AI Terminator Fears Grow & Rates Breach 4.9% | The Weekly Wrap

0:00This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check responses set up require compatibility and availability varies 18 plus. Do you hear that? That's not sound right. That means that summer is officially here. It means that grown adults just sprint into the street for a frozen dessert shaped like a cartoon. But this summer, Mint Mobile has a better treat. Every plan, including unlimited, is $15 a month. And unlike Ice Cream, it won't drip down your wrist or look nothing like the picture. Does anyone have any cash? Give it a try at minmoble.com slash switch. A front payment of $45 for three months, $90 for six months, or $180 for 12-planned plan required, $15 per month equivalent to taxes and fees extra. New customer offer for initial plan term only greater than 50 gigabytes, me slow and network is busy. The Trump administration is issuing multiple and somewhat threatening statements that the Fed should not raise rates.

1:01My guess is that these threats will be ignored. The market is projecting a 60% chance that the Fed will raise rates at the September meeting. Oracle reported Thursday night. In some ways, it was a very good quarter. Macy's reported. GameStop reported when it comes to the RoboTaxi business, Elon Musk has a history of Oberpromising and underdeliver. The future of this company depends on the success of the RoboTaxi. The former and frantic researcher warned that artificial intelligence has a realistic chance of causing human extinction by the end of the decade. So I think there's some other shoe that could drop here. So let's get started. Hi, this is Steve Eisman and welcome to the weekly wrap. This is for the week ending Friday, September 11, but recorded Thursday night, September 10. This last Wednesday on our premium, sub-stack subscription service we posted a great interview with Ed Zittron, creator of the newsletter, Where's Your Ed Act?

2:06The hyperscalers are starting to expect real money from AI entirely from anthropic and open AI spending money on compute. And that's why they're still spending all the money on catpacks they're doing it so they can capture revenue from two companies that they themselves have to keep inflating. This is a catastrophe. Ed is a prolific writer and critic of the entire AI ecosystem. Premium chat is a lively forum. And today I will reference two relevant comments about Ed Zittron and explain their significance in the AI debate and my opinion on this rapidly evolving and fascinating conversation. This coming Wednesday, September 16, we will drop on premium part one of a two part master class on how to analyze banks. I'm providing you with all the tools to understand how banks work and how to think about large cap mid cap and small cap banks and the investment banks as well. Part two will drop two weeks later. This is a shortened post-labor day week and it was mostly a slow week with some earnings

3:08that I will comment on. And on this week's wrap, we will discuss one, the war in Iran and the 10 year bond, what is Scott Besson really after with respect to buying treasuries? The Terminator question, will AI destroy us all? Thoughts on Tesla's Robotaxi announcement? My thoughts on the feedback from the Ed Zittron interview? Thoughts on open AI cutting price? Qualcomm and Amazon make an arrangement? Oracle reports? Build Pulti goes after FICO again. Macies and GameStop report? And one mail bag question about gold versus 5% treasuries. So let's get started. The war in Iran continues with Iran bombing the U.S. and the U.S. retaliating. As a result, oil prices rose well above $100 and the 10 year yield breached 4.8% and then the 4.9% level. 4.9% is the highest level since November 2023. The equity markets, in my view, will not be able to tolerate some level of higher long-term

4:14rates. What that level is? No one really knows. Now I thought 4.5% was the Rubicon and I'll admit I was wrong. We earn higher now. So the Rubicon is that much closer but still unknowable. Regardless of the impact on the stock market, the rise in long-term rates is a negative for the real economy. This perhaps explains why last week Treasury Secretary Scott Bessent announced that the Treasury would be buying long-term treasuries in order to drive rates down. He stated initially that he was setting aside 4 billion to effectuate such purposes. The famous hedge fund manager Stanley Druckermiller wrote an opinion piece in the Wall Street Journal criticizing Bessent. Moreover since the announcement, long-term rates are higher. So many are arguing that this plan is already a failure. On Wednesday of this week, Bessent came out and upped the repurchase authority to 6 billion

5:15and the market was frankly just not impressed at all and the 10-year climbed to 4.845% from 4.80% that day which in Treasury world is a big move. Bessent needs a bigger bazooka. The irony is that the new Fed chair is a big critic of quantitative easing. QE was a Fed policy whereby the Fed went out and bought treasuries in order to drive rates lower and jumpstart the economy. Now since the GFC, the Fed has done several QEs with the last time during COVID. In my view QE did not help the economy but it did inflate asset prices in particular the stock market. It also ballooned the Fed's balance sheet which today stands at $6.7 trillion. Fed Chairman Warsh wants the Fed to get out of the QE business and he wants to gradually shrink the Fed's balance sheet. The ironic part is that just as the Fed is getting out of the QE business, treasuries

6:18stepping into its shoes. However, the 4 billion that Bessent originally allocated and now 6 billion is just not anywhere close to being able to do the job. After all, US Federal debt stands at $40 trillion. Now taking a step back, when someone who you think has a brain does something you think looks dumb, it's always best to ask, what am I missing? Bessent needs a large buyer of treasuries and it can't be the Fed or Treasury. So I think that some other shoe that could drop here but I don't know quite what it is yet. The last point on Bessent, this week Republicans hosted a midterm political convention. Nothing wrong with that. However, Treasury Secretary Bessent spoke at the event in a very partisan manner. Now what I'm about to say is I want to emphasize independent of whether you do or don't support President Trump. No Treasury Secretary has spoken at a partisan political event in literally 50 years.

7:20This is a norm that one in here too provides a Treasury Secretary with Gravitas. Given that Bessent is trying to manipulate the bond markets, he could use all the Gravitas he can get and speaking at this partisan event does not help. And one less point on the Fed. The Trump administration is issuing multiple and somewhat threatening statements that the Fed should not raise rates. My guess is that these threats will be ignored. The market is projecting a 60% chance that the Fed will raise rates at the September meeting. Now I have no idea, but I do think Warsh will do whatever he wants to do. I also want to flag one more story. Former anthropic researcher Jacob Coxen warned this week that artificial intelligence has a realistic chance of causing human extinction by the end of the decade. Count me a skeptic. There is still no evidence that AI is ever going to achieve AGI, artificial general intelligence. Gary Marcus, prior guest, still thinks it's incapable of doing so. We had for several years people insisting that AGI was about to be here tomorrow.

8:25People finally backed off on that. We really need right now is maybe not magical, infinite intelligence, but we want intelligence we can trust that does not hallucinate. Now I will be the first to admit I am no expert, but this story expresses a theme I've noticed about people in the tech world. They grew up reading a lot of science fiction and they take it very seriously. In the SpaceX perspective, if you recall, it says that one of the goals of the company is to mine asteroids. Now we have a tech researcher predicting Terminator. I've read a ton of science fiction and some of it actually does have incredible predictive power. For example, the major premise of Isaac Asimov's foundation trilogy is that it is impossible to predict the actions of one human being, but mathematics can predict the future actions of many people. He wrote the first foundation book in 1951.

9:27Incredible. This concept is the entire premise of all current loan underwriting, making a loan to one person is dangerous, making loans to many people is much more predictable. So science fiction is great, but it sometimes leads to people predicting the end of the world. I want to emphasize, this is not Stuart fails to save the universe, the new show on HBO, which is all about multiple dystopias. Life goes on. Last week, Tesla hosted a Robotaxi event, not much new emerged, and the slack was down 6% on the day of the announcement. When it comes to the Robotaxi business, Elon Musk has a history of overpromising and underdelivering. He seems to have done so again. The future of this company depends on the success of the Robotaxi. How do I know this? Well, the consensus estimate for Tesla for 2026 is $1.66, so the 2026 PE is 220 times. Auto stocks, by contrast, have very low multiples.

10:30GM's 2026 PE is 6.5 times. The only explanation for Tesla's crazy multiple is that some investors believe that Tesla's Robotaxi business will conquer the world. Now I have no skin in this game. Just count me a skeptic. A quick side note on Tesla. Earnings reached a peak in 2022 with EPS at $4.07, and EPS has gone straight down ever since. With the 2026 consensus estimate at $1.66, the 2026 EPS estimate is 59% lower than the peak, so the people who were short were right on the fundamentals. Still, the stock has done nothing for five years despite the massive decline in earnings. This shows once again how difficult it can be to short a cult stock. Hi, Steve Eisman here. You know that sinking feeling, a meeting ends, everyone's nodding in agreement, and then two days later you realize nobody actually wrote down who was doing what? Or worse, you're digging through your notes trying to piece together what actually happened.

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12:39This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check responses set up require compatibility and availability varies 18 plus. Before I dive into AI, I want to explain that our community on Substack has grown enormously. I write a note and chat in Substack almost every day and I get many comments which I learn a great deal from and I'm now going to share some of them. When I share these comments, I may jump into the middle of the comment to explain what the commentator is getting at. So here we go. The Ed Zitron interview got a lot of responses from viewers, many positive, but some negative. One viewer sent in a long email criticizing Ed's negative thesis on AI and I quote it below. Steve, I'm surprised you characterise Nvidia's strategy as circular financing.

13:44Historically, semis were roughly 45% gross margin businesses. Nvidia is now operating at close to 80%. Economically, Nvidia is extracting rent from hyperscalers and then using it to finance their emerging competitors. What the subscriber is pointing out is that Nvidia's margins are unusually high. They weren't 80% this core. I think they were 74% but still very high and it is using some of that excess profit to support the AI ecosystem with financing. I continue. Initially, those competitors were the AI labs. Increasingly, they are the Neo Clouds and the open source open weight ecosystem. Hence, the strategic logic of acquiring hugging face, which Nvidia acquired, I believe, last week. Hyperscalers hate this dynamic. They are responding by developing their own silicon, working with Broadcom, Marvell and others, but this takes time. His point here is that the hyperscalers know that they are overly dependent on Nvidia and they hate it and they are looking for alternatives. I continue.

14:45In this knife fight, you want to be the one selling the knives. Stream, semiconductor suppliers such as ASML, KLA, LAM research and applied materials, together with memory suppliers such as micron and SK hynics. They benefit regardless of whether the winner is Nvidia, a hyperscaler and AI lab or some architecture we haven't seen yet. A second order of fact is that all this competition should drive the cost of inference and models sharply lower. More prices should stimulate usage, which in turn drives greater demand for compute, memory and semiconductor manufacturing capacity. Nvidia's actions may actually accelerate the commoditization of the very economics from which it currently earns extraordinary rents. In that sense, Nvidia is a modern day Robinhood. It extracts rents from the hyperscaler aristocracy and uses some of the proceeds to arm their challenges. And then he says, I would go one step further, although this part is more debatable, I think

15:47the social consequences could ultimately be beneficial. If inexpensive, widely available AI erodes the rents earned by a class of incumbent corporate aristocrats, the resulting diffusion of capability could be strongly pro-competitive and pro-productivity. It was a very interesting comment. And I take his viewpoint very seriously. This viewer is arguing that the cost of compute could be driven sharply lower and the new companies will replace anthropic and open AI. And I'll admit this could be correct, but with one major caveat. If Ed's atron is right, the current, and I do emphasize current, AI ecosystem is dependent, almost completely dependent on the health of anthropic and open AI. Now one of them could fail before these new companies are capable of replacing the commitments of anthropic and open AI. And this could be like the dot com bubble bursting. The first generation of dot com companies failed miserably. And it was only the second generation companies like Google that went on to glory.

16:49I still believe that if open AI fails within a year, there will be a massive correction on the stock market. We shall see. Moving on, some are over and equity conference season has begun. At a Goldman Sachs Tech conference, the CFO of open AI announced that open AI had cut price on its GPT 5.6 lunar model shortly after its release in July. The CFO claimed that this created a tenfold increase in model usage. I wonder if anthropic will have to follow with its own price cut. Is this the harbinger of a price war? We shall see. There was a very interesting announcement this week from Qualcomm. Qualcomm announced a collaboration with Amazon to build custom AI chips and optical networking equipment. The deal is designed to create competition within video. As part of the deal, Qualcomm issued a warrant to Amazon, giving Amazon the right to buy 25 million Qualcomm shares at $161.26. Now since Qualcomm's stock is over 175, the warrants are in the money and are worth

17:51over $4 billion. Frankly, I'm a bit bewildered by this deal. Not by the partnership, but by the warrants. This does not appear to be another version of circular financing. When warrants are issued, no cash changes hands until later, and Qualcomm does not need any cash anyway. So why give away warrants? I addressed this question in a chat to my sub-stack community and got many great answers. I quote too. The first one. One subscriber said, quote, think of it as a strategic customer acquisition cost. Qualcomm trades equity upside to guarantee a 60 billion revenue pipeline and secure AWS as a flagship anchor customer. As a result, the company has been desperate to break out of its mobile routes. Qualcomm saw this as a gold opportunity to establish credibility in the data center market. An interesting comment. The second comment states a following, maybe it's naive, but Qualcomm is mainly known for modems. As such, their expertise and expuse is not established. Maybe Amazon's contribution of IP will be important for Qualcomm to succeed, and that would

18:56explain Amazon's asking for warrants. Oracle reported Thursday night. In some ways, it was a very good quarter. Revenue increased by an impressive 30% and non-GAP EPS increased by 30% as well. What's the difference between Oracle's GAP and non-GAP EPS? Stock-based comp. Non-GAP EPS excludes it, which is a common practice in the tech world, which I just think is wrong, but nobody cares what I think I'm stopping. On the somewhat negative side, remaining performance obligations, RPO, a form of backlog, each 664 billion, which is not that much greater than the 600 billion of the prior quarter. An Oracle remains highly dependent on OpenAI with approximately 50% of its RPO coming from OpenAI, a company that we all know has massive negative cash flow. After hours, Oracle stock was up 4%, which is okay, but the stock is way off its highs as the market continues to be concerned about Oracle's overliance on OpenAI.

19:57Moving on. Last week, Bill Pulti, the head of the FHFA, the regulator of Fannie Mae and Freddie Mac, voiced massive criticisms of FICO and the credit bureaus for price gouging. For example, he said, over the last five years, FICO raised prices by something like 1,600%. This week, Pulti was back at it, criticizing FICO and the credit bureaus again. Prior to last week, Vantage Score, the competition for FICO, was only available as a pilot program. Now, it is available to all lenders. My view, I think FICO's monopoly is going to break and break badly, and I still like this short. Macy's reported, generally no one cares about this retailer anymore at all. Its market cap is only 10 billion, but it had a good quarter, and it looks like this is now a turnaround story that is beginning to work. The company beat and raised, but what I thought was most interesting was a total same store sales increased 2.7%, which is not bad, but not great.

21:00However, its high end division, Bloomingdale's, saw a same store sales growth of 11.3%. The reason for this strength at Bloomingdale's is that Bloomingdale's benefits from the demise of sex. Despite the good quarter, however, the stock was down because it projected worse and expected earnings per share in the coming quarter. But still, the strength and same store sales comes was a pretty good sign. GameStop reported higher profits in its latest quarter, boosted by an increase in collectible sales, and raised its full year outlook. The video game re-atailer on Tuesday reported second quarter, adjusted EPS of 27 cents versus 25 cents last year. Despite the slight increase in earnings, revenue fell to $790 million versus $972 million last year. Bloomingdale's profit is now a huge increase in revenue from collectibles and video games. This was once a crazy meme stock, no longer. It's generating a profit, but EPS growth is slow and revenue growth is negative.

22:01The market kept its 9 billion. Despite its occasional volatility, the stock has done nothing in years and is down slightly this year. No one seems to really care anymore. Finally, I also received a question about gold. The subscriber asks Steve. I'm a subscriber to the Real Eyesman Playbook and wanted your take on something I've been tracking. Gold's behavior against a 10 year caught my attention. Since June 30, the 10 year has moved from 4.42 to 4.81 percent. It's now higher, obviously. Normally, I'd expect that to put real pressure on gold because you can earn nearly 5 percent owning a treasury. Instead, gold had a second run higher. End quote. Great question. Gold marches to its own music. The subscriber is correct that a higher 10 year yield makes treasuries more attractive. That is partially why higher rates are generally negative for the stock market. Why buy stocks when you can get 5 percent risk-free? Gold is different.

23:02Rightly or wrongly, investors view it as a hedge against inflation and against the debatement of fee currency. The 10 year yield has marched higher because the Warner Ron has driven oil prices higher and that creates fears of inflation. And those inflation fears drive some investors to buy gold. Owning the tried and true precious metal feels safer to many than pocketing the interest being paid by what seems to be an overstretched government. That's the argument. Now I don't own gold and I think our government is stretched but not yet overstretched. 5 percent seems like the better choice to me. This coming Monday September 14, we will post an interview with my former big short partners Vincent Daniel and Porter Collins. This is our old sandbox, right? This is the fae, this is monetary policy, this is the treasury. They're at a point where they have to try these extraordinary measures because they're out of things to do. We had a wide ranging discussion and touched on topics such as interest rates and Scott

24:03Besent, the deficit, and why it is a lot harder to short stocks these days. They also each gave a long that they like and own. The best way to support the real Isman Playbook is to subscribe to Substack through Steveisemen.com. Subscriptions are free and we appreciate your support. And that's the wrap. This podcast is for informational purposes only and does not constitute investment advice. A host and guests may hold positions in stocks discuss, opinions expressed on their own and not recommendations. Please do your own due diligence and consult the license financial advisor before making any investment decisions. Do you hear that? That's how it means that summer is officially here. It means that grown adults just sprint into the street for a frozen dessert shaped like a cartoon. But this summer, Mint Mobile has a better tree. Every plan including unlimited is $15 a month. And unlike ice cream, it won't drip down your wrist or look nothing like the picture. Does anyone have any cash?

25:04Give it a try at MintMobile.com slash switch. A front payment of $45 for three months, $90 for six months or $180 for 12 month plan required $15 a month equivalent to taxes and fees extra. New customer offer for initial plan term only greater than 50 gigabytes. Me slow and network is busy. See terms. I'm not giving up. I am selling the building. The final season of FX is the bear. Restaurant is flooded. Everything's either going to be okay. No. Or not. We are outgunned and we are outmaned but we have each other. FX is the bear. The final season. All episodes now streaming on Disney+.