The Hidden Recession Beneath The AI Bubble w/ Paul Kedrosky

In this week’s Better Offline, Ed Zitron is joined by economist Paul Kedrosky to talk about how AI is distorting the bond markets to the point that it’s changing the price on US Treasuries, how AI data center economics don’t make sense, and the troubling signs he’s hearing out of Anthropic. https://paulkedrosky.com/ The Nick, Dick and Paul Show: https://www.youtube.com/channel/UCFbDiETo29GTIjg6Lk4imig Save $10 off a year of my premium newsletter: https://edzitronswheresyouredatghostio.outpost.pub/public/promo-subscription/gzqwkv54e1 YOU CAN NOW BUY BETTER OFFLINE MERCH! Go to https://cottonbureau.com/people/better-offline and use code FREE99 for free shipping on orders of $99 or more. --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/ Discord: chat.wheresyoured.at https://discord.com/invite/QUUQUP9szv Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/edzitron.com https://www.threads.net/@edzitron Email Me: [email protected] mailto:[email protected] See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  This is an iHeart Podcast. Guaranteed Human.

• 0:04Speaker 01

  Hi, I'm Steph and I work at United Healthcare. When I think about United Healthcare's members, I think of my own family. My niece was diagnosed with an ultra rare genetic disorder. I know how hard it is for families at United Healthcare. We can make it easier.

• 0:19Speaker 02

  I'm Brian. I care because I know what it's like to not speak the language. It's not easy. Health insurance is complicated. I would say our job is to make everything easy for our UAC members. I work for United Healthcare. I'm committed to care.

• 0:34Speaker 03

  Snoring, gasping for air during sleep, daytime sleepiness. I'm Shaquille O'Neal and this shouldn't be anybody's experience. Ask your doctor about Zepbound Trisepotide, the first and only FDA-approved prescription medicine for moderate to severe obstructive sleep apnea in adults with obesity.

• 0:50Speaker 04

  Zepbound is a prescription medicine used with a reduced calorie diet and increased physical activity to help adults with moderate to severe obstructive sleep apnea, OSA, and obesity to improve their OSA. Zepbound is approved as a 2.5, 5, 7.5, 10, 12.5, or 15-milligram injection. Zepbound contains trisepotide and should not be used with other trisepotide-containing products or any GLP-1 receptor agonist medicines. It is not known if Zepbound is safe and effective for use in children. Don't share needles or pens, or reuse needles. Don't take if allergic to it, or if you or someone in your family had medullary thyroid cancer, or if you've had multiple endocrine neoplasia syndrome type 2. Tell your doctor if you get a lump or swelling in your neck.

• 1:31Speaker 04

  Stop Zepbound and call your doctor if you have severe stomach pain or a serious allergic reaction. Severe side effects may include inflamed pancreas or gallbladder problems. Tell your doctor if you experience vision changes before scheduled procedures with anesthesia, if you're nursing, pregnant, plant-to-be, or taking birth control pills. Taking Zepbound with a sulphonal urea or insulin may cause low blood sugar. Side effects include nausea, diarrhea, and vomiting, which can cause dehydration and worsen kidney problems.

• 1:58Speaker 03

  Talk to your doctor. Call 1-800-545-5979 or visit zepbound.lily.com.

• 2:05Speaker 05

  Small businesses are the pulse of every community. They bring people together, create opportunities, and drive growth. Chase for Business helps business owners like you with personalized guidance and convenient digital tools all in one place. With that guidance and your determination, you can take your business further and help build a brighter future for your community. Learn more at chase.com/business. Chase for Business: Make More of What's Yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank, N.A., Member FDIC. Copyright 2026 JPMorgan Chase and Company.

• 2:46Speaker 06

  Even on my antidepressant, I still struggled with depression symptoms.

• 2:50Speaker 07

  You okay, honey?

• 2:51Speaker 06

  I'm okay-ish. My doctor said adding Rexulti Brexpitrazole could help.

• 2:56Speaker 07

  When added to an antidepressant, Rexulti was proven to significantly reduce depression symptoms, more than an antidepressant alone. Elderly people with dementia-related psychosis have increased risk of death or stroke. Antidepressants may increase suicidal thoughts and actions and worsen depression in children and young adults. Call your healthcare provider right away to report new or sudden changes in mood, behavior, thoughts, or feelings, or if you develop suicidal thoughts or actions. Report fever, stiff muscles, and confusion, which can be life-threatening, or uncontrolled muscle movements which may be permanent. High blood sugar can lead to coma or death. Weight gain, increased cholesterol, unusual urges, dizziness on standing, falls, seizures, trouble swallowing, or sleepiness may occur. Learn about these and other side effects at rexulti.com. Tap ad for PI. Hey, how you doing, honey?

• 3:38Speaker 06

  Okay.

• 3:38Speaker 07

  Okay-ish?

• 3:40Speaker 06

  No-ish. I'm okay, really.

• 3:42Speaker 07

  Ask your doctor about adding Rexulti.

• 3:47Speaker 00

  Your Saturday's packed, and overthinking skincare isn't on the agenda. Simple can still be effective because going overboard with active ingredients can weaken the skin's moisture barrier. New Aqua4 Hydrating Daily Lotion is gentle enough for all skin types, including sensitive skin. It's lightweight and fast-absorbing on skin. Even though your Saturday's packed, your skin's moisture barrier is supported. Grab Aqua4 Hydrating Daily Lotion at your nearest retailer. There's before, and then there's Aqua4.

• 4:18Speaker 08

  Coca-Cola. For the big, for the small, the short, and the tall. Peacemakers, risk-takers. For the optimists, pessimists. For long-distance love. For introverts and extroverts. The thinkers and the doers. For old friends and new. Coca-Cola. For everyone. Pick up some Coca-Cola at a store near you.

• 4:47Speaker 09

  Jardiance has a big story to tell. Discover Jardiance's Empoglophosin 10 or 25-milligram tablets. Visit jardiance.com, call 1-888-968-6648, or talk to your doctor to see if Jardiance is right for you.

• 5:05Speaker 10

  Call Zone Media.

• 5:09Ed Zitron?

  Greetings and salutations, Zionet Zitron, and this is Better Off Lime.

• 5:26Ed Zitron?

  We are back, folks. We're back, fellas and ladies and everyone in between. And today, we are joined by the incredible economist and writer, Paul Kudrowski. Paul, good to have you back.

• 5:37Speaker 12

  Hey, Ed, good to be back.

• 5:39Ed Zitron?

  So, just before, literally seconds ago, you were telling me that AI has started to show up in odd places. And I think that's just a good, a good place to start. Where are the odd places in the economy it's showing? Because I can kind of guess, but...

• 5:55Speaker 12

  Yeah, yeah, yeah, yes. Yeah, like, it's funny because almost a year ago, one of the things that first got me interested in this bananas topic was that it was, AI capex specifically was, you know, blah, blah, more than half of GDP growth, blah, blah, and so on, which was just, you know, unprecedented and goes back to the railroads and everything else. And so that was interesting, and I started talking about it. And then I was surprised that no one else was sort of noticing this, that how consequential it had become. And now, of course, that's become commonplace. And so then I went on, and I've been, I've been paying attention to that. And that hasn't varied very much from quarter to quarter over the last eight, sort of, I don't know, 12 to 18 months. It's been consistently between 30 and 70% of GDP growth. And then it started, it was interesting how it's almost in cancer terms,

• 6:37Speaker 12

  sort of metastasized across the global economy and become even more consequential. So the next example was about a month ago, where all of a sudden, we had this treasury market freak out in the 10-year. And one of the reasons driving what happened was this sudden spike in the 10-year, and up over 5% now.

• 6:55Ed Zitron?

  And that's the 10-year treasury bond, right?

• 6:57Speaker 12

  So that's... That's right.

• 6:59Ed Zitron?

  And when you say spike, it means it was selling off, so people were asking for more interest on it.

• 7:05Speaker 12

  Correct. People required more compensation. Yeah, sorry. I go all, I go all finance.

• 7:11Ed Zitron?

  No, no, it's fine. Keep going.

• 7:13Speaker 12

  Yeah, yeah. So, so normally, the treasury market, which is a multi-trillion-dollar market, is so large and liquid that unless you are a sovereign, meaning another country issuing debt on the scale and with the same sort of security as the United States, you really, it's really hard to influence it just through issuance, meaning that I, just because I'm selling treasuries, or I'm, or not treasuries, I'm selling comparable-duration debt. It's really hard to have an impact on treasuries because it's such a big, large, and unusually liquid market. So, one of the things that, one of the things that happened a month ago was that this thing we call AI capex and this staggering amount of issuance, much of which has a duration, meaning the length of time over which the bond is, becomes due,

• 7:59Speaker 12

  the debt becomes due, is on the, it varies from five to 15 years, but let's call it a median duration of 10 years. It began to seem like it was something unusual was going on in treasuries. And as we sort of worked through the math, and then this has now become fairly widely accepted, that AI capex issuance was actually had become so large that was beginning to bleed into the treasury market. And so one of the reasons why we had this treasury market freak out is because of the unprecedented amount of AI-related debt being issued. And that, in turn, was causing a sell-off in treasuries as people said, you know what? Given the choice, and this is a remarkable thing,

• 8:38Speaker 12

  given the choice between owning 10-year treasuries backed by the full faith and credit of the United States, or owning 10-year debt backed by a hyperscalers pristine, and I have that in air quotes, credit rating, I'd rather, I'd rather have the latter at the margin. That just doesn't happen. I mean, there's no reason why someone historically would do that because obviously sovereign debt is backed by the full faith and credit of the country. And in particular, in the case of the United States, you can print your own currency. So it's like you'd have no, there's no prospect of default other than deflating it away. So having that happen was an artifact of two things. One was the crazy scale of issuance, which is now approaching in excess of a trillion dollars.

• 9:19Ed Zitron?

  And, well, like, all AI debt is approaching a trillion.

• 9:23Speaker 12

  And, and it's more than 60% of AI financing is now debt, is debt financed, up from something like 15 to 20% a year ago. And it's now the largest piece of the investment grade marketplace. It's now the largest piece of the high yield marketplace. It is literally taking over global debt markets. And we had this unprecedented phenomenon, literally a month ago, where it caused this, in part, caused this global bond freak out in the treasury market because the scale was so large and the counterparties, the hyperscalers, for crazy reasons, were seen as such secure credits, that it began to literally compete with the most, the highest scale sovereign in the world's debt issuance, which is the United States.

• 10:06Ed Zitron?

  Yeah, the currency of the world.

• 10:10Speaker 12

  The currency of the world was that AI CapEx as a currency was beginning to compete with the dollar in a really sort of loose sense. So that was the next one that really caught my attention because that has consequences. Because, you know, in turn, as the cost of financing the US deficit rises, then, and its existing debt, the cost of servicing it rises, then obviously that has consequences in terms of the United States' fiscal position. And so you're having this crazy bleed over from what we see going on in AI CapEx into the fiscal health of an entire country and by, in turn, of the entire world. So that is just a remarkable moment. And then it gets crazier, right? And I'll stop on this next one and then we can sort of loop into it in whatever way you want.

• 10:55Speaker 12

  But just last week, the WTO put out a report saying, whoops, our bad. We completely screwed up with respect to trade data on the goods side, not the services sides, because the WTO, the World Trade Organization, tracks goods and services, global trade data, because they had been forecasting a fairly sharp decline, in part because of the US tariff policy and the consequences of it, both in terms of uncertain uncertainty and changing trade flows. And actually, the opposite happened, right? And so it was up something like four and a half percent or something like this, which was

• 11:30Ed Zitron?

  What does that mean in real terms?

• 11:32Speaker 12

  So this means that the global economy, in terms of exchanging goods between countries, grew almost double the rate that was forecast by the WTO, the World Trade Organization, in anticipation of the effect of the tariffs that were coming through. So now they broke down the data, because they, you know, like any good economist, they said, so, you know, we were wrong, why? And it turned out that something like 19% of global trade in goods in the last three quarters was AI-related.

• 12:05Ed Zitron?

  Jesus Christ.

• 12:07Speaker 12

  And it gets worse.

• 12:08Ed Zitron?

  That's Nvidia GPUs.

• 12:10Speaker 12

  That's right, which goes back to your favorite story. So that's Nvidia GPUs. And then, if you take it the next step, well, then how much of growth, so if 19% was AI-related, how much of the growth that was anomalous, almost 55% of global trade growth was AI-related? So in a sense, we're created this global now illusory phenomenon that's being driven by this incredibly anomalous spending, and much of which is concentrated on one specific thing, these things we call GPUs, but it's bleeding over into sovereign debt, it's bleeding over into the cost of financing the US deficit, it's bleeding over into world trade, it's

• 12:52Speaker 12

  masking the effect of the Trump tariffs because it's so consequential. So it's having all of these incredible effects that are rippling across the entire economy. And I'll give you one last one, which is one of the craziest ones. So you probably saw last week, the Fed raised rates because US inflation remains stubbornly high, in excess of 3%. So let's break that down, because, you know, it seems like, okay, fine, consumers must be spending a lot. And of course, the answer is that consumers are actually more nervous than they've been in a long time and sit with relatively high levels of debt. And so it's like, well, wait a minute, where is this inflation coming from? So if you break it down and sort of tear apart the pieces of this, you find out that

• 13:35Speaker 12

  the two largest pieces that are driving inflation in the United States over the last year are, well, you'll sort of sing along with me on the chorus, is AI CapEx, which is driving energy prices higher, which is driving all sorts of externalities across the economy, it's driving all sorts of services higher, construction costs, materials, all of those are being driven higher. And then, this is the sneaky one, the other piece is obviously energy in the context of the war in Iran, which is the other big piece. And you can argue, and I did last week at a thing I was doing in Oxford, that in a sense, that's also AI-related. And the reason why that's AI-related is the Trump administration was emboldened by its success in Venezuela, which I call the first AI war.

• 14:19Speaker 12

  Pete Hegseth and others have been very straightforward in saying that that entire campaign was organized and administered using Anthropic, which is one of the reasons why they had a seizure when Anthropic said, you can't use this for military purposes. And emboldened by their success using AI to conduct a campaign in Venezuela, they said, what's next? So Iran was next, and they've obviously used AI extensively in conducting that campaign. So it's created a kind of arrogance about what's possible, whenever you use AI to backstop all sorts of things in a perverse way. Now, let's go back to this inflation data. Both pieces of inflation have underneath them as predicates, this incredible and unprecedented

• 15:02Speaker 12

  growth in AI, whether it's the energy side directly and the war in Iran, which is AI-enabled, it's almost, we've almost sort of turned war into an app. And on the other side, what's happening in AI CapEx? So here's, these examples for me are just startling in terms of understanding the breadth and scope of this phenomenon and the consequences across the entire global economy.

• 15:28Ed Zitron?

  So let's start the top of that. So the reason that US Treasuries are going up, which means that, and just to explain to the audience, and stop me if I mess this up, when people say that the US 10-year is going up, it means that people are selling off Treasuries, which means that if you want to, if you have a Treasury that offers 5%, but the market wants 5.5%, that Treasury you have at 5% is worth less, right?

• 15:54Speaker 12

  That's correct. So that's on the run, for bonds that have already been issued. So it obviously has a similar consequence for new

• 16:01Ed Zitron?

  It's the effective yield. So, yeah. So just so I understand.

• 16:05Speaker 12

  And if you're issuing new debt, obviously it has to be at the higher rate. So either way.

• 16:08Ed Zitron?

  Yeah, because you're competing with that, with what the market demands. So just so I understand, hyperscalers are issuing so much debt that people are choosing it instead of US government bonds, or at least saying, US government, I need you to compete with this?

• 16:24Speaker 12

  Yeah, so that's exactly right. And that's in part because the structure of the treasury market, and in broadly, the US debt market has changed a lot over the last 20 years. It used to be dominated by large sovereign purchasers like Japan and China and others. And so, and they were, in this great economics term, they were relatively yield insensitive, meaning that they didn't get a rat's ass with the yield was, they just had to, they had huge dollar flows coming into their country and they had to do something with them. So they bought Treasuries. And it was like, whether the rate's one or five, I don't really care, I just have to do something with all these dollars. And now, the treasury market, and broadly, the US debt market, is much more taken up

• 17:06Speaker 12

  by yield-sensitive investors, individual consumers, by people buying Treasuries or having it embedded in ETFs, by corporates, by sovereign, or sorry, by institutions and others. And they care what the yield is. So now you have this phenomenon where people are yield-sensitive and they actually care. And they say, you know what? At the margin, given the choice between owning hyperscaler debt at the same duration, with a pristine balance sheet, they argue, or owning Treasuries, at the margin, I'd rather own the hyperscaler debt. And up goes the yield on the Treasuries.

• 17:37Ed Zitron?

  Right. And that is, and I'm guessing that some of that is also not just a reflection of, it's not a reflection of the US government's solvency so much as these people believe that US Treasuries won't pay as well over that period.

• 17:48Speaker 12

  That's right. So that's the mistake people make, exactly right there. Right, where they misunderstand the causal link here. And they think, oh, this is because people have suddenly lost faith in the US's ability to pay its debt. The US prints dollars, they are not going to default. They may deflate it away, but don't confuse the issue by introducing the idea that somehow, because of some madness the US is doing, that its debt is more suspect. This is literally an artifact of competition at the margin from hyperscaler issuance in a newly yield-sensitive market, causing people to say, I'd rather own X than Y. And that has sovereign consequences for the US as an increasing fraction of its budget gets eaten up every year by payments on the debt, and in part because of AI issuance.

• 18:33Ed Zitron?

  And the thing is, though, this kind of, doesn't this have a kind of a doom loop to it, though? Because the US government, as a result, has to pay more on their interest. They have to, and interest is one of the US government's largest line items behind, what, like Medicare, which it should do, military, which should do less of, and I forget what the other, it's like social security in the other one. But the point I'm making is

• 18:55Speaker 12

  Social services broadly and defense, you know, Medicare, and sort of all of those, those are the three big buckets. But behind all of those, very closely, depending on the math, comes in something like in the mid-teens, interest payments.

• 19:07Ed Zitron?

  And that will keep going up, but as that interest rate goes up that the government is charging, future hyperscaler debt will be more expensive, which will get issued at a higher interest rate, which will push the US one up.

• 19:22Speaker 12

  Yeah.

• 19:22Ed Zitron?

  Am I reading this correct? This doesn't sound good.

• 19:26Speaker 12

  No, and it doesn't, there's an even, it's a double locking doom loop. I'll give you the other piece of it. So if you're the government and you say, okay, you know, this is causing, has consequences for us in terms of increasing current and future projected debt payments as a result of competing at the margin for these yield-sensitive investors, what do you say to yourself as a solution? Well, we need to grow the economy faster, because that'll solve the problem, obviously. And how do I grow the economy? Well, I increase productivity. Well, how do I increase productivity? Well, people tell me this AI stuff is really good. So there's your double loop. So now, all of a sudden, AI is not just the problem, it's the solution.

• 20:02Ed Zitron?

  I have a really dumb economics question that I think my listeners will appreciate. How is productivity measured and what does it mean? As far as like on a, on an economics level.

• 20:13Speaker 12

  So it's literally just the input over output. So, or sorry, output over input. So if we look at how much is being produced per unit labor and capital, that's and, and how that's growing. So we have a measure of how much labor and capital are going into the economy. And we look at what the output is that we're getting for that in GDP terms. There's your, there's productivity. So it's really just, it's a simple.

• 20:33Ed Zitron?

  What is the labor measurement?

• 20:35Speaker 12

  So the labor measurement goes back to sort of what the size of the labor force, hours worked, all of the BLS, the, all the BLS aggregate data plays into that. So, but it's a good question though, because there's another, there's two ways, obviously, well, multiple ways to increase productivity. People can become more productive, but I can also introduce a lot more capital into the economy and replace people and also become much more productive, right? There's a two, multiple ways to increase the productivity numbers. And so you have to be very careful because people keep citing data showing that the US is becoming more productive, but it doesn't have very much to do with individuals becoming more productive. It's because we're increasingly replacing individuals with capital and that too, show, shows up as higher productivity in the economy.

• 21:16Ed Zitron?

  But are we actually doing, are we actually doing that though? Because I've seen data that says productivity isn't really growing, at least.

• 21:26Speaker 12

  No, no, it's not. But it's, there's, every once in a while you'll see a blip and then of course instantly people seize on it and say, ah, there it is. It's showing up in the economy. And generally speaking, that's right now, that's almost entirely an artifact of, of, of capital spending, not labor. And so it's not showing up on the labor side. It's showing up on the capital side. And you see this all the time. It's classic, in behavioral finance terms, it's classic motivated reasoning. I see some data, I have a bias, this proves my point, it must be right. And so that's what's happening. And, you know, we see this in healthcare data. There was a, and Andreessen Horowitz graph making the rounds yesterday, trying to show that mortality was sharply decreasing in US hospitals in the ones that were, you know, adopting AI the fastest, in which is ridiculous claim, right?

• 22:10Ed Zitron?

  I saw that too. That made me very angry.

• 22:14Speaker 12

  Well, it's too, you know, there's so many issues with this kind of thing and it's, you know, we can get into it, but it's in part has to do with what is AI spending, what are they spending on? Well, they were spending on AI scribes. Well, which hospitals spend the most on AI scribes? Well, the wealthiest hospitals spend the most on AI scribes. Well, what's happened also inside of the wealthiest hospitals? Well, they have the best outcomes and the healthiest patients. There you go, voila. We just found another way to filter hospitals and say, it's, it's really just a proxy for hospitals that have the, you know, that are the, have the healthiest patients and the wealthiest.

• 22:47Ed Zitron?

  Right, because they have the largest discretionary budgets and.

• 22:51Speaker 12

  Right, right. It's exactly what you would expect to have happen if you found a new variable that filtered hospitals for healthy patients and wealthy hospitals. And so it's, this kind of stuff, going back to the other point though, is these are all examples of motivated reasoning. And you have to always be very careful when you find, you know, a data point that, that proves something you believe fervently or even religiously because, you know, you're so desperate to believe it. And, and I, you see this in the productivity data, you saw this in the A16Z health graph I was talking about. I mean, it's just sort of everywhere.

• 23:28Ed Zitron?

  All right, everyone, I'm back talking about Quince, one of my favorite clothing brands. And as we speak, I'm currently wearing one of their excellent cotton knit over shirts. I wear like a jacket, nice pre fall piece to wear as things cool off a bit. I've also been eyeballing one of their heritage water resistant Harrington jackets too, for later in the year, to pair with their Mongolian cashmere sweaters I bought. And I have several of them and I really can't recommend Quince's stuff enough. I love Quince because they focus on high quality wardrobe staples made with premium materials, jackets, pants, fitted tees and polos, activewear and even travel gear. Everything at Quince is priced 50 to 80% less than similar brands. And because they work directly with ethical factories and cut out the middlemen, you're getting more for less. Find the four pieces you'll

• 24:09Ed Zitron?

  reach for most at Quince. Download the Quince app for app exclusive offers or go to quince.com. Get free shipping on your order and 365 day returns. Now available in Canada and the UK too. And when Quince asks where you heard about them, let them know it was on Better Offline. It's the best way to support the show.

• 24:28Speaker 03

  Snoring, gasping for air during sleep, daytime sleepiness. I'm Shaquille O'Neal and this shouldn't be anybody's experience. Ask your doctor about Zepbound Trisepotide, the first and only FDA approved prescription medicine for moderate to severe obstructive sleep apnea in adults with obesity.

• 24:44Speaker 04

  Zepbound is a prescription medicine used with a reduced calorie diet and increased physical activity to help adults with moderate to severe obstructive sleep apnea, OSA, and obesity to improve their OSA. Zepbound is approved as a 2.5, 5, 7.5, 10, 12.5, or 15 milligram injection. Zepbound contains trisepotide and should not be used with other trisepotide containing products or any GLP-1 receptor agonist medicines. It is not known if Zepbound is safe and effective for use in children. Don't cheer needles or pens or reuse needles. Don't take if allergic to it. Or if you or someone in your family had medullary thyroid cancer, or if you've had multiple endocrine neoplasia syndrome type two. Tell your doctor if you get a lump or swelling in your neck. Stop Zepbound and call your doctor if you have severe stomach pain or a serious allergic reaction.

• 25:29Speaker 04

  Severe side effects may include inflamed pancreas or gallbladder problems. Tell your doctor if you experience vision changes before scheduled procedures with anesthesia. If you're nursing, pregnant, plant to be, or taking birth control pills. Taking Zepbound with a sulphonal urea or insulin may cause low blood sugar. Side effects include nausea, diarrhea, and vomiting, which can cause dehydration and worsen kidney problems.

• 25:51Speaker 03

  Talk to your doctor. Call 1-800-545-5979 or visit zepbound.lily.com.

• 26:00Speaker 13

  The world is transforming faster than ever. And standing still isn't an option. At Oppenheimer, we're working at the forefront of the innovation economy to invest where progress begins. Finding opportunities that build and protect wealth for individuals and institutions that want a seat at the edge of tomorrow. Put the power of Oppenheimer thinking to work for you. Wealth management, capital markets, investment banking.

• 26:28Speaker 14

  What if you could have more wins, more support, more sound effects? At LPL Financial, we like the sound of that because LPL offers more. Advisors, what if you could have more ways to help your clients? Ready to invest? What if you could find an advisor that really understands you? When it comes to your finances, your business, your future, at LPL, we ask, what if you could?

• 26:53Speaker 15

  Paid advertisement. Investing involves risk, including potential loss of principal. LPL Financial, LLC, member FINRA, SIPC.

• 26:58Speaker 16

  Summer's still going strong. Make a stop at Total Wine & More for white wines, beer, and ready to drink cocktails. Just know you're getting the lowest prices. Keep the summer celebrations going at Total Wine & More. Spirits are not sold in Virginia and North Carolina. Drink responsibly. Be 21.

• 27:14Speaker 17

  This is Danielle Fishel.

• 27:16Speaker 18

  Ryder Strong.

• 27:17Speaker 19

  And Will Friedle from Pod Meets World.

• 27:19Speaker 17

  Halloween has a funny way of making you buy things you'd never normally buy. A 10 foot skeleton? Sure.

• 27:25Speaker 18

  Full size fog machine? Why not?

• 27:28Speaker 19

  Three bags of candy that somehow becomes six bags of candy? It happens.

• 27:32Speaker 17

  Which brings us to the Chase Freedom Flex card, the savvy decision that will earn you more cash back on the everyday purchases, plus the extraordinary Halloween tricks and treats.

• 27:42Speaker 18

  With Freedom Flex, you earn even more treats on your Halloween and everyday needs. You get 5% cash back on popular rotating quarterly categories, 3% on dining and drugstores, and 1% on all other purchases.

• 27:56Speaker 19

  More ways to earn, more ways to get rewarded. That's no tricks, all treats.

• 28:01Speaker 17

  More ways to earn, more ways to get rewarded. So sign up for the Chase Freedom Flex card. Learn more at chase.com/getflex.

• 28:08Speaker 18

  This is a paid collaboration with Chase Freedom Flex. Cards issued by JP Morgan Chase Bank, NA, member FDIC. Subject to credit approval. Offer subject to change. Terms apply.

• 28:18Speaker 06

  Even on my antidepressant, I still struggled with depression symptoms.

• 28:22Speaker 07

  You okay, honey?

• 28:23Speaker 06

  I'm okay, ish. My doctor said adding Rexulti Brexiprazole could help.

• 28:28Speaker 07

  When added to an antidepressant, Rexulti was proven to significantly reduce depression symptoms, more than an antidepressant alone. Elderly people with dementia-related psychosis have increased risk of death or stroke. Antidepressants may increase suicidal thoughts and actions, and worsen depression in children and young adults. Call your healthcare provider right away to report new or sudden changes in mood, behavior, thoughts, or feelings, or if you develop suicidal thoughts or actions. Report fever, stiff muscles, and confusion, which can be life threatening, or uncontrolled muscle movements which may be permanent. High blood sugar can lead to coma or death. Weight gain, increased cholesterol, unusual urges, dizziness on standing, falls, seizures, trouble swallowing, or sleepiness may occur. Learn about these and other side effects at rexulti.com. Tap ad for PI. Hey, how you doing, honey?

• 29:10Speaker 06

  Okay.

• 29:10Speaker 07

  Okay-ish?

• 29:12Speaker 06

  No-ish. I'm okay, really.

• 29:14Speaker 07

  Ask your doctor about adding.

• 29:24Ed Zitron?

  I've learned this lesson myself like a few years ago, like in 2024, there were so many times where I made this mistake, where it's just you take, you find a data point, you hope it proves everything. And these days, while I do absolutely use data points, as I kind of did with the AI capex not being used thing, that was at least, hey, you can point a construction in progress and say, oh, you have hundreds of billions of stuff not being used versus just saying, oh, productivity data is up, that must be AI. Or it's down.

• 29:53Speaker 12

  Yeah, yeah, yeah. It's seizing on these data points to prove something that you're, you know, you really want to believe. I'm always very suspicious of anything when I feel almost an emotional triumphalism. When I, when I see something, I say, aha, this is exactly what I thought. And I'm like, okay, you know what? Let's be a little, let's cool down a bit here because this probably is an emotional motivated reasoning response. Anyway, so across the board, you see this now. So going back to the original point, it's now in the treasury data. It was in the originally in GDP data. And so just on the, on the inflation data, I'll take it one step further, which is even more, which is even crazier. If you back out all the AI capex related inflation, and if you back grant me that energy increasingly is

• 30:35Speaker 12

  being driven by this campaign that was AI enabled and thus AI has a role in it. Back those two pieces out of the US economy.

• 30:42Ed Zitron?

  When you say, and sorry, I hate to do this. When you say energy in this case, what are we measuring?

• 30:47Speaker 12

  Okay, so there's two, there's multiple components to this. So the inflationary component in this, from the standpoint of US consumers is utility prices and gas prices. So it's not, let's not get into the embedded price of gasoline or energy in terms of how it plays into the products you purchase. But that obviously is another issue and because it shows up in shipping and other places. But the direct one that people are feel most consequentially are prices at the pump, if whether you're an individual with gas or a trucker with diesel. And then obviously utility prices, both of which, both pieces of which have gone sharply higher over the last three years, in part driven by either competition for the, for energy from the standpoint of data centers or the Iran war.

• 31:31Speaker 12

  So these two things, and I'm arguing that the Iran war is in part a function of the sort of emboldened US government treating everything as kind of a, an AI enabled app in the wake of Venezuela. So if you grant me that, then what you find out really quickly is actually the US economy far from being very strong and actually going, growing so strongly that it's justified for the Fed to raise rates to try and choke off inflation. Back those pieces out and by my math, the US is actually in a deflationary mode, about a quarter of a percent. So what we have happening is something very analogous to what happened in the walk, walk up to the, the crash of 29, which is you had the Fed raising rates because it misunderstood what was actually happening in the economy and it thinks it's

• 32:13Speaker 12

  choking off inflation. But the inflation is actually something exogenous, something different than what they expect. It's being driven by this capex and by these, this anomalous work. So as a result, as this unwinds and it will unwind, the war will end and capex will taper off. You actually have high rates in a weak consumer environment, which is a classic precursor to what, there's an economist named Richard Koo, who's written a lot about the Japanese 15 year recession that was sort of went on and on and on. People called it the happy recession.

• 32:44Ed Zitron?

  The lost era.

• 32:45Speaker 12

  Yeah, yeah, yeah. The lost era. So those, those are classic precursors to those kinds of recessions because you now have companies that have loaded their balance sheet up and will take a decade for them to unwind all this debt. So rates will have no impact on them. They'll simply be trying to cut spending to reduce debt and that will play out over the next 10 years. So we've got all the pieces in place right now for a very long balance sheet recession analogous to what happened in Japan in its, in its last decade.

• 33:13Ed Zitron?

  And what does a balance sheet recession look like? Because this is actually something I've been thinking about a lot where, okay, you bump up interest rates, but when a lot of the reason the interest rate, like when inflation is happening in one specific area, specifically to companies that are not interest rate sensitive. Let's be very clear about this, like SoftBank, SB Energy is trying to raise it 10%. Yeah. Like just what, what are you doing here? Like CoreWeave raises at nine, 10% and the hyperscalers will, yeah, six or seven percent. They are going to keep raising them out of what? How like, what does, what does that lead to? What is this balance sheet recession?

• 33:52Speaker 12

  So what happens is, and leaving aside for a second, some of the more, how shall I say, less investment grade prospects out there, the CoreWeaves and others, because they're, they face a different, a different problem, which is as they try to roll over their debt, it may come at on terms over the next five years that forced, that forced them into some species of insolvency. And that's fairly typical. But let's say you're a hyperscaler, some of the largest companies out there that don't face solvency risk, they're not going to likely go broke. What they're going to spend the next decade doing is cleaning up their balance sheet because they just went from some of the least indebted companies in the market. Tech historically had very low levels of long term and short term debt to some of the most indebted companies in the economy. And we see this as they, as they sort of soak up all their cash flow and sort of in the case of some of these guys

• 34:36Speaker 12

  increasingly teeter on the edge of having their credit rating downgraded. And so what a balance sheet recession means is essentially, I'm having to put myself into a kind of, like a debt workout and say, I'm going to spend the next 10 years getting all this debt off my balance sheet again, because it doesn't need, I don't want to have it there anymore because it's no longer required for, you know, ongoing purposes, because I'm not spending that heavily in future and I'm being punished for it because I have this huge debt obligation. So think about the consequences. You're not spending on growth. You're not spending on employees and you're trying to unwind all this debt and get it off your balance sheet. So a balance sheet is recession is a workout where heavily indebted companies, irregardless of interest rates, continue to try and get, get themselves less leveraged,

• 35:21Speaker 12

  get the debt off their balance sheets. And so the problem is of course, this is going to come at a time when there's already other pressures on hiring, you know, the, the AI effects at the margin. So the, the effects overall on hiring will be even more dramatic because companies are, will be focused entirely on deleveraging. So at the same time as they're looking for opportunities to use AI to have what fewer people around. So this will be really consequential over the next five years. And it's really not well understood that we kind of sit on the edge of a, of a Japan moment in terms of the likelihood of a balance sheet recession, given that there's this really profound misunderstanding of what the causes are of inflation in the economy and what, what the effect that rates are going to have. And we're actually sitting in a kind of deflationary moment masked by what's happening in AI.

• 36:06Ed Zitron?

  And how does that manifest for regular people?

• 36:09Speaker 12

  So for regular people, the, your expectation should be that over the next, say, over the next year or so, we'll start seeing increasing signs that the economy is much weaker than people expect. And as a result, we'll probably be heading into a relatively longer recession, which is inevitable after a moment like this. A longer recession than people expect that with a few policy, policy errors could easily be something on par with what often is called a depression. So a recession that turns into a depression, which means multi-year and really consequential in terms of companies and themselves becoming insolvent as they try to work off debt. So the problem of course is, is normally when that happens, the government

• 36:49Speaker 12

  steps in and tries in a Keynesian way and tries to replace the lost consumer spending with increased fiscal spending. And the problem of course is, is that most, and there was a great IMF report out this week showing that most countries around the world are basically all fiscal stimulus out because we've gone through multiple episodes over the last 15 years. And so there isn't a lot of headroom anymore to bail out your own economies as we sort of approach this inevitable moment. So your expectation as a consumer should be that the, the so-called, you know, you could call it the Bernanke put, this idea that Ben will save us. And then it was the Greenspan, I suppose in the other order.

• 37:28Ed Zitron?

  And that just isn't a possible.

• 37:29Speaker 12

  It's not possible here. Right. And in particular, because fiscal policy is being increasingly rendered impossible because of the indebtedness of major sovereigns around the world and monetary policy rates, as we've been discussing, is, is almost impotent because of the nature of what's going on. And so you have this double whammy problem.

• 37:48Ed Zitron?

  So it's just, so there'll be, I feel like there's one thing with your, your idea here that I'm pushing back on, which is, we haven't seen the AI side actually in productivity. So it just kind of feels like everything will get more expensive, more people will get laid off. And then, yeah, nothing will happen. Like, it's not like there's.

• 38:08Speaker 12

  Oh, no, no, listen.

• 38:09Ed Zitron?

  Replacing them with AI.

• 38:10Speaker 12

  Yeah, yeah, yeah. So it's, it's, you have option A and option B, and both of them are bad. Right? So either one leads to whether companies are just experimenting madly because they feel they must, and they discover that there's the productivity benefits aren't really there, or they find some productivity benefits, however modest, and they use that as a justification for further cuts to work with. The consequences economy wide are the same. You're into a multi-year recession and then because of this balance sheet problem, something that teeters on the edge of being a depression or, or at least a decade will work out like the, the happy recession in, or the last decade in Japan.

• 38:48Ed Zitron?

  So what finally stops hyperscalers borrowing? Because at this point, it kind of feels like they don't care. But the same, like, where are the limits on this? Because they've, I've, I've seen like 300, 400, 500 billion dollars thrown at us. How much they'll have to raise in the next year or two?

• 39:06Speaker 12

  Yeah, no, that's for sure. So there's, there's physical limits and there's, and there's, and there's financial limits. So the physical limits, obviously, we're already seeing. There was a great piece in the FT the other day talking about how, and it's so loopy to me, to use the technical term, like, how dramatically short we are in terms of the amount of power required to power up all of the GPUs that are currently sold and forecast to be sold. And you've been really good on this, showing this is just, something doesn't make sense in here. There's a dramatic disconnect.

• 39:35Ed Zitron?

  Yeah, there is a, there is a really big disconnect that actually genuinely worries me.

• 39:40Speaker 12

  Yeah, and I think you're spot on with that. And there's all kinds of reasons for what's happening there. But the math doesn't work in terms of our ability to power up data centers on a scale commensurate with the numbers of GPUs being sold in the data centers. I won't say built, but at least specked. And so there, there's a natural physical limit in here, but the system is the issue that I look to. So the system is telling you through what's happening with inflation, what's happening with the 10-year, that it's under immense stress. The system is under immense stress.

• 40:13Ed Zitron?

  That means the interest rates are being, so when the interest rates are high, sorry, I've got to be, for my sake and listeners, when the interest rates are high, that is the system kind of screaming a little.

• 40:23Speaker 12

  Yeah, the system's screaming at you and saying, I don't know where this money's going to come from, so I'm going to have to raise, the system is autonomously doing this, no individuals out there, there's no, like the Von Trapp family or something. There's no one actually doing this and saying, I'm going to raise it. So the system is raising rates because it says, you know what, I don't know, I need to bring money out of unusual places because the only way that we can justify or get enough capital for what you say you need is by having rates go higher and pull in capital from other places. And so the systems, that's really just a sign of stress because what happens next is the hurdle rate, the amount that this, that these, the data centers have to earn goes up constantly as a result of the rise, the rising 10-years. The 10-year has gone up like 100 basis points over the last, so, you know, 1% roughly over

• 41:08Speaker 12

  the last six months, or even last three months, which is crazy. So that directly translates into the funding costs for new data centers, but it doesn't stop there because if the, if the 10-year goes up 100 basis points, the spread goes up even more, meaning that it's not just that I now have to rate, I have to put out my debt at 100 basis points higher. The system recognizes that this is a stressful moment. And so the spread between the rate at which you raise and the rate on 10-years, which is often something you use to anchor the, the cost of financing, might go at 150, might go at 200 basis points because the system's under stress. So every time you see rates increase, say to yourself instead, oops, it just got a lot more expensive and difficult for data centers to justify the future cash flows on top of

• 41:52Speaker 12

  which they're, they're building these data centers. And so to answer your question, we're within six to 12 months on the outside of this, of that aspect of it all breaking because it's very clear that they're not going to earn 11 and 12%, which are the kinds of numbers we're seeing at the, at the most stressed end of the market, 10 plus anyways. That's not going to happen. There's no economics that does that.

• 42:15Ed Zitron?

  So, but there's also another problem, which is for the hyperscaler debt that's already been sold. So the bondholders are now effectively making less money on that, as in their bonds are worth less. Because there's new debt that's paying better. So anyone who's invested, anyone, any bond investors who invested earlier will probably hold them to maturity, meaning they'll get paid off. But at the same time, their underlying holdings are worthless.

• 42:39Speaker 12

  Yeah, right. That's exactly right. So, but that in turn has, that in turn has consequences because that debt is collateral. No one just holds anything. It's, that's used as collateral for other economic activity that I'm doing, whether it's, you know, leverage or other borrowing. And so as this debt becomes less valuable, it reduces my ability to other things in the economy as a functioning, you know, kind of economic actor. And so you have to always think about it. I like to point people, there's some great books out there by people like Donna Meadows and others, like, think about it in systems terms. You have to always connect everything to everything. And what happens whenever the debt becomes less valuable? Okay, I can't do as much. Well, what, what are the consequences of that? Like, connecting everything, for whatever reason, is really hard for people to do.

• 43:21Speaker 12

  And the system's telling you, it's telling you, it's screaming at you, whether it's the world trade data, the inflation data, the 10-year data, that the system is both under stress and wildly connected. And all of these pieces are, are, you know, reaching breaking points.

• 43:35Ed Zitron?

  But what makes it, what exhausts the system? Like, what slows this down? Because I, one of my moments of naivete was believing that good sense would take over. That's never happened in history. I've now read more for history and realizing, yeah, so I, yeah. So what is it that actually exhausts this? Where are the limits of the money? I'm not asking for a time period so much as an event series.

• 43:59Speaker 12

  I, I say this all the time, but I think it's over determined, meaning there's so many ways this can break because of all of those ways in which the system is under stress, whether it's in trade flows, whether it's in, you know, there's the likelihood of a balance sheet recession, whether it's in the increasing hurdle rate on new data center debt issuance. All of these, all of these are places it can break. My, my guess is it breaks in somewhere because this is the way these things tend to go. It breaks in somewhere unexpected, like we have a botched 10-year treasury auction. Wouldn't surprise me at all.

• 44:30Ed Zitron?

  By which you mean there is insufficient demand for it?

• 44:34Speaker 12

  That's correct, yeah. So they said, here's how much we'd like to sell. We can't sell that at anywhere near this price. And if you saw that, something like that happen, which would be an artifact of what's happening in AI data centers, the spreads on 10-years would blow out, meaning they would get much, much wider, they would get much larger. And the rates would go higher, but it would, it would explode your ability to raise debt at any economic price in the world of, of data centers, whether you're a hyperscaler or a junk issuer, it doesn't really matter. And so that, the system's telling you it's on the edge of that right now. And so that would surprise me zero, in part because people like Scott Bess and are saying that could never happen, which for me is always, you never say never when it comes to this stuff.

• 45:13Ed Zitron?

  And I will say, a friend of mine in fixed income has told me that in the event you ever hear about the treasury, or sorry, the, is it the treasury that sells bonds, right? Or is it, yeah, cool. Not, not pleased to you there. If you ever hear about a technical issue, the delayed an auction, that's what happened. That's what I've been told, like, if there's a, yeah, if you ever hear about there being a tech, yeah.

• 45:36Speaker 12

  Yeah, that's exactly right. So there, for me, that's, that's the, that's the place to look because what's happened is, is this stuff has, as I keep saying, it's kind of metastasized outside the orthodox places. And tech bros are really bad at thinking in these terms because they think exclusively in terms of, it's Christmas morning and look, there's all these gifts for me under the tree and I don't really care how it's being paid for. Because that historically was an ortho, was a relatively defensible way of looking at things, was I don't know what's going on and, you know, I don't know, fiber optic cables, but all I know is it's now cheap for me to get streaming movies. The difference, the difference this time is that the scale is so consequential that it's actually distorting not, not just trade flows, not just inflation, but also the very essence of what it is to be an independent sovereign.

• 46:21Ed Zitron?

  Yeah, it just feels like there is something, like, it's not going, it's not going to be that they just borrow too much, it's just the system is going to exhaust itself somehow.

• 46:29Speaker 12

  Oh, no, no, the system will crack. It'll, there's no question in my mind that it'll crack. It'll probably happen, and it could start in Europe and come this way, but it's going to, it's going to be a sovereign and issuance problem where someone's going to have a, a technical issue with a major issuance that around probably is sort of a 10-year duration. And then that'll float around the world, cause spreads to blow out, in which it'll have consequences in terms of the existing debt and the solvency of all of these people playing in this area. And again, not because AI isn't, you know, useful in many contexts or whatever else. That's all, I won't even get into that debate. Just because the scale of the problem dictates this must happen. And the system is telling it, but people don't want to listen.

• 47:19Speaker 03

  Snoring, gasping for air during sleep, daytime sleepiness? I'm Shaquille O'Neal and this shouldn't be anybody's experience. Ask your doctor about Zepbound Trisepotide, the first and only FDA-approved prescription medicine for moderate to severe obstructive sleep apnea in adults with obesity.

• 47:35Speaker 04

  Zepbound is a prescription medicine used with a reduced calorie diet and increased physical activity to help adults with moderate to severe obstructive sleep apnea, OSA, and obesity to improve their OSA. Zepbound is approved as a 2.5, 5, 7.5, 10, 12.5, or 15-milligram injection. Zepbound contains trisepotide and should not be used with other trisepotide-containing products or any GLP-1 receptor agonist medicines. It is not known if Zepbound is safe and effective for use in children. Don't share needles or pens, or reuse needles. Don't take if allergic to it. Or if you or someone in your family had medullary thyroid cancer, or if you've had multiple endocrine neoplasia syndrome type 2, tell your doctor if you get a lump or swelling in your neck. Stop Zepbound and call your doctor if you have severe stomach pain or a serious allergic

• 48:20Speaker 04

  reaction. Severe side effects may include inflamed pancreas or gallbladder problems. Tell your doctor if you experience vision changes before scheduled procedures with anesthesia. If you're nursing, pregnant, plant to be, or taking birth control pills. Taking Zepbound with a sulphonal urea or insulin may cause low blood sugar. Side effects include nausea, diarrhea, and vomiting, which can cause dehydration and worsen kidney problems.

• 48:43Speaker 03

  Talk to your doctor, call 1-800-545-5979, or visit zepbound.lily.com.

• 48:51Speaker 13

  At Oppenheimer, we're proven because we're grounded in discipline. For 145 years, we've been building and protecting wealth through every market cycle with precision, clarity, and the courage to think boldly beyond the moment. This is what market-tested legacy looks like for this generation and the next. Put the power of Oppenheimer thinking to work for you. Wealth management, capital markets, investment banking.

• 49:20Speaker 14

  What if you could have even more and more and more help to pursue your goals? At LPL Financial, we offer more ways for advisors and their clients to thrive. So what if you could?

• 49:30Speaker 15

  Paid advertisement. Investing involves risk, including potential loss of principal. LPL Financial, LSE member, FINRA, SIPC.

• 49:35Speaker 20

  I'll admit it, I'm one of those people who gets excited for football season way before the first kickoff. That's why a trip to Total Wine & More has become part of my game day routine. I can get the cooler ready with my favorite beers and ready to drink cocktails. I'm usually picking up enough for everybody, so it's nice knowing I'm scoring the lowest prices. This season, make Total Wine & More part of your game day tradition. Spirits are not sold in Virginia and North Carolina. Drink responsibly. B21.

• 50:05Speaker 17

  This is Danielle Fishel.

• 50:06Speaker 12

  Ryder Strong.

• 50:07Speaker 19

  And Will Friedle from Pod Meets World.

• 50:09Speaker 17

  Halloween has a funny way of making you buy things you'd never normally buy. A 10-foot skeleton? Sure.

• 50:16Speaker 12

  Full-size fog machine? Why not?

• 50:18Speaker 19

  Three bags of candy that somehow become six bags of candy? It happens.

• 50:23Speaker 17

  Which brings us to the Chase Freedom Flex card. The savvy decision that will earn you more cash back on the everyday purchases, plus the extraordinary Halloween tricks and treats.

• 50:32Speaker 12

  With Freedom Flex, you earn even more treats on your Halloween and everyday needs. You get 5% cash back on popular rotating quarterly categories, 3% on dining and drugstores, and 1% on all other purchases.

• 50:46Speaker 19

  More ways to earn, more ways to get rewarded. That's no tricks, all treats.

• 50:51Speaker 17

  More ways to earn, more ways to get rewarded. So sign up for the Chase Freedom Flex card. Learn more at chase.com/getflex.

• 50:58Speaker 12

  This is a paid collaboration with Chase Freedom Flex. Cards issued by JP Morgan Chase Bank, NA, Member FDIC. Subject to credit approval. Offer subject to change. Terms apply.

• 51:08Speaker 06

  Even on my antidepressant, I still struggled with depression symptoms.

• 51:12Speaker 08

  You okay, honey?

• 51:14Speaker 06

  I'm okay-ish. My doctor said adding Rexulti Brex Pitrazole could help.

• 51:18Speaker 07

  When added to an antidepressant, Rexulti was proven to significantly reduce depression symptoms, more than an antidepressant alone. Elderly people with dementia-related psychosis have increased risk of death or stroke. Antidepressants may increase suicidal thoughts and actions, and worsen depression in children and young adults. Call your healthcare provider right away to report new or sudden changes in mood, behavior, thoughts, or feelings, or if you develop suicidal thoughts or actions. Report fever, stiff muscles, and confusion, which can be life-threatening, or uncontrolled muscle movements which may be permanent. High blood sugar can lead to coma or death. Weight gain, increased cholesterol, unusual urges, dizziness on standing, falls, seizures, trouble swallowing, or sleepiness may occur. Learn about these and other side effects at rexulti.com. Tap ad for PI. Hey, how you doing, honey?

• 52:00Speaker 06

  Okay.

• 52:01Speaker 07

  Okay-ish?

• 52:02Speaker 06

  No-ish. I'm okay, really.

• 52:04Speaker 07

  Ask your doctor about adding Rexulti.

• 52:09Speaker 01

  Hi, I'm Steph, and I work at United Healthcare. When I think about United Healthcare's members, I think of my own family. My niece was diagnosed with an ultra-rare genetic disorder. I know how hard it is for families. At United Healthcare, we can make it easier.

• 52:24Speaker 02

  I'm Brian. I care because I know what it's like to not speak the language. It's not easy. Health insurance is complicated. I would say our job is to make everything easy for our UAC members. I work for United Healthcare. I'm committed to care.

• 52:44Ed Zitron?

  It feels just impossible. Like, they can't afford all the CapEx next year. Like, we've established that. So at some point, at some point, they just... I mean, hyperscalers must have a point at which it's too hot for them. Like, it must... There must be a point when it's too expensive. It just depends on how bad it becomes.

• 53:03Speaker 12

  But the problem is, like, it's the Chuck Prince line, right? From back in the GFC, from the financial crisis. As long as the music keeps playing, I keep dancing. If you... You can't stop, right? It's a classic collective action problem. No different than the collective action problem whenever Dario put out the memo a couple of weeks ago, asking for a frontier pacing slowdown, blah, blah, blah. And leaving aside whether you thought that was a good idea or a bad idea, you instantly found the system thrown into a prisoner's dilemma, where everyone was... You could tell everyone was busy trying to find an angle to defect, because if we all cooperate, but I defect, I make more money than anyone else, and you're right back into a race again. The exact same thing is true in the context of fundraising. If all of your peers suddenly stop raising money because they see this as a collective

• 53:46Speaker 12

  action problem, and we're walking off a precipice, great, I'm the only guy left who's still out there raising prodigious amounts of money. I get to own the market. And of course, on goes the race, because then everyone sees that, and they all defect, and we're right back where we were before.

• 54:00Ed Zitron?

  So you mentioned... Do you have any idea around what the payoff now needs to be on a data center? To make it worth it? Like, I'm what?

• 54:08Speaker 12

  Well, yeah.

• 54:09Ed Zitron?

  I'm surprised I haven't sat down and done the math. Yeah.

• 54:12Speaker 12

  Yeah, so you just can do it from a yield standpoint. I mean, so the median is now around 7.2%. So you can do the math pretty easily in terms of... Think about it.

• 54:19Ed Zitron?

  What does that mean? Sorry, just...

• 54:21Speaker 12

  So that's what the hurdle rate, that these things are required to earn back, to justify, to attract investors at the investment-grade end of the marketplace. It's more like 10% at the junk.

• 54:32Ed Zitron?

  Yeah, so it's like, you need to own 7% on the investment a year? Sorry.

• 54:36Speaker 12

  That's right. That's right. So that's what debt investors are telling you they will take. So that's not the same thing as saying, how much I have to earn to earn back the capital that's been spent. That's a completely different problem. I think it's unlikely you could ever earn it back, but you can at least attract debt investors on those terms. So there's two different issues here, right?

• 54:53Ed Zitron?

  Yeah, so how much? So you have to... So you basically, for a hyperscaler, you need to make about 7% per annum?

• 55:00Speaker 12

  Right. Which continues to rise, but on that order of things. That's right.

• 55:04Ed Zitron?

  And that's...

• 55:04Speaker 12

  Which people will say is, oh, that's really straightforward. You know, Gavin Baker's out there telling you that, right? That the margins on these things in terms of pure inference are so high. But of course, the problem is that this is the classic phenomenon of, I call it like earnings before bad things. So if I cut out all of the things that are costing me a lot of money, and then I calculate EBBT, not EBIT, but EBBT, earnings before bad things, then my cash flow is tremendous. Well, then, fine. Show me the hyperscalers that have stopped spending on frontier models, and I'll buy the argument that the economics now make sense, purely in terms of commodity inference. But if you go to the world of saying, okay, fine, industrial inference is actually a relatively high cash flow business. Let's just grant them that. Then the question becomes, well, who's going to win that?

• 55:48Speaker 12

  Well, if it's just industrial inference, so then meaning that I'm just doing, you know, token completion sequences as low cost as possible and at the highest scale possible, that's really just an energy problem? So it's just who can throw the most energy at this? China's throwing, on an annual basis, roughly three times, adding three times as much capacity per year as the United States is, and is already ahead of the US, right? In terms of the amount of energy it's thrown at this. So it's fairly straightforward. You're just looking at solar panels, but it happens to be tokens.

• 56:19Ed Zitron?

  So, but that's the thing. Even with standing-up inference, because is inference profitable? Is that the Wario is libertarian conversation online when it comes to this stuff? It's like, and no one can really... I think it's unprofitable. But the reason I do is, is because inference isn't just, oh, I turn on the inference machine. It's you buy an allocation of GPUs, and you need a certain level of saturation and a certain amount of customers to make it viable. And if you miss that demand calculation, it's horribly unprofitable.

• 56:53Speaker 12

  Oh, absolutely. Which is a classic scale problem, right? That either I'm... It's kind of like running an airline, right? Either I'm... You're a very, very high fixed cost business. So either I'm fantastically profitable, or I'm aft, right? And if you... And very few people are able to run it at a scale requisite to be able to, you know, generate those kinds of cash flows from covering the high fixed cost. And so this is the deep problem. And then if you take it the next step and say, if that is the nature of what's going on, and tokens are this globally fungible commodity, and so that's the market's moving towards industrial inference, it's, you know, fairly straightforward to see who the winners are going to be, and it ain't going to be OpenAI and Anthropic.

• 57:32Ed Zitron?

  Yeah, it just... It feels so inherently doomed. But now, you know what? You said Anthropic. And before we got on, you were mentioning you'd heard some strange things, and I am now curious about how strange those are.

• 57:45Speaker 12

  Yeah, so I keep hearing these unusual things about what's going on over there. And I mean, obviously, the most unusual thing was the company was racing fairly madly for reasons that didn't make a lot of sense to an IPO, which was supposedly, I think was supposed to be October 1st, was the first dates I heard.

• 58:00Ed Zitron?

  Yes.

• 58:01Speaker 12

  And now, allegedly, and again, this is all just, you know, financial markets and tech market babble, but it's now allegedly in November. And so that's getting pushed out. And my general thesis is, is that even in a good year, if you say you're going to go public in a... Late in the year, odds are at least 50% it won't happen that year, because lots of things can happen toward the tail end of the year. And of course, this one's coming after the midterm and elections in the United States. Who knows whether or not any of these AI companies get nationalized in that period? So there's a forced equity stake. All of these things could radically change the likelihood of the company going public. So there's raging panic inside the company about the nature of what an IPO this year would even look like, given what's happening out there.

• 58:46Speaker 12

  And you can take it further, because if... Let's say I'm an employee, and this is something I'm hearing from people inside. Take it further and think about it in terms of employees having exercised their options, purchased their options in anticipation of an upcoming IPO. And then the IPO doesn't happen. Well, what happens? Well, let's say it eventually...

• 59:04Ed Zitron?

  You just dumped all your cash into buying stock or buying into your stock?

• 59:08Speaker 12

  You generate a massive tax bill under the IRS has this thing called AMT. So under AMT, you just bought something cheaply, your options, exercised them cheaply for a low price, and then you, in turn, have been generated, given something with value. It doesn't care that you never got any cash out of it, that the company never went public. So I know of people who take... That's right. So I know of people, many people, who've taken out multimillion-dollar loans to exercise their options and purchase them, and then have... Are going to be phased, if this thing doesn't go public this year, with multimillion-dollar AMT bills, because the company didn't go public. So this has happened...

• 59:45Ed Zitron?

  Yeah.

• 59:46Speaker 12

  Sorry, go ahead.

• 59:47Ed Zitron?

  Is it usual that a company... This is not a leading question. Is it unusual or usual that a company delays their IPO what appears to be twice? Because they were meant to do it in September, then it's October, now it's November.

• 1:00:01Speaker 12

  It's uncommon in general with a blue chip company. So a company that's seen to be a marquee company that the entire sell side is beating each other up to underwrite, it's more likely that it happens on schedule than not. So this is really unusual. And so there's all kinds of reasons you might anticipate why, but it's very fraught as it gets closer to the end of the year, not least because of the political consequences in the US, given that this thing is kind of a laser target, but also the AMT consequences for employees, this IRS AMT issue, and further, obviously, the consequences for the company itself in terms of whether or not the valuation even looks like the kinds of numbers that they've

• 1:00:45Speaker 12

  been looking at. Because, again, this is complete, complete hearsay speculation, but a vendor who's fairly close to the company was told me that they had at least underperformed their expectations in the third quarter. I had no idea if that's-

• 1:01:02Ed Zitron?

  Anthropic did?

• 1:01:04Speaker 12

  Anthropic, that's right. So they had underperformed their expectations. Now, again, this was not from someone at Anthropic. This was from a third party who was with intimate knowledge of what the company was doing as a provider to them on a very large-

• 1:01:16Ed Zitron?

  I'm blanking my eyebrows nonetheless. I'm like-

• 1:01:19Speaker 12

  Yeah, yeah, yeah. Which is obviously really interesting. Isn't necessarily particularly surprising in the context of the numbers we keep seeing out there in terms of customer concentration-

• 1:01:30Ed Zitron?

  Well, also the token maxing as well. You had that era where everyone was blowing a bun.

• 1:01:35Speaker 12

  That's right. That's right. So this incredible customer concentration among customers who were token maxing and who have increasingly cut back. And so whenever you have two or three customers making up 60-plus percent of your revenues, and they were following a policy of token maxing, whatever else, it's not particularly surprising that you get this incredible pulse of revenues and growth at one point, and then you get a kind of air pocket later in the year. And that's exactly what it seems like we may be seeing.

• 1:02:04Ed Zitron?

  Yeah. And I mean, I don't know if you saw the SB Energy S1-

• 1:02:09Speaker 12

  I did. Yeah.

• 1:02:10Ed Zitron?

  Yeah. What a dog. But also, they have now pushed their IPO. It kind of feels like we're at the latter stages. I guess I've been saying that a while. But this feels like when you've got multiple IPOs being delayed with weird stuff happening around them. Like, there was the Anthropic story with the Financial Times, they should know better, where it was like, oh, yeah, they have 80% gross margins if you remove many of the costs.

• 1:02:36Speaker 12

  Yeah, right. The EBPT problem. Earnings before bad things again. So my general view on all of these things is, and it sort of goes back to this guy, Hyman Minsky, who talked about these sort of Minsky moments in financial markets, where financialization of the phenomenon takes over and detaches from any underlying reality. That's when things accelerate and then break. And that usually requires the public markets. It usually requires people to be dumping stuff into the public markets, investors dumping stuff. And so that's the moment we're at now. A year or two ago, there wasn't a public market component to this in terms of directly related to the frontier companies themselves. It was mostly, obviously, the GPU and memory providers. And so we're now in this moment

• 1:03:19Speaker 12

  where the companies at the center of all of this are in this kind of Minsky moment, where the financialization of what they're doing is so large and so broad, it's affecting everything. But at the same time, they're all very eager to dump the shares and get them out there on an incredibly large scale to retail investors. And that's the moment that where I think everything becomes, starts to crack and break, because you realize that this is that financialization Minsky moment where everything breaks down. And you're seeing a little bit of it already with the delays and everything else. And I mean, I don't know if you saw it, but there was even back in September, was it in September?

• 1:04:00Speaker 12

  I saw that there was at least one acquisition that Anthropic walked away from, that it was apparently in its late stages of trying to get done.

• 1:04:09Ed Zitron?

  Yeah, Descartes.

• 1:04:10Speaker 12

  That's right. So Descartes, right, yeah, Descartes. And so, again, not to overread into these things, but what tends to happen as people approach IPO, they feel kind of omnipotent that I have like a printing press in the basement, and I can buy anything and do anything. And when you see them start to pull back and think, you know what, that printing press isn't as powerful as I once thought it was, that's a really important tell about what they're seeing inside the business, because the printing press in the basement doesn't look as all-powerful as it once did.

• 1:04:38Ed Zitron?

  Well, as we wrap up, though, I wanted to talk briefly about this OpenAI non-IPO and the fact that they're raising at either-

• 1:04:50Speaker 12

  1.7 or something?

• 1:04:51Ed Zitron?

  Well, they want to raise at 1.5 trillion, which is amazing. So amazing. But what's great about it is apparently investors tried to preempt them and say, we'll give you 1.2, according to the New York Times. But then OpenAI said, no, we want 1.5. Is that not, even 1.2 feels, isn't 1.5 kind of a suicidal private valuation based on what they'll get on the public markets?

• 1:05:18Speaker 12

  It's obviously impossible to know what demented things public markets will do if you float. And this is the key. It depends on the size of the float.

• 1:05:26Ed Zitron?

  Load-bearing issue.

• 1:05:27Speaker 12

  Right? That's the thing. So if I do something like, I do a SpaceX, and I float a tiny sliver of my potential eventual public issuance, you can get any price you want in terms of an eventual valuation. And so that'll be the key. It really comes down to how cynical Sam wants to be in terms of whatever he decides to float. Because at a small enough float, you can do anything. I can get any valuation I want in the public markets. Of course, what happens then is, at a small float, when I then bring the rest of the stock out, six months, the employees all leave lockup, and all of that stuff comes to market, well, then the stock, of course, promptly craters, or at least craters in anticipation of it. And so my expectation is, the higher the valuation we see today,

• 1:06:12Speaker 12

  the smaller the float will be, and the more cynical the eventual IPO will be in terms of trying to manipulate the price.

• 1:06:17Ed Zitron?

  Yeah. And I think that my thing is, as well, is just a suicidal round for investors to put money in.

• 1:06:24Speaker 12

  Oh, of course.

• 1:06:25Ed Zitron?

  Because SpaceX is 2 trillion.

• 1:06:28Speaker 12

  Yeah, yeah, yeah. So you'll never, you have to think about it in terms of, if I'm a large institutional investor, not a retail investor, retail investors, God bless them, but if I'm putting in like, say, $50 to $100 million, or something like this, some giant sovereign amount of money into this at this price, my expectation has to be that I'll be able to sell fairly quickly post-IPO at a significant bump up. Well, fine, let's say I can get the bump up in price by floating only a small amount of the stock. You'll never be able to sell hundreds of millions of shares into that bump up, because there simply won't be the liquidity, given the small size of the float. So you'll be able to, on paper, say you made some money, but in practice, you're stuck.

• 1:07:07Ed Zitron?

  Yeah. This feels, it all feels like, to round up everything, like there is going to just be something that snaps and everything kind of falls apart. Because these things don't tend to fall apart because, oh, like, everyone decides to pull back for ethical or moral reasons. It's part of the system breaks, and everything falls apart around it.

• 1:07:32Speaker 12

  Right. And this is it. Because you can take it, that next step, and say, if it's this large of a P, if it's distorting inflation, and it's distorting the tenure, and it's distorting world trade, take that the next step. That's causing, and I use this term loosely, intelligent policymakers, because I'm not sure those exist anymore, but it's causing policy to be distorted. Because if you think, oh, you know what, tariffs didn't have any effect on world trade, or, yo, you know what, despite the US consumer being very weak, there's high inflation, so we must be something strong. And you pursue all kinds of bad and self-destructive policies, because you don't actually understand the mechanics of what's happening. And so as a result, the crackup becomes sharper. There's

• 1:08:14Speaker 12

  a sharper delineation between the now time and the after time, because of this colossal misunderstanding of the nature of what's actually going on in the economy. And this wild unwillingness of people to connect all the pieces, even at the Fed. I mean, the Fed's recent commentary on economic outcomes is so narrowly siloed and so backwards-looking in trying to reinterpret what's happening in the economy in terms that might have made sense 40 years ago, but that don't make sense in the context of what we're seeing. So people really don't have a good handle in terms of understanding these drivers. And that makes this inevitable break much more consequential.

• 1:08:52Ed Zitron?

  And also means that people are going to be surprised.

• 1:08:56Speaker 12

  Oh, absolutely. Right. Yeah. And of course, we'll have this crazy moment, where even if you feel that way, the constant, people are always so nervous about, well, what happens if on a Saturday I lean over the fence and my neighbor says he bought stock in this pre-IPO, and it did so well? People are just congenitally unable to walk away from that and not feel like I missed out on something, this FOMO problem. And so people, despite all of the things I'm saying, are going to walk right into this, and then the crack will happen, and it'll be a lot of who could have known.

• 1:09:26Ed Zitron?

  That's such a shame. Well, Paul, on that happy note, thank you so much for joining me on the show this week.

• 1:09:32Speaker 12

  Thanks, Ed. Good to be here.

• 1:09:34Ed Zitron?

  And everyone, you'll get me on a monologue this week, of course, on Friday. Thank you as ever for listening to Better Offline. Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio projects at mattosowski.com, M-A-T-T-O-S-O-W-S-K-I.com. You can email me at [email protected] or visit betteroffline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat dot where's your ed dot app to visit the Discord,

• 1:10:15Ed Zitron?

  and go to r slash betteroffline to check out our Reddit. Thank you so much for listening.

• 1:10:21Speaker 10

  Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

• 1:10:53Speaker 21

  Snoring, gasping during sleep, feeling fatigued? Ask your doctor about Zepbound Terzepatide, the first and only FDA-approved prescription medicine for moderate to severe obstructive sleep apnea, OSA, and adults with obesity. Zepbound is a prescription medicine used with a reduced-calorie diet and increased physical activity to help adults with moderate to severe obstructive sleep apnea, OSA, and obesity to improve their OSA. Zepbound is approved as a 2.5, 5, 7.5, 10, 12.5, or 15-milligram injection. Zepbound contains Terzepatide and should not be used with other Terzepatide-containing products or any GLP-1 receptor agonist medicines. It is not known if Zepbound is safe and effective for use in children.

• 1:11:37Speaker 21

  Don't share needles or pins or reuse needles. Don't take if allergic to it or if you or someone in your family had medullary thyroid cancer or if you've had multiple endocrine neoplasia syndrome type 2. Tell your doctor if you get a lump or swelling in your neck. Stop Zepbound and call your doctor if you have severe stomach pain or a serious allergic reaction. Severe side effects may include inflamed pancreas or gallbladder problems. Tell your doctor if you experience vision changes before scheduled procedures with anesthesia, if you're nursing, pregnant, glandebi, or taking birth control pills. Taking Zepbound with a sulfonylurea or insulin may cause low blood sugar. Side effects include nausea, diarrhea, and vomiting, which can cause dehydration and worsen kidney problems. Talk to your doctor. Call 1-800-545-5979

• 1:12:20Speaker 21

  or visit zepbound.lilly.com.

• 1:12:25Speaker 14

  With LPL Financial, we provide the services to help push you forward. When it comes to your finances, your business, your future, the only question should be, what if you could?

• 1:12:33Speaker 22

  Paid advertisement. Anna Kendrick is not a client of LPL Financial LLC and receives compensation to promote LPL. Investing involves risk, including potential loss to principal LPL Financial LLC member FINRA, SIPC.

• 1:12:40Speaker 23

  Football season is back. Stop by Total Wine & More before kickoff for cold beer, craft bourbon, and ready-to-drink cocktails. Get the lowest prices and get your game day lineup ready at Total Wine & More. Spirits are not sold in Virginia and North Carolina. Drink responsibly. Be 21.

• 1:12:55Speaker 24

  Small businesses are the pulse of every community. They bring people together, create opportunities, and drive growth. That's why Chase for Business helps small business owners like you by offering personalized guidance and digital tools that can help your business grow. With our guidance and your determination, you can take your business farther and help build a brighter future for your community. Learn more at chase.com/business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. J.P. Morgan Chase Bank, N.A., member FDIC. Copyright 2026 J.P. Morgan Chase and Company.

• 1:13:30Speaker 25

  If you want something done right, you do it yourself. That's why you change your own oil. You're thinking about the long haul. Pennzoil Ultra Platinum Full Synthetic Motor Oil offers engine protection for the lifetime of your vehicle. And if you're doing it right, that's a long time. Plus, it's on rollback at Walmart for a short time, so you can save while protecting your engine. Pennzoil. Long may we drive. Limited lubrication warranty for lifetime engine protection. Other conditions apply, including enrollment and receipt requirements. See pennzoil.com/warranty for full details and terms.

• 1:14:00Speaker 26

  This is Jacob Goldstein from What's Your Problem? Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting. That's software overload. Odoo is the all-in-one platform that replaces them all. CRM, accounting, inventory, e-commerce, HR. Fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you? Try Odoo for free at O D O O dot com. That's Odoo dot com.

• 1:14:37Speaker 27

  The path to retirement is different for everyone. And as life changes, so do priorities. Fidelity can help you get where you want to go. With a free personalized plan, goal tracking, and timely insights, you'll be set to take on retirement, whether you're saving for it or already living in it. Get started at fidelity.com/takeon. Expenses charged by your investments and other costs and fees associated with trading or transacting in your account apply. Fidelity Brokerage Services, member NYSE, SIPC. This is an iHeart Podcast. Guaranteed Human.