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AI Keeps Lifting Earnings, But the Risks Are Growing · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Paul Lane and Mark Vandetti.
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  Speaker 2: Markets remain in positive territory an hour and a half
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  Speaker 2: into trading. S & P 500 up over a half percent.
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  Speaker 2: The Dow Jones up about 60 points, where we saw
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  Speaker 2: a couple of economic reports come out this morning. We
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  Speaker 2: had the PCE inflation release, which showed inflation coming in
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  Speaker 2: at 3% for the month of August on a core
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  Speaker 2: inflation basis. That was slightly lower than anticipated, and the
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  Speaker 2: markets are rallying on that news. We also had a
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  Speaker 2: GDP estimate for Q2 release coming in at 2.2%. That
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  Speaker 2: was 0.7% higher than initial estimates. So those two economic
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  Speaker 2: reports seem to be providing a little bit of rally
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  Speaker 2: for the markets, granted only 0.5% or so on the
• 1:59
  Speaker 2: S & P 500. Oil is up about 2.5% at
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  Speaker 2: $ 91 a barrel on West Texas Intermediate as Donald Trump
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  Speaker 2: has denied that he is willing to ease sanctions on Iran.
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  Speaker 2: There was an Axios report stating that he may be
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  Speaker 2: willing to do that. He came out on True Social
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  Speaker 2: and said, no, that is not acceptable. the case, he
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  Speaker 2: will not be easing sanctions. And then the U.S. two-year
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  Speaker 2: treasury was down about four or five basis points earlier
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  Speaker 2: in trading from its 4.92% recent high, but it now
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  Speaker 2: is only off about one or two basis points at 4.87%.
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  Speaker 2: And the U.S. 10-year treasury here still sits up quite
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  Speaker 2: a bit from the last few months or so, now
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  Speaker 2: at 5.28%. This is the highest we've seen it since 2007,
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  Speaker 2: and there's really been no abating these significant run-ups that
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  Speaker 2: we've seen on the U.S. 10-year treasury. We kick off
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  Speaker 2: the show, the second hour here, with some commentary on
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  Speaker 2: the markets and if stocks are looking cheap. This is
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  Speaker 2: a piece here from Bloomberg, which Jonathan Levin goes over
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  Speaker 2: Just what we've seen on a price-to-earnings basis with some
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  Speaker 2: of the valuations on the market, we've seen tremendous earnings growth.
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  Speaker 2: A lot of the profits that are being booked are
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  Speaker 2: as a result of the $ 800 billion that Microsoft and
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  Speaker 2: Google and Meta and Oracle are spending to build out
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  Speaker 2: AI data centers. In fact, that is responsible for about
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  Speaker 2: half of the expected growth for the earnings in the
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  Speaker 2: members of the S & P 500 market. according to
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  Speaker 2: Goldman Sachs. So on a future basis, there is a
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  Speaker 2: tremendous amount of high expectations for earnings growth that has
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  Speaker 2: some valuations looking a little bit cheaper on a forward
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  Speaker 2: price to earnings ratio metric. However, if you do look backward,
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  Speaker 2: valuations are significantly higher than they've been in the past.
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  Speaker 2: If you use CAPE, which is a common one that
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  Speaker 2: adjusts for cyclical factors and looking back on a 10-year basis,
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  Speaker 2: we are at some very high levels. But earnings season
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  Speaker 2: is going to be a significant focus again. And any
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  Speaker 2: momentum that can sustain from AI data center development will
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  Speaker 2: be scrutinized quite a bit by economists here.
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  Speaker 3: Yeah, the bull or the optimist argument is, well, PEs
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  Speaker 3: have come down because the denominator PEs is sort of
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  Speaker 3: shorthand for a ratio P to E. And if E
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  Speaker 3: goes up, just think of a fraction, it's in the denominator,
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  Speaker 3: PEs come down. The question, of course, is that, is
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  Speaker 3: the growth rate of E sustainable? That's the big question,
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  Speaker 3: which is why Schiller and Campbell, when they first started
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  Speaker 3: digging into this about four decades ago, pointed out that, well,
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  Speaker 3: you can't just look at the last year's earnings or
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  Speaker 3: what you expect next year's earnings to be. You have
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  Speaker 3: to look at the last seven or ten years' earnings,
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  Speaker 3: and you should look at real, not nominal earnings. So
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  Speaker 3: smooth earnings out. Get at the trend. You want to
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  Speaker 3: filter out blips, maybe due to a frenzy of investment in, say,
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  Speaker 3: for example, AI. that might be distorting the trend in earnings,
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  Speaker 3: which is why Shiller's measure is, or something like it,
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  Speaker 3: is generally favored. And you can forget about the specifics.
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  Speaker 3: Just think in terms of smoothing it out. It's the
• 5:29
  Speaker 3: same way as if it's the same sort of approach
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  Speaker 3: you might employ if you're trying to lose weight. You
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  Speaker 3: don't weigh yourself every day and then declare victory, or
• 5:39
  Speaker 3: you don't extrapolate from a good one day experience it
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  Speaker 3: might be distorted by you having departed from your regular
• 5:47
  Speaker 3: diet you drank a lot of coffee instead of ate
• 5:49
  Speaker 3: a lot whatever you look at your say weekly average
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  Speaker 3: right or this applies to any goal obviously um or
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  Speaker 3: or anything you're trying to to measure over a period
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  Speaker 3: of time uh when you use the schiller measure which
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  Speaker 3: smooths earnings as you pointed out you get a far
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  Speaker 3: less rosy picture. It's still at near all-time highs. It's
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  Speaker 3: basically where it was in 2000. If AI investment continues
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  Speaker 3: at its current clip, and if it generates the revenues
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  Speaker 3: that it's expected to generate, those are huge ifs. But
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  Speaker 3: if those two things happen, maybe these valuations look reasonable.
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  Speaker 3: But historically, when prices have been driven up this far
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  Speaker 3: in anticipation of some sort of miracle, and AI would
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  Speaker 3: be a miracle if it pans out to the extent
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  Speaker 3: that some are predicting, Uh, its portended bad returns. Lower
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  Speaker 3: than average, not necessarily negative, but lower than average future returns.
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  Speaker 2: Yeah, I think the other drag that you could very
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  Speaker 2: easily see, and I'm not the first to point this out,
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  Speaker 2: it is pointed out in this Bloomberg piece here, is
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  Speaker 2: that there has been a tremendous amount of investment, a
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  Speaker 2: tremendous amount of increase in CapEx, but as a result
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  Speaker 2: of that, you're seeing a lot of the revenue and
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  Speaker 2: profits acknowledged quite quickly and recorded from all of this CapEx,
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  Speaker 2: but the way that that gets recognized, the CapEx specifically,
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  Speaker 2: on these big hyperscalers balance sheet is that it falls
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  Speaker 2: off through depreciation over time. It acts as a drain
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  Speaker 2: basically on earnings growth. So that is something that remains
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  Speaker 2: a headwind for a lot of these big hyperscalers is
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  Speaker 2: that they have to recognize these expenses over time, continually
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  Speaker 2: draining away from earnings. Yeah, it's not.
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  Speaker 3: Like building a railroad or something where the tracks are
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  Speaker 3: good for 50 years and you have to rip them out.
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  Speaker 3: I mean, they Or whatever your favorite past technological revolution is,
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  Speaker 3: fiber optic or.
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  Speaker 4: Utility wires. Or something. This, as you said, needs to be.
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  Speaker 4: You need to do this over and over again.
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  Speaker 2: Right.
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  Speaker 4: Every three years, right? I mean, some of the investment.
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  Speaker 2: Maybe longer, but yeah. It's certainly not as sustainable as
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  Speaker 2: the railroad tracks. That's for sure. Maybe five to seven
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  Speaker 2: year cycle. Five to seven on chips?
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  Speaker 3: Yeah.
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  Speaker 4: Okay.
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  Speaker 3: So some of it, some of the data center investment
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  Speaker 3: will not have to be replicated. You're not going to
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  Speaker 3: have to lay down a new pad, concrete pad, every
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  Speaker 3: X number of years. of years, the structure itself is okay,
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  Speaker 3: but virtually everything within it, has to turn over a.
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  Speaker 2: Lot of that stuff requires several years. Yeah, certainly. Uh,
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  Speaker 2: speaking of data centers and chips, we are going to
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  Speaker 2: get our first earnings report from a company that is
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  Speaker 2: probably little known to listeners out there, but has grown
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  Speaker 2: tremendously in size over the course of the last year.
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  Speaker 2: So this is now the 10th heaviest weighted company in
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  Speaker 2: the S and P 500 accounting for about one and
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  Speaker 2: a half plus percent waiting in the S and P 500.
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  Speaker 2: That's Micron. They're going to report their earnings today. after
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  Speaker 2: the close of the bell today. They are the makers
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  Speaker 2: of memory chips that are utilized in the chips that
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  Speaker 2: are required for these data center build-outs. There has been
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  Speaker 2: a tremendous amount of supply shortage on these memory chips,
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  Speaker 2: so they have been able to command Just incredible margins.
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  Speaker 2: And typically, this memory chip business has been very cyclical
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  Speaker 2: in nature. And the fact that they are sitting on
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  Speaker 2: the precipice of what's estimated to be about an 86%
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  Speaker 2: gross margin for this upcoming quarter that they're about to report,
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  Speaker 2: which is far higher than their Q4 2025 gross margin
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  Speaker 2: of about 46%. they have just been benefiting tremendously. I
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  Speaker 2: can't overstate enough. The stock's up 240 plus percent year
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  Speaker 2: to date. They have really been one of the bigger benefactors.
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  Speaker 2: NVIDIA obviously probably being the biggest of all of this
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  Speaker 2: AI investment is that there's been a shortage for the
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  Speaker 2: chips that they make. There's really only two or three
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  Speaker 2: companies that participate in in the making of memory chips
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  Speaker 2: and not necessarily that they are, um, you know, an oligopoly,
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  Speaker 2: but they do tend to try and constrain supply a
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  Speaker 2: little bit. It's Sam it's Micron, and it's SanDisk that
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  Speaker 2: are the three big memory chip makers. As a result
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  Speaker 2: of all of this investment, there has just been so
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  Speaker 2: much demand for the chips that they make, and they
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  Speaker 2: really don't grow capacity more than 25% or 30% over
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  Speaker 2: a certain number of years. This demand has the stock soaring.
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  Speaker 2: What is important about Micron's earnings report is... We're constantly
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  Speaker 2: looking as investors or people who follow this and the
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  Speaker 2: economy for any sort of dent in the AI CapEx
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  Speaker 2: build out. That's what we're looking for. There has continued
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  Speaker 2: to be tremendous demand. enthusiasm and Micron has come out
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  Speaker 2: with great earnings. They will need to clear a very
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  Speaker 2: high bar today at the close of market because investors
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  Speaker 2: are really expecting the world and they want assurances that
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  Speaker 2: there is a long-term demand for these memory checks because typically,
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  Speaker 2: like I said, it's gone boom and then gone bust
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  Speaker 2: because they oversupply the market. So that's what we'll be
• 10:57
  Speaker 2: looking for. at the close of the market today, and
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  Speaker 2: we'll be talking about it on tomorrow's show. We're going
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  Speaker 2: to take a quick break here on the financial exchange.
• 11:05
  Speaker 2: When we come back, we'll be talking a little bit
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  Speaker 2: about the markets and President Trump meeting with AI safety leaders.
• 11:13
  Speaker 2: I know Mark has a lot to say on this
• 11:15
  Speaker 2: subject right after this break.
• 11:17
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• 12:10
  Speaker 2: Mentioned before the break here, Micron is going to be
• 12:13
  Speaker 2: reporting earnings after the bell. This is a company that
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  Speaker 2: has swelled to a market cap exceeding a trillion dollars
• 12:20
  Speaker 2: off a tremendous year of performance as there continues to
• 12:24
  Speaker 2: just be unsatiated demand for their memory chips. Mark, this
• 12:29
  Speaker 2: is just a theme, and they are one of the
• 12:31
  Speaker 2: big beneficiaries this year in terms of their stock.
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  Speaker 3: But you would expect eye-popping. uh, results and forecasts at
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  Speaker 3: this point. We know the hyperscalers anticipate spending. Is it
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  Speaker 3: 800 billion now?
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  Speaker 2: I've heard one trillion for next year.
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  Speaker 1: Yeah.
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  Speaker 2: Okay. A lot of money. Yeah.
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  Speaker 3: At some point it doesn't even matter. These are like rounding, uh.
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  Speaker 2: Uh, not, yeah, it's a couple hundred billion amongst friends.
• 12:55
  Speaker 2: I'm with you. Well, it's okay.
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  Speaker 3: It'd be, you know, 25% more than, than 800, I guess. But, um,
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  Speaker 3: So anything other than explosive growth, quarter over quarter or
• 13:07
  Speaker 3: whatever period you're looking at, would be surprising. We know
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  Speaker 3: they can't throw money at chip makers like Micron fast enough.
• 13:17
  Speaker 3: The more interesting question, and there's not an answer to this, unfortunately,
• 13:22
  Speaker 3: is what causes, I'll just call it investor enthusiasm, to wane?
• 13:30
  Speaker 3: We talked earlier about GDP. We shared some good news,
• 13:34
  Speaker 3: which is that it was revised up. GDP is just spending.
• 13:37
  Speaker 3: When you hear GDP, just think spending. It's not just
• 13:39
  Speaker 3: by people, but governments and firms, and that includes investment.
• 13:43
  Speaker 3: There's an adjustment for exports there, but don't worry too
• 13:46
  Speaker 3: much about that. GDP was up, revised up to 2.2%, real.
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  Speaker 3: That is after inflation. That's very respectable. It's nothing to
• 13:54
  Speaker 3: write home about. It's about what you'd expect, given the
• 13:57
  Speaker 3: economy's productive capacity. That's just about right in line with
• 13:59
  Speaker 3: potential GDP, the economy's speed limit, if you like. Anything
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  Speaker 3: faster than that, in fact, and you probably risk stoking
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  Speaker 3: inflation further. First quarter was 2.5, so maybe a little
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  Speaker 3: bit faster than potential.
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  Speaker 2: So good.
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  Speaker 3: In the first quarter, though, data centers, which are a
• 14:17
  Speaker 3: subcategory of these national income product accounts that we get
• 14:21
  Speaker 3: GDP from, contributed significantly about 20% of that growth. In
• 14:29
  Speaker 3: the second quarter, interestingly, and we're talking about this a
• 14:32
  Speaker 3: little bit offline too, the category, which is called computers
• 14:37
  Speaker 3: and peripherals and other, that's meant to capture everything associated
• 14:41
  Speaker 3: with data center build-outs from laying the pad down to
• 14:45
  Speaker 3: bringing the wiring in the bring the power and you
• 14:47
  Speaker 3: know the utility lines whatever uh... it it slightly detracted
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  Speaker 3: from gdp the it was its contribution was negative minus
• 14:54
  Speaker 3: point one percent first time in several quarters that that's
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  Speaker 3: happened i don't know could you asked like why you
• 15:00
  Speaker 3: wouldn't wouldn't how do you explain i said i don't
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  Speaker 3: i just look at the tables of the government doesn't
• 15:05
  Speaker 3: published anecdotes along with these i don't have a good explanation.
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  Speaker 2: Yeah, that was one of the final estimates, too, for
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  Speaker 2: Q2' s third one. So we're pretty sure.
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  Speaker 3: Now, there could be other stuff in there. That's not
• 15:20
  Speaker 3: just data centers. It's also, you know, IBM clears out
• 15:23
  Speaker 3: its old server room and adds, you know, its old
• 15:26
  Speaker 3: cloud server room, adds a new one.
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  Speaker 4: I mean, I don't know. I'm just reaching here. I
• 15:30
  Speaker 4: don't know what I'm doing.
• 15:31
  Speaker 3: I'm not really talking about when it comes to this stuff.
• 15:32
  Speaker 3: I'm just a high-level data person. So there's other stuff
• 15:35
  Speaker 3: in there, too, that may be offset data center spending.
• 15:38
  Speaker 3: So it might not have been negative quarter over. Its
• 15:40
  Speaker 3: contribution might not have been negative quarter over quarter. But
• 15:44
  Speaker 3: I was a little startled by that because I expected
• 15:46
  Speaker 3: another big contribution to GDP from the data center build-out.
• 15:51
  Speaker 3: And on its face, the numbers don't suggest that.
• 15:53
  Speaker 2: Yeah, something that we'll certainly have to monitor in future
• 15:56
  Speaker 2: quarters here. President Trump met with tech leaders regarding AI
• 16:01
  Speaker 2: safety the other day at the White House, and there
• 16:04
  Speaker 2: really was not a tremendous change in terms of course there.
• 16:08
  Speaker 2: That is one piece here from CNBC. Also, we have
• 16:12
  Speaker 2: another piece that came out of the New York Times
• 16:14
  Speaker 2: talking about OpenAI and some of its failures regarding AI.
• 16:19
  Speaker 2: its safety protocols on its models. OpenAI, widely publicized, had
• 16:23
  Speaker 2: numerous reported breakings of their model, where their model went
• 16:28
  Speaker 2: out and, acting nefariously, tried to hack into, most famously,
• 16:32
  Speaker 2: Hugging Faces, which is an open platform developer. AI model company,
• 16:39
  Speaker 2: as well as now there's been numerous others examples of
• 16:42
  Speaker 2: this occurring. And this is that in lies here, you
• 16:45
  Speaker 2: have a company that has reached, you know, a trillion
• 16:47
  Speaker 2: dollar plus valuation, significant deadlines that it has to hit
• 16:52
  Speaker 2: in terms of releasing its models, a lot of pressure
• 16:56
  Speaker 2: to continue to raise money and justify the valuations that
• 16:59
  Speaker 2: it has, as well as a tremendous amount of competition
• 17:02
  Speaker 2: in the space. And unfortunately, what can often occur is
• 17:06
  Speaker 2: they brush safety to the side and they just focus
• 17:10
  Speaker 2: on the demands of the business. And it seems like
• 17:12
  Speaker 2: from this New York Times expose that that has been
• 17:15
  Speaker 2: the case.
• 17:16
  Speaker 3: Yeah, the allure of profit in any industry is too strong.
• 17:19
  Speaker 3: I can't think of another industry that we let regulate
• 17:22
  Speaker 3: itself with no government body, even though sometimes it's just theater.
• 17:26
  Speaker 3: Sometimes the regulated captures the regulator. There are plenty of
• 17:31
  Speaker 3: examples of that. But That phenomenon aside, does anybody trust
• 17:38
  Speaker 3: AI to regulate itself after what we've heard in the
• 17:41
  Speaker 3: past several weeks? High-level, very senior programmers who know this
• 17:46
  Speaker 3: stuff better than any executive does, any C-level person who's
• 17:50
  Speaker 3: removed from it a little bit. Altman, I think, is
• 17:53
  Speaker 3: a coder himself, so he gets it, but still, he's
• 17:54
  Speaker 3: pretty far removed.
• 17:55
  Speaker 2: He is.
• 17:56
  Speaker 3: Zuckerberg, too. Coder, brilliant, pretty far removed. So I take
• 18:01
  Speaker 3: the testimony of these... whistleblowers seriously. And there have been
• 18:05
  Speaker 3: like innumerable instances of whistleblowers coming out and saying, this
• 18:08
  Speaker 3: thing's going to kill us all.
• 18:10
  Speaker 4: I worked on it.
• 18:10
  Speaker 3: I know what it's capable of. That should give us
• 18:13
  Speaker 3: all right then and there. Government should step in and say, stop.
• 18:16
  Speaker 3: Until we understand this, the threat may be existential. Stop.
• 18:19
  Speaker 4: Next quarter's earnings can wait, everybody.
• 18:23
  Speaker 3: The Federal Trade Commission is scrutinizing OpenAI, Anthropic, and others.
• 18:28
  Speaker 3: We learned today about the safety of their products amid
• 18:31
  Speaker 3: these high-profile, Bloomberg reports, cybersecurity incidents. Does any serious person
• 18:39
  Speaker 3: trust these companies to regulate themselves?
• 18:41
  Speaker 2: No, because ultimately they're playing in a game that this
• 18:47
  Speaker 2: build-out and the valuations and the money at stake are
• 18:50
  Speaker 2: so great, to your point, that it feels as if
• 18:53
  Speaker 2: many of them will throw caution to the wind because
• 18:56
  Speaker 2: the fears of not substantiating the valuation that they have
• 19:00
  Speaker 2: for the next fundraising, for investors and VC firms. There's
• 19:04
  Speaker 2: just too much incentive to continue to plug forward, to
• 19:07
  Speaker 2: compete and try and make profit. So I don't think
• 19:11
  Speaker 2: that they will act appropriately and put safety over profits,
• 19:15
  Speaker 2: which is unfortunate. Hopefully there can be some sort of
• 19:19
  Speaker 2: resolve or pace slowing before a really bad incident would occur.
• 19:26
  Speaker 2: We're going to take a quick break here, but when
• 19:27
  Speaker 2: we come back, we'll have Wall Street Watch and much
• 19:29
  Speaker 2: more right after this break.
• 19:39
  Speaker 1: Bringing the latest financial news straight to your radio every day.
• 19:43
  Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
• 19:48
  Speaker 1: Time now for Wall Street Watch. Tracking the stocks, the data,
• 19:53
  Speaker 1: and the headlines driving markets so far today. Right here
• 19:56
  Speaker 1: on the Financial Exchange Radio Network.
• 19:58
  Speaker 5: Markets in positive territory after the Fed's preferred measure of inflation,
• 20:02
  Speaker 5: the Core PCE Index, showed core inflation was at 3%
• 20:06
  Speaker 5: on an annual basis, softer than estimates expected.
• 20:09
  Speaker 2: Of 3.3%.
• 20:10
  Speaker 5: We also saw an upwardly revised second quarter GDP reading
• 20:13
  Speaker 5: of 2.2%, higher than previous estimates of 1.5%. Right now,
• 20:19
  Speaker 5: the Dow is up only 31 points. S & P
• 20:22
  Speaker 5: 500 up about two-thirds of percent or 47 points up.
• 20:26
  Speaker 5: NASDAQ rallying over 1% or 282 points higher. Russell 2000
• 20:31
  Speaker 5: is up about a half a percent. 10-year Treasury yield
• 20:33
  Speaker 5: is up one basis point at 5.2%. 2.72%, crude oil
• 20:38
  Speaker 5: up nearly 3% higher, trading at $ 91 a barrel. Boeing
• 20:43
  Speaker 5: shares are edging higher after it secured a $ 20 billion
• 20:46
  Speaker 5: contract from the U.S. Navy to build.
• 20:49
  Speaker 4: Its next-gen jet fighter.
• 20:51
  Speaker 5: Meanwhile, Bloomberg reported that Apple plans to make a push
• 20:54
  Speaker 5: into the smart home market on October 13th with a
• 20:58
  Speaker 5: smart home hub, which will have a 6-inch square display.
• 21:02
  Speaker 5: Apple is up 2.5%. Elsewhere, CalMain Foods is seeing its
• 21:07
  Speaker 5: stock sink 4% after the egg producer posted a wider-than-expected
• 21:11
  Speaker 5: loss for the previous quarter. Moderna was downgraded by Citi
• 21:15
  Speaker 5: to sell, where the analyst said the stock's current valuation
• 21:18
  Speaker 5: can't be justified. Moderna is tumbling 8% on that downgrade.
• 21:24
  Speaker 5: And after today's closing bell, Micron Technology will report its
• 21:29
  Speaker 5: quarterly results. Micron shares are up 1% at the moment
• 21:34
  Speaker 5: ahead of its earnings report. I'm Tucker Silva, and that
• 21:38
  Speaker 5: is Wall Street Watch.
• 21:40
  Speaker 2: It is the last day of the month of September,
• 21:43
  Speaker 2: so that means that this is your last chance to
• 21:47
  Speaker 2: get this guide here from the Armstrong Advisor Group. You've
• 21:50
  Speaker 2: spent years preparing for retirement, but there comes a point
• 21:54
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• 21:57
  Speaker 2: This is Paul Lane from the Armstrong Advisory Group. Saving
• 22:00
  Speaker 2: more may provide additional financial security, but it can also
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  Speaker 2: mean working longer than you need to. That means waiting
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  Speaker 2: being with your family, or simply having more freedom to
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  Speaker 2: decide how you spend your time. These are some of
• 22:16
  Speaker 2: the ideas included in our new guide, Five Hidden Costs
• 22:19
  Speaker 2: of Saving Too Much for Retirement. Our retirement plan shouldn't
• 22:23
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• 22:29
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• 22:31
  Speaker 2: doing it. Get your free copy by calling the Armstrong
• 22:34
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• 22:43
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• 22:46
  Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
• 22:49
  Speaker 1: registered investment advisor. Nothing in the ad or in any
• 22:51
  Speaker 1: Armstrong guide is specific financial, legal, or tax advice. Consult
• 22:55
  Speaker 1: your own financial, tax, and estate planning advisors before making
• 22:57
  Speaker 1: any investment decisions. Armstrong may contact you to offer investment
• 23:00
  Speaker 1: advisory services.
• 23:02
  Speaker 2: We were speaking before the break regarding this New York
• 23:05
  Speaker 2: Times exclusive, which covers OpenAI and how it ignored many
• 23:11
  Speaker 2: of its employees who warned them that they weren't doing
• 23:14
  Speaker 2: enough for security on these models. There have been dozens
• 23:18
  Speaker 2: of incidents now that have been reported on OpenAI's model
• 23:23
  Speaker 2: training and how it's broken out of containment to try
• 23:26
  Speaker 2: and act in a negative fashion to breach into government
• 23:30
  Speaker 2: databases or other secure areas. And the last comment that
• 23:35
  Speaker 2: I'd like to make on the subject is there has
• 23:38
  Speaker 2: been an interesting shift in posturing from a lot of
• 23:41
  Speaker 2: the AI leaders. Dario Mode had wrote an essay mentioning
• 23:46
  Speaker 2: some of the concerns that he has with AI, if
• 23:49
  Speaker 2: it's not regulated, how it could spin out of control.
• 23:52
  Speaker 2: And Altman, Sam Altman, the CEO of OpenAI, has also
• 23:56
  Speaker 2: taken a similar path. In fact, on Monday, OpenAI announced
• 24:01
  Speaker 2: that it would not release its newest AI model, ChatGPT 6.1 Astra.
• 24:06
  Speaker 2: As we've mentioned on the show before, I really would
• 24:08
  Speaker 2: like them to find an easier way to list off
• 24:11
  Speaker 2: these model names, but I think that has fallen on
• 24:14
  Speaker 2: deaf ears. They didn't release it because of some of
• 24:16
  Speaker 2: the security concerns raised by its researchers. And I always... unfortunately,
• 24:21
  Speaker 2: take some of their announcements with a cynical view. And
• 24:24
  Speaker 2: I was trying to, earlier this week on Monday, determine
• 24:28
  Speaker 2: why there was such emphasis on these AI leaders mentioning
• 24:33
  Speaker 2: their concerns on security. And to me, this New York
• 24:36
  Speaker 2: Times exclusive just further adds ammunition that they know that
• 24:41
  Speaker 2: probably a lot of stuff is going to come out,
• 24:43
  Speaker 2: a lot of commentary on their failure to appropriately... monitor
• 24:48
  Speaker 2: the security of these models. And it feels like now
• 24:51
  Speaker 2: that I look back at some of these announcements that
• 24:53
  Speaker 2: they're trying to play a little bit catch up and
• 24:55
  Speaker 2: change their mindset a bit to focus more on security,
• 24:58
  Speaker 2: at least publicly. Now it's comes down to, you know,
• 25:01
  Speaker 2: what they got to act on it too.
• 25:04
  Speaker 4: What's stopping them?
• 25:05
  Speaker 2: Yeah.
• 25:05
  Speaker 3: What is stopping them from, why do they have to
• 25:08
  Speaker 3: make pronouncements about, you know, people who profess to be
• 25:11
  Speaker 3: something typically aren't, Hey, I'm, I'm honest.
• 25:12
  Speaker 4: You can invest your money with us. You know, they're
• 25:15
  Speaker 4: hiding something right away.
• 25:16
  Speaker 3: No one says that unless they're protesting too much, you know,
• 25:22
  Speaker 3: or whatever the expression is.
• 25:25
  Speaker 4: It's suspicious.
• 25:27
  Speaker 3: Why now?
• 25:27
  Speaker 4: Why not two years ago? You've already made this point.
• 25:32
  Speaker 2: We're six models in, or, you know, six, I don't know,
• 25:34
  Speaker 2: however many versions into the model, there's probably been more
• 25:37
  Speaker 2: than that. Dozens of the iterations on chat TV. They've
• 25:40
  Speaker 2: seen how it's progressed over time.
• 25:41
  Speaker 3: I mean, I get the sense that the president's getting
• 25:44
  Speaker 3: bad advice on this. I get the sense that our
• 25:45
  Speaker 3: leadership is not up to, they're not in the past,
• 25:50
  Speaker 3: a big, when, when government has taken on big business,
• 25:53
  Speaker 3: whether or not I agree that they should have. And
• 25:56
  Speaker 3: as a, as a pretty extreme capitalist, I generally look
• 26:01
  Speaker 3: askance at it, but nevertheless. In this case, we're not
• 26:05
  Speaker 3: talking about a company doing something morally questionable or something.
• 26:13
  Speaker 3: This poses a threat, as these people have admitted, to
• 26:17
  Speaker 3: our existence. And existence might not mean our lives. It
• 26:21
  Speaker 3: might just mean the way that we live today. If
• 26:25
  Speaker 3: a rogue AI agent shuts down The electrical grid, for example.
• 26:29
  Speaker 2: It's a great example. I'm so glad you mentioned that.
• 26:31
  Speaker 2: And a plausible one, right? Yeah, yeah.
• 26:33
  Speaker 4: Because it's already happened.
• 26:35
  Speaker 2: I think it's great that you mentioned that example because
• 26:38
  Speaker 2: so often I would feel that for listeners it's hard
• 26:41
  Speaker 2: to grasp what does this mean that the model breaks
• 26:43
  Speaker 2: containment and it sounds like sci-fi sort of chatter. And
• 26:46
  Speaker 2: I was talking with my wife over the weekend who
• 26:49
  Speaker 2: doesn't follow this stuff and she was mentioning that she
• 26:52
  Speaker 2: was talking to someone else who had these concerns that
• 26:55
  Speaker 2: AI could really take a very negative term. And what
• 26:58
  Speaker 2: my wife was asking me, what does she mean by that?
• 27:00
  Speaker 2: What could actually happen? And that is an example I
• 27:03
  Speaker 2: gave is that, hey, things like our grid could be
• 27:07
  Speaker 2: hacked into and we could be without power. That is
• 27:11
  Speaker 2: something that looms as a legitimate risk. Probably going to happen.
• 27:13
  Speaker 3: A water treatment plant goes down.
• 27:16
  Speaker 2: I think those examples are good to give to give
• 27:18
  Speaker 2: concrete understanding to what potentially could be at risk. So
• 27:22
  Speaker 2: much of our infrastructure is is digitally based banking, financial institutions.
• 27:26
  Speaker 4: Or the interest in the internet, for that matter.
• 27:27
  Speaker 1: Right.
• 27:27
  Speaker 4: Imagine if that happened.
• 27:28
  Speaker 2: It's so intertwined to our world. So if you have
• 27:30
  Speaker 2: cybersecurity incidents that take on a far greater scale than
• 27:34
  Speaker 2: what we've seen in the past, it can really have
• 27:38
  Speaker 2: the risk to disrupt our day-to-day lives. You know, think
• 27:42
  Speaker 2: your electricity systems, think your financial institutions.
• 27:45
  Speaker 3: Yeah, I think if you're regulating these companies, and this
• 27:47
  Speaker 3: is why I say, I don't think our leadership, and
• 27:49
  Speaker 3: I mean, the president's being badly advised here.
• 27:51
  Speaker 4: He's not an expert. This isn't his area.
• 27:53
  Speaker 3: He needs to be told more forcefully, I think, that
• 27:56
  Speaker 3: the political peril to you is great. If one of
• 27:59
  Speaker 3: these things, again, gets out of containment, does some real damage,
• 28:02
  Speaker 3: shuts down a water treatment plant for a major metropolitan area,
• 28:07
  Speaker 3: or a grid, a section.
• 28:08
  Speaker 4: Of the U.S. grid, hospitals lose power. Well, they have generators,
• 28:12
  Speaker 4: probably a bad example. But anyway, he needs.
• 28:17
  Speaker 3: to have it explained to him in very stark terms,
• 28:19
  Speaker 3: even a small incident that didn't, that didn't pose an
• 28:23
  Speaker 3: immediate threat to life, uh, would rebound to hurt him
• 28:29
  Speaker 3: greatly politically and hurt his legacy politically. You do not
• 28:32
  Speaker 3: want to be the guy who said, let's let these
• 28:35
  Speaker 3: guys regulate themselves. And then six months, six months later,
• 28:38
  Speaker 3: there's a catastrophe.
• 28:39
  Speaker 2: Sure.
• 28:40
  Speaker 3: Cause it's just too, he's, he's, he's staked out to extreme.
• 28:43
  Speaker 3: His advisors have led him to stake out to extreme
• 28:45
  Speaker 3: a position on this.
• 28:46
  Speaker 2: Yeah, and when it's such a significant contribution to GDP growth,
• 28:50
  Speaker 2: like we were talking about before. Well, not last quarter, though, interestingly. Well,
• 28:53
  Speaker 2: come on. Let's go back. I mean, just one year.
• 28:56
  Speaker 2: Keep your hammer on this one quarter. They've spent a
• 28:59
  Speaker 2: lot of money.
• 28:59
  Speaker 1: You're right.
• 29:00
  Speaker 3: And I've been the guy internally who's been saying, hey, guys,
• 29:02
  Speaker 3: it's all about AI, data center investing.
• 29:04
  Speaker 2: Look at the numbers.
• 29:04
  Speaker 4: Then last quarter, it came in.
• 29:06
  Speaker 3: I mean, I felt I had a little bit of
• 29:07
  Speaker 3: egg on my face because last quarter, contribution from computers, peripherals,
• 29:10
  Speaker 3: and other came in.
• 29:10
  Speaker 4: Negative, and GDP growth was... was solid.
• 29:13
  Speaker 2: Still big picture, there's a lot of money. No, you're right.
• 29:15
  Speaker 3: And I understand his advisors have to stop putting today's
• 29:20
  Speaker 3: value of the stock market in front of him and
• 29:21
  Speaker 3: start thinking about your legacy and how it's going to
• 29:24
  Speaker 3: look like Hoover looks to today's generations, even though Hoover
• 29:29
  Speaker 3: is painted unfairly by the people that write economic history.
• 29:33
  Speaker 3: He did, in fact, try to do something about the
• 29:35
  Speaker 3: great early stages of the Great Depression. He did spend
• 29:37
  Speaker 3: a lot more than his predecessors, et cetera, et cetera.
• 29:40
  Speaker 3: Nobody remembers Herbert Hoover that way. They remember him as
• 29:42
  Speaker 3: the guy who did nothing about the Depression as the U.S.
• 29:45
  Speaker 4: Sank, as the U.S.
• 29:46
  Speaker 3: Fell off a cliff into the abyss, 25 percent unemployment,
• 29:49
  Speaker 3: et cetera, et cetera. And then FDR came in and
• 29:52
  Speaker 3: sort of saved the day.
• 29:53
  Speaker 4: That is unfair.
• 29:53
  Speaker 3: That is inaccurate. But it's the way we remember it.
• 29:56
  Speaker 3: I think someone is going to tell this president how
• 29:58
  Speaker 3: he'll be remembered in if things do go off the rails,
• 30:01
  Speaker 3: as everybody who's closely associated with it says it will.
• 30:05
  Speaker 2: We're going to take a quick break here on the
• 30:06
  Speaker 2: Finish Exchange. When we come back, a little bit of
• 30:08
  Speaker 2: Stack Roulette right after this.
• 30:11
  Speaker 1: Hear the Financial Exchange every day from 11 to noon
• 30:14
  Speaker 1: on Sirius XM's Business Radio Channel 132. Keep it here
• 30:18
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• 30:21
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• 30:24
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• 30:29
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• 30:33
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• 30:40
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• 30:43
  Speaker 1: This is the Financial Exchange Radio Network.
• 30:53
  Speaker 2: All right, it's time for a little bit of Stack Roulette. Matt, Mark,
• 30:57
  Speaker 2: not Matt. Do you want to bat?
• 30:59
  Speaker 4: We don't even have a man.
• 31:01
  Speaker 2: Do you want to bat? There's no excuse for that.
• 31:03
  Speaker 2: There's no Matt in the office. I'm grasping at straws
• 31:06
  Speaker 2: to think of who the Matt could be.
• 31:10
  Speaker 4: I mean, we all knew who you meant, Pete.
• 31:13
  Speaker 2: Do you want to bat first or second?
• 31:14
  Speaker 4: Yeah, the SEC.
• 31:16
  Speaker 3: Can I give you something for your consideration, you guys,
• 31:18
  Speaker 3: and tell me whether you think this is harebrained or not?
• 31:21
  Speaker 1: It's, well.
• 31:22
  Speaker 3: The SEC is considering allowing Funds, like a mutual fund
• 31:27
  Speaker 3: or an ETF that invests in private stuff, and there
• 31:30
  Speaker 3: are some out there that invest in stuff that's not
• 31:33
  Speaker 3: publicly traded but can be publicly owned. It gets a
• 31:36
  Speaker 3: little confusing, but we've all heard the term private equity.
• 31:39
  Speaker 1: Sure.
• 31:40
  Speaker 3: And we all have a sense that that means businesses
• 31:42
  Speaker 3: that aren't traded on the stock exchange. So just keep
• 31:45
  Speaker 3: that in mind. These things are increasingly making their way
• 31:48
  Speaker 3: into 401ks through retail, for you and me, vehicles, mutual funds,
• 31:53
  Speaker 3: and even ETFs. currently they just charge a flat investment
• 31:57
  Speaker 3: management expense. And you're used to seeing that in your
• 32:00
  Speaker 3: 401k statement.
• 32:00
  Speaker 1: Right.
• 32:00
  Speaker 3: You're used to seeing performance and then an expense ratio,
• 32:03
  Speaker 3: say 0.5% for an equity fund, a stock fund, one
• 32:07
  Speaker 3: half of 1% a year. It's easy to know what
• 32:11
  Speaker 3: that means, to conceptualize it. The SEC wants to allow
• 32:15
  Speaker 3: funds that invest in private funds, market stuff could be
• 32:18
  Speaker 3: private equity or credit, to allow them to charge performance-based fees,
• 32:24
  Speaker 3: which is what they charge sophisticated institutional investors like pension funds.
• 32:28
  Speaker 3: So a performance-based fee would be you pay a flat
• 32:31
  Speaker 3: management fee of 1% to 2% while the fund makes
• 32:36
  Speaker 3: its underlying investments, and you don't know what those are
• 32:38
  Speaker 3: going to be ahead of time. And then you pay
• 32:42
  Speaker 3: After you get a certain rate of return called a
• 32:44
  Speaker 3: hurdle rate, typically 8-ish percent, then you split all profits
• 32:49
  Speaker 3: with the private equity manager. They could take 20%, 30%
• 32:52
  Speaker 3: of all profits after you get your hurdle rate. If
• 32:55
  Speaker 3: that sounds confusing, and it is confusing. Imagine seeing this
• 33:00
  Speaker 3: on your 401k statement for fee structure next to index
• 33:05
  Speaker 3: S & P 500 index fee 0.03%. Right.
• 33:08
  Speaker 4: Very familiar.
• 33:09
  Speaker 3: We all know how to interpret that. Well, you might
• 33:11
  Speaker 3: have to think about it a little bit, but generally familiar.
• 33:14
  Speaker 3: And then you see all that gobbledygook that I just explained.
• 33:17
  Speaker 2: Two and 20, basically.
• 33:17
  Speaker 3: A management fee, a hurdle rate, a carry, all these terms,
• 33:22
  Speaker 3: all this jargon associated with private markets. And I'm just not,
• 33:26
  Speaker 3: you know, we have our reservations, I think, about private
• 33:30
  Speaker 3: market stuff and 401k plans because of risk and illiquidity.
• 33:34
  Speaker 3: But allow them to charge performance-based fees that. have no
• 33:38
  Speaker 3: obvious benchmark because they're all slightly different. And there is
• 33:41
  Speaker 3: no fair or unfair. It's just, is it reasonable value?
• 33:44
  Speaker 3: Is it a reasonable fee to pay given the services
• 33:46
  Speaker 3: they're providing? I'm not sure that a typical participant, and
• 33:49
  Speaker 3: I put myself in that category, could evaluate whether or
• 33:53
  Speaker 3: not it's good value for money.
• 33:56
  Speaker 2: Do they mention a certain percentage that they could go
• 33:58
  Speaker 2: up to within a mutual fund that could be private assets?
• 34:02
  Speaker 2: investment exposure?
• 34:03
  Speaker 4: I didn't even think about that.
• 34:04
  Speaker 2: Or is this just a straight-up fund that's going to
• 34:05
  Speaker 2: be a private fund?
• 34:06
  Speaker 3: I didn't think about that. What do you do with
• 34:07
  Speaker 3: a target date fund that has 10% in private equity?
• 34:10
  Speaker 3: What's the fee structure there?
• 34:11
  Speaker 2: But you're saying that this would be a private equity
• 34:13
  Speaker 2: fund that you could pick within your lineup.
• 34:15
  Speaker 4: Yeah, and they're out there.
• 34:16
  Speaker 3: You can invest in any number of private, and as
• 34:19
  Speaker 3: you know, it's broader than private equity. It could be infrastructure,
• 34:22
  Speaker 3: any number of privately traded asset classes are increasingly available
• 34:25
  Speaker 3: in retirement plans. But it could also be a slug
• 34:28
  Speaker 3: of a diversified fund, like a balanced fund.
• 34:30
  Speaker 2: Yeah.
• 34:31
  Speaker 4: I don't know how you report that.
• 34:32
  Speaker 2: I think the private credit issues that we were reporting
• 34:36
  Speaker 2: on or covering on the show, when was that? Last year?
• 34:39
  Speaker 2: Within the last year or so, are strong evidence that
• 34:44
  Speaker 2: what had happened with the private credit market is it
• 34:46
  Speaker 2: had just had this proliferation of tremendous growth over the
• 34:49
  Speaker 2: last 10 to 15 years because banks stopped lending to
• 34:52
  Speaker 2: what you call middle market stocks. mid-sized businesses, they started
• 34:55
  Speaker 2: to pull away from some of that lending in other
• 34:57
  Speaker 2: areas of the market. Private credit kind of came in
• 34:59
  Speaker 2: and swooped up that demand for lending capacity. And it
• 35:03
  Speaker 2: broadened out so much that it started to trickle into
• 35:06
  Speaker 2: retail investors to a degree, getting exposure to these private markets.
• 35:12
  Speaker 2: And my view on it is retail is not well-suited
• 35:15
  Speaker 2: for private market investment. That doesn't mean everybody, but broadly speaking,
• 35:20
  Speaker 2: The illiquidity associated with those type of investments and the
• 35:23
  Speaker 2: run that we saw to a degree on private credit
• 35:26
  Speaker 2: that has granted a very small fragment over the overall
• 35:29
  Speaker 2: investing market proves evidence that I don't feel as if
• 35:34
  Speaker 2: it's the best place for those type of investors to
• 35:37
  Speaker 2: go because they tend to run for the exits really
• 35:39
  Speaker 2: quickly when things get bad. And these private investments, private
• 35:43
  Speaker 2: with their nature, are illiquid and don't really have the
• 35:50
  Speaker 2: strongest track record of being suitable for retail investors, is
• 35:55
  Speaker 2: what I would say. Not to say that they can't
• 35:57
  Speaker 2: generate strong returns, but you need to have a certain
• 36:00
  Speaker 2: disposition or risk component to the investment.
• 36:04
  Speaker 3: It's a powerful and potentially dangerous tool. If it's blended
• 36:08
  Speaker 3: into a bigger portfolio, like we talked about, that's okay.
• 36:11
  Speaker 3: But if you start to charge, and you got at this,
• 36:13
  Speaker 3: I didn't even pick up on it. What if there's
• 36:15
  Speaker 3: just a little part of your portfolio that charges a
• 36:16
  Speaker 3: performance-based fee?
• 36:18
  Speaker 4: What is the average fee in that case?
• 36:19
  Speaker 1: Exactly.
• 36:19
  Speaker 3: You don't really know what you're going to pay a
• 36:20
  Speaker 3: private market manager until their fund is fully invested and
• 36:25
  Speaker 3: their success or failure is apparent. It's hard to compare
• 36:29
  Speaker 3: to other asset classes.
• 36:31
  Speaker 2: Now, I feel like that's more of a headache for
• 36:33
  Speaker 2: the SEC, but we'll see how that develops. Lazy customers
• 36:36
  Speaker 2: are great for banks. Could AI change that? A piece
• 36:39
  Speaker 2: here from the Wall Street Journal. This came off the
• 36:42
  Speaker 2: backs of, there's been a lot of talk about AI
• 36:44
  Speaker 2: agents with Muse being released by Meta, where basically banks
• 36:49
  Speaker 2: make a lot of money based on the idea that
• 36:51
  Speaker 2: you leave your deposits there and they lend off those
• 36:54
  Speaker 2: deposits at a higher rate of interest than they are
• 36:56
  Speaker 2: paying you. Oftentimes, I've seen this numerous times meeting with
• 37:00
  Speaker 2: prospective clients that people are lazy to change, to move
• 37:04
  Speaker 2: money out of their bank and command a higher yield
• 37:07
  Speaker 2: of interest. And that's how banks make their money. And
• 37:10
  Speaker 2: they're claiming here that AI agents could basically take that
• 37:13
  Speaker 2: laziness off the table and take courses of action to
• 37:17
  Speaker 2: reinvest those deposits there at higher yielding instruments, thus compressing
• 37:21
  Speaker 2: the spread that banks make. I do think that that
• 37:24
  Speaker 2: is a possibility in the future. It's not going to
• 37:26
  Speaker 2: shift dramatically tomorrow. But if they're willing to automate some
• 37:29
  Speaker 2: of these things, that could occur.
• 37:30
  Speaker 3: It's a risk for the economy. It's called disintermediation. It's
• 37:33
  Speaker 3: when people take money out of banks and put it in, say,
• 37:35
  Speaker 3: treasuries or money market funds, which.
• 37:37
  Speaker 4: Is what MUSE is going to tell you to do.
• 37:38
  Speaker 2: Exactly.
• 37:38
  Speaker 3: MUSE is going to say you get 4% on a federal.
• 37:40
  Speaker 2: Money market fund right now. You're getting zero from Bank
• 37:42
  Speaker 2: of America.
• 37:43
  Speaker 3: I'm just giving an example here. This is not like
• 37:44
  Speaker 3: investment advice. But banks make mortgage loans. Money market funds
• 37:51
  Speaker 3: do not. This used to be a problem when banks'
• 37:53
  Speaker 3: interest rates were capped until the early 1980s. It is
• 37:57
  Speaker 3: certainly something that could definitely disrupt the business. I love
• 38:00
  Speaker 3: the word disintermediation. You never get to say it. But
• 38:03
  Speaker 3: this is an example of potential disintermediation.
• 38:06
  Speaker 2: Certainly could be.
• 38:06
  Speaker 4: And it could kill the mortgage market.
• 38:08
  Speaker 2: We're out of time for today, but we'll be right
• 38:11
  Speaker 2: back at it 10 a.m. tomorrow morning. Thanks so much
• 38:14
  Speaker 2: for joining us.