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>> This is Bloomberg Business Week Daily.

Reporting from the magazine that helps

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trends shaping today's complex economy.

Plus, global business, finance, and tech

news as it happens. The Bloomberg

Business Week Daily Podcast with Carol

Masser and [music] Tim Stenc on

Bloomberg Radio.

>> Hi everyone, welcome to the Bloomberg

Business Week weekend podcast. A big

focus for everyone this week. I got to

be honest, [music] since the IPO back in

June, this has been a countdown. We are

talking about SpaceX and its earnings.

Investors got their first look at

SpaceX's financials following its

landmark IPO. For all the details on the

results, head to the Bloomberg end at

bloomberg.com. But Tim, like you kept

saying, it wasn't really about earnings

because the company isn't profitable

overall.

>> Yeah, my dad always reminds me, earnings

mean you have earnings and SpaceX didn't

have any earnings. Uh bottom line for

investors, topline revenue surged,

staggering capex sent the stock tumbling

in the release. that theme of the

eyewatering AI spend. It's something we

dig into this hour with a noted critic

of the AI build and spend.

>> That tech critic, he's also the

publisher of Where's Your Ed? We're

talking about Ed Zitron. He stopped by

to dissect the hundreds of billions of

dollars going into the AI capex movement

and spend overall and why the massive

gap between data center spending and

actual AI revenue is creating what Ed

calls quote an unsustainable circular

economy. He's kind of not alone in that

thinking.

>> No, he he's definitely not. And I think

what he says really resonates with uh a

an audience and and we see that when he

comes on the program. AI is talked a lot

about by us here at Bloomberg. You know

that at this point. So too increasingly

are prediction markets and the battles

they are dealing with when it comes to

their role in the financial world and

the growing legal challenges that are

questioning them.

>> That's right. We wanted to hear how

Kelshi is keeping up with all the

lawsuits filed against them. We do that

with Bobby Denalt, head of enforcement

and legal counsel at Kshi. Needless to

say, there's a lot at stake. And

speaking of high stakes and back to AI,

Aaron Brown, Bloomberg opinion columnist

and former chief risk manager at AQR

Capital Management, that's Cliff

Asesses's fund, weighs in on the AI

hedge fund situational awareness and why

a staggering 439%

first half return was a glaring warning

sign about market mania.

>> All of that to come this hour. We begin

with legal battles surrounding

prediction markets. The recent surge in

volume across platforms like Kelshi and

Poly Market has made event-based trading

one of the fastest growing corners of

finance. Yes, but also growing

regulatory scrutiny of these markets.

Just last week, New York State

authorities sued Kali for allegedly

running an illegal unlicensed gambling

operation in the state, marking another

legal hurdle for an industry that has

won support from the Trump

administration.

>> We needed to learn more. And so for

that, we caught up with Robert Denalt,

head of enforcement and legal counsel at

Kshi.

>> I mean, as both a New Yorker and a

lawyer, I'm alarmed by the overreaching

sentiment that's coming from the

attorney general's office. So Khi is a

licensed federally regulated exchange.

By her logic, any federally regulated

exchange that's operating with a federal

license and overseen by a federal

regulator can suddenly be subject to the

whims of state criminal enforcement if

the attorney general of a particular

state wakes up and decides one day that

these contracts actually come within New

York state gambling law. That's not how

any exchange in US history has ever

operated. Right. So, we have we're here

at Bloomberg. guys talk about the New

York Stock Exchange, NASDAQ, other

exchanges, all of them could be

potentially affected by the breadth and

scope of the New York Attorney General's

uh approach and legal theory in terms of

how she believes she can regulate and

bring to heal federally licensed

exchanges here in New York State.

>> Bobby, are you saying you're the exact

same things as the New York Stock

Exchange or the NASDAQ markets that are

saying you're the exact same thing

apples to apples? Then

>> what I am saying is that federal law

dictates that that is the case. When a

federal law like the commodity exchange

act exists and provides for a way for an

entity to get licensed by something like

the commodity futures trading commission

or the securities exchange commission

that lensure and that federal regulation

is what governs that marketplace. Now if

states want to litigate with that

regulator on a case-by case basis about

what types of contracts might implicate

some state laws, that's one question.

And that's some of the lawsuits we've

seen over the last year on sports. But

this is much more farreaching. This is

claiming that that license means nothing

and if you don't hold a New York

license, you're running a criminal

operation and you need to be run out of

the state. And I think it's important to

ground this sort of in history of

disruptive sort of new players in

marketplaces, right? Ki's new, but this

this sort of licensed regime has existed

for many decades. We've seen similar

playbooks used against companies like

Uber and Airbnb where states try to

throw their weight around and bring

crazy cases to block what customers want

as a reasonable alternative. We think

that that's pretty similar playbook to

what the attorney general is following

here.

>> So why why shouldn't Kali seek a license

from the New York State Gaming

Commission? Why wouldn't you do that?

>> So it really goes to the way that the

business operates. We are a federally

licensed exchange that requires us to

run open markets that are available

nationwide. Our users set the price.

Traders set the price. We match traders

in an open marketplace with one another.

We are not on the other side of

individuals trading. We don't run a

casino where people can come in and

drink and play card games. We don't run

a sports book where we profit when

people lose. What we do is run open

marketplaces where users define the

price point. And that type of financial

product, even if it touches on topics

that is similar to a topic touched on by

a sports book, the way that that product

operates is typically what governs what

regulations appi apply.

>> So even though people keep coming at you

and say gambling, gambling, gambling,

that's why you're not gambling.

>> So I think it's important to define

exactly what they mean when they say

gambling. To me, gambling is when you go

up against the house. when you go to a

place that controls whether you're going

to win or lose, they're going to chase

losers, they're going to maximize their

ability to limit winners, they're not

going to run like a true business, but

where a where an exchange exists and

individuals are setting price with one

another. I think that it operates under

a different regulatory framework. And

it's not to say that a whole paniply of

different topics can be touched on by

different regulated products. Right? So

we see concerns in options trading or

leverage trading, retail traders moving

into markets that are traditionally

regulated markets at the federal level.

I think some of the same concerns exist

for those markets. And if you read the

lawsuit closely, a ton of the

definitions and the language and the

descriptions that Attorney General

James' office uses could easily be

transposed onto Robin Hood, crypto

trading, derivatives trading, any sort

of trading activity that the attorney

general suddenly decides poses a

customer threat to individuals who want

to participate in. I mean there is in in

April she did sue Coinbase and Gemini

for running illegal gambling platforms.

There were some like why do you think

Khi was singled out in this this typical

or this this iteration of the lawsuit?

>> You'd have to ask the governor's office

why you know Khi's was single singled

out. I I I think the truth is there are

a number of prediction markets that

would be affected by this approach.

There's a number of other exchanges that

would be affected. There are a number of

exch like Robin Hood's based in New

York, right? Um, Novig, Poly Market,

they're all based in New York. None of

whom have been subject to the attorney

general's focus. So, I I don't know if

that's coming. I don't know if you'd

have to ask her office, but certainly,

you know, we're a bit alarmed that the

attorney general is seeing the scope of

New York gambling law applying to

potentially federal derivatives

exchanges.

>> But I do think about

exchanges. Do you think about the

composition of the bets that are on like

if we're going to use the gambling

analogy that keeps getting kind of

lobbied at you? I mean, if I think about

exchange, there is incredible oversight,

you know, and there's rules and so that

there isn't, you know, trades that are

happening that are not legit or fair or

right, you know, if if gambling is, as

you say, there is no house, right? it's

just two parties figuring out something.

Where is the oversight and concern about

the composition of the bets being made

and making sure that they are true?

Because I think that's where you're

getting to gambling. If anybody can kind

of put up a bet and another person can

take the side and who knows if those two

sides didn't get together to figure out

this bet like you know what I'm saying.

>> So I

>> So that to me is where you get into the

gambling. It's a little it feels a

little loose.

>> Sure. I I don't think it's loose at all.

So I think that when you're So just to

sort of zero in on some of the nuance

that you just said, gambling is when

there is the house. What you do on an

exchange is where there is no house.

There are two counterparties in a

particular market agreeing on a price

together and executing what we

characterize as a swap. What the CA

qualifies as a swap. Those types of

trades are heavily regulated under CFTC

regulation. There are hundreds of

regulations.

>> So you're saying all the trades that are

happening on Cali will be heavily

regulated and oversight. We understand

the two sides.

>> They are currently heavily regulated and

being overseen. I meet with the CFTC's

enforcement division. That's my line of

work at Kali. I lead our exchange

enforcement. I meet with their

enforcement division multiple times a

week, but separately they have other

divisions, division market oversight,

other divisions that oversee the

implementation of markets so that they

are structurally fair for the

participants operating in them. And that

oversight requires Khi as an exchange,

but all prediction market exchanges to

work very closely with the CFTC on the

products that they offer. They have to

self-certify them to the CFTC who can

revoke approval for those products. Uh,

and the CFTC recently came out with a

267page rulemaking that was specific

toward prediction market contracts. So,

I think, you know, it isn't correct to

say these aren't currently heavily

regulated.

>> We're speaking with Bobby Denalt. He's

head of enforcement and legal counsel at

KHI. He joins us here in the Bloomberg

Business Week studio. I want to shift

gears and talk about some other recent

news. It seems like you're you're really

playing whack-a-ole at this point with

these lawsuits. Like obviously it's

keeping you busy. Uh also keeping you

busy as enforcement and former

Congressman George Santos agreed to pay

more than $35,000 to settle allegations

that he manipulated a wager on your

platform about whether he'd attend the

2026 State of the Union. Is it your

responsibility to police that? Are you

the one who recognized that and flagged

it?

>> Yes, it is our responsibility to police

that.

>> Do you have the resources? like this is

one example, but do you have the

resources to find every single one of

them that allegedly has insider

information?

>> So, I I pause there and say that's not

our standard at the New York Stock

Exchange and that's not our standard in

the securities and equities markets.

What we expect our federally regulated

exchanges to do is to have reasonable

procedures to detect insider trading,

market manipulation, etc. Khi has very

robust and in fact more robust than

stock exchanges uh policing measures to

prevent and detect insider trade. We do

have uh 24/7 market surveillance. We use

uh a surveillance vendor but also in the

coming days are going to announce an

expansion of our surveillance systems.

Um and we police these markets both in

real time and in retrospect and we work

with the CFTC to investigate specific

markets and detect anomalous activity in

those markets. We did detect the trading

activity by Mr. Santos. We conducted an

investigation that involved an interview

with Mr. Santos and we referred uh the

entire matter and the evidence that we

collected to the CFTC which allowed them

to pursue enforcement. But separately in

the derivatives and commodities uh space

these exchanges like ours have a

responsibility to also bring enforcement

actions directly against the users who

participate on them. And so we pursue

direct exchange enforcement in areas

where individuals come on and violate

our CFTC approved exchange rules. How

often is that happening and how many

investigations are you triggering like

on a daily basis or a weekly basis?

>> So I we we sort of estimate quarterly uh

and and volumes upticked quite a bit. So

the investigations have upticked quite a

bit but somewhere between 150 and 250 a

quarter become material investigations.

Uh we make a number of referrals. I

think year to date we've probably made

about 40 or 50 referrals to the CFTC.

These matters take time though. The

legal process everybody deserves due

process rights. Yep. So, we afford

people due process. We've settled uh or

or brought disciplinary actions in a

number of cases. We're going to continue

to do so. By the end of the year, you

know, I'm sure you'll see a meaningful

number of actions. I put for con context

the SEC in the last year of the Biden

administration bought 35 insider trading

actions. So, you know, I I I think the

expectation be somewhere in the ballpark

of that number.

>> Do you think that there's some markets

that are listed on KIHI that are more

susceptible to manipulation than others?

I think much like um insider trading in

the traditional securities and equities

markets, there are certain paradigms

that exist that create more likelihood

for insider or manipulation risk. Um

>> like mentioned markets perhaps,

>> you know, I I think mentioned markets

are a unique category. Um I I I don't

know that they're necessarily more

susceptible to insider risk, but I can

see the context or argument for saying

they maybe are more susceptible to

manipulation where one person controls

what word they say. On the counter of

that, there's a small pool of people who

could possibly be capable of

manipulating that market. And because

we're an exchange that collects user

information, we follow KYC, know your

customer rules for every single

individual trading on the exchange, we

have a pretty good idea of who's taking

positions in certain markets. That

allows us to police mention markets just

like we police all markets.

>> You're talking about Kelsey public

companies, right? I just What are

>> Oh, I mean, yeah, that's part of it. I

mean, that's the new

>> just 60 seconds. I know we've got to

run. Um it's interesting earnings

updates, KPI forecasts, earnings call me

when you saw this. I do and I I'm

thinking God does this replace

ultimately the earnings estimates that

we follow. Is that the goal? Just

quickly,

>> I think there's two goals. I think the

first goal is what we find is so many

people are using KHI as a resource just

to obtain information. 75% of people who

visit the platform are there just to to

look to to learn. They're not there to

trade. And so this is a resource for

people who might be on a trading desk,

people who might be in a financial

position where they want to analyze

these really subtopic uh financial

questions about a particular KPI. But

you know, of course, we are seeing

academic research that shows these are

somehow and sometimes more accurate than

our traditional metrics in financial

markets. And so it's exciting to to

develop further in that space.

>> Please [music] come back and talk more

about this because I am fascinated about

kind of where this goes um and who will

all be on it. Um [music] Bobby, thank

you so much.

You're listening [music] to the

Bloomberg Business Week Daily podcast.

Catch us live weekday afternoons from 2

to 5:00 [music] p.m. Eastern. Listen on

Apple CarPlay and Android Auto with the

Bloomberg Business App or watch us live

on YouTube. This past [music] week, we

got further information that points to

Microsoft generating most of its AI

revenues and likely about 70% from one

customer, OpenAI. This is all according

to new Microsoft company disclosures.

Under an agreement between the two

companies, OpenAI pays Microsoft for

computing power, costs associated with

building AI models, and a share of its

revenue.

>> Our next guest says that is worth

watching. Here to pull apart big tech's

capex obsession, and why he believes

this circular ecosystem is nearing a

tipping point is Ed Zitron. He's CEO of

Easy Primary Research. He's the host of

the Better Offline podcast. And to note,

we caught up with Ed before the news

broke of Microsoft's AI sales.

>> Where are we in terms of the AI

narrative in your view and what's the

reality?

>> Well, I think investors have to ask a

question right now. What am I getting

into when I invest in Microsoft, Google,

and Amazon? So, UBS estimates that 27%

of Google Cloud's revenue this year will

be OpenAI and Anthropic, increasing to

over 48% next year. That is a remarkable

amount of money. It's going to be over

$124 billion next year. Everyone is

buying into these stocks cuz they

believe all of that capex is going

towards diverse and spread out AI demand

when in fact what it's actually doing is

helping create infrastructure for two

unprofitable unsustainable companies.

>> So those the other one would be

anthropic is you argue. So give us more

data because you have the micro you're

citing Microsoft but what about AWS?

>> Well that was what I was saying. So

Barclays actually says that this year

13% of AWS revenue will be both open and

anthropic and next year will be 18%. AWS

much bigger business than Google cloud.

Now just to be clear when I was saying

that 27% this year and uh 48% next year

for Google cloud I meant both anthropic

and open AI. Most people don't know that

OpenAI is a large customer of Google

Cloud. It's not a well it's not a

well-known fact but this was this was

actually mentioned by UBS's Steven J. So

where would those companies be right now

without Anthropic and without OpenAI?

>> Well, I have serious questions about

that. So in calendar year 2025,

according to my own reporting about

OpenAI's numbers, 69% of the

yearover-year growth of Microsoft

intelligent cloud segment was actually

from OpenAI. Without that, it would have

only grown 8% year-over-year, which is

barely beating inflation. And so

everyone is being sold what I consider

kind of a lie. It's honestly kind of a

scandal. So this goes back to I feel

like we have companies the circular

financing the circularity of it all and

kind of creating demand for their

products. So when does the party end in

your view?

>> So with OpenAI's IPO I think that could

be one of the flash points. Remember

this company was meant to go public this

year. They failed about a month or two

ago and now the New York Times has

reported that they're considering they

are delaying until 2027. That's lethal

for a number of people. But OpenAI and

Anthropic need continual flows of

capital. They do not pay their bills out

of existent cash flow. So when anything

happens to that cash, I think that's the

first thing kind of domino to fall. But

then again, there's also the overall

problem of data centers just not getting

built very fast, taking about 12 to 36

months depending on how small or large a

data center is actually being built at.

And the problem is is that everyone

believes that AI is coming out of cash

flow, that AI is coming out of just this

diverse revenue base when it's really

not. It's extremely narrow. The

information reported a few months ago

that 89% of the largest AI companies,

well, their revenue comes just from

OpenAI and Anthropic. It's heavily

centralized.

>> Doesn't it have to be centralized to

some extent? This is expensive to do or

no. in terms of data center buildout and

so on and so forth and what's going to

make um AI generative AI the ability for

it to be really really good is having

access to lots of information so doesn't

it have to be to some extent Ed

concentrated

>> well when I say concentration I mean

concentration of revenue in these two

companies

>> no I understand but to make it good so

doesn't it make sense that those who are

exposed the most it's going to be

concentrated to some extent

>> well I mean when we're talking about so

sighteline climate said that they saw

back in February about 190 GW worth of

data center capacity being built in the

next few years. It was is built or under

planning. Now, if you work that out with

a PU, so just the efficiency rating of

1.3, you're coming out to 12 million a

megawatt over $1.6 trillion of annual

revenue needed to satiate those data

centers. Having two customers is not

going to do that. Even their most spendy

and open AAI, well, they can't afford

anything. They need venture capital, but

they're only going to spend 400 billion

a year. And that's if they get that far,

which I don't believe they will.

>> How much do we know about their balance

sheets? Really? Really?

>> Well, I from personal from personal

experience a great deal about Open AI

because I reported their auditive

financials with the Financial Times,

>> right?

>> And it's a company just burning cash.

They lost $20.9 billion in 2025 and

things are only getting worse. And

what's crazy as well was over $800

million of Open Eyes revenue came from

SoftBank for their Crystal Intelligence.

And yes, that's really what it's called.

Their Crystal Intelligence program,

which I can find no evidence of actually

anything happening. And SoftBank a large

shareholder of OpenAI with no board

seats.

>> Like you talk about for Google Cloud um

the exposure, right?

>> And you said 48% next year in terms of

these two customers. I have to say that

there are smart people running these

companies and normally you would say

your exposure to just a handful of

customers is not a great thing. Do you

say that these companies that aren't

doing their due diligence be it

alphabeted or you know pick your

hyperscaler?

>> I think they did their due diligence in

the sense that they said we are going to

create our largest customers and we're

going to own large parts of them and on

top of that we're going to own all of

their infrastructure. Google has a nice

they have a nice thing going here. They

buy TPUs from well sorry Broadcom sells

TPUs to Google. They are then sold to

Anthropic and then rented back to

Anthropic through Google. Google gets to

double up on revenue. This sounds really

good right up until you realize that

Anthropic and Open AI are unsustainable.

So what they may be and the problem is

with saying these are smart people is it

immediately makes me think of Enron, the

smartest guys in the room. Not saying

anything like that's happening,

>> but I'm just saying you have a fiduciary

responsibility. And you're right. You go

back to Enron or World.

>> And I think the point I'm making is

>> with Google, they probably thought there

would be more customers. I imagine with

Azure and with AWS they thought would be

more large players. But the problem with

Anthropic and OpenAI is they've raised

2003 $3300 billion of funding but

they've actually raised more because

OpenAI and Anthropic got all of their

infrastructure built for them by

Microsoft, Google and Amazon. They

didn't have to pay I think in the Samman

Elon Musk trial one of the Microsoft

executives said that they cost $und00

billion so call it like 70 $80 billion

of infrastructure. So the problem is is

that nobody else can get as big as them.

No one else can get that much comput. No

one else could afford that compute and

have the chance to do the pre-training

runs necessary. Except now China's

coming up behind them.

>> And it's unclear how anyone really deals

with any of the problems I've been

listing for years, which is

unsustainable, unprofitable, and also

not really finding the ROI in AI. Ed,

uh, play this out for us because I I

think a lot of people think, okay, for

for there to be some sort of ROI on

this, one thing has to happen. And like

the best case scenario for all this

money being spent is that productivity

increases, fewer people are needed to do

more things. There are some serious

implications if that were to come true

and to the labor force. And Dario Amade

of Anthropic has talked about this in

the past. Maybe he's talking his book. I

don't know. The other side of this is

well if that doesn't come true then what

does it mean for these stocks that have

gained so much on hopes that they would

be responsible for some of this

productivity increase like how does this

the shoe drop what happens well the

thing is if you think about what Amazon

Google and Microsoft have done and meta

to some extent but they're not selling

compute capacity yet is they have gone

from being these cash heavy these cash

machines they just spill out money low

cash burn high revenue low assets into

these bulb us GPUfilled asset mongers

who are just full of these semi-built

data centers for two customers or three

customers at best so that they can do

what? Rent them out so that they can

rent their models. And it isn't really

clear what the plan is at this point.

And the problem is for me to be right,

it doesn't even have to go that badly.

Open AAI and Anthropic have to grow so

large to be able to make all of this

data center capacity good. I mean,

Google's I think uh the UBS estimate was

like $76 billion in 2027 of Google

Cloud's revenue will come from

Anthropic. How's Anthropic going to

afford that? They burn tens of billions

of dollars. So, it's not just that these

companies are unprofitable and

unsustainable, but they have to grow so

very large to make AI pay off because

otherwise they're just isn't demand for

compute at scale. Last time you were on

with us, we got an really incredible

response to be honest and it a lot of

people who weren't typical viewers or or

listeners of our show saw what you did

and listened to what you did and it

really seemed like there's this uh what

you're saying is resonating with a lot

of people like there's a it was almost

like there's this anti-AII fervor

>> that that's out there and I'm just

curious why you think that is.

>> So I'm not sure it's it is anti-AII,

don't get me wrong, but I think it's

also anti-inancial shenanigans. I think

everyone sees the circular financing. I

think they see that Microsoft, Google,

and Amazon gets basically all of their

AI revenues either through products

they're pushing on their customers or

indeed compute spend from anthropic and

open AI. And the average person's

existence right now is so expensive, so

hard, so difficult. Getting a mortgage

as a regular person is so difficult. But

if you're standing up a theoretical data

center in 36 months full of Nvidia GPUs,

the banks fall over themselves to give

you the money. core we've just raised

what a 9% bond I mean you can raise

anything if you have a data center and I

think regular people can see that AI

does not deliver what people promise

they can see the opulence of the people

at the top of the AI industry they can

also see that they're being lied to and

being deliberately scared on top of all

of this egregious circular financing

>> so you think people are actually lying

like or do you think people

>> specifically

>> I don't know like is it the companies at

the hyperscalers the CEOs, the bankers,

like do you think, you know, and to be

fair and we really should reach out to

everybody, [laughter]

but I mean, is that what you're saying

that or or do they not or do they not

really know?

>> I think they're overstating things. I

think lying would suggest a certain

malice, what have you, I don't want to

accuse anyone of,

>> but I believe that they are massively

overstating what AI will do. You'll

notice that AI people tend to speak in

the future tense. They tend not to say,

"Oh, well, today it can." It's always AI

will, AI will. Oh, we're going to get

the singularity. Oh, AI will do this and

that. That's because when they talk

about what's happening today, it's

pretty mediocre outside of code. And on

top of that, these things are horribly

unsustainable and unprofitable. And on

top of that, they've got these

destructive data centers, these massive

eyes that poison black communities,

these massive eyes that need billions of

dollars at a time when it's hard for a

regular person to get a dime from the

banks. So yeah, I think that there is

beyond just the misleading this general

sense of unfairness that AI taps into.

And on top of that, if this all goes

pear-shaped, these people are going to

realize that there was an authority

crisis happening that so many people got

beguiled by hyperscala promises. And

what it ultimately is, and I'm quoting

Edson of ProfG Markets here,

>> our media, I believe, has a cult-like

worship of the wealthy that they believe

that whatever the wealthy says will come

true. And in the past with the tech

industry that's kind of come true except

it stopped really coming true about 10

11 years ago and we exited the era of

hyperrowth and that's all AI is. AI is

an attempt to restart hyperrowth for

hyperscalers who don't have a new Google

search who don't have a new iPhone and

certainly do not have a next Amazon web

services.

>> You know the conversation narrative is

changing. Don't you think it will

continue to change and it might be

uncomfortable in terms of how it plays

out in financial markets? Yes, I think

this conversation is only going to

accelerate. Open AAI didn't cut prices

because they found some mystical way of

making things cheaper. It makes

something 80% cheaper. They saw the

danger from China and they saw the

competition from Anthropic and they

said, "Well, we're allowed to burn

billions of dollars, so why don't we

just cut prices and then make it up in

volume for an unprofitable product?" I

think the ROI conversation is only going

to accelerate, too. Because we should

have really had it years ago. We really

should have had it immediately. But

again, people believe everything the

tech industry says and they just

thought, well, they wouldn't say this

and be wrong, would they?

>> Where in your view does Elon Musk and

SpaceX fit into this conversation? I

bring it up because we learned this

afternoon that Elon Musk's net worth has

fallen to 684 billion, which yes, is a

lot of money. Um, it has erased though

the IPO gains from SpaceX. And you, we

haven't been with you, you world's

richest. You got a rich guy on the blue.

Okay. Uh you you haven't joined us since

SpaceX IPOed, but there's a data point

there for at least in the short term

reception to a public company that has

pretty significant exposure with AI.

>> Well, I think SpaceX is kind of the

proof point you need. We have someone

who can sink unlimited capital into

this, who can hire anyone, who can

theoretically stand up as much capacity

as possible, breaking multiple laws at

the same time, not getting the permits.

And what did we get for it? We got

Grock. And what is Grock? Well, it's a

third, fourth, fifth tier LLM that

really only some people use by accident

when they turn on Twitter. So, we have

this thing where we've had our third

anthropic and open AI. We've seen

someone else try it. We've had what

should be the proof point that AI is a

an industry that we can have many AI

labs and oh, a thousand flowers will

bloom. And what we have is manure. We

have a company that loses billions of

dollars to do what? I don't know.

>> So, should the US be in an arms race

with China for AI?

>> No. I think that the arms race with

China in and of itself is a marketing

ploy. What? Oh, no. What's China going

to do? Make a cheaper and better LLM?

Uh-oh. It already happened. Nothing

happened. Nothing happened. China

>> What about the security risks that these

LLMs or these these some of these agents

are exposing? Those from Open AI and

those from Anthropic. Well, I think the

biggest risk with OpenAI and Anthropics

agents is they don't appear to do basic

security practices. They don't appear to

take care of how they're using their

systems. OpenAI say I actually question

this entire story that their agent ran

autonomously for multiple days burning

what sounds like unlimited compute.

Either this company is run so terribly

that they were running up millions of

dollars of bills to randomly do stuff

and also they don't watch what it's

doing. Software does what it's told to

do. We don't know the prompt. We don't

know the training. And they're not

releasing the model.

>> But it doesn't change the fact that

these agents reportedly found weaknesses

in code that if not exposed or that that

could be vulnerable. Like what I'm

saying is if this there there is an idea

that if this gets into the wrong hands

>> then uh systems could break down. Just

very briefly.

>> One thing it's already in the wrong

hands. open air and anthropic. They've

shown they do not have the

responsibility to make security tools.

They should not be making them. They

don't know what they're doing. It's

blatantly obvious. And on top of it,

it's they brute forced a hacking agent.

They shoved as much compute power into

it as possible. You could also pay

hackers to do that. It's illegal. Also,

this all sounds illegal. I'm no lawyer.

I'm no judge, but I don't know why

they're allowed to do this. Yeah, these

things are dangerous if they're allowed

to be trained on cyber security measures

and execute against them. We I just I

find the whole thing repugnant because

everyone is saying, "Oh, look at the

scary LM versus looking at the companies

that run it."

>> We got to run 20 seconds. Anything that

would change your mind and make you say,

"This is real." Real quickly,

>> not really.

>> No. Okay. [laughter]

Um, thank you.

>> Thank you.

>> Thank you. Thank you. There's a lot of

conversations this week and it was great

to get your your input, Ed. Thank you.

[music] Ed Zitran, he's CEO, Easy

Primary Research, right here in our

studio.

You're listening to [music] the

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Former OpenAI researcher Leopold Ashen

Brunner's fund situational awareness was

riding high on a 439%

return until a brutal July tech selloff

triggered massive margin calls. Ken

Griffin came to the rescue as he's want

to do with beaten down assets and

snapped up some of them at a discount.

Citadel's flagship fund surged 5% in

July after the firm bought most of

situational awareness's public stocks at

that discount. And the transaction

helped boost year-to- date gains at

Citadel to 12%. That's according to a

person familiar with the matter. And

then after all of that, and really to be

quite fair, just a few days after his

hedge fund came close to a collapse,

Ashen Brener is back in the game,

plunking down $400 million on a

privately held company, according to

people familiar with the matter.

>> Bloomberg Opinions Aaron Brown knows a

thing or two about market risks. He's

former chief risk manager at AQR Capital

Management, the hedge fund of Cliff

Asesses. Aaron argues that situational

awareness's massive return was a quote

warning, not a triumph.

>> Erin, nice to have you here with us.

Welcome. Welcome. Um, you do know a

thing or two about risk. You're right.

That math sets a speed limit on how fast

a portfolio can compound. What is that

math? Take us to Bell Labs and take us

to 1956.

>> Thank you for having me, Carol. Uh,

yeah. So this is John Kelly from Bell

Labs, a physicist, also a fighter pilot

and a bridge player, you know, really

fascinating guy. [snorts] Um, and he uh

discovered that uh, you know, mo most

people assume that taking more risk

means you increase the possibility of

very good and very bad outcomes, but

what he discovered is there's a limit

and beyond that all you do is increase

the probability of very bad outcomes.

uh the the the Kelly point and and and

for those of you who are you know

familiar with his work probably in

gambling context or investing context

the optimum is half of the Kelly limit

you know you go halfway to the cliff and

that's where you get your maximum growth

uh 439% under any reasonable economics

any analysis uh you know we only have

partial information about uh situational

awareness we have a 13F from April that

doesn't have the shorts we have you know

Wall Street trader chatter, but any

reasonable

uh suggestion says 439% meant they were

well over the Kelly limit,

>> meaning sooner or later you have this

happen to you, you blow up. Uh could

could be years, could be tomorrow.

>> The columns about situ situational

awareness, but it's also about the time

period that we're in. And you referenced

what's happening in in South Korea and

specifically with some of those levered

ETFs and the chip names there. to to

you. Does this illustrate um sort of

where we are in maybe a market cycle, a

hype cycle? What does it tell you?

>> Well, it it's I'm I I'm an AI bull

myself and uh you know, I have I have

some considerable uh investments in AI.

Nothing we're talking about today would

would affect that. But uh but having a

long-term vision that AI is going to be

very big uh doesn't give you uh a reason

to take unlimited risk. And whether

we're talking about South Korean retail

investors uh for that matter New York

retail investors

um or the situational awareness fund uh

you have to think about the long term.

You have to think about do I survive

long enough to collect on my bets.

>> So I want I have a question for you. you

know, investment folks, right? And

companies often have, you know, risk

managers and I understand, you know, so

so

>> he's laughing, right?

>> Am I wrong? Is there not someone to say,

"Okay, you're in over your skis here,

you know, like, so

what's your read on this this firm?" I

mean, it's still a $10 billion hedge

fund, so it's not like it's collapsed.

and Citadel was happy to take, you know,

but we understand that that's what they

do. But I don't know like h how do we

kind of step back here in terms of

internally what this company is doing or

this hedge fund is doing.

>> Well, okay. So, Citadel has tremendous

risk management, has some of the best

risk management on the planet, which is

why they're in a position to do this

kind of thing. I I don't know anybody at

situational awareness, but the fact that

they had either four or seven, I've seen

different media reports, total financial

professionals, uh, makes me suspect and

and plus their investments make me

suspect they did not have a risk manager

or did not pay attention to him or did

not have a a a qualified one because

they're it just not does not seem like a

riskmanage portfolio. and all of the

public statements we've heard from them

only mention expected return, you know,

future outcomes. None of it um mentions

risk. So, yes, uh they should have had a

better risk manager. And that 10 billion

is that's pretty misleading. First of

all, I think that they're still carrying

anthropic at 5 billion. I don't think

they've marked it down at all uh from

its peak, and it's certainly worth less

than that. second um you know they

started the year at 1.5 billion we think

um they grew to well over you know 10

billion and so I suspect most of the

investors in uh essay on a dollar basis

have lost quite a bit of money if you

were in January you know if you were

part of that 1.5 billion you're still up

I think 30% for the year Wall Street

Journal reported but most of the people

got in closer to the peak and are

probably well underwater water. Today

>> we're speaking with Aaron Brown,

columnist for Bloomer Opinion, former

chief risk manager at AQR Capital

Management, also the author of Wrong

Number: How to Extract Truth from a

Blizzard of Quantitative Disinformation.

I like that you brought up that private

stake in Anthropic because I don't want

to give the whole column away, but you

and I encourage everybody to go read it.

I was just sending it around to some

some guests who've joined us in the

past. Um, you make the point that the

anthropic investment like it makes sense

they still have that because they

couldn't they couldn't take margin on

that. They can't transfer shares of

that. So, it's like at the end of the

day, it's sort of the safest thing for

them because they couldn't bet against

it.

>> Well, oh, they well, they can't lever

it. Um, there are people who will lend

you money against it, but they won't.

They're not daily margin. So, you're not

getting the kind of leverage they had

out of public investments and and it's

possible that they didn't leverage it at

all. My guess is they didn't. You know,

if you have public stock, you're going

to lever those. You don't have to uh go

to your private, but yes, uh, a company

like, uh, situational awareness with

their approach to the market, they

should be making private investments and

not levering them.

>> What about the banks that were lending

the money? like what's the due diligence

on that? And they were well-known banks

we keep citing like JP Morgan. Um I I'm

just curious how that typically works

out.

>> Well, it typically works out like this

one did. They get all their money back.

[laughter]

>> Okay.

>> You know the

>> But the due diligence ahead of it,

Aaron, like do they just is there

something that they look at ahead of it

in terms of

>> Well, yeah. Oh, sure.

>> Yeah.

>> Yes. Yes. They they they do that very

carefully. And um Archagos was, you

know, a couple years ago that was the

exception. That was where they all got

burned.

>> Um because they went ahead over their

skis, as you put it. Um they uh they

they went ahead. This is exactly how it

is supposed to work. The banks always uh

should do okay. And what they were

looking at is they were looking at the

market for this stock. They were they

knew Citadel was around. knew there were

other people around who would, you know,

be in a position to buy on a dip. And

they quickly got out, you know, before

uh before they got hurt. And uh and as I

say, that's how it's supposed to work.

And that's how it usually does work.

That's why these companies are so big

and rich.

>> But you also make the point in the piece

that Citadel learned this lesson the

hard way. Like they're looked at right

now as coming in swooping in at at this

time, but post 2008, they suffered some

some serious losses.

and and AQR did AQR in 2007 did as well.

Yeah. So so yes, risk management is a

lot of uh unhappy experience but

learning from experience. So, okay. So,

hindsight is 2020. I if if this if this

portfolio and again we we don't have

complete information like you said this

is this is based around what has leaked

and and 13F but what would have been the

right way to build positions in

companies that that you believe in that

wouldn't have overexposed

them on the downside.

>> Well, okay. So situational awareness the

investment thesis is that AI is going to

be gigantic is going to uh um you know I

won't say take over the world but but is

going to be bigger than even most of the

optimists think but it has no thesis at

least as many of the public statements

about the path to getting there. So you

have to think about that through say

what are the scenarios where we're right

but we don't get to keep our positions.

Um, it also has I think people are not

aware of how complex its positions are.

Again, this is looking at the 13F

without the shorts, but we can see

they're betting against a lot of these

companies. They're picking and choosing

and and so they've got longs and shorts

and they've got a lot of puts on. So,

they're betting certain segments will do

well and others are going to get uh uh

beaten out. So, this is a very complex

bet. So, you have to think, okay, what's

the situation in which we're right, but

what's the worst point between now and

then? and can we survive it? It doesn't

appear to me that they were asking that

question or they weren't, you know,

taking it seriously enough.

>> I want to wrap up with, you know, you

said earlier, Erin, that you are an AI

bull and you have positions um

situational um awareness. We were trying

to figure out is this kind of maybe a

coal in the canary mine when it comes to

the AI trade and narrative. What would

you say it's not?

>> No. No, I don't think so. So I mean you

know we had a pullback in AI and uh you

know a lot of people got hurt but really

the only headlines disasters are the

people who were overlevered either the

ETFs or situational awareness most of

the investors are there for the long

term you know you don't see a huge

selloff I don't see anybody changing

their mind about AI

>> u you had to expect I mean I mean these

stocks are extremely volatile and the

events of the summer have been you know

pretty much normal volatility for this

sector so if you were investing think

sensibly in AI this summer was not an

unpleasant experience for you.

>> We're going to leave it on that note.

We're so glad um we could get you on. We

read your column and thought it was

super super smart and just a different

take and uh it was something we wanted

to bring to our viewers and our

listeners. Erin, thank you so much. I

hope you'll come back.

>> Thank you. I will.

>> Okay. Good stuff. Erin Brown, columnist

for Bloomberg Opinion, former chief risk

manager at AQR Capital Management. His

book Wrong Number. I'm glad he said he'd

come back cuz if he would have said,

"I'm not going to come back."

>> Yeah, I guess I guess it wouldn't have

been It wouldn't put him on the spot.

That's [laughter] not so fair.

>> No, it's a good strategy. It's I like

it. Now we're going to hold him to it

and we're going to get him on for our

next call.

>> It's It's a story like we're still

trying to figure [laughter] Aaron.

Please come back.

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