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- [00:00]
A
At pjum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long term goals. Pjum our investments shape tomorrow today.
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B
Pushkin the vocabulary word of the day today is Ouroboros. For those of you who don't know that word, it is a snake that eats its own tail and it is a powerful symbol both of life and of death. Today on the show we will be discussing whether AI is the synergistic parabolic high growth, high return investment of a lifetime or a monster in the process of consuming itself and taking all of us with it. This is Unhedged, the Markets of Finance podcast from the Financial Times in Pushkin. I am Rob Armstrong coming to you from a refreshingly cool New York City where I am joined by the editor of the Lex column, John Foley. John, welcome back to the show.
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C
Thanks, Rob. It's a delight to come here and discuss ouroboro with you.
- [01:48]
B
In the last couple of weeks. The kind of diagram that is dominating Wall street research reports is what you might call a spaghetti diagram of the relationships between the companies that make up the AI industry. So OpenAI, Google, Microsoft, Nvidia, AMD, CoreWeave, Oracle, intel, the US government, all there's like different kinds of lines connecting all these things that represent kind of customer relationships and investments and take or pay contracts, et cetera. Can you just give us a little flavor for the Ouroboro. Ish.
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C
Ouroboreality.
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B
The Ouroboreality of this, yeah.
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C
So all of these companies that you've mentioned all do different things that are necessary for the arrival of AI and the mass adoption of AI. Nvidia makes chips. AMD also makes chips. Core Weave puts the chips into data centers. Microsoft also is using data centers to create cloud products for its customers, et cetera, et cetera. What's happening at the moment is that all of them are kind of finding different ways to work together and invest in each other to bring this new AI reality to fruition. But it's very confusing and it ranges from direct investments. So Nvidia, for example, investing in OpenAI and saying it would invest more. OpenAI investing in chipmaker AMD. Some of these are just kind of commercial collaborations. So for example, you can now use OpenAI's models on Google's cloud, even though Google also has its own models and is a competitor to OpenAI. So everyone's just kind of trying to work out like who can do something. For me right now it doesn't matter whether they're a competitor or whether they're literally doing the same thing or doing something different. They're a supplier, they're a customer.
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B
And strategically, what do we make of all this? Let's look at it from the point of view of Sam Altman, the head of OpenAI. Strategically, what is the point of all of this? Basically handing back and forth of quite large checks.
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C
So Sam Altman has a problem and an opportunity. The problem that he has is that he wants to build an enormous number of data centers that process an incredibly large amount of data. He's looking at spending about a trillion dollars we've worked out at the FT on data centers. That's the problem, is he's got to work out how to do that and how to fund it. He needs all the ingredients, he needs the chips, he needs the bricks and Mort needs the power, he needs the cooling systems. The opportunity is that OpenAI is red hot. Everyone wants a piece of it. No one is not taking Sam Alton's call at the moment. It looks like he can dictate terms so he can call all these companies that are part of this ecosystem and say, I need you to commit to do this. I need you to commit to give me chips. I need you to commit to building data centers. Here's what I want in return. And they say, yes, yeah, buy some.
- [04:38]
B
Of our equity or we're going to buy some of your equity or we're going to have a contract where I commit to spend $50 billion with you over X, Y or Z, period.
- [04:47]
C
Absolutely. And he really mixing and matching. So some of these deals are similar but different. So for example, Nvidia has promised to buy a stake in OpenAI, a large multi billion dollar stake in OpenAI. AMD, which is a rival to Nvidia, is instead giving OpenAI a massive slab of stock, 10% of the company pretty much. And it's not quite giving, but it's basically giving it away for a pittance. So in each case, OpenAI gets a promise that it will receive loads of chips. And it also gets something else. Nvidia's putting in cash, AMD's putting in stock. They're sort of paying tribute to Altman and saying thanks for being a customer who's going to buy a shed load of our chips and in the process is going to keep our own stock market valuations. High because we share in that glow that surrounds OpenAI right now.
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B
Let me articulate an anxiety to you. Picture the spaghetti diagram in your mind with the names of the companies we've mentioned. Here are all circles and there's lots of different kinds of lines connecting them. The anxiety is that there isn't enough money coming from outside of the diagram, from outside of the diagram's perimeter to keep the whole show going. Like obviously a lot of investment capital has gone into these companies and their stocks are worth a lot of money. But with any industry there has to be cash flow coming from the outside world out of customers pockets rather than investors pockets. And the worry is there's not enough of that in this ecosystem. Yeah. And that the kind of passing back and forth of big checks is what you do in the absence of outside cash flow from customers.
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C
That is a very real concern. And I would split what's going on in AI at the moment into two camps because you have companies that have a business model of sorts already built around AI or they are starting to. Google is a great example. Right. Google is building data centers, but it also effectively rents out its data center space, its cloud computing platforms to companies and people who pay for it. Facebook Meta doesn't do that, but it is using its AI to make its Facebook advertising engines and Instagram and so on better. And it's actually getting real money for that. We can see that that's creating more revenue because we're spending, sadly, we're spending measurably more time on Instagram and clicking on ads more often. But ultimately, as you say, someone has to pay for all of this. OpenAI in particular needs to find customers who will pay for its products because all of those data centers, that trillion dollars of data centers is all supposed to be dedicated to OpenAI's products, which currently make some pitiful. I mean in real human terms it's a large number, but in relative terms like $13 billion of revenue maybe, which is really not very much, it is.
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B
Slightly reminiscent on the non revenue side of the early days of the Internet where all these Internet publishers were making money amorphously from eyeballs and it took some time for those eyeballs to appear and appear as money, I should say as revenue. But for some it did and some it did not. You know. So you've reassured me on some of my anxiety, but I have more.
- [07:57]
C
I didn't mean to.
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B
Well, you did. You are not sufficiently cynical, John. Bear that in mind. I want to raise another anxiety which was brought up to me by Todd Castagno and I'm sorry if I'm mispronouncing his name, but he is a valuation accounting and tax strategist at Morgan Stanley and in a note called Mapping Circularity he talks about how there is a worry that for investors in these complicated interrelationships between companies, transparency is lost. It's hard to assess the quality of the revenues or what is coming from. Where do you think that's an issue here?
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C
I think that really is an issue. I think at the moment it's a relatively small issue. But it's certainly the case that if you're a portfolio manager and you bought stock in Nvidia, well, like after the deal that AMD announced OpenAI, you will own Nvidia, which owns a stake in OpenAI, which owns a stake in AMD. So you've suddenly also, like Nvidia, bought a stake in Int. You maybe didn't want to own intel, but now if you're a shareholder in Nvidia, you kind of do. So there is a bit of murkiness around. What do you actually own? Is it helpful? How do you diversify when everyone is buying shares in each other? It's also just not really the done thing. Right. We like to see companies invest their capital in things that further their business, not just in stakes in each other. It's not necessarily a great use of shareholders.
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B
Well, you bring us kind of neatly to the next topic that I wanted to discuss which is sort of historical analogies for what we are seeing now. And the first one that jumps to mind is corporate Japan or corporate Japan as it was classically kind of in the 80s 90s, which was Japan Inc. Was one big company. The banks owned bits of the operating companies and operating companies owned bits of each other and carmakers would own car makers. And it was all very insulated, not particularly shareholder friendly in a lot of ways, not particularly accountable to the outside world in general. And that's changing now and people are very excited about that. Do we have, just as we have had Japan Inc. Do we have AI Inc.
- [10:30]
C
There are a lot of parallels between those two. Right. And it's not just Japan. Germany did this to China. When I was based in China we saw this sort of interlocking shareholdings. There are definitely things about that that are not so great and it is true that we do seem to be moving in that direction. I guess what I would say I'm trying to be a bit open minded about it because it's very easy to see a pattern and Kind of take that too far and assume it will end in the same way. Or I think that one of the things that was seen to be good about the Japanese keiretsu model and actually was copied by Chrysler was an American company that deliberately tried to copy this aspect of it was that it got suppliers and customers to work together in a more collaborative way instead of just engaging in a sort of destructive tug of war where my gain is your loss and vice versa. And if you're trying to create complicated products with complicated parts in them, it can be helpful to see each other as partners to some extent. I'm not saying you should buy shares in each other.
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B
Yeah. And Chrysler, of course, learned the hard way, I think, or at least this is what they teach you in business school, is that Chrysler learned the hard way from watching other Detroit carmakers who were too nasty to their suppliers. And then when a down cycle came, the suppliers didn't survive. And so suddenly you're the carmaker and you can't get a steering wheel.
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C
Exactly.
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B
It's a little bit of a problem.
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C
And by the mid-90s, Chrysler was, I mean, then things went a bit wrong after the Daimler merger, but it was at point the most profitable US carmaker by quite a long way. And that may be one reason why. So it's clearly a concern when companies start teaming up in this way because we can't, as you say, we can't exactly see why they're doing it. Who's calling the shots. A particularly worrying thing is how is the influence being exerted if we can't see that from the outside? Is it now the case that you can call up your customer and just tell them what to do and they'll do it because you're a shareholder as well? That lack of visibility is concerning. But some kind of collaboration may not be the worst thing.
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B
Yes. One idea that I've heard kicked around is that how appropriate a kind of corporate cross holding model is depends what stage of life your economy and your capital markets are in. So I mean, this is often brought up about Korean companies. There is a term for these chaebol. The chaebol exactly is that these grew up at a time in post war Korea when the economy was still developing quickly but had a lot of kind of weak spots in it and the capital markets were shallow and unsteady and having a chai ball model where the different ports parts support each other, that's what you need. In the absence of a fuller, richer, more mature economic and market ecosystem, I.
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C
Think these arguments are all good. I think the thing that we have to come back to is that we're also in the middle of a massive bubble.
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B
Yes.
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C
Which is the difference.
- [13:29]
B
That was my point. Right. Is that we seem to be in the opposite position than like 1960s and 70s Korea was in. There is gobs of financial capital around just there for the taking. We have a very robust legal and economic infrastructure in the United States. It doesn't seem like the kind of time that we would need the mutual support networks that you're discussing. Unless of course the project of building all these data centers is so expensive. Such a truly massive project of historically unprecedented scale.
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C
If the people who are doing this believe that the financial markets red blooded and sharp elbowed would not understand the long term returns on this and therefore would not put money in. So you have to just short circuit them and strike these kind of backroom deals.
- [14:24]
B
And you do hear quotes from big shots at these companies that are like this, that are kind of like financial returns be damned. There was one from one of the Google guys, I think I.
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C
It's not just Google, but like Google is one that said like. And Zuckerberg said it at Facebook too. Like we may, like effectively, we may torch tens of billions, but you know, it's worth giving it a try. Better than not competing and being left.
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B
It's not like you're developing a new model of car. It's like the space race.
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C
Yeah.
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B
Or it's like the race to build a transcontinental railway.
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C
Yeah.
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B
Like there's the people with the vision and as you put it very nicely now, they just. You want to short circuit the bean counters.
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C
Yeah.
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B
In the process of doing that, should we talk a little bit about whether we believe the end customer is going to show up for that? That is the bet the vision people are making that if you build, call it what you want to call it, superintelligence or AGI, artificial general intelligence or whatever, the revenue will come maybe.
- [15:29]
C
So the classic example of revenue not coming is Microsoft letting people pirate its software in China on the understanding that once they were using it they'd be like, I love this, I'll pay for it. And they just never did. The other example of how people do sometimes pay for stuff and pay more for it is something like Netflix, which has managed to push through price increases against all odds and people pay it and subscribers don't unhook. So OpenAI and its peers are clearly hoping that they're more Netflix than Microsoft in China and that people will, you know, chatgpt is basically, it's not really free. You can pay for it, but the people will increasingly see financial value in its products and pay high prices for them. Maybe they will. I guess we'll have to see what those products are.
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B
Yes.
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C
Already though, companies are paying. A lot of companies, businesses are paying. Enterprises are paying for AI services, paying for, like AI enabled software. That's real money. But then their customers need to pay them to make that worthwhile.
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B
Great free model, right, Is Google. Google figured out that if you make the Internet accessible to people and you become the little boat, people float around on the, you know, on the search engine, going to the bits of the Internet they like, the customer won't pay for that. The advertiser will pay. Right. And I wonder if in the back of their minds, AI people are thinking, what Google showed is if you make a computing product that customers love, you can always just sell ads against it.
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C
And I think that's at the front of their minds, actually. I think that is literally what is going to happen. Everything will have ads.
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B
Yeah, everything will have ads. And so even if the average Joe doesn't pay for his chatbot, the ads will do that for him. Okay, you said what is going to happen? Let's talk as a way to close this discussion about what is going to happen. Where are we five years from now, ten years from now? Where does this land? What has the spider in the middle of the web Sam Altman woven?
- [17:38]
C
There are actually, there are two spiders in the middle of two overlapping webs here. One is Jensen Huang at Nvidia and the other is Sam Altman at OpenAI. And I think they're both kind of doing a similar thing at the same time, which is to make themselves completely indispensable to make their companies too big to fail. And so what I think is quite clever about this interlocking relationship with all of these suppliers and customers and partners is that everyone increasingly has an interest in seeing this project succeed. So a few years from now, if OpenAI is struggling to raise the trillion dollars that it needs to spend on data centers, there are now a lot of people who will want to help it. Because either those data centers are going to contain their chips, so the revenue is at stake, or they need the products that OpenAI, or they're just mutual shareholders. I think the risk for everyone and the opportunity again for Altman, is that he's creating something that will a tide that will raise all boats because everyone is interlinked. But the problem is that that means just as everyone rises together, everyone potentially falls together. And if one link in the chain starts to look weak, everyone has to put in more money to keep it going.
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B
Listeners, we'll be right back with Long and Short.
- [19:02]
A
Speaking of alternatives, PGIM's monthly podcast discussing trends and strategies in alternative investing.
- [19:09]
B
We've seen a lot of growth in the evergreen structures. They have become the most dominant structure within Alternatives, supplanting the traditional 3C 7QP closed end fund. And we think that demand will continue and that's making alt more accessible to wealth.
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A
Hear the full conversation on PJIM's podcast. Speaking of Alternatives.
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B
Listeners, welcome back. This is Long and Short, that portion of the show where we go short things we don't like and long things we like. John, what do you have for us today?
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C
I'm gonna go long steak, Rob, Steak, steak, E a K the meat.
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B
Okay, got it.
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C
Because cattle prices have been rising dramatically and we had this summer the lowest slaughtering of the herd in the US in about a decade.
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B
So it's a momentum. Steak is a momentum trade.
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C
Yeah. And it's a commodity that responds very slowly to price signals because cow gestation periods are quite similar to human gestation periods. It takes a while. Feed is very there's been droughts, grass hard to come by. So stockpile steak.
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B
This is terror. Yeah, this is terrible news. I get my steak at Costco and I buy them in like five big steaks I got. I'm going to go buy a bunch.
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C
I go to Whole Foods.
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B
Yeah, buy a big package. You're a better class person. Basically.
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C
You go to Whole Foods, grass fed.
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B
They're not far from each other in Brooklyn. Okay, I will take along. And while we're on the commodities theme, I guess I'll be long cocoa prices. We had a huge cocoa price bubble and it has popped. And I don't know anything about speculating commodities, but I believe in chocolate and I believe in the human desire for chocolate. And in these trying times, I'm betting that cocoa is a commodity you can't keep down because we all need a little treat sometimes. Listeners, write us@unhedged.com and tell us which commodities you are speculating in and we will be back in your feed next week. Until then, stay sharp out there. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedged offer I'm Rob Armstrong. Thanks for listening.
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C
Sam.