Transcription
Turning now to some crazy rumblings going on in the stock market, including South Korea, many chip manufacturers, our own tech companies, and perhaps here the very first glaring sign of margin gone wrong with AI stocks and a potential bubble collapse. Let's put this up here on the screen.
Leopold, I'm not going to try and say his last name. I think it's going to say Ashenburgers. His situational awareness hedge fund is now quote seeking to raise capital after an AI route. The reason why this is important is that this C hedge fund, 20 billion dollar hedge fund, was founded by a former Open AI employee who now needs quote fresh capital after heavy losses in recent AI stock selloffs. The fund had previously posted a 439% net return for the year through the end of June, which means now that it is July 30th, he is now lost nearly the entirety of the fund was hurt by a July downturn leverage or amplified by its use of leverage to man magnify returns. Its hardest hit large positions include Oracle and AMD which are each down 20% for the month along with the smaller uh bets like Nebius, Sharon AI, Bloom Energy and SanDisk. For context, the NASDAQ 100 has down 10% in July and South Korea's Cosby has lost roughly a third of its valued. He says now that the fund was not immune to the turbulence but framed the sell-off as creating attractive buying opportunities inviting investors now to add cash so that he continue the strategy and he says the anthropic IPO is a potential catalyst for his recovery.
So why does that matter? This is the first person to actually get wiped out at least so far if nobody gives him any more money on these leveraged bets on AI. The initial downturn is indicative of a dramatically changing geopolitical situation, not just to mention a financial market situation. Let's start with South Korea. We'll put C3 up here on the screen. South Korea has now had a stock market at a three-month low with a massive AI sell-off. Samsung and SKH Highex have fell by more than 10%. Quote, renewed fears over AI spending and Chinese competition. Investor investors were ditching their chip stocks on Tuesday. rising concern about the huge amount of borrowing from AI companies and South Korean semiconductor companies specifically fell by more than 10 to 10% with their entire index down by 11.5% back to midappril but the stock selloff itself is more indicative of what is going on beneath the behind the scenes in terms of the rising problems with the amount of debt that these AI companies have the amount that they have to invest in these chips and China this is actually the big one that a lot of the western press just doesn't want to deal with.
And that's and I'll get your take here, Crystal. We'll put C4 on the screen. Chinese chip champion CXMT whenever it debuted came out with 466% pop on the Chinese stock exchange because of their ability basically to prove not only with their AI with their AI fever gripping their own stock market, but it was about domestic chip manufacturer, which has always been their biggest problem. America relies both on Taiwan and these South Korean companies to boost our chip manufacturing basically the western alliance kind of if you will. The dream for the Chinese has been to disagregate themselves from reliance on Nvidia chip design and Taiwan as well. And this is one of the first times that they have the ability to build out their own infrastructure. A lot of this is very reductive and like it's very complicated etc. But the bottom line is like the South Korean and Asian markets, Western markets do, Western Allied markets not doing very well. American companies like Meta as of this morning posting a 10% loss. You have significant losses by this hedge fund, Chinese chip manufacturer going up and a lot of it, you know, portends very badly for any potential bubble conversation.
>> The question is are these canaries in the coal mine? And it looks very much like it because the South Korean stock market which has collapsed and the taking down I mean tons retail investors are just like utterly screwed because of course they saw the stock market going crazy. They got in on the action many of them around its peak then it's been nothing but destruction since then. In any case the South Korean stock market is heavily dependent on these chip stocks. Like they they it's like half of the stock market is represented in these chip stocks. So when they take a tumble, the whole thing goes down and it's a disaster. So is that a canary in the coal mine? And then this guy with his hedge fund, his whole thing was, I am betting on the AI revolution. I'm betting on the need for all of this compute, all of these chips. I'm betting against software companies because I think AI is going to come in and displace them. So now with him basically saying, okay, those bets didn't work out. I may have to unwind this whole thing. Well, what do you think our entire economy is a bet on at this point? It's a very similar bet that our whole economy is making on the AI revolution. So, that's why these things are incredibly important to take a look at. And now in South Korea with their stock market wos, you've also because you had so many retail investors get in and so many of them buy them using debt basically on margin. Now, as those stock prices go down and they're experiencing those margin calls, then they have to sell more and more and more and that [clears throat] creates a self-fulfilling pro prophecy.
But to Sager's point, you know, a lot of this does come back to China. They have made this extraordinary push um partly because of our own ex chips export controls that forced them into the direction of okay, we're going to have to be self-reliant. Now, they haven't caught up, but they're getting a lot closer. And I think no one would bet against them. I mean, just look she surely at the human capital, the number of engineers that they graduate versus us. Like, it's not even comparable. And they have a nationwide strategic emphasis as part of their 5-year plan on this sector. They are going to continue to develop. They are going to continue to get better. And then when you look at the way that their AI models have basically nearly or you know have matched the frontier models here, they do it requiring a lot less um compute. It's much more efficient. Uh kind of destroying and undermining the entire business model that OpenAI, Anthropic, and our other, you know, big AI development companies here have pursued. Yeah, this is the this is the ground shifting. These are the canaries in the coal mine. This is the quick sand that this whole thing could could sink into ultimately.
>> Let's put C5 up here on the screen to bolster that point. This is about chip lithography. So again, I'm not an expert. I'm doing my best. This is all very complicated but this was one of the major bottlenecks for China. So what they write is that China has now potentially made a significant breakthrough in chipmaking equipment. The information a stateback firm in Shanghai has now figured out how to build immersion deep ultraviolet known as DUV lithography tools which is capable of manufacturing the most widely used chips. This is technology which was long been dominated by the Netherlands ASML which means that China is now progressing faster than outsiders expected in a push for semiconductor self-efficiency. If you compare this DUV chipmaking advance with China to the CXMT uh stock that I talked about very previously. You pair those two things together. What you see is that you basically have a situation where you have chip manufacturer which is now becoming one of the bull areas of Chinese investment and it also means that what they're creating is the ability to compete both with the United States with South Korea all at a time of immense speculation from the United States and or sorry immense speculation in the United States and a potential bubble burst which could rip a lot of the capital out of this. That is the big picture problem as to why I think all of this matters.
And generally, I mean, you can see here, let's put C1 for example up on the screen. I mean, SanDisk got absolutely wiped out uh in terms of a 30% loss uh over the week. I think it's down, yeah, 54% in July. The S&P 500's biggest loser. They continue to look at a lot of these different stocks. And you know, just to be fair, I Let's see. Stocks are a little bit up this morning. So, it's not really about, you know, our own S&P 500. We're looking specifically at the technology sector and these chip manufacturers, but you had Meta that also posted a significant loss. Let's put uh C7, please, up on the screen. The stuff really matters. Their stock, I think, is down by about 10% as of this morning. All of this because of weaker than expected revenue forecast, and it took a big hit to its cash pile. So basically what they said analysts were expecting a guidance of $63 billion in revenue. The company had said that assumes foreign currency etc. But the biggest capital expenditure is that their guidance for the year to between 130 and 145 bill 145 billion from a prior range of 125 to 145 billion. Basically, what they're saying is that they are going to spend billions more dollars on capital expenditure than they previously had admitted and that their free cash flow is now down actually this quarter from what they previously had expected for a lot of these analysts aka chip or data center construction and AI investment is going up and up and up and we don't see that reflected in the revenue. They have a long-term bet which we're going to talk in a little bit that you know the open models etc and all that will come but we're still talking about hundreds of billions a year trillions you know totally if you look at all of it and if it doesn't work out all of it goes bust completely.
>> and not just if it doesn't work out because sometimes two things are conflated will the technology be transformational that's one question a totally separate question is what happens with the revenue and the economics ICS and whether the stock stock market crashes. Those two things that you could have a scenario where, you know, the models work out, it's transformational and the stock market does really well and all these companies, you know, become larger than anything that's ever existed on the planet. You could have where, you know, they it kind of sucks, but they continue to pump the stock market. You could have where both things fail and you could have a situation where it's transformational, but they bet on the wrong model. And that's the thing that increasingly looks likely to me as you know someone who's looking at this from the outside trying to read and understand as much as I can that our companies bet on this model of we're just going to churn and burn hypers scale build out all of these data centers throw as much compute as possible bring in suck in all of this investor cash endlessly and hope that the productivity gains translation replacing of human beings at their work that that is valuable enough that is all ends up being justified.
But when China comes in with cheaper, more efficient models and open-source, meaning that a company can just, you know, download that and run it themselves, they don't have to give their data to anyone else. It's cheaper. Why wouldn't you do that? That undercuts their entire business model. So even if the tech ends up being transformational, does it work out from their business model perspective? And that is what I mean you look at the data center construction across the country. So many of the jobs that are that are being created right now are like electricians and um in construction for specifically these data centers. If that goes down it's I mean it is really dire. We actually just had a GDP number come in that was weaker than expected. It was like 1% growth. Um you know and and some of that is because of government spending going down due to a variety of reasons etc. But a lot of the economy is built on this AI buildown. That's where all of the money is going. And so when you see these canaries in the coal mine of this guy that bet everything on exactly that direction on the South Korean stock market, which is all bet on the the chips and the continued increased demand for chips, you have to pay attention to that.
>> Yeah. Exactly. So we'll continue to monitor uh how it's all going. But and and look, you know, to again be fair, many tech companies, their stock is up as well. So it's not like this is exactly an entire industrywide phenomenon, but generally like with stock with South Korea, this is their worst crash since 97. It's worse than 97. It's worse than '08. Like this is one of the greatest stock market calamities in their history. I don't think that we can ignore that, especially on a country whose you know whole econ at least market was bet on these chip stocks. We are not as exposed, but we are exposed broadly to all of the AI sector for all of our growth. Oh, and not to mention gas is $4 a gallon. So, grocery prices are up like 50%. Consumer spending is very high for the top 10%, but for most people, it continues to crunch. So, in terms of our real production, it's not looking that great. All right, let's get to AI. Hey, if you like that video, hit the like button or leave a comment below. It really helps get the show to more people.
>> And if you'd like to get the full show, ad free and in your inbox every morning, you can sign up at breakingpoints.com.
>> That's right. Get the full show. Help support the future of independent media at breakingpoints.com.