatiable need for

commentators to predict a dystopian

ending to the AI bubble. Three, why I'm

not there yet. Four, AI's insatiable

need for capex is the major driver of

GDP growth. Five, is open AI the

potential catalyst for a recession? And

six, some recent events. So, let's get

started. This week, the war heated back

up and oil prices spiked, thereby

driving fears of mounting inflation. The

10-year yield almost brushed against

4.8%. And there is no question that at

some level of interest rates the market

will correct. What that level is, no one

really knows. I thought that 4.5% was

the Rubicon and I was wrong. Is it 4.8%

or even higher? I don't really know, but

we are certainly getting closer. I'd

also point out that part of the problem

is the enormous amount of AI debt being

issued. This supply is putting pressure

on rates. And I'd also point out that

Treasury Secretary Besson's recent

attempt to reduce long-term rates

appears to have already failed. One more

point, higher rates put pressure on any

company issuing debt. However, higher

rates are good for consumers who save

and put their money in the bank or in a

money market fund. Before we get to some

of this week's events, I am going to

spend some time discussing the desire by

many commentators to call for the end of

the world and what it would actually

take to cause a recession. Now, one of

the last great sitcoms on network TV was

The Big Bang Theory. For those of you

who never watched the show, it was about

a group of friends who were science

nerds. In the show, there was a minor

character called Stewart. Stuart owned a

comic book store that the main

characters like to hang out at as they

all loved comic books. Now, recently,

Chuck Lori, the creator of The Big Bang

Theory, created a new show on HBO called

Stuart Fails to Save the Universe. In

this new show, a catastrophe has

enveloped the world, and humanity now

lives in a horrible dystopia. Stuart

finds a machine that allows him and his

friends to travel to alternative

universes, constantly searching for a

better place to live. Thus far on the

show, every universe Steuart jumps to is

just another form of dystopia. Show is

quite funny, but captures something

essential. There is something about

imagining a dystopian future that people

find captivating. I've noticed that over

the years since the GFC, whenever I am

interviewed, the interviewer is almost

begging me to predict the end of the

world. How do I feel about that? Well, I

predicted the end of the world once, and

believe me, it was no fun. I am in no

rush to predict to the end of the world

again, unless I am really convinced that

it's going to happen. But I'm not going

to make such a prediction just because

it will get a lot of press. There is no

question in my mind that the entire US

economy hinges on the success of AI. The

amount being spent is just so large that

were it to stop, the economy would go

into a recession almost immediately.

There are several commentators who are

making exactly that prediction. They

could be right, but right now the data

does not support the end of the AI

story, at least not yet. So let me point

out where the points of weakness reside

because it's time to consider how the

unwind could could occur, what the

catalysts are and what the impact could

could be. Now there is no question that

the large tech companies have

transformed the dynamics of their

businesses. They used to run businesses

that threw off so much cash they didn't

know what to do with it. But because of

the hundreds of billions they are each

spending on AI capex, their cash flow

has evaporated and in some cases they

are raising both debt and equity to fund

that capex. This is a topic of great

concern. It gets a lot of press, but it

is not necessarily the deathnell of the

AI story. After all, if and it's a big

if, AI generates new businesses and

large returns on this capex investment,

then the hyperscalers will be okay. Now,

there is also a great deal of circular

financing going on, mostly led by

Nvidia, and these transactions are very

complicated and convoluted, but

essentially Nvidia is either lending

money or making equity investments. The

companies then take that cash and buy

more Nvidia chips. Now I'm

oversimplifying but that is essentially

what is going on. Nvidia's potential

investment in perplexity and the recent

investment in poolside are only the most

recent examples of such transactions.

This financing circularity is also a

topic of great concern. However, here

too if AI succeeds then these financing

techniques will probably turn out to be

okay. So where is the Achilles heel? I

think that it resides with anthropic and

open AI because they are so central to

the entire AI food chain. According to

reports from various Wall Street firms,

something like 70% of hyperscaler AI

revenue comes from anthropic and open

AI. 70% equates to around 25 to 35% of

total hyperscaler cloud revenue. I can't

confirm those statistics, but they sound

right given what we actually know about

Oracle. Oracle has a backlog of around

600 billion and we know because the

information is public that around 50%

50% of that backlog is from open AI

alone and by the way open AI accounts

for over 20% of coreweave's total

contracted order book hyperscalers are

spending about 700 billion in capex this

year and even more next year and that

spend accounts for around half of the 2%

% GDP growth projected for 2026.

So one must conclude that the health of

the US economy is extremely dependent on

hyperscaler capex and hyperscaler capex

x is highly dependent on the health of

anthropic and open aai. That's the

chain. Now between the two openai is the

weaker entity. It has lost several key

senior employees. Let's list them

because the list is kind of

illuminating. One, Denise Dresser, chief

revenue officer, resigned in August 2026

after only eight months on the job. That

probably means she gave up all her stock

options as those usually don't vest for

at least a year. That's a big data point

for her. I guess moving on was perhaps

worth the loss options and maybe she

never thought they would vest because

going public is being pushed further out

on the timeline. Two, Brad Lcap, former

COO, resigned in August 2026 after eight

years with the company. Three, Caitlyn

Kalinowski, head of robotics and

consumer hardware, resigned in March

2026 over governance concerns regarding

an agreement with the Pentagon. Four,

Kate Rouch, chief marketing officer, and

Kevin Wild, science research overseer,

both departed in April 2026. The most

concerning departures are the ones that

took place this August. Denise Dresser

and Brad Lcap. Supposedly, OpenAI is

getting closer to an IPO. That's the big

payday for employees because it means

that eventually they can sell some of

their shares. That two such senior

employees would leave now is an

important data point. More importantly,

OpenAI's financials look tepid. The Wall

Street Journal reported that OpenAI's

June quarter revenue reached 6.7

billion, up only only 18% versus the

March quarter. Compare that to

Anthropic's revenue of 11 billion plus

in the June quarter, which was up over

100% versus the March quarter. What's

even worse than the relatively weak

revenue growth is the explosion in

costs. Again, according to the Wall

Street Journal, OpenAI's costs reached

12.3 billion, up 3 billion versus the

March quarter. So, in 3 months, revenue

increased 1 billion, but costs surged 3

billion. Things are not moving in the

right direction. Now, you might ask,

what is the problem at OpenAI? Part of

the problem, I think, is that OpenAI

made a strategic mistake. It chose to

chase the business to consumer market, B

TOC. It did so by giving its product

away or underpricing it with the hope

that later on it could raise prices.

That strategy proved to be flawed and

now OpenAI is chasing the businessto

business market B2B. The problem is that

it's late and playing catch-up with

anthropic which chose the B2B market at

the outset. Again, I think that OpenAI

is potentially in trouble and this bears

continuous monitoring. According to Ed

Zitron, our guest in a week, to survive,

Open AI will have to raise hundred

billion dollars per year for the next

several years. Now, when you lose

billions upon billions, appearances

matter a lot. Open AI is completely

dependent on the kindness of strangers

funding its cash flow needs. When a

company is growing and very profitable,

appearances don't matter nearly as much.

Such a company can survive quite well.

But when a company is not profitable and

has an insatiable need for capital,

appearances matter more than anything

because if the narrative turns negative,

raising capital becomes much more

difficult. Now, this is just me reading

the tea leaves, but Open AI's press is

no longer all positive. The press is

actually focused on the high level of

departures and on the weak numbers I

just described. That's why, as Ed Zitron

wrote recently, it's not too early to

think about the ramifications of Open AI

failing. So, let's think about it. First

of all, I want to emphasize I'm not

predicting, at least not yet, that Open

AI will fail. I still think it's too

early to make that prediction, but it's

not too early to think about it. If Open

AI fails, Oracle is in immediate trouble

because of the large increase in

Oracle's debt levels. Oracle's debt

rating is barely above junk. Oracle's

S&P credit rating is tripleB minus,

which is quite weak. Like I said before,

it has a $600 billion backlog, and half

of that backlog is from OpenAI. Now,

what would happen to Oracle stock price

if Open AAI failed? Well, we've already

had something of a preview. Last year

when Oracle reported its backlog for the

August quarter of 2025,

what it calls remaining performance

obligations, RPO, it showed an RPO

explosion to 455 billion. It's now 600

billion. Now, in that quarter, the RPO

was up over 300 billion in just three

months. People were blown away. Prior to

the earnings report, stock was $230 a

share. In just a few days, it jumped to

$330 a share. Then analysts started

publishing reports pointing out that 50%

of the RPO was from Open AI, and the

stock gave back all of its gains plus in

a few months. Today, the stock is around

145, well below where it stood before it

reported the August 2025 quarter

results. From the peak, the stock is

down over 50%. That decline is because

the market perceives an over reliance on

Open AI. Imagine what the market would

do to Oracle stock if Open AI fails. The

ramifications of an OpenAI failure

extend far beyond just Oracle. Remember

I said that AI capex accounts for 50% of

US GDP growth. While the other

hyperscalers are not quite as dependent

on entropic and open AAI as Oracle, they

are dependent enough. If OpenAI failed,

the hyperscalers I am sure would cut

back on their capex. So I'm starting to

think that the demise of Open AI could

push the US into an almost immediate

recession. So what would happen to

particular stocks and sectors? Well,

first the hyperscalers would go down. A

failure of Open AI would mean they would

pull back on capex. cloud revenue growth

would slow and these stocks Amazon,

Google, Microsoft and Oracle, Nvidia,

I'm sure as well would all correct.

Also, the whole tech sector would

correct. But the ramifications are even

much broader than just that. Investment

banks and large banks, these stocks are

at peak valuations. Also, the investment

banking cycle is super strong right now,

partially because of the financing needs

of AI. Should those needs lessen, the

investment banking cycle would weaken

and these stocks would correct from

their peak valuations. Industrials.

There is a subset of industrial

companies that are major beneficiaries

of AI. They are in the power space like

GE Vernova and Quanta or they are in the

electrification or automation spaces

like Eaton and Rockwell. These stocks

will decline as well. So what will do

well? This is not a stockpicking

question but a reallocation question.

Investors will reallocate to safety

sectors and subsectors. In the safety

sector category, think about healthcare

and consumer staples. I'd also point out

that within almost every sector, there

exists safety subsectors. For example,

within financials, the property and

casualty sector is considered the safety

subsector. Since we are talking about

capital reallocation and not stock

picking, let me flag three safety ETFs.

One, LVHD,

the Franklin US low volatility high

dividend index ETF. SPLV,

the Invesco S&P 500 low volatility ETF.

And finally, the KBWP,

which is the Invesco KBW Property and

Casualty Insurance ETF. It's still early

and I want to emphasize that I am not

making a major call. Not yet. I'm just

preparing. Last week, Nvidia reported

and the results in many ways support

what I'm saying about the AI story that

it continues but is displaying potential

weakness. Both apparently contradictory

ideas can be true. What do I mean by

that? On the one hand, Nvidia's results

show that the AI story continues. How

could it be otherwise? The hyperscalers

continue to increase their capex and

that means they are buying more chips

from Nvidia. Nvidia's July 2026 quarter

results showed revenue growth in excess

of 100%. 100%. Think about it. The

largest company by market cap on planet

Earth just posted revenue growth in

excess of 100%. And that is an

acceleration from the 85% revenue growth

in the April 2026 quarter. That shows

that the AI story continues. However,

beneath the surface, there are

weaknesses. In note 7 of Nvidia's 10Q,

it states, quote, "Five direct customers

accounted for 22%, 14%, 13%, 11%, and

10% of our accounts receivable balance

as of July 26, 2026." End quote. That

adds up to 70%. So yes, Nvidia's revenue

growth is explosive, but it is dependent

largely on only five companies. Who are

those companies? They must be the

hyperscalers who therefore account for

most of Nvidia's revenue. And the AI

revenue of the hyperscalers, as we've

just discussed, is dependent largely on

entropic and open AI. Once again, it

looks like the entire AI ecosystem is

dependent on the future health and

success of two companies that currently

lose billions. Again, if Anthropic or

OpenAI ever get into trouble, the whole

AI ecosystem will slow to a crawl. There

was also news from OpenAI that at first

looked positive, but which I think was

actually quite negative. Open AAI

announced that its advertising business

reached 1 billion in an annualized

revenue run rate, ARR. Now, I have no

idea what ARR means in this context.

What exactly is being annualized? Is it

revenue for a day, week, month, or

quarter? OpenAI won't say. But leaving

aside the definition of ARR, what was

interesting was that this news was

lauded by the business press. Not so

fast. First of all, in the June quarter,

OpenAI had 6.7 billion in revenue and

12.3 billion in costs. So 1 billion in

advertising ARR hardly cuts those losses

by much. More importantly, much more

importantly, earlier this year, OpenAI

projected 2.4 billion in advertising

revenue for all of 2026.

1 billion ARR now means that it won't be

even close to that 2.4 billion

projection. In other important news,

Meta reached a legal settlement with

several state attorneys general.

California-based lawsuit alleged that

Meta harmed young adults and children

via its algorithms. The size of the

settlement was not large, 17 plus

billion. More importantly, Meta agreed

to change its conduct and alter its

algorithms. Now, on June 17th, we posted

an interview on our premium Substack

service with law professor Ben Zaperski.

In the interview, Professor Zaperski

outlined the legal theories behind these

social media lawsuits. Our problem is

with your algorithms, not with the

content that the algorithms get users

to, but with how much they use it and

how addicted to it they are.

>> I reached out to him and asked him what

he thought of the settlement, and this

was his response. Quote, I think the

state AG should be pleased to have

extracted from Meta a commitment to

change the way they do things to

children and teens. The draft consent

agreement is quite detailed. And my

current instinct is that it could really

make a difference to kids, assuming they

were mainly users of Meta's platforms,

not other platforms. I also think Meta

is in some ways the biggest fish here,

and it really does put pressure on the

other defendants, for example, Tik Tok

and Snap in related lawsuits. I think

Meta was smart to do this. The verdict

could have been much bigger. Equally

important, they may avoid legislation

and regulation from many different

states and they will get to play a key

role on what sorts of rules they will

have to abide by. And it is possible

that this show of cooperiveness may have

an impact on some of the other cases

that lie ahead. I.e. judges including

the federal judge in the Northern

District of California who still

presides over a massive number of live

cases against Meta may be more favorably

inclined on close calls moving forward.

Finally, and not insignificantly, one of

the big problems for defendants in mass

tort cases is that with regard to

individual tort plaintiffs, one worries

that the stream of cases will never dry

up. By changing their practices now in a

way that state ages approve of, they

will make September of 2026 or whenever

they really change a kind of line in the

sand moving forward. To illustrate, 10

year olds now who try to bring claims in

2036 for their psychiatric problems as

20 year olds will probably lose out of

the gate. And no doubt Meta will try to

use this fact far more aggressively than

that. Most of all, I do think the result

is good in the sense that public health

may benefit and less money may get spent

on litigation. Thank you, Professor

Zaperski, for your response. Several

weeks ago, I recommended a whole bunch

of books. I also said that I love

historical fiction and in honor of the

new movie the Odyssey I recommended a

trilogy by David Gmel with the first

book called Lord of the Silver Bow. The

trilogy is an incredible reimagining of

the Iliad. One viewer wrote to me that

based on my recommendation, he read the

trilogy and loved it and asked for

another historical fiction

recommendation. Here's one. It's a four

book series that begins with Mistress of

Rome by Kate Quinn. The series starts

with the reign of Emperor Demission in

Rome and ends with the reign of Hadrien.

It's amazing. This coming Monday,

September 7, we will post an interview

with Ryan Tunis, a property and casualty

insurance analyst at Caner. This is a

very timely interview. Investors are

looking for ways to diversify away from

the AI tech trade. I would point out

that there are safety sectors and within

every sector there are safety subsectors

and the property and casualty insurance

subsector is the safety sub- sector

within financials. So if you're looking

for some low volatility safety stocks,

this interview is timely. The best way

to support the realizing playbook is to

subscribe to Substack. Subscriptions are

free and we appreciate your support. And

that's the wrap.

This podcast is forformational purposes

only and does not constitute investment

advice. The hosts and guests may hold

positions in stocks discussed. Opinions

expressed on their own and not

recommendations. Please do your own due

diligence and consult a licensed

financial adviser before making any

investment decisions.