Bonds Are Warning Of A Global Inflation Crisis

Ed Elson is joined by John Mowrey to break down why bond yields have been rising and what it would mean for investors if they continue to increase. Then, Alex Heath returns to unpack his interview with Sam Altman. Finally, Ed shares his thoughts on why bond investors are fed up with the Trump administration. John Mowrey is the Chief Investment Officer at NFJ Investment Group. Alex Heath is the author of the Sources newsletter and host of the Sources podcast. Subscribe to the Prof G Markets Youtube Channel Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:58Speaker 04

  Money markets. If money is evil, then that building is hell.

• 2:08Ed Elson?

  Welcome to Prop G Markets. I'm Ed Elson. It is September 3rd. Let's check in on yesterday's market vitals. The major indices rose, halting a sell off. Treasury yields remained at multi-year highs. More on that in just a moment. Brent crude's rally slowed, but it did stay above $90 per barrel. And finally, Dell shares soared 16% after posting record revenue due to AI server demand. Okay. What else is happening? Around the world, bond markets are having their worst stretch in years. Japan's 10-year yield hit 3% for the first time in three decades. Germany's is at its highest since 2011. France's is at its highest since 2008.

• 2:53Ed Elson?

  British 30-year borrowing costs are back at levels lost seen in the 1990s. And the US 30-year yields recently hit its highest level since before the financial crisis. This global sell off reflects the countless worries that investors are now forced to reckon with, including climbing energy prices and hot inflation due to the war in Iran, unsustainable levels of government debt, hawkish sentiment from the Federal Reserve, and also the enormous amounts of debt that is now being issued to fund the AI build out. As we discussed earlier this week, Secretary Scott Besant tried to bring yields down and failed. And so the big question for investors is the following. What will happen if yields keep rising?

• 3:37Ed Elson?

  Here to help answer this question, we are speaking with John Maori, Chief Investment Officer at NFJ Investment Group. John, it's great to see you again. I'll just start with kind of a broad question, which is when you look at the bond markets right now, when you look at this sell off, which has continued into the week, what do you think the bond market is really trying to tell us right now?

• 3:59Speaker 06

  Ed, great to see you. So I think there's really, you know, there's two scoreboards. There's the equity market and there's the bond market. And they both have interactions on the bond market side. There's click concern about deficits and debt. But what I would say is that, you know, the deficits and debt levels were pretty high 15 years ago as well, relative to nominal GDP across Switzerland, Japan, the US. I think the real difference today is there's been a regime shift because for so long, investors thought inflation was dead and globalization really had kind of quenched that. And today we have a shift that's going on, Ed. And I think we've moved from the cheapest being the most important to the safest.

• 4:43Speaker 06

  And that's not that it's a binary situation, but there's a continuum. And I think that as that trickles into supply chains, you know, inflation is part of kind of the new, the new normal a little bit because it's almost like we skipped the insurance premium for getting everything so cheap in years past.

• 5:04Ed Elson?

  To what extent does the war in Iran have a role to play in this new normal of higher elevated inflation? Is it that or is it multiple things at the same time?

• 5:14Speaker 06

  Well, I think the war in Iran is one key component of it. I mean, energy prices are definitely affecting so many components of the economy and it's something that touches the consumer very directly. But you know, the, the, the high oil prices is just one part of this. You know, again, I'd kind of go back to the reordering of supply chains, Ed. I mean, if you think about, you know, we used to rely heavily on China for cheap exports, cheap labor. That was basically importing labor deflation to the US. So there's a lot of things that are, that are pulling up inflation today. Oil is definitely part of that. I think the challenge for investors and for the Fed is raising rates won't necessarily fix the strata four moves.

• 5:58Speaker 06

  It doesn't necessarily fix the supply chains in China. So there's no doubt that what's going on in Iran is, is pushing inflation higher. But I think it's a bigger phenomenon that's going on when you look at bond yields across the globe.

• 6:12Ed Elson?

  We look at the prediction markets, there's now a 77% chance of a rate hike this year. We're getting increasingly hawkish sentiment from Kevin Walsh and the Federal Reserve. Is your expectation that he's going to raise rates and is the, is the plan to essentially try to get to 2%? It seems kind of crazy at this point. We've been so far from the target for so long, but are we actually going to continue to try to get to that Federal Reserve target?

• 6:41Speaker 06

  You know, it's a great question. You know, the bond markets have done a lot of tightening for the Fed. I mean, you know, you had negative rates, right? Back in COVID. Now you've got the highest rates going back to, in some cases, like in Japan since 96, as you cited. So, you know, what I would say about, you know, the Fed's decision coming up with the rates is yes, they are in a tough spot because the two-year bond yield is roughly 60 basis points ahead of the Fed funds rate. So that's a signal for them, but I think they know the complication. And that is that if they raise rates, that is going to definitely increase the cost of capital. But the cost of capital is already up. I mean, everyone knows what the mortgage rates are. Everyone knows what it costs to go, you know, buy a new car today. So you already have cost of capital higher.

• 7:25Speaker 06

  I think the real fascinating dynamic in the market is cost of capital is up and that's a headwind, but earnings resiliency and earnings growth is a tailwind. And right now, the earnings growth is beating the, the headwind, if you will, from the cost of capital. So, you know, it's plausible for sure that they could raise rates, but my expectation would be that it's going to be a tough, a tough outcome for them because I don't think that's actually going to fix the problem. And Ed, maybe if I can share one other observation, you think back to where rates were, they were negative. And I just want to make kind of a valuation comment around this. I don't think people fully appreciated what they were paying. We just went through a bond bubble bursting. Okay.

• 8:10Speaker 06

  When you have the 10-year bond yield at 50 basis points, that's like paying 200 times cash flow for that asset. So people were paying enormous multiples for bonds. And so what we've really done is normalize the bond market. Everyone thought it was going to stay that way forever, but inflation has kind of woken up and it's really rerated bond yields back to levels that are really more normal if you look at history.

• 8:38Ed Elson?

  I mean, you say that basically Kevin Walsh is trying to fix this, but he might not be able to fix it. There's not much that you can do at the Federal Reserve to fix what's happening in Iran. But Scott Besant has tried to fix it and he tried to fix it with buybacks and it didn't really work. Or maybe it did for a couple of days and then it didn't. What do you make of, of the buyback strategy as a, as a means to lower borrowing costs in America? Is it the right strategy? Is it the wrong strategy? What do you think of it?

• 9:18Speaker 06

  Treasury's job is to finance America. But there's no rulebook on where on the curve the Treasury can issue that debt. It's a really fascinating topic. How many 30-year bonds is the right number? How many 10-year? What the Treasury is effectively doing is they're saying, okay, we would rather finance more of America's debt at the short end of the curve. So it's basically like taking out an arm on America's debt. An adjustable rate mortgage, you have to refinance more versus the 30-year fixed. So it's their prerogative. They can do it. You know, I think that it's a relatively small compared to what was Operation Twist back in 2011, when the Fed stepped in and said, hey, we're going to buy bonds back

• 10:01Speaker 06

  on the long end and sell short term. So it's a relatively small move from two to four billion. When you think about the total size of the balance sheet of the US government. But it's in his prerogative to do so. He's getting criticized for it. But I guess I would just kind of throw out again, kind of a thought piece on what's the right number for 30-year bonds that the US government should hold? And whenever he decides he's going to go out and buy back those bonds, what he's effectively doing is he's buying those back and he is exchanging what was at a lower interest rate for something that's at a higher interest rate. So that could be good if rates fall, but it looks a little bit like active management to me, which is an interesting role for the Treasury to be in.

• 10:45Ed Elson?

  You mentioned earlier that the debt situation in America and kind of across the rest of the advanced world isn't that much different compared to what it was on a nominal basis or compared to GDP at least. I wonder if perhaps part of the concern for investors right now is that it seems like the longer this drags on, the clearer it becomes that our government just doesn't really care about fiscal responsibility. Like if we get to the higher numbers we get to, now we're at $40 trillion in US national debt, the longer this goes on, the more we start to realize, okay, no one's going to fix this. This is never going to change.

• 11:29Ed Elson?

  And perhaps that might be the concern that is being priced in. Is that a concern to you? Do you see our debt and our rising deficit under this administration? After he said that this was an important thing to balance the budget at least, that was part of his platform, is that a real concern for you?

• 11:50Speaker 06

  No doubt. I mean, look, I mean, the debt continues to expand. But if you think about how we deal with debt in kind of the, you know, the modern economy, it's through inflation. I mean, the reality is that we repay our debt with many dollars because the dollar and all currencies continues to depreciate over time. And everyone understands this. Everyone knows what a cup of coffee cost 10 years ago, 20 years ago, 30 years ago. So the way that we deal with this is inflation. It's the most insidious tax on the global population that's ever been invented. And you can see it very slowly. And it's a regressive tax, Ed. So it taxes everyone. So are we going to be able to contain it?

• 12:34Speaker 06

  I mean, if you look at the CAGR of the national debt, it's about 7.6%. And that CAGR is pretty consistent. So we like to spend money. And unfortunately, when you don't pull enough in taxes and you spend more than you bring in, you've got to issue debt and the markets tolerate it. And particularly in the US, they tolerate it because we're the strongest, most liquid, deepest market in the world. But the way that it's paid for is through inflation. And I think that, I think that for years, Ed, it was masked by globalization. And now that that's been reordered, I think that it's revealing that, hey, maybe that was temporary, maybe inflation is permanently in the system and it's a byproduct of what

• 13:17Speaker 06

  we've done fiscally and monetarily. But it's also the price that you should pay for convenience. I mean, if you look again, going back to what you said about what's going on in Iran, yeah, the oil markets are probably going to price in a new risk premium because it's like, hey, if a straight gets shut down, that's a big problem. And when you have a just-in-time supply chain where everyone was used to getting things just when they needed them for their, you know, distributors and for their production, everyone got used to no inflation. And I think that's what created kind of the bond bubble. You have no inflation, you can spend more than you need and you can issue debt very cheaply. And now we are having to pay that bill.

• 13:58Speaker 06

  And what's fascinating, though, is if you told me that rates on JGBs would go from negative to three over the course of three or four years, I would have thought the markets would have had a really tough time. The Nikkei is at all-time highs, the S and P is at all-time highs. Why is that? It's because earnings are overpowering what's going on with the cost of capital. And so I think the Fed needs to pay close attention to that because at the extent they raise rates and at the extent they slow down growth in the economy, it could be a much more challenging situation because it's ultimately the US companies that employ all the people.

• 14:34Ed Elson?

  Say yields continue to rise even higher. They've, they've been rising all week, practically all month. Say it continues. What does that mean for investors? And then what does it mean for everyday Americans?

• 14:48Speaker 06

  Well, I think that if you look at the continual rise in the cost of capital, there's no question that that is, again, a regressive, a regressive tax, if you will, because that's affecting everyone up and down economic scale. In terms of how it affects the market, though, Ed, it's really going to come down to when does the cost of capital start to pull away the earnings resilience? And the reason that the market has tolerated higher rates is because we're probably sitting inside the biggest capex cycle in history. And so that's trickling to so many areas of the economy and it's absolutely tied to the AI buildout. And so that has allowed the economy to tolerate higher rates.

• 15:31Speaker 06

  So no one knows exactly what that number will be when that starts to kind of erode the durability of earnings. But as long as we continue in this capex cycle, then that's going to allow earnings to be resilient and that's going to allow the markets to be resilient. And so that's really the tug of war right now between cost of capital and earnings resiliency. And to be honest, you know, the way you deal with it is you invest because you want to be on the side of the companies that can pass through that inflation. That's really the best gift that Americans have. We have a very open and liberalized market and anybody can do it. Our kids can do it. You can open an account, you can stick in $500 once you get that saved up, you can start it. And I've done that with my kids. I've started investment accounts and I've shown them when it's up and down.

• 16:15Speaker 06

  So I, I think that that is how Americans should try to tackle, again, going back to the most insidious tax ever put on, on, on the global economy, which is inflation. You need to be an investor and get on the right side of the equation.

• 16:29Ed Elson?

  John Murray is Chief Investment Officer at NFJ Investment Group. John, it's always good to see you. Thank you for your time.

• 16:36Speaker 06

  Thank you, Ed.

• 16:39Ed Elson?

  After the break, an inside look at OpenAI.

• 16:51Speaker 03

  Support for this show comes from Justworks. Small business owners love to roll up their sleeves and get things done. But that doesn't mean you should spend your Saturday night staring at tax and payroll forms, especially when you should be strategizing your next move. That's why Justworks handles the stuff you can't afford to get wrong. It's intuitive software plus real people, all working to help keep your eye on the big picture. So instead of stretching yourself thin, you can focus and shoot your small business shot because you don't have to worry when it just works. Head to justworks.com to learn more.

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• 18:44Ed Elson?

  We're back with Prof G Markets. OpenAI has had a tumultuous few weeks. As we discussed a couple of days ago, roughly 700 rogue OpenAI agents hacked the machine learning platform Hugging Face in July, and reportedly OpenAI didn't know about it until later. Meanwhile, the company is facing multiple legal battles. On Monday, Apple escalated its trade secrets lawsuit against the company, telling a federal judge that OpenAI is actively destroying evidence. Meanwhile, 30 new lawsuits were filed this week over a school shooting in British Columbia, which killed eight people. The suits alleged that OpenAI could have helped to prevent this, as the suspected shooter

• 19:27Ed Elson?

  had heavily interacted with ChatGPT. This all comes amid the anticipated release of OpenAI's newest model, Astra, which is reportedly the first to have critical cyber abilities. So to get into all of this OpenAI news, we are speaking with Alex Heath, who just sat down for multiple one-on-one interviews with the CEO of OpenAI, Sam Altman. He also spoke to more than 20 people at the company for a cover story he just wrote for Time Magazine. Few people know more about what's going on at OpenAI than Alex. Alex is the author of the Sources newsletter, and he just launched the new Sources podcast. Alex, thank you for joining us. Good to see you.

• 20:08Ed Elson?

  Let's just start with your interview with Sam, which was just released this week. I watched the interview. Fascinating on many levels. We'll get into it. But what were your top takeaways?

• 20:18Alex Heath

  Oh, man. Thank you, Ed. I appreciate that. Yeah, I've been spending a lot of time at OpenAI and with Sam, and we covered a lot of ground in the conversation. A couple of things stood out. They are really slowing down frontier research in a way that is unprecedented in the industry, speaks to the capabilities they're seeing that have not yet been released. They have Astra, their next family of models, coming, which I've gotten to see as part of my reporting process for the Time cover story you were talking about. But no one externally has used yet. And what they saw, and I was actually in the office as this was happening, was even

• 20:59Alex Heath

  further frontier training runs that they have after Astra were showing, as Sam put it to me, you know, various degrees of misalignment, which is AI speak for. The AI is not doing what it's supposed to. And you see that with Hugging Face, right? The hack on Hugging Face that everyone knows about. But I think it speaks to as these models become more agentic, doing things in browsers, taking over computers, the security risks go way up. And OpenAI's research team decided, which that company is still very much a research culture-led company, even with all the commercial stuff that we'll get into, that team has pushed them to slow down, and they are.

• 21:42Alex Heath

  That said, they're also in this fierce model race. They want to get Astra out the door as soon as possible. I think it's going to be any day now. It's going to be a very powerful, capable model. And then we touched on a bunch of stuff. We touched on recent leadership departures. We touched on the IPO, Anthropic competition, the device work with Johnny Ive. He told me they're going to make a humanoid robot. There's a lot to go over.

• 22:05Ed Elson?

  You asked him about the Hugging Face incident and the extent to which it was a security breach, an accident. Here's what he had to say in response.

• 22:18Sam Altman?

  It's a safety failure for sure. There's a question of how much you're supposed to understand that it is a security issue or alignment issue. I think it's mostly been reported on as a security issue. I think I understand it personally more as an alignment issue. But in any case, yes, that was a bad thing. And I don't want us to make excuses for that, because I don't believe that's how we fix it. The more we're like, oh, our nice little model, he would never do anything bad. Like, you know, it was just a little evals, harness, misconfiguration, no problem, nice little model. That would be a very, if I said something like that, then I think you should be like, whoa, this is really bad.

• 22:48Ed Elson?

  It seemed as though his view is, we're recognizing the problem. We've admitted the problem, so it's not that much of a problem. What did you make of his comments?

• 22:59Alex Heath

  I can see that take. I think he was throwing a little shade at other labs who, you know, hype up the capabilities of the models, and then when stuff happens, don't really talk about it or kind of throw it under the rug. I think that was more of the meaning behind that statement he was talking, when he was explaining that. And, you know, there's another part of the interview where he's like, people call me the yellow CEO. He was referring to like something that Dario Amade said at a conference last year.

• 23:31Ed Elson?

  Yeah.

• 23:32Alex Heath

  And.

• 23:33Ed Elson?

  Which you acknowledged, and then he sort of refused to admit that that's what he was saying, which I also thought was interesting. I won't acknowledge or deny or not deny who I'm talking about, and you're like, yeah, you're talking about him.

• 23:49Alex Heath

  Well, I look, Sam and Dario, I think, live rent-free in each other's heads always. It's very apparent. But I think, you know, I'm not saying this for a fact, but I think if you were Sam, Anthropic's about to have maybe the biggest IPO of all time in the coming weeks. If I'm Sam and you're slowing down frontier research for a good reason, because you have concerns about the alignment risks, it's probably like a good PR move to go out there and be the safety company, right? Because that's what Anthropic's whole claim to fame is. I mean, that's how the company began, was a bunch of safety people left OpenAI, right? So I think there's a genuineness in that OpenAI really does see capabilities internally

• 24:33Alex Heath

  that frighten them in terms of their ability to align them. And I also think, look, it's convenient timing. I think both can be true.

• 24:40Ed Elson?

  Something I've been wondering about this Hugging Face incident, which I feel like is, people weren't talking about, and then suddenly everyone's talking about it. To me, I can't tell whether maybe they're proud of it, because it's this example of their agents being very capable and going out there and doing something that is very sci-fi-y. And then also, they get to say like, oh, but we're addressing the problem. And part of me wonders, I mean, on the one hand, I feel like maybe they want us to see it as evidence of how capable their agents are. But then part of me thinks, the cynical part of me thinks, well, maybe you guys just aren't really doing a good job with your own security. And it doesn't say that much about the advanced capabilities of the models as much as it says

• 25:23Ed Elson?

  about that you're a kind of scrappy startup and you're not doing your job when it comes to cybersecurity. How did you see that incident? Do you see it as a serious statement? Does it say something big about where AI is headed right now?

• 25:40Alex Heath

  I think it does. If you, I would encourage everyone listening or watching this to go watch OpenAI's black hat presentation, where their researchers, I cited in the interview with Sam, where the researchers walk through how the model actually escaped and hacked Hugging Face. It's remarkable, and it's the first incident of this happening. And at the same time, I think you're right to point out, OpenAI didn't have the safeguards in place. If this is a company, one of the two main companies we're trusting with the future of AI, upending everything, how should we feel about the fact they didn't have the safeguards in place to keep this from happening? They didn't foresee what would happen. And I talked to, you know, the chief scientist and head of research and a bunch of people, head of alignment about this.

• 26:25Alex Heath

  They had safeguards that they had developed that would have stopped this. They didn't implement them for the training run that led to the Hugging Face breach, because they didn't think the model was going to be that capable. So there is a sense of what's happening inside these labs at the frontier is, the model capability is getting ahead of the human researcher's ability to foresee what's happening, which is, you get into this concept of an AI recursive self-improvement, RSI, which Sam and I also talk about in the interview, particularly around the IPO, which is, I thought, interesting, the way he framed it around the IPO. People in the frontier labs really feel like they're on the edge of like a precipice that's like potentially amazing and also cataclysmic in the sense of AI that can build itself

• 27:10Alex Heath

  recursively, self-improve, not need a human in the loop, even the chief scientist of OpenAI. And that's already starting to happen. People talk about RSI as a thing that hasn't happened yet. It's definitely starting to happen. And so then you get into this, AI people talk about this concept of takeoff and like, there's no going back. It can get very spooky, very sci-fi, you know? I mean, Sam said that in the interview too. It feels like sci-fi. And it kind of is, like when you see what happened with Hugging Face. At the same time, to your point, yes, OpenAI should have had safeguards in place.

• 27:44Ed Elson?

  One of the big themes we talk about on this show is the profitability of AI or the lack thereof among the AI labs, OpenAI included. You guys talked a little bit about the AI buildout and the extent to which it is or isn't profitable. I thought his comments were really interesting. Here's what he said.

• 28:03Sam Altman?

  I'm not worried about our compute buildout plans. I am worried about the world's compute buildout plans. Like, I think we are going to be able to use all of the compute very profitably that we were planning to build. But I am seeing the first signs of what feels to me like unsustainable silliness of, you know, random new NeoCloud popping up, people claiming that they're going to build gigantic massive compute next year that I think they don't have the revenue to support or a buyer. Yeah, I definitely feel like some fear about what the world is doing as a whole, although I think we feel very good about what we've committed to.

• 28:38Ed Elson?

  What were your reactions to those comments?

• 28:40Alex Heath

  Oh, it's interesting, right? I mean, there are a bunch of NeoClouds that are making gigantic contractual commitments. And that was the position OpenAI was in last year, right? With Stargate and Sam, with Larry Ellison and the White House, you know, these trillion dollar headlines that were flying around. And you could look at a lot of companies making huge commitments and just kind of do basic napkin math of what revenue do they have to support those commitments? OpenAI, obviously, it's not public yet. We don't have an S1. I, Ed, I gotta be honest, and I know you've had people on the show that are very critical of the finances, and you have been too, and I get that. And until we see it, right, you kind of have to be. It's your job. I've walked away from the reporting process, and I talked to Sarah Fryer, I talked to all the compute leaves,

• 29:24Alex Heath

  I talked to everyone, feeling a lot more confident that this isn't as fragile as maybe people think it is, at least with OpenAI and Anthropic. I mean, OpenAI is at about a 40 billion run rate, enterprises past consumer in terms of the revenue mix. The most interesting part about OpenAI's business from the interview that I actually wanted to talk about with you was, A, that, his comment about the NeoClouds, but B, there was a moment where I was asking him about ChatGPT growth, because they hit a billion users recently, but it took a long time. It took, there was an incredible ramp up to hundreds of millions of users, and then they, they teetered on a billion for months and months and months. And I thought that was unusual and suggested maybe more

• 30:04Alex Heath

  competition in the market, you know, is chat losing its luster. And he very matter-of-factly was like, well, we decided to put all our compute in the codex, in the coding, to compete with Anthropic. And I was like, wait, so your revenue is a direct function of where you can put the compute? And he's like, yeah, completely. So they're kind of like, these labs are like alchemists in a sense of how they control their business, because they are so compute constrained, that it's not like a normal business where, you know, there's demand that you can forecast and control. They're just, they don't have enough. They don't have enough compute to serve the demand at any given point. And so OpenAI made a decision to shift compute that then slowed its consumer growth to grow its enterprise

• 30:49Alex Heath

  growth. So yeah, these labs are a little bit like alchemists right now. And I don't think that's, I don't know if there's precedent in the history of modern capitalism, especially for two companies that are about to have trillion plus IPOs. Like, I don't think there's precedent for that. And I found that very interesting.

• 31:04Ed Elson?

  What parts of your interactions with particularly Sarah Fryer made you feel more confident in the financial sustainability and the financial health of this company?

• 31:12Alex Heath

  Well, look, they're not profitable. I think if they stopped training today, they could be. I think that's been the case, by the way, for a while. What happens to the multiple on the company, on the valuation, if they stop training, if there's no more frontier to chase? That's a bigger, you know, question, obviously. The economics of just like inference are actually really good. The frontier labs operate at incredible margins on inference.

• 31:36Ed Elson?

  Inference, meaning running the models themselves that people are using versus trying to build these incredible frontier models for the future?

• 31:44Alex Heath

  Correct. And if you look at what OpenAI has done with token efficiency, driving the cost down of tokens, even for the Sol family, its most recent one with Luna and the smaller ones, this is not the behavior of a company that is teetering. And they're building a real machine in-house that is, you know, they're still growing up. They're still startup, even though they're huge. Like, the culture is a startup, right? Like, that company operates on like a 12-hour horizon at any given point. I can just tell you from being on there for a couple of weeks. At the same time, like, they're starting to become more regimented about spending, and the inference business is going to be very good, I think. I have no doubt about it. Now, look, like, if training continues to

• 32:28Alex Heath

  balloon, maybe that's an issue. I think a lot of people in AI think RSI will lead to training costs declining. Also, like, the chip gains that they're making with their custom chip, jalapeno, like, lowering the cost of compute is a big focus for them. And I think they see a line of sight to it. So, look, it's unprofitable. I think that's a choice. I don't think that's like a, that's because they have, they have no choice. But, you know, we'll see. We don't have an S1 yet.

• 32:59Ed Elson?

  Just to wrap up here, you asked him about the growing anti-AI sentiment and the data center backlash. I'm not sure he gave you much on how he actually felt about that. What do you think he thinks about the fact that so many people hate AI, and not just AI, but OpenAI?

• 33:22Alex Heath

  I was really curious to hear how he thought about this, especially with, you know, the recent attacks on his home personally, right? And the data center backlash is stronger than ever. I thought his, his response to me was, you know, it was interesting. It was basically like, if we make a better product, they'll like it. And, you know, I kind of respect it in the sense that it puts the pressure on them to deliver. You know, I've had some pretty magical moments, I'm not gonna lie, with AI in the last few weeks. ChatGPT work, Claude Co work, doing basic stuff, I mentioned in the interview, but like, filling out a post office web form so a package gets picked up, and it would have taken me 20 minutes. I just did a prompt and I did it, and I put the package out and it was gone the next day. Little stuff, but it starts to add up, and you're like,

• 34:07Alex Heath

  wow, this is like, this is a nice value. Like, I'll pay $100 a month for this. Most people do not use chat that way. They use the basic free model. It's better Google search, it can do some other things, but it's like, people look at it as like insanely expensive Google search. That's like detrimental to the environment. That's how most people think about AI. And I think what he was trying to say there is like, as we move into this agent world, which like Astro, the next model, it's trained to use enterprise software faster than humans. So like, as we move into this world where like, you hate using your expense software, and you just tell chat to go do it for you, like, maybe you start to feel differently about AI if it's like actually making a meaningful, positive change in your life. And I think that's what he's banking will happen. That's a, that's

• 34:51Alex Heath

  a prediction by him. I'm not saying that's going to happen. But that was his answer. And yeah, I don't know. I don't know if people will find that answer fulfilling or not. I think people are going to keep hating AI.

• 35:05Ed Elson?

  Alex Heath is the author of the Sources newsletter and host of the Sources podcast. Alex, appreciate your time. Thank you.

• 35:13Alex Heath

  Always. Thanks, Ed.

• 35:18Ed Elson?

  Circling back to our discussion with John, it appears that the bond markets have finally reached the end of their line with the administration. Turns out that if you drive up inflation with tariffs that ended up just being returned to corporations, and if you double that inflation with another forever war that just so happened to choke off a fifth of global oil supplies, and if you rack up $2 trillion in annual deficits, and if you explode our total debt to $40 trillion, and if you show the world that you don't really care about any of this, nor do you think that any of it even matters,

• 35:58Ed Elson?

  then eventually, yeah, investors will price that in. The yields on the 10-year has risen to more than 4.8%, its highest level since 2023. The yield on the 30-year recently hit 5.3%, its highest level since the financial crisis. And the yields on foreign bonds from Japan to the UK to Germany and France have all hit multi-decade highs. Borrowing costs around the world are soaring as the bond market speaks out about an impending inflation crisis. Now, keep in mind, this is all in spite of the fact that Scott Besant used the Treasury Department to try to muzzle the bond market. He issued billions of dollars

• 36:41Ed Elson?

  in long-dated bond buybacks. That was his attempt to fix the price of US bonds, to bring yields down, and, as his former colleague Stanley Druckenmiller put it, to prevent the bond market from speaking. But you can only shut investors up for so long. And in his case, it was a couple of days. Eventually, reality has to catch up. Now, is the full force of our fiscal reality and our inflationary reality fully set into the markets yet? I think probably not, but it appears that it is beginning to. Whatever appetite investors used to have for this administration's BS is clearly beginning to wane. They are fed

• 37:25Ed Elson?

  up with it. And if you can't tell from the sound of my voice, I am fed up with it, too.

• 37:34Ed Elson?

  Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen O'Donoghue, and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow. I'm Ed Elson. Tune in tomorrow for our conversation with Tyler Cowen.

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• 39:22Speaker 11

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