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Nvidia Is Becoming the Banker Behind the AI Boom · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Mike Armstrong and Paul Lane.
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  Speaker 2: Good morning. Happy Tuesday.
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  Speaker 3: Welcome back here to The Financial Exchange. We've got markets.
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  Speaker 3: We have a rebound mode with NASDAQ up about six-tenths
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  Speaker 3: of a percent in early trading. Movement in bonds, movement
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  Speaker 3: in gold and Bitcoin that we're going to be getting
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  Speaker 3: to later in the program. But it's Mike, Paul, and
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  Speaker 3: Tucker with you here on a Tuesday. Yesterday, we had
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  Speaker 3: the self-proclaimed Economic D-Day announced by Scott Besant. Yesterday, that
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  Speaker 3: was a press conference at, I believe, 2 p.m., Tucker.
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  Speaker 3: 1 p.m.? I missed it. I was in meetings yesterday afternoon.
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  Speaker 2: But he started the day with..
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  Speaker 3: Sorry, he started Sunday with a piece written in the
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  Speaker 3: Financial Times, which we went through on the program yesterday.
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  Speaker 3: It was a pretty high-minded piece, a lot of very
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  Speaker 3: strong language, and if you need any proof of it,
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  Speaker 3: just read the first line. This is something that Besant
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  Speaker 3: wrote and had published in the Financial Times. In 1943,
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  Speaker 3: the Allied powers convened the Tehran Conference to plot the
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  Speaker 3: course of an uncharted act, goes on to basically compare
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  Speaker 3: what the U.S. is going to do regarding Iran to
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  Speaker 3: that moment, then goes on to bring up French philosopher
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  Speaker 3: Blaise Pascal and a whole bunch of comparisons to the
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  Speaker 3: maker and who is passing judgment, which seems to be
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  Speaker 3: the United States, but very high-minded terms and seemingly very
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  Speaker 3: serious rhetoric about holding to account those who support the
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  Speaker 3: Iranian regime. So, you know, going into 1 p.m., I
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  Speaker 3: was kind of under the impression that we might get
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  Speaker 3: something pretty serious in terms of announcements. And don't get
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  Speaker 3: me wrong. I mean, the treasurer's secretary left the door
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  Speaker 3: open for further action.
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  Speaker 2: In the future.
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  Speaker 3: But the announcements that we got yesterday, I think, at
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  Speaker 3: least in my opinion, fall well short of an economic
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  Speaker 3: D-Day for Iran. And while they could be escalated down
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  Speaker 3: the road, do next to nothing today in terms of
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  Speaker 3: curtailing the behavior of Iran's trading partners and cutting off
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  Speaker 3: lifelines to the Iranian economy.
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  Speaker 4: Yeah, the biggest financial risk that you run here as
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  Speaker 4: a country domestically here in the United States is that China,
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  Speaker 4: which we'll get into, is a big buyer of Iran's oil.
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  Speaker 2: Pretty much the only buyer.
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  Speaker 4: The only buyer in town, 90% of it. And as
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  Speaker 4: a result of that, you have to be careful in
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  Speaker 4: that we kind of felt the pain last year of
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  Speaker 4: what can occur if we irritate China from an economic
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  Speaker 4: perspective because of some of the resources that they can
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  Speaker 4: provide to the United States that are critical on the
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  Speaker 4: tech side and semiconductor side of things. And so These
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  Speaker 4: measures here stop short of going from that severe in
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  Speaker 4: terms of their impact. They did not have immediate actions
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  Speaker 4: against China, the UAE, Turkey, Iraq, as well as some
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  Speaker 4: of the other big trading partners for Iran. They really
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  Speaker 4: wore a bit of a step up, but like you mentioned,
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  Speaker 4: not nearly as punishing as they could have been.
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  Speaker 3: Frankly, if you are not taking immediate action on countries
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  Speaker 3: like China, UAE, Turkey and Iraq, you just aren't doing anything. Yeah.
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  Speaker 1: Yeah.
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  Speaker 2: Just full stop.
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  Speaker 3: So what did Besant have to say about that? Quote,
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  Speaker 3: we are giving everyone the opportunity to remedy bad behavior.
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  Speaker 3: why would I want to blow up the global financial system? Well,
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  Speaker 3: you just told everyone yesterday that you were planning to
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  Speaker 3: do so.
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  Speaker 4: When you invoke D-Day comparisons, that's usually what comes to mind.
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  Speaker 3: Yeah. We believe it's important to level set, but they
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  Speaker 3: should know that we will move very quickly and that
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  Speaker 3: we are serious. They're targeting five sectors of the Iranian economy,
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  Speaker 3: digital assets, technology, gold, aviation, and shipping, digital assets. largely
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  Speaker 3: how they're being paid for different hacking schemes that Iranian
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  Speaker 3: actors undertake, aviation shipping. All of this is surrounding the
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  Speaker 3: transportation of oil. The way that actually works, just so
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  Speaker 3: everybody knows, I think everyone's generally aware, the Iranian economy
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  Speaker 3: is one of the heaviest sanctioned economies in the world.
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  Speaker 3: It has been for decades. Along with North Korea, those
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  Speaker 3: are the only two that you can really compare in
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  Speaker 3: terms of current sanctions. The way that the Iranians have
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  Speaker 3: been able to still export oil, getting around those sanctions,
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  Speaker 3: has largely been through what's referred to as teapot refiners
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  Speaker 3: in China. So if you're a giant multinational oil company
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  Speaker 3: operating in China, you don't buy Iranian oil because you
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  Speaker 3: don't want to risk sanctions. Instead, there are these little
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  Speaker 3: small refiners, privately held companies in China that that buy
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  Speaker 3: the majority of the Iranian oil on the black market.
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  Speaker 3: And effectively, China has set up a barrier to prevent
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  Speaker 3: them from being sanctioned. They don't do the trade in U.S.
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  Speaker 2: Dollars. And while the U.S.
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  Speaker 3: Government has attempted to sanction these actors, again, they're privately
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  Speaker 3: held by small companies that don't have access to public markets.
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  Speaker 3: And so there's no real means by which the U.S.
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  Speaker 3: government can sanction those companies without China participating, which they
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  Speaker 3: refuse to. 90% of the Iranian oil goes to their
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  Speaker 3: It's been disrupted because you can't get the oil easily
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  Speaker 3: out of Iran right now, but the Chinese have effectively
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  Speaker 3: said they're not going to stop doing any of that.
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  Speaker 3: And so, again, the question in my mind, which we
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  Speaker 3: did not get an answer to yesterday, and if anything,
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  Speaker 3: I think we got an indication that Besant and the
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  Speaker 3: White House may not be willing to go the furthest and,
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  Speaker 3: you know, really on a economic D-Day type of event
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  Speaker 3: against Iran. The only way to do so is by
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  Speaker 3: punishing China.
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  Speaker 5: Right.
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  Speaker 3: And so that is the question. Are we willing to
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  Speaker 3: go back to where we were in April of last
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  Speaker 3: year when the Chinese, you know, threw up their own
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  Speaker 3: tariff barriers and more critically important, importantly, cut off access
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  Speaker 3: to key things that the U.S.
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  Speaker 2: Manufacturing industry. world relies upon. Exactly.
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  Speaker 4: The rarest minerals were something that probably weren't at many
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  Speaker 4: of the top of our minds back last April, but
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  Speaker 4: we learned very quickly how critical they are.
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  Speaker 2: And particularly..
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  Speaker 4: That would be if this is all, multiple ifs are
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  Speaker 4: in this scenario here, but this is if the U.S.
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  Speaker 4: punishes China and if China uses the same playbook again
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  Speaker 4: as to curtailing the exports of these rare earth minerals,
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  Speaker 4: this would come at a critical juncture where the U.S.
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  Speaker 4: economy is largely firing quite well because of this expansionary
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  Speaker 4: build-out in the AI infrastructure trade that is from a
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  Speaker 4: GDP perspective, rivals one of the greatest economic expansions in U.S.
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  Speaker 4: history in terms of its size and scale. And some
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  Speaker 4: of these rare earth minerals are critical in that process.
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  Speaker 4: So this is why it is a difficult dance to undergo.
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  Speaker 4: You also sit a month away from another visit from
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  Speaker 4: China to the U.S. in Washington. We have been coming
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  Speaker 4: close to the expiration of a one-year truce that was
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  Speaker 4: established last year between the China and U.S., kind of
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  Speaker 4: taking a backseat on this idea of going after one another.
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  Speaker 4: It was under the impression by many that this truce
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  Speaker 4: would be extended ahead of this meeting here. So that
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  Speaker 4: is what is at stake. You risk running afoul of
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  Speaker 4: this truce that's been in place for almost a year,
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  Speaker 4: 10 months or so now. It comes at a time
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  Speaker 4: where inflation is running quite hot and a lot of
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  Speaker 4: the exports that we need from China are quite critical.
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  Speaker 4: So you can talk a big game, but you've always
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  Speaker 4: had to judge this war by actions. And judging on
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  Speaker 4: these actions, again, things can change very quickly. It's more
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  Speaker 4: of a larder bark than actual bite.
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  Speaker 3: The response, by the way, from Chinese foreign ministry, which
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  Speaker 3: responded on Tuesday in response to The announcement by Besson, quote,
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  Speaker 3: China will take all necessary measures to firmly safeguard its
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  Speaker 3: rights and interests. China has made clear on many occasions
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  Speaker 3: its firm opposition to illicit unilateral sanctions that have no
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  Speaker 3: basis in international law or the authorization of the UN
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  Speaker 3: Security Council. The pressing task is to facilitate de-escalation of
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  Speaker 3: the situation and return to dialogue and negotiation as soon
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  Speaker 3: as possible. Again, Again, all of this stuff can be
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  Speaker 3: open to interpretation. My personal interpretation, the U.S. wants to
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  Speaker 3: make a big point of pivoting from military action in
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  Speaker 3: Iran towards economic action in Iran, and China, the literal
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  Speaker 3: moment they could respond to that, stood up and said, yeah,
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  Speaker 3: we're not doing that. And if you, again, this just
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  Speaker 3: has to do with the composition of China's economy.
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  Speaker 2: They rely on, sorry, Iran's economy.
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  Speaker 3: They rely on China for the economic support that they
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  Speaker 3: receive for being able to run their economy. And China
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  Speaker 3: basically just told the U.S. to pound sand as far
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  Speaker 3: as I can tell.
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  Speaker 4: If China's not going to play ball, then the efficacy
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  Speaker 4: of these financial sanctions will be Null and void. And
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  Speaker 4: so that leaves you with saying, okay, what next.
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  Speaker 2: If you're not going to take military action?
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  Speaker 3: Oil markets today, you've got West Texas crude off just
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  Speaker 3: about 3% today. One read would be that, hey, if
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  Speaker 3: we're shifting to economic pressure on Iran, then that might
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  Speaker 3: ease the fears of renewed hostilities there. Another read might be, hey,
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  Speaker 3: we had some concerns that this could be a real
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  Speaker 3: sanctions regime that was announced that could drive up oil prices.
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  Speaker 3: And instead, we got a bunch of bluster without much action.
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  Speaker 3: So take your read the way you want. I'll welcome
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  Speaker 3: lower oil prices, no doubt. But we will have to
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  Speaker 3: see in the coming weeks just how much pressure Treasury
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  Speaker 3: and the White House are willing to exert on those
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  Speaker 3: trading partners of Iran.
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  Speaker 2: Let's take a quick break. When we come back, It's
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  Speaker 2: been a busy few weeks for the Treasury.
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  Speaker 3: I want to talk a little bit about their actions
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  Speaker 3: in interest rate markets, what they're doing, why they might
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  Speaker 3: be doing it, and will it have the intended effect.
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  Speaker 2: That's all next on The Financial Exchange.
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  Speaker 3: So last week, the Treasury led by Scott Besant announced
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  Speaker 3: that they were going to be doing some maneuvering in
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  Speaker 3: the Treasury market. And we've talked about this now at
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  Speaker 3: length because it's set up a really interesting dynamic between
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  Speaker 3: Treasury versus the Fed. But I think just some plain
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  Speaker 3: explanation right now of what actually happens here, how it
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  Speaker 3: hypothetically works, and then we can get into maybe the
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  Speaker 3: why it's happening too. But the Treasury Secretary, the Treasury
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  Speaker 3: itself is the bank account and bill payer for the
• 12:54
  Speaker 3: United States government. So they manage the not literal bank account,
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  Speaker 3: but the figurative bank account where income taxes, all sorts
• 13:02
  Speaker 3: of taxes get paid.
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  Speaker 2: Into at the federal level. And then they have all
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  Speaker 2: sorts of bills.
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  Speaker 3: To pay from social security to defense to every government
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  Speaker 3: program that's out there. You may be aware of this,
• 13:15
  Speaker 3: but we actually do not have enough tax revenue coming
• 13:18
  Speaker 3: in to pay all those bills. That's kind of what
• 13:20
  Speaker 3: we talk about with the growing deficit. It's been a
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  Speaker 3: 6% of GDP deficit, which has been about the same
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  Speaker 3: since the Biden era and is the largest deficit we
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  Speaker 3: have ever seen from percentage of GDP outside of wartime
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  Speaker 3: and recession. Massive, massive numbers that we're talking about here.
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  Speaker 3: And so in order to make up that difference, the
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  Speaker 3: Treasury cannot print dollars. That's not what they do. Instead,
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  Speaker 3: they issue debt.
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  Speaker 2: Right. And so They have regular auctions for this.
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  Speaker 3: Somebody might have seen that they mentioned that the next
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  Speaker 3: action audit might be until September. That's because that's the
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  Speaker 3: next regularly scheduled auction. And they can choose at Treasury
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  Speaker 3: in what denominations of bonds to issue. They can go
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  Speaker 3: mostly 30 years. They can go mostly five years. And
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  Speaker 3: just plain old supply and demand here, if you increase
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  Speaker 3: the supply of a whole bunch of bonds, without any
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  Speaker 3: change in demand, then you have effects on price, which
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  Speaker 3: then affects the yield ultimately. And so what Besson and
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  Speaker 3: Treasury are talking about doing is issuing less of the
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  Speaker 3: 30-year or actually physically buying some of that 30-year debt
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  Speaker 3: using that quote-unquote bank account that they have with billions
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  Speaker 3: of dollars in it, hundreds of billions.
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  Speaker 2: Of dollars in it.
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  Speaker 3: Issuing more of the shorter term debt if they would
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  Speaker 3: need to, if they're willing to spend down that cash,
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  Speaker 3: or if they want to issue more on the shorter
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  Speaker 3: end of the curve, they could do so. And that's
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  Speaker 3: the technicalities of how that actually works. And fundamentally, if
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  Speaker 3: you think about it for a moment, excuse me, if
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  Speaker 3: you are the treasury and you're throwing a bunch of
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  Speaker 3: firepower behind buying up 30-year bonds, you are likely to
• 15:14
  Speaker 3: drive up the price and down the yield on those bonds. Importantly,
• 15:19
  Speaker 3: things like mortgage rates and corporate bond issuance are usually
• 15:23
  Speaker 3: tied to what is that bond paying at the treasury level.
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  Speaker 3: It's not like they're going to pay the same rate,
• 15:29
  Speaker 3: but if you are Microsoft issuing a bunch of debt,
• 15:32
  Speaker 3: investors are going to look at that and say, okay, well,
• 15:34
  Speaker 3: I could get a U.S. government bond for XYZ percentage,
• 15:38
  Speaker 3: all right, I'm going to put a little multiple on
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  Speaker 3: this and Microsoft, you're going to have to pay a
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  Speaker 3: little bit more.
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  Speaker 2: Yeah.
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  Speaker 4: Important to note on the mortgage market, because I think
• 15:45
  Speaker 4: everyone listener-wise is going to understand this, where when we
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  Speaker 4: say 30-year fixed mortgage rates are running at 6.75 today
• 15:53
  Speaker 4: on average, the US 10-year treasury sits at 4.65 today.
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  Speaker 4: That spread, the 4.65 and the 6.75, that's what a
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  Speaker 4: bank is going to make basically. I mean, they all
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  Speaker 4: do it differently. in terms of what they're lending the
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  Speaker 4: money at to you versus what they could get on
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  Speaker 4: this simple, like Mike was saying, a U.S. 10-year treasury.
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  Speaker 4: The reason why this is so much in focus and
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  Speaker 4: it bears us giving this overview is because interest rates
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  Speaker 4: get talked about a lot, but on the Federal Reserve side,
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  Speaker 4: and those are on the shorter end of the curve.
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  Speaker 4: So Mike and I have just been talking about 10-year treasury,
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  Speaker 4: 30-year treasury. Those are years of maturity, and on the
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  Speaker 4: much longer end of things. The shorter end is what
• 16:36
  Speaker 4: we talk about, the Federal Reserve. They have much more
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  Speaker 4: of an impact, what the Federal Reserve does, on things
• 16:41
  Speaker 4: like money markets, CDs, variable lines of debt, like home
• 16:45
  Speaker 4: equity lines of credit. And really, there is a just
• 16:50
  Speaker 4: general sort of acknowledged premise that the great thing about
• 16:53
  Speaker 4: the U.S. 10-year Treasury is that it is very hard
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  Speaker 4: to influence that market is the biggest and most liquid
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  Speaker 4: market in the world. There's $ 30 trillion of treasuries that
• 17:04
  Speaker 4: are out there in the market and about a trillion
• 17:06
  Speaker 4: of those trade on a daily basis. So when they
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  Speaker 4: talk about the increasing these buybacks, even though they're more
• 17:13
  Speaker 4: like swaps are basically like Mike said, sort of curtailing
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  Speaker 4: some of the supply on certain ends of the treasury
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  Speaker 4: maturity scale, it's throwing a stone into a very big ocean.
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  Speaker 4: And the ripple effects can be, you can argue, yeah,
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  Speaker 4: you can argue how much of a ripple impact it
• 17:33
  Speaker 4: can make. But what's been really the benefit of this
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  Speaker 4: structure that the U.S. financial system has had for a
• 17:39
  Speaker 4: long period of time is that it's very hard to
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  Speaker 4: influence that 10-year treasury. It is dictated by market forces.
• 17:45
  Speaker 4: And if you look back to what we saw with
• 17:47
  Speaker 4: the tariffs back in, was it 24 or 25 at Elblur's? 25,
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  Speaker 4: April of last year, the bond market was really the
• 17:55
  Speaker 4: white knight that came in, and its movements really put
• 18:00
  Speaker 4: an end to the severity of the initial tariffs that
• 18:03
  Speaker 4: were announced.
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  Speaker 3: So Stanley Druckenmiller has a piece in the Wall Street
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  Speaker 3: Journal today about all of this, and here's his point
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  Speaker 3: that he made over six pages that I'll make in
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  Speaker 3: one or two.
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  Speaker 2: Not pages, seconds. His point is very simple.
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  Speaker 3: The Treasury does have a history of interfering in this market,
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  Speaker 3: especially when things aren't going well.
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  Speaker 2: If there's a.
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  Speaker 3: Failed auction, if there's forced unwinds on the part of
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  Speaker 3: the Treasury auctions, then Treasury should step in and make
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  Speaker 3: sure it's really a fluid market because it is a
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  Speaker 3: crucially important market.
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  Speaker 2: None of that was happening here. Auctions were happening.
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  Speaker 3: Unemployment's at full employment, inflation's running hot. His point is
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  Speaker 3: you are interfering at a time when seemingly the auction
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  Speaker 3: for treasuries is going just fine and the market's trying
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  Speaker 3: to tell you something and you don't like that message, so.
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  Speaker 2: You're deciding to bring down interest rates.
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  Speaker 3: Well within your purview to do so, but again, I
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  Speaker 3: guess the question would be if we're going to do
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  Speaker 3: this every time there's an election in the fall, what
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  Speaker 3: does that do to the, you know, To the full
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  Speaker 3: faith and credit. And, you know, is there anything that
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  Speaker 3: is going to prevent the next administration from doing the
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  Speaker 3: same thing?
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  Speaker 2: Hey, election around the corner. Let's do what we can
• 19:21
  Speaker 2: to bring down mortgage rates. Quick break. Wall Street Watch
• 19:24
  Speaker 2: is next.
• 19:29
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:32
  Speaker 1: TFE Show. Breaking business news is always first. Right here
• 19:36
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
• 19:41
  Speaker 1: Street Watch. Tracking the stocks, the data, and the headlines
• 19:45
  Speaker 1: driving markets so far today. Right here on the Financial
• 19:48
  Speaker 1: Exchange Radio Network.
• 19:49
  Speaker 5: Markets are up modestly higher as traders are seemingly shortening
• 19:54
  Speaker 5: off geopolitical tensions where oil is retreating. Wall Street's also
• 19:58
  Speaker 5: ready for NVIDIA's anticipated earnings report tomorrow afternoon. And now
• 20:03
  Speaker 5: the Dow is edging 22 points higher. S & P
• 20:06
  Speaker 5: 500 up over a tenth of a percent or 12
• 20:09
  Speaker 5: points higher. NASDAQ up over four tenths of one percent
• 20:13
  Speaker 5: or 112 points higher. Russell 2000 up about a quarter percent.
• 20:17
  Speaker 5: Ten-year Treasury yield is down five basis points at 4.65 percent.
• 20:21
  Speaker 5: And oil down nearly three percent lower, trading at $ 82
• 20:26
  Speaker 5: a barrel. Crypto-based stocks, including Strategy, Coinbase and Robinhood, We're
• 20:31
  Speaker 5: all seeing gains on the day as Bitcoin extended its
• 20:34
  Speaker 5: rally to.
• 20:34
  Speaker 2: 80, 000.
• 20:34
  Speaker 5: Those stocks are up anywhere between 2% and 4%. Meanwhile,
• 20:41
  Speaker 5: shares in Dick's Sporting Goods are tanking 25% after the
• 20:46
  Speaker 5: retailer missed second quarter earnings expectations amid what it called
• 20:50
  Speaker 5: a challenging environment. The retailer said Foot Locker was largely
• 20:55
  Speaker 5: impacted by those conditions and lowered its comparable sales outlook. Elsewhere,
• 21:00
  Speaker 5: Raymond James upgraded AMD to strong buy from outperform with
• 21:04
  Speaker 5: a new price target implying a 40% upside from yesterday's close.
• 21:08
  Speaker 5: AMD shares are up by about 3% today. And Intuit
• 21:13
  Speaker 5: will report second quarter earnings after today's closing bell. I'm
• 21:19
  Speaker 5: Tucker Sylvan.
• 21:19
  Speaker 1: That is Wall Street Watch.
• 21:22
  Speaker 2: I'll tell you, I really like Dick's Sporting Goods. I
• 21:26
  Speaker 2: don't know why they bought Footlogger.
• 21:29
  Speaker 5: It seems like it's weighing on their business.
• 21:31
  Speaker 2: Pretty badly right now. I don't know.
• 21:33
  Speaker 3: Granted, maybe I'm not the right demo, but the shoe
• 21:37
  Speaker 3: business generally and, yeah, I don't know. It just doesn't
• 21:43
  Speaker 3: seem like it was a good fit, but we will
• 21:45
  Speaker 3: see how it develops. NVIDIA has become a banker to
• 21:49
  Speaker 3: the AI boom, putting it on dangerous ground. What they're
• 21:52
  Speaker 3: talking about here is all of the maneuvering NVIDIA has
• 21:56
  Speaker 3: made over the last, few years, the last two years especially,
• 21:59
  Speaker 3: to backstop and make it so their customers are in
• 22:04
  Speaker 3: a better financial position to buy more of their stuff.
• 22:07
  Speaker 3: It leads me to a question, Paul, that I've been
• 22:09
  Speaker 3: getting more frequently from folks, which is just how exposed
• 22:14
  Speaker 3: am I personally, you know, from that person's perspective, or
• 22:18
  Speaker 3: how exposed is the U.S. stock market to the AI
• 22:21
  Speaker 3: trade It's ultimately an impossible question to answer because you
• 22:25
  Speaker 3: can define that in any number of different ways. You
• 22:29
  Speaker 3: could say, well, pretty much the entire tech sector other
• 22:32
  Speaker 3: than Apple plus Google and Amazon and Facebook, which are
• 22:38
  Speaker 3: not in the tech sector, add them back in and
• 22:40
  Speaker 3: there's your AI exposure. You could say, But yeah, look
• 22:46
  Speaker 3: at all those utility companies and how much money they're
• 22:48
  Speaker 3: making because of the presumed higher electricity costs. And what
• 22:52
  Speaker 3: about real estate companies that might own the real estate
• 22:54
  Speaker 3: that's being bought up?
• 22:56
  Speaker 4: Caterpillar and its earnings come from data center build-outs, engineering
• 23:00
  Speaker 4: firms that you talk to, similar sorts of things, HVAC companies.
• 23:03
  Speaker 4: It has such a large..
• 23:05
  Speaker 2: What about the banks that are benefiting from the cash
• 23:08
  Speaker 2: raises and bond sales and IPOs?
• 23:12
  Speaker 1: Yeah.
• 23:12
  Speaker 3: I think most of the time when people are thinking
• 23:14
  Speaker 3: about it, they are taking that first definition, right?
• 23:16
  Speaker 2: Like what's the first order stuff? It's largely the U.S.
• 23:20
  Speaker 3: Technology sector plus a few companies that are not in there.
• 23:23
  Speaker 3: People confuse this sometimes, but Amazon, according to S &
• 23:26
  Speaker 3: P Global, not a tech company. They're a consumer discretionary company. Alphabet,
• 23:32
  Speaker 3: which is Google's parent company, is not a tech company.
• 23:35
  Speaker 3: They're a communication services.
• 23:36
  Speaker 2: Same with Facebook.
• 23:37
  Speaker 3: Meta, a Facebook parent company as well. You do that math,
• 23:41
  Speaker 3: it's probably about 40% of the S & P 500,
• 23:43
  Speaker 3: which is a big chunk. Increasingly, though, stories like this,
• 23:48
  Speaker 3: why this matters is because increasingly not only is the
• 23:53
  Speaker 3: entire U.S. economy and stock market seemingly tied up in
• 23:59
  Speaker 3: the boom from AI, which, to be frank, has been
• 24:03
  Speaker 3: pretty good. It's tough to look at that as a disappointment.
• 24:07
  Speaker 3: But people are worried about the risk that that could
• 24:11
  Speaker 3: bring to the markets in the future. Increasingly, just within
• 24:15
  Speaker 3: the AI sector, though, these companies are inexorably tying their
• 24:19
  Speaker 3: success or failure to other companies. So the example that's
• 24:23
  Speaker 3: been given here with NVIDIA, they have set up this,
• 24:28
  Speaker 3: I don't know what to call it, like a funding
• 24:31
  Speaker 3: mechanism by which they will go in.
• 24:35
  Speaker 2: Let's say you're a ChatGPT.
• 24:36
  Speaker 3: Is parent company, OpenAI, and you want to buy a
• 24:40
  Speaker 3: bunch of stuff to build out more data centers and
• 24:43
  Speaker 3: all the compute power that you need to run ChatGPT.
• 24:48
  Speaker 3: You might decide, since you don't have any profits, to
• 24:51
  Speaker 3: issue a bunch of debt.
• 24:52
  Speaker 2: I don't know how else you would get the money
• 24:54
  Speaker 2: to do it. And, you know, privately held company without
• 24:58
  Speaker 2: much history. Raise more equity and dilute shareholders. Yeah, you
• 25:01
  Speaker 2: could do that too.
• 25:03
  Speaker 3: But you might look at that market and find that, okay,
• 25:05
  Speaker 3: it's going to cost us whatever it is to borrow.
• 25:09
  Speaker 2: To borrow money to do all this.
• 25:11
  Speaker 4: And the problem to add on to this is not
• 25:12
  Speaker 4: only are they borrowing at 9%, they're borrowing a lot
• 25:15
  Speaker 4: of money.
• 25:15
  Speaker 2: We're talking hundreds of billions of dollars. By the way,
• 25:17
  Speaker 2: I have no idea. I made up 9%. Right, right, right.
• 25:19
  Speaker 3: No clue what the actual interest rate is. NVIDIA has said, well,
• 25:23
  Speaker 3: if they have to do that, they're not going to
• 25:25
  Speaker 3: be able to buy as many chips. So what we
• 25:27
  Speaker 3: are going to do is we're going to step in
• 25:29
  Speaker 3: and say, if ChatGPT OpenAI defaults, we got your back.
• 25:35
  Speaker 3: We're going to back this debt and guarantee it with
• 25:37
  Speaker 3: our own balance sheet or some portion of it. It
• 25:40
  Speaker 3: might not be all of it. And that, by its
• 25:42
  Speaker 3: very nature, is going to.
• 25:43
  Speaker 2: Lower the borrowing cost to OpenAI.
• 25:47
  Speaker 3: What you've just done there is pretty much tied together
• 25:51
  Speaker 3: Nvidia's balance sheet to OpenAI's. There are dozens of these
• 25:57
  Speaker 3: types of deals out there. They are all over the place.
• 26:01
  Speaker 3: They are tying all these companies together. And if it
• 26:05
  Speaker 3: all goes as well as they are predicting, then no sweat.
• 26:09
  Speaker 3: You know, OpenAI doesn't go bust, then no real problem here.
• 26:15
  Speaker 3: More and more the concern would be, okay, what happens
• 26:17
  Speaker 3: to some of these players that do go bust?
• 26:19
  Speaker 2: Who's tied together with them?
• 26:21
  Speaker 3: Do we really understand all of these complex linkings that
• 26:24
  Speaker 3: are in this industry right now? Or are we all
• 26:27
  Speaker 3: just putting on a smile because everything's going well right now?
• 26:30
  Speaker 4: Yeah, it's a great issue to mention and kind of
• 26:34
  Speaker 4: get an understanding on because one may be asking, well,
• 26:38
  Speaker 4: Mike and Paul, why is NVIDIA doing this? Why are
• 26:41
  Speaker 4: they backstopping OpenAI? NVIDIA is printing money. and they have
• 26:46
  Speaker 4: a very successful business. Well, a lot of their revenue
• 26:50
  Speaker 4: is concentrated on just several companies that are the biggest
• 26:53
  Speaker 4: buyers of these chips, the hyperscalers that we talk about
• 26:56
  Speaker 4: so frequently. They are the biggest buyers of NVIDIA's chips.
• 27:01
  Speaker 4: NVIDIA wants to ensure that they have an ecosystem where
• 27:04
  Speaker 4: they're not relying just on customer concentration on four or
• 27:08
  Speaker 4: five different companies, because that can change very quickly if
• 27:12
  Speaker 4: any of these companies of huge size and scale cut
• 27:16
  Speaker 4: back on some of their spending, that has a direct
• 27:18
  Speaker 4: impact to NVIDIA. So what they're trying to do is
• 27:21
  Speaker 4: utilize this balance sheet that they've amassed, which is tremendous
• 27:25
  Speaker 4: in terms of all the profits that they've been generating,
• 27:27
  Speaker 4: to prop up other competitors so that there are numerous
• 27:31
  Speaker 4: buyers out there that helps out NVIDIA. But to Mike's point,
• 27:36
  Speaker 4: the problem lies that when you are backstopping them or
• 27:39
  Speaker 4: acting as the financial guarantee, just think about it on
• 27:41
  Speaker 4: a very small scale If you are signing off on
• 27:45
  Speaker 4: your son or daughter's rent lease agreement as their co-signer,
• 27:51
  Speaker 4: then if your son or daughter crushes it and does
• 27:54
  Speaker 4: well on their job and continues to pay the rent,
• 27:56
  Speaker 4: no big deal. You just signed your name as the backing,
• 27:59
  Speaker 4: but that never came to fruition or never came to roost.
• 28:03
  Speaker 4: If they lose their job or if there's some sort
• 28:06
  Speaker 4: of issue that they bump into, and think about this
• 28:08
  Speaker 4: on a million-dollar billion times bigger scale of just this
• 28:12
  Speaker 4: one isolated sort of sign your name to something, then
• 28:15
  Speaker 4: it becomes really problematic. You have to step in and pay.
• 28:18
  Speaker 4: Same thing would apply here with NVIDIA is not only
• 28:21
  Speaker 4: if some of these companies were to blow up, would
• 28:24
  Speaker 4: NVIDIA lose their customer who's supposed to be buying their chips,
• 28:27
  Speaker 4: but oh, by the way, they're now on the hook
• 28:30
  Speaker 4: for some of the liabilities that these companies undertook. So
• 28:35
  Speaker 4: it's a fascinating... just trade in general, this whole AI
• 28:40
  Speaker 4: trade is just really incredible fall. The tentacles on it
• 28:43
  Speaker 4: spread out so wide. It is the fulcrum behind a
• 28:46
  Speaker 4: lot of the economic growth. But there is this risk
• 28:49
  Speaker 4: that I think the reason why you're getting those questions, Mike,
• 28:52
  Speaker 4: is that this is a tremendous build out. It has
• 28:54
  Speaker 4: had tremendous impact on the US economy in a positive
• 28:58
  Speaker 4: way at this point in time. But there can always
• 29:00
  Speaker 4: be that risk that looms out there is there a
• 29:03
  Speaker 4: mismatch of investment in CapEx versus profits? There can be
• 29:08
  Speaker 4: a delay where you spend all this money to build
• 29:10
  Speaker 4: up these data centers, but you don't get the profits
• 29:13
  Speaker 4: that come with that investment as soon as Wall Street
• 29:15
  Speaker 4: anticipates because of any numerous delays that could occur, whether
• 29:19
  Speaker 4: they be regulatory or just supply constraints. And that's what
• 29:24
  Speaker 4: makes this such a fascinating thing to continue to monitor.
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• 30:32
  Speaker 3: Equity markets faltering a bit as we head towards the
• 30:34
  Speaker 3: 11 o'clock hour. Dow barely holding on to gains. S
• 30:38
  Speaker 3: & P now up a tenth of a percent. NASDAQ
• 30:40
  Speaker 3: up four tenths of a percent. We're going to take
• 30:41
  Speaker 3: a quick break. When we come back, I want to
• 30:45
  Speaker 3: dump it. dive into a little bit on what's happening
• 30:49
  Speaker 3: in the craziest stock market.
• 30:51
  Speaker 2: In the world. We'll be talking Korea next on The
• 30:54
  Speaker 2: Financial Exchange.
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• 31:09
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• 31:43
  Speaker 3: Paul, the Korean stock market is not something that we
• 31:47
  Speaker 3: frequently talk about on the program. It is dominated by
• 31:51
  Speaker 3: just two companies that make up about half of the
• 31:54
  Speaker 3: overall index. So, you know, think about that for a moment.
• 31:57
  Speaker 3: We bemoan the concentration risk on the S & P 500,
• 32:00
  Speaker 3: where I think the top 10 companies make up, what.
• 32:03
  Speaker 2: Is it, 40, 50 percent? Pretty close to 40, yeah.
• 32:06
  Speaker 3: The KOSPI, which is the Korean benchmark, two companies make
• 32:09
  Speaker 3: up 50. So you have a different set of risks
• 32:12
  Speaker 3: when you're talking about that, and they're pretty much all
• 32:15
  Speaker 3: AI chipmaker stocks. But this summer, back in June and July,
• 32:21
  Speaker 3: the KOSPI, that Korean index, plummeted around 40% over six weeks, uh,
• 32:27
  Speaker 3: in June and July. Since that bottom, it is now
• 32:30
  Speaker 3: rebounded by about 20%. And I don't, do you remember
• 32:35
  Speaker 3: the stat that, uh, I think Chuck brought it up.
• 32:38
  Speaker 3: Weren't there like a few million margin calls in the
• 32:41
  Speaker 3: middle of that June, July fall? If I recall a
• 32:44
  Speaker 3: margin call being when you've borrowed money on your portfolio
• 32:47
  Speaker 3: and then the brokerage has to call you out of
• 32:49
  Speaker 3: your loan and sell shares underneath you in order to
• 32:52
  Speaker 3: cover that loan.
• 32:53
  Speaker 2: Uh, It's been a pretty wild ride.
• 32:56
  Speaker 3: And as entertaining as it might be to theoretically talk
• 33:00
  Speaker 3: about that and talk about this roller coaster ride, on
• 33:04
  Speaker 3: the ground, it's been pretty ugly there because a lot
• 33:07
  Speaker 3: of this market is made up of individual Korean investors
• 33:10
  Speaker 3: that may or may not have known just how risky
• 33:13
  Speaker 3: they were being with their portfolios. A pretty tough lesson
• 33:17
  Speaker 3: to learn there. But The Journal interviews a teacher who
• 33:22
  Speaker 3: lost some $ 19, 000 and is in a pretty tough.
• 33:26
  Speaker 2: Spot right now.
• 33:27
  Speaker 3: And it's actually pushing some political movements around in terms
• 33:33
  Speaker 3: of holding folks accountable for what they did to deregulate
• 33:37
  Speaker 3: the Korean market. And ultimately, my take on all this
• 33:42
  Speaker 3: would be, Really tough lesson to learn. Probably ruined some
• 33:48
  Speaker 3: people's lives. And a really important lesson on, once again,
• 33:53
  Speaker 3: understanding what you're owning. Because there's nothing that would prevent
• 33:56
  Speaker 3: the average U.S. investor from doing the exact same thing
• 33:59
  Speaker 3: in their portfolio on U.S. benchmarked assets either.
• 34:04
  Speaker 4: No, you'd like to think the financial institutions behind them
• 34:07
  Speaker 4: here in the U.S. would put up some guardrails. There
• 34:11
  Speaker 4: are a lot of different measures that they'll take before
• 34:14
  Speaker 4: really sophisticated option trading is allowed, but margin is pretty
• 34:18
  Speaker 4: widely accessible on the U.S. side of things.
• 34:21
  Speaker 2: But ultimately, there has been hundreds.
• 34:24
  Speaker 4: Of years of 100 plus years of market history, like
• 34:27
  Speaker 4: the idea of leverage and it causing financial pain is
• 34:32
  Speaker 4: not new at all. So I really find it hard
• 34:35
  Speaker 4: to believe in 2026 or hard to lead too much
• 34:38
  Speaker 4: sympathy in 2026 when people are utilizing single stock leveraged
• 34:44
  Speaker 4: in exchange traded funds where they're doubling or tripling the
• 34:49
  Speaker 4: leverage on a specific bet. How you don't know going
• 34:52
  Speaker 4: into that, just because you get two times the upside
• 34:55
  Speaker 4: correspondingly typically means you get two or three times the downside.
• 34:58
  Speaker 4: I just, there should be enough resources and education out there.
• 35:03
  Speaker 2: Paul Lane doesn't care about the little man.
• 35:05
  Speaker 4: I don't, I don't, I don't on this one. You know,
• 35:08
  Speaker 4: I tried to on more like general economic issues here
• 35:12
  Speaker 4: in terms of affordability in the U S but on
• 35:15
  Speaker 4: this side of things, I just don't, there's so many
• 35:18
  Speaker 4: ways that you can tap into readily available information and
• 35:23
  Speaker 4: that you should do your due diligence on before making
• 35:25
  Speaker 4: an investment that should tell you the pros and cons
• 35:28
  Speaker 4: of this approach, um, of using leverage and margin. It just,
• 35:33
  Speaker 4: there's so many documents. There's so many cases of this
• 35:37
  Speaker 4: over history, Mike, we're really doing this again in 26. 2021,
• 35:43
  Speaker 4: this was an issue with SPACs and, you know, individual
• 35:47
  Speaker 4: trading and the meme stocks. Like, come on.
• 35:50
  Speaker 2: Yeah, I do tend to agree.
• 35:52
  Speaker 3: Um, I think the only piece of this that I
• 35:56
  Speaker 3: will just admit that politically is going to be a
• 35:59
  Speaker 3: bit of a disaster for them, the idea of the
• 36:03
  Speaker 3: single stock ETFs was only introduced to the Korean stock
• 36:06
  Speaker 3: market in May.
• 36:08
  Speaker 1: Right.
• 36:08
  Speaker 3: It took a month for this stuff to tear the
• 36:11
  Speaker 3: market down. I'm not saying that all of it was
• 36:13
  Speaker 3: to blame on single stock leveraged ETFs, but literally two
• 36:18
  Speaker 3: months after that got introduced, the stock market fell by 40%.
• 36:22
  Speaker 2: So correlation, causation, say what you will.
• 36:25
  Speaker 3: But there was some interesting stuff happening here and just
• 36:30
  Speaker 3: a really painful lesson to learn. Another piece here that
• 36:34
  Speaker 3: we'll just continue to update because once again, if you
• 36:38
  Speaker 3: missed it, a hedge fund called Situational Awareness blew up
• 36:43
  Speaker 3: and had to sell the majority of their assets to
• 36:45
  Speaker 3: another hedge fund, which is just the best little bit
• 36:49
  Speaker 3: of I don't know if it's irony, but it seems
• 36:52
  Speaker 3: like irony to me. SEC is opening or investigating exactly
• 37:00
  Speaker 3: what led up to all of this.
• 37:01
  Speaker 2: This is very common.
• 37:02
  Speaker 3: The SEC will ask questions of the banks that lent
• 37:06
  Speaker 3: the money and yada, yada, yada. What I will just
• 37:09
  Speaker 3: say about this one, I have a little bit more
• 37:11
  Speaker 3: pity for Korean investors who got washed on this thing.
• 37:14
  Speaker 3: I have Very little in the way of pity for
• 37:17
  Speaker 3: investors that lost their money to situational awareness. There does
• 37:20
  Speaker 3: not appear to be any allegations of fraud. And by
• 37:23
  Speaker 3: the way, the minimum investment to put your money into
• 37:27
  Speaker 3: this situational awareness hedge fund was $ 5 million.
• 37:32
  Speaker 2: Sorry.
• 37:33
  Speaker 3: Like, you know, if you're putting $ 5 million minimum into
• 37:35
  Speaker 3: an investment, it's on you.
• 37:37
  Speaker 2: To do your research here.
• 37:38
  Speaker 3: And, you know, when the thing jumps by 200 or
• 37:41
  Speaker 3: whatever percent at the beginning of the year, be prepared
• 37:43
  Speaker 3: for it to blow up later in the year.
• 37:46
  Speaker 2: Quick break. A lot more to cover in the second
• 37:48
  Speaker 2: hour of the Financial Exchange. We will be right back.