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What if data didn't sit still? What if intelligence moved with us, not buried in reports, but activated in real time? Where lives are being shaped, where decisions are being made. It all starts with a Where is the potential? Totality turns data into clarity, intelligence into insight, insight into action. Because when intelligence moves, we all move forward. Intelligence beyond bounds.
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Amazon Health AI presents Painful Thoughts I
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I can't stop scratching my downtown.
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Mm, yeah, but I'm not itching to
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go downtown and tell a receptionist I'm
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here to talk about my downtown. Some things you'd rather type than say out loud. There's no question too embarrassing for Amazon Health. AI, chat your symptoms and get virtual care 24. 7 Healthcare just got less painful.
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Bloomberg Audio Studios podcasts Radio News this
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is Bloomberg Business Week Daily reporting from the magazine that helps global leaders stay
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ahead with insight on the people, companies and trends shaping today's complex economy.
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Plus global finance and tech news as it happens.
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The Bloomberg businessweek Daily Podcast with Carol Massar and Tim Stanweck on Bloomberg Radio.
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Hi everyone. Welcome to the Bloomberg businessweek Weekend Podcast, a big focus for everyone this week. I got to be honest, since the IPO back in June, this has been a countdown. We are talking about Space X 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@bloomberg.com But Tim, like you kept saying, it wasn't really about earnings because the company isn't profitable overall.
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Yeah, my dad always reminds me earnings mean you have earnings and Space X didn't have any earnings. Bottom line for investors. Top line Revenue surged, staggering. Capex sent the stock tumbling in the release. That theme of the eye watering AI spend. It's something we dig into this hour with a noted critic of the AI Build and spend.
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C
That tech critic. He's also the publisher of where's your Ed at? 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.
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E
No, he's definitely not. And I think what he says really resonates with an audience. 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 our 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.
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That's right. We wanted to hear how Kelsey is keeping up with all the lawsuits filed against them. We do that with Bobby Denalt, head of enforcement and legal counsel at Kalshi. Needless to say, there's a lot at stake.
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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 Asness 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.
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C
All of that to come this hour. We begin with legal battles surrounding prediction markets. The recent surge in volume across platforms like Kalshi and Polymarket has made event based trading one of the fastest growing corners of finance.
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Yes, but also growing regulatory scrutiny of these markets. Just last week, New York State authorities sued Kalshee 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.
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C
We needed to learn more. And so for that, we caught up with Robert Denault, head of enforcement and legal counsel at Kalshi.
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F
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 Kalshi 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. You 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 approach and legal theory in terms of how she believes she can regulate and bring to heel federally licensed exchanges here in New York State.
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C
Bobby, are you saying you're the exact same things as the New York Stock Exchange or the NASDAQ markets? You're saying you're the exact same things, same thing. Apples to apples then.
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F
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 licensure 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 far reaching. 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.
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Right.
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F
Kalshi's new. But this, this sort of license 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 BL customers want as a reasonable alternative. We think that that's pretty similar playbook to what the Attorney General's following here.
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E
So why shouldn't Kalshi seek a license from the New York State Gaming Commission? Why wouldn't you do that?
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F
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 sportsbook, the way that that product operates is typically what governs what regulations apply.
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C
So even though people keep coming at you and say gambling, gambling, gambling, that's why you're not gambling.
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F
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 gonna win or lose, they're gonna chase losers, they're gonna maximize their ability to limit winners. They're not going to run like a true business. But where an exchange exists and individuals are setting price with one another, I think that it operates under a different regulatory framework and it to say that a whole panoply of different topics can be touched on by different regulated products. 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.
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E
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 Kalshi was singled out in this, this typical or this, this iteration of the lawsuit?
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F
You'd have to ask the governor's office why, you know, Kalshee's was signaled. Signaled out. 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 exchanges like Robinhood's based in New York. Right. Novig, Polymarket, they're all based in New York, none of whom have been subject to the Attorney General's focus. So I don't know if that's coming. I don't know if you'd have to ask her office. But certainly we're a bit alarmed that the Attorney General is seeing the scope of New York gambling law applying to potentially federal derivatives exchanges.
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C
But I do think about exchanges, do 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 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 get into 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 that to me is where you get into the gambling. It's a little, it feels a little loose.
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Sure.
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F
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 CEA qualifies as a swap. Those types of trades are heavily regulated under CFTC regulation. There are hundreds of regulations.
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C
So you're saying all the trades that are happening on Kalstry will be heavily regulated. And oversight, we understand the two sides.
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F
They are currently heavily regulated and being overseen. I meet with the CFTC's enforcement division. That's my line of work at Kalshi. 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 Kalshi 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. And the CFTC recently came out with a 267 page 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.
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E
We're speaking with Bobby Donald, he's head of enforcement and legal counsel at Kalshi. He joins us here in the Bloomberg Businessweek studio. I want to shift gears and talk about some other recent news. It seems like you're, you're really playing whack a mole at this point with these lawsuits. Like obviously it's keeping you busy. Also keeping you busy is 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?
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F
Yes. It is our responsibility to police that.
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E
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?
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F
So I, I'd 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. Kalshi has very robust and in fact more robust than stock exchanges policing measures to prevent and detect insider trading. We do have 24,7 market surveillance. We use a surveillance vendor, but also in the coming days are going to announce an expansion of our surveillance systems. 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 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 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.
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C
And how often is that happening and how many investigations are you triggering? Like on a daily basis or a weekly basis?
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F
So we, we sort of estimate quarterly 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. We make a number of referrals. I think year to date we've probably made 40 or 50 referrals to the CFTC. These matters take time though the legal process. Everybody deserves due process rights. So we afford people due process. We've settled 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 context, the SEC in the last year of the Biden administration bought 35 insider trading actions. So you know, I think the expectation be somewhere in the ballpark of that number.
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E
Do you think that there are some markets that are listed on Kalshi that are more susceptible to manipulation than others?
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F
I think much like insider trading in the traditional securities and equities markets, there Are certain paradigms that exist that create more likelihood for insider or manipulation risk,
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E
like mentioned markets, perhaps?
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F
You know, I think mentioned markets are a unique category. 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.
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C
You're talking about Cal State public companies, right? I just.
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I mean, yeah, that's part of it. I mean, that's the new.
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Just 60 seconds. I know we've got to run. It's interesting. Earnings updates. KPI forecasts earnings.
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You love this when you saw.
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I do. And I'm thinking, God, does this replace ultimately the earnings estimates that we follow? Is that the goal? Just quickly.
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F
I think there's two goals. I think the first goal is what we find is so many people are using Kalshi as a resource just to obtain information. 75% of people who visit the platform are there just to look, 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 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 develop further in that space.
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C
Please come back and talk more about this because I am fascinated about kind of where this goes and who will all be on it. Bobbi, thank you so much.
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A
What if data didn't sit still? What if intelligence moved with us, not buried in reports, but activated in real time, where lives are being shaped, where decisions are being made. It all starts with a question. Where is the potential? Totality turns data into clarity, intelligence into insight, insight into action. Because when intelligence moves, we all move forward. Intelligence beyond bounds. Aging is real. And so are the benefits of adding vital proteins, collagen, peptides to your daily routine. New vital proteins, collagen, sparkling water. Your daily glow up now in three fresh flavors. Strawberry blossom, lemon, lime and blood orange. Improved skin health in as little as 30 days thanks to Collagen Peptides. Cheers to that. Or go with our classic Collagen Peptides so you can stay vital stay you. Visit vitalproteins.com to learn more and where to buy these statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease.
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You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5pm Eastern. Listen on Apple, Apple CarPlay and Android Auto with the Bloomberg Business app or
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watch us live on YouTube.
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C
This past 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.
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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.
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C
Where are we in terms of the AI narrative in your view, and what's the reality?
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D
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 because 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.
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E
So those. The other one would be Anthropic. Yes, you argue so give us more data because you have the micro. You're citing Microsoft, but what about.
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D
Well that was what I was saying. So Barclays actually says that this year 13% of AWS revenue will be both Open Air 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 48% next year for Google Cloud, I meant both anthropic and OpenAI. 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 actually mentioned by UBS's Stephen Ju.
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E
So where would those companies be right now without anthropic and without OpenAI?
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D
Well I have serious questions about that. So in calendar year 2025, according to my own reporting about OpenAI's numbers, 69% of the year over 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.
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C
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 product products. So when does the party end in your view?
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D
So with OpenAI's IPO I think that could be one of the flashpoints. Remember this company was meant to go public this year they 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 existing cash flow. So when anything happens to that cash, I think that's the first think 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 a larger 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.
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C
Doesn't it have to be centralized to some extent? This is expensive to do or no, in terms of data center build out and so on and so forth. And what's going to make 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?
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D
Well, when I say concentration, I mean concentration of revenue in these two companies.
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C
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?
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D
Well, I mean when we're talking about. So Sightline Climate said that they saw back in February about 190 gigawatts worth of data center capacity being built in the next few years. It was, it's built around the planning. Now if you work that out with a PUE, so just the efficiency rate 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 anthropic and OpenAI, 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.
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C
How much do we know about their balance sheets? Really, really.
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D
Well, I, from personal, from personal experience a great deal about OpenAI because I reported that Autitive Financials for the Financial Times.
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C
Right.
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D
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 OpenAI's 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
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C
about for Google Cloud, the exposure rate and you said 48% next year in terms of these two customers. I have to say 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 Alphabet or you know, pick your hyperscaler,
- [24:21]
D
I think they did their due diligence in the sense that they said we are going to create our largest customers 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 by 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 OpenAI 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.
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C
But I'm just saying you have a fiduciary responsibility and you're right, you go back to Enron or WorldCom.
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D
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 200, $300 billion a 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 Sam Altman, Elon Musk trial one of the Microsoft executives said that they cost $100 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 compute. 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.
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C
Right.
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D
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
- [26:00]
E
in AI Ed Play this out for us because I think a lot of people think okay 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 Amadei 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 the shoe drop? What happens?
- [26:43]
D
Well, the thing is, if you think about what Amazon, Google and Microsoft have done and met 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 bulbous GPU filled 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. OpenAI 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 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 there just isn't demand for compute at scale.
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E
Last time you were on with us we got a really incredible response to be honest. And a lot of people who weren't typical viewers or listeners of our show saw what you did and listened to what you did and it really seemed like there's this, what you're saying is resonating with a lot of people. Like there's a. It was almost like there's this anti AI fervor that, that's out there and I'm just curious why you think that is.
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D
So I'm not sure it's is anti AI, don't get me wrong, but I think it's also anti financial shenanigans. I think everyone sees the circular financing, I think they see the 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 OpenAI. 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 for the Venvidia 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.
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C
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, we really should reach out to everybody. But I mean, is that what you're saying that I believe or do they not? Or do they not really know?
- [29:31]
D
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 I 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 eyesores that poison black communities. These massive eyesores 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 hyperscaler promises and what it ultimately is, and I'm quoting Ed Elson of Prof. G 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 hypergrowth. And that's all AI is. AI is an attempt to restart hypergrowth 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.
- [31:02]
C
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?
- [31:10]
D
Markets, yes. I think this conversation is only going to accelerate. OpenAI 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?
- [31:45]
E
Where, in your view, does Elon Musk and Space X 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. It has erased though, the IPO gains from SpaceX. And you, we haven't been with you.
- [32:04]
C
Still the world's richest, still got a rich go on the blueberry.
- [32:08]
E
You, you haven't joined us since Space X IPO'd, 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.
- [32:21]
D
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 grok. And what is Grok? 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 in OpenAI. We've seen someone else try it. We've had what should be the proof Point that AI is an industry, that we can have many AI labs and. 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.
- [33:05]
E
So should the US be in an arms race with China for AI?
- [33:09]
D
No, I think that the arms race with China in and of itself is a marketing ploy. Well, no. What's China going to do? Make a cheaper and better LLM. Oh, it already happened. Nothing happened. Nothing happened. China.
- [33:23]
E
What about the security risks that these LLMs or these, these. Some of these agents are exposing? Those from OpenAI and those from Anthropic.
- [33:31]
D
Well, I think the biggest risk with OpenAI and anthropic 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 has 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.
- [34:03]
E
But it doesn't change the fact that these agents reportedly found weaknesses in code that if not exposed, 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 systems could break down. Just very briefly.
- [34:23]
D
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 the brute force, the hacking agent. They shoved as much compute power into it as possible. You can 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 cybersecurity measures and execute against them. I find the whole thing repugnant because everyone is saying, oh, look at the scary LLM versus looking at the companies that run it.
- [35:01]
C
We gotta run 20 seconds. Anything that would change your mind and make you say, this is real real quickly?
- [35:05]
D
Not really, no.
- [35:07]
C
Okay, thank you. Thank you, thank you, thank you. There's a lot lot of conversations this week and it was great to get your input. Ed thank you. Ed Zitrin He's CEO Easy Primary Research right here in our studio.
- [35:23]
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D
You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5pm Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [37:38]
C
Former OpenAI researcher Leopold Aschenbrenner 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.
- [37:59]
E
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.
- [38:13]
C
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, Aschenbrenner is back in the game, plunking down $400 million on a privately held company, according to people familiar with the matter.
- [38:29]
E
Bloomberg Opinion's 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 Asness. Aaron argues that situational awareness is massive return was a quote, warning, not a triumph.
- [38:44]
C
Aaron, nice to have you here with us. Welcome, welcome. You do know a thing or two about risk. You write 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.
- [38:59]
G
Thank you for having me, Carol. Yeah, so this is John Kelly from Bell Labs, a physicist, also a fighter pilot and a bridge player. You know, really fascinating guy. And he discovered that, you know, 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. The Kelly point. And for those of you who are familiar with his work, probably in gambling context or investing context, the optimum is half of the Kelly limit. You go halfway to the cliff and that's where you get your maximum growth, 439%. Under any reasonable economics, any analysis, we only have partial information about 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 suggestion says 439% meant they were well over the Kelly limit, meaning sooner or later you have this happen to you. You blow up. Could, could be years, could be tomorrow.
- [40:12]
E
Aaron, the columns about situational awareness, but it's also about the time period that we're in and you referenced what's happening in South Korea and specifically with some of those levered ETFs and the chip names there to you. Does this illustrate sort of where we are in maybe a Market cycle, a hype cycle. What does it tell you?
- [40:32]
G
Well, it's, I'm in an AI bull myself. And you know, I have, I have some considerable investments in AI. Nothing we're talking about today would, would affect that. But, but having a long term vision that AI is going to be very big doesn't give you a reason to take unlimited risk. And whether we're talking about South Korean retail investors, for that matter, New York retail investors, or the Situational Awareness Fund, you have to think about the long term. You have to think about, do I survive long enough to collect on my bets.
- [41:10]
C
So I have a question for you investment folks and, and companies often have, you know, risk managers. And I understand, you know, so he's laughing, right?
- [41:23]
F
Am I wrong?
- [41:24]
C
Is there not someone to say, okay, you're in over your skis here? You know, like, so what's your read on 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, how do we kind of step back here in terms of internally what this company is doing or this hedge fund is doing?
- [41:49]
G
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 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, makes me suspect. And plus their investments make me suspect they did not have a risk manager or did not not pay attention to him, or did not have a qualified one because it just does not seem like a risk managed portfolio. And all of the public statements we've heard from them only mention expected return, future outcomes. None of it mentions risk. So yes, they should have had a better risk manager. And that 10 billion, 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 from its peak and it's certainly worth less than that. Second, you know, they started the year at 1.5 billion. We think they grew to well over, you know, 10 billion. And so I suspect most of the investors in SA 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.
- [43:16]
E
Today we're speaking with Aaron Brown, columnist for Bloomberg Opinion, former chief risk manager at AQR Capital Management, also the author of Wrong 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. 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.
- [43:57]
G
Well, they, well, they can't lever it. 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 have public investments. And it's possible that they didn't leverage 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 go to your private. But yes, a company like Situational Awareness with their approach to the market, they should be making private investments and not levering them.
- [44:26]
C
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. I'm just curious how that typically works out.
- [44:41]
G
Well, it typically works out like this one. Did they get all their money back?
- [44:45]
B
Yeah.
- [44:45]
C
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.
- [44:54]
G
Yeah, yes, yes. They, they, they do that very carefully. And Archegose was, you know, a coup years ago. That was the exception. That was where they all got burned because they went ahead over their skis, as you put it. They, they, they went ahead. This, this is exactly how it is supposed to work. The banks always 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. They 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, before they got hurt and 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.
- [45:37]
E
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 and swooping in at this time. But post 2008 they suffered some, some serious losses.
- [45:49]
G
And you are in 2007 did as well. Yeah, so, so yes, risk management is a lot of unhappy experience, but learning from experience.
- [46:00]
E
So, okay, so hindsight is 20 20. If, if this, if this portfolio. And again, we don't have complete information like you said, this is, this is based around what has leaked and 13 apps. 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?
- [46:25]
G
Well, okay, so situational awareness, the investment thesis is that AI is going to be gigantic, is going to, you know, I won't say take over the world, but, but it's 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 a say, what are the scenarios where we're right but we don't get to keep our positions. 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 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? Doesn't appear to me that they were asking that question or they weren't, you know, taking it seriously enough.
- [47:28]
C
I want to wrap up with, you know, you said earlier, Aaron, that you are an AI bull and you have positions. Situational 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. It's not.
- [47:47]
G
No, no, I don't think so. I mean, you know, we had a pullback in AI and you know, a lot of people got hurt, but really the only headlines disasters are the people who were over levered either the ETFs or situational awareness. Most of the investors are there for the long term. You know, you don't see a huge sell off. I don't see anybody changing their mind about AI. 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 sensibly in AI, this summer was not an unpleasant experience for you.
- [48:23]
C
We're going to leave it on that note. We're so glad we could get you on. We read your column and thought it was super, super smart and just a different take and it was something we wanted to bring to our viewers and our listeners. Aaron, thank you so much. I hope you'll come back.
- [48:36]
G
Thank you. I will.
- [48:38]
C
Okay, good stuff. Aaron Brown, columnist for Bloomberg Opinion, former chief risk manager at AQR Capital Management. His book Wrong Number.
- [48:45]
E
I'm glad he said he'd come back because if he would have said, I'm not gonna come back.
- [48:49]
A
Yeah, I guess, I guess it wouldn't
- [48:50]
C
have been, it wouldn't come on the spot. That's not so fair.
- [48:52]
E
No, it's a good strategy. I like it. Now we're gonna hold him to it and we're gonna get him on for our next column too.
- [48:57]
C
It's a story like we're still trying to figure out. Aaron, please come back.
- [49:02]
E
This is the Bloomberg Business Week daily
- [49:05]
D
podcast, available on Apple, Spotify and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5pm Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business App. You can also watch us live Every
- [49:22]
E
weekday on YouTube and always on the Bloomberg terminal.
- [49:33]
D
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