Steve Eisman: One Company Could Break The AI Boom

Ed Elson is joined by Steve Eisman to discuss why he thinks Anthropic and OpenAI are manufacturing a crisis. Steve explains why he wouldn’t invest in the Anthropic IPO and what he’ll be looking for when the S-1 finally drops. He also breaks down why he thinks high yields could result in a market correction, which company he is shorting, and what his investment strategy currently looks like. Vote for Prof G Markets at the Signal Awards here 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

• 0:00Speaker 00

  Support for the show comes from Morgan Stanley's podcast, Hard Lessons. Some investing lessons only become clear after you see how a call plays out. On Hard Lessons, iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments, both successes and setbacks that shaped who they are today. Watch or listen to Hard Lessons wherever you get your podcasts.

• 0:27Speaker 01

  What's driving the markets this week? What's on investors' minds as they look ahead? Find out on the Markets Podcast from Goldman Sachs. A breakdown of market moves and macro signals in 10 minutes or less. The Markets Podcast from Goldman Sachs. Listen now.

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• 1:25Speaker 03

  Listen to me. Markets are bigger than us. What you have here is a structural change in the wealth distribution. Cash is trash.

• 1:30Speaker 04

  Stocks look pretty attractive.

• 1:32Speaker 03

  Something's going to break. Forget about it.

• 1:34Speaker 05

  Welcome to Prof G Markets. This week marked the end of the third quarter and there is a lot to unpack. We had AI researchers warning that the technology could pose an existential threat to humanity. The Fed raised rates for the first time in three years. Treasury yields hit multi decade highs and we started to get a sense of what we're going to see in the Anthropic IPO. Those are just a few of the highlights. So we wanted to take a step back and break down what happened this quarter, what the biggest takeaways are and what we can expect heading into the final quarter of the year. So to help us make sense of it all, we are joined by a guest who has been helping us navigate this year's headlines and separate the signal from the noise. Here is our conversation with Steve Eisman,

• 2:20Speaker 05

  investment analyst, portfolio manager and a Big Short legend. Steve, great to have you back on the show. I want to start with a clip that you went very viral for. This was from your recent interview on CNBC where you all were discussing all of these doomerist threats from these AI companies, saying that, you know, there's a 10% chance that humanity will go extinct because of AI or even higher probability ratings. You had a very interesting take on the matter. A lot of people heard it. I'm going to play it and we'll get your reaction.

• 2:56Speaker 06

  The idea that this whole Terminator thing is nonsense. So I think some completely different is going on. And what I think is happening is that token maxing is over. The open weight models are taking big market share. I think these companies are very nervous. They realize that there are no moats around their business whatsoever. And they're trying to manufacture a crisis that will create regulation and that, and that, but that they think they can then manipulate to create the moats, to create the duopoly that they want.

• 3:29Speaker 05

  Talk more about what you mean by all of that.

• 3:32Speaker 06

  Well, I didn't know that went viral.

• 3:35Speaker 06

  Thanks for letting me know.

• 3:40Speaker 06

  You know, I grew up reading a tremendous amount of science fiction, like an insane amount. And I'm just amused by the fact that I think all these people who live in Silicon Valley basically read almost as much science fiction as I did. They just take it very seriously. And I, and that's funny, but I think also true. I mean, the idea that AI, first of all, there's absolutely no evidence whatsoever that AI is anywhere close to AGI. None, absolutely none. I mean, what AI is, is like a next word retrieval model. That's what it is. It doesn't think.

• 4:22Speaker 06

  And there's no evidence at all that it's, that it's ever going to think. Now, maybe one day it will, but even, even so,

• 4:31Speaker 06

  the idea that somehow that is going to literally create Terminator, I think is insane. But by the way, I re-watched Terminator one and Terminator two. Still good.

• 4:43Speaker 06

  Okay. I enjoyed both movies enormously, even though the sci-fi effects obviously weren't so great anymore. You know, when somebody says that the world's about to end, I just don't take it seriously. So I have to, I ask myself, okay, if, if they really don't believe that the world's going to end. I mean, maybe some of them do, but I don't think any of the senior people really do.

• 5:09Speaker 06

  What's really going on? And, you know, what has changed in the last six months or so is, you know, if you, if we were going back six months,

• 5:23Speaker 06

  token maxing was going crazy. I mean, employees at firms were basically told, use AI till you're ill and then, and then use it some more.

• 5:35Speaker 05

  And we're going to track you and we're going to put you on a leaderboard.

• 5:37Speaker 06

  I'm going to track you to make sure that you were using AI 24/7. And, and what happened was they blew through their budgets and within months. So sometime this summer, I think token maxing probably ended. I think everybody who, who uses AI, which is a lot of enterprises, I've gotten a lot more cost conscious. And at the same time, the open weight models have really come into their own. And as far as I can tell, are starting to take very, very large market share.

• 6:10Speaker 06

  So if I was Anthropic and OpenAI, I'd be nervous because I had everything to myself and now I don't. So what can I do about that? So if I can manufacture a crisis where there's regulation and then the regulators come in and I can manipulate them so that we don't want the open weight models, all of a sudden I've got a duopoly. And that, that's what I think this is really all about.

• 6:37Speaker 05

  Well, this is very relevant to the news that we just got this week, which is we now have some insight into how Anthropic is doing as a business. This was the reporting from Reuters. Who knows by the time this episode comes out, maybe the S1 will actually be fully out. But what we know about Anthropic as a company, last year they generated $4.6 billion in revenue, up more than 1,000% from 2024, extraordinary revenue growth. But their operating losses came out to more than $8 billion and their net loss, uh, which has a giant caveat, which is that a big portion of this number was a non cash charge tied to revaluing these financing instruments.

• 7:21Speaker 05

  But still, the net loss was almost $42 billion.

• 7:26Speaker 06

  Eight billion on an operating basis.

• 7:28Speaker 05

  So we should probably pay most of our attention to the $8 billion operating loss.

• 7:32Speaker 06

  Eight billion is bad enough.

• 7:35Speaker 06

  We don't need to pursue the 40.

• 7:36Speaker 05

  Yes, we'll, we'll stick with the eight because there are no asterisks.

• 7:40Speaker 06

  Right.

• 7:40Speaker 05

  There are no caveats. That is a real number. That is how much they're losing or they lost last year just from day to day operations. What do you make of those numbers? What does it say about the AI business? And does it confirm your suspicions related to the, this crisis manufacturer?

• 8:02Speaker 06

  I don't think the 2025 numbers matter.

• 8:05Speaker 05

  Okay.

• 8:06Speaker 06

  I think what I, what I want to see is, I actually have another conspiracy theory, which is the reason why Anthropic is going public now.

• 8:18Speaker 06

  And I'm not a hundred percent sure I'm right here, but, but if I am right, it's a good one. Which is that I think Anthropic is, might be going public now because the first half of the year looks really good because of token maxing and the lack of open weight models. And maybe, maybe when they, when they report their third quarter numbers, which they won't have to report when they do the IPO, because it's before the third, it may be too early.

• 8:48Speaker 06

  The, the third quarter numbers might show something of a slowdown because of the end of token maxing. I actually think by the fourth quarter, we'll definitely see a slowdown. And, and so I think they needed to go public now. I'm, I'm more interested in comparing the first half of 2026 versus the second half.

• 9:04Speaker 05

  Do you take anything from the 2025 numbers? Or do you think that we, we purely need to understand what's going on right now? Because to be clear, we, we don't know anything about how they've done in 2026. We've heard some rumors in some of the reporting. There was of course, the reporting that they might have achieved adjusted operating profitability on a quarterly basis. But then we kind of dig into what does the adjusted operating profitability actually mean? And there are some, some big questions there. I mean, what are you looking for right now? And is there anything we can glean from the current information that we have to understand how this business is actually doing?

• 9:45Speaker 06

  I, I don't think the current, the information that came out in Reuters about 2024 and 2025 is going to be all that relevant to people. People are going to want to look at 2026 and they would want to compare the, what, what the company is saying about the second half versus the first half of 2026. I think that's the most relevant.

• 10:02Speaker 05

  This crisis manufacturing, do you think that these companies are actually in trouble? Or do you think that they think that they're in trouble?

• 10:13Speaker 06

  I really don't know. I think they're nervous. You know, how in trouble are they are at this point? I don't know. I think, I think they see that they're losing market share.

• 10:22Speaker 06

  I think that, you know, you're starting to see signs of a price war breaking out by all the various players, which is very bad. I think what I said on CNBC, that this business has no moats, I think is really true. You know, Google with its search had a moat, moat that was insurmountable for decades. None of these companies have any moats, you know? One day one model is, is up, next day another model is up. One day Muse is up, the next day somebody else will be up. You know, there's no, there's nothing protecting what you're doing.

• 10:56Speaker 05

  Does that indicate then the possibility of a bubble? I mean, you are famous for predicting the, the bubble in 2008.

• 11:06Speaker 05

  Where are you in your, in your perspective on the possibility of the existence of an AI bubble at this point?

• 11:13Speaker 06

  What worries me is the concentration risk. Because, I mean, if you look at Nvidia, for example, and you look at, you know, Nvidia had revenue growth of over a hundred percent, but 70% of their accounts receivable were from five accounts.

• 11:30Speaker 06

  You know, if you look at the hyperscalers, 70% of their AI revenue is from OpenAI and Anthropic. The whole, the whole chain basically flows to Anthropic and OpenAI. If those two companies succeed, you know, we'll be back in a year from now and saying, wow, AI is really, really triumphing. But if, if there's a problem with those two companies, then I think the whole chain is in trouble.

• 11:57Speaker 05

  I'm wondering what you make of current valuations in tech because, you know, I, I have been thinking about and looking at the circular financing problem for a long time and the concentration risk problem, which to me, as you say, it seems like a very big deal. But I wonder the extent to which that is actually priced in. And something we've been talking about on the show is the fact that Nvidia on a forward earnings multiple basis is actually quite cheap compared to the past several years. Do you think this is a dynamic that Wall Street understands quite well? Do you think that investors have their heads wrapped around these risks? And do you think that they are pricing it in?

• 12:36Speaker 06

  I love when people ask me that question because my answer to that question is I have no freaking idea. I mean, my answer is like, like we would need to have like a massive group therapy session. We're all, all 1 million of us are in a room and we pay, you know, we, we pass the baton and say, hey, what are you thinking? I, I never, I literally never know what is and is not priced into the market. I never, I, you know, I, what I, what I, what I do think is that there's a narrative about AI that's positive and then there's a narrative about AI that's negative. And it's not clear to me which one of those is going to succeed. But I do think at some point within the next six months, we'll have a better idea.

• 13:15Speaker 05

  Would you not say that in 2008, you did have a, an understanding of what was priced into the market specifically, that there was a lot that, that wasn't priced in?

• 13:24Speaker 06

  Oh, absolutely. I, I learned this because I, I remember when Bear Stearns is, they had like this fixed income fund that blew up in May of 2007. And what that fund had done was invest in subprime paper. And I remember there was a sell side analyst who I was very friendly, who, he worked at a firm that was very heavily involved in subprime paper. He was a financial services analyst. And so he asked me what was going on. And I said, well, why don't you just get in the elevator, go down two floors and go talk to your own desk?

• 14:05Speaker 06

  And what I realized was that the reason that, that the equity people didn't know what was going on, because it wasn't an equity story, it was a fixed income story. And unless you immersed yourself in the world of fixed income, there was no way you could figure out what was going on. That's not true here. You know, this, this is a tech story, which will, you know, I think everybody understands there's, there's massive concentration risk. I mean, I think even the, the people who are very bullish would, would, would say that. And at the end of the day, I think the, the statement that it, at least for now, it depends on OpenAI and Anthropic being successful, I think is true.

• 14:50Speaker 06

  Now, maybe it'll be successful and it'll all be okay. And then again, maybe not. I, I don't know yet.

• 14:57Speaker 05

  You've also talked about some of the off balance sheet debt issues that are becoming more and more pervasive, it seems, in AI world, in data center world. Could you speak a little bit to what we're seeing there in terms of debt issuance, what the risks might be and how systemic and important it is to the AI build out right now?

• 15:22Speaker 06

  Well, is this something like $500 billion worth of AI debt being raised this year? You know, how much of that is off balance sheet? I don't know yet. I don't think it's insignificant. I think the reason why they're doing some of these off balance sheet shenanigans is the best way I could put it, is they're trying to preserve their credit ratings as much as possible. So if you can get it off balance sheet, it's like puff magic, it doesn't exist.

• 15:53Speaker 06

  And the, the rating, ratings agencies won't count it. I've seen this movie before.

• 16:00Speaker 05

  You've been in that movie before.

• 16:01Speaker 06

  I've been in that movie. So I'm kind of appalled. I mean, there was, there's a, Meta did a, last year did a almost $30 billion deal where they're building a data center in Louisiana. And they created some off balance sheet vehicle where the all 30, basically all 30 billion of debt or something like that doesn't show up on their balance sheet. And if you go into Meta's 10K, there's an entire, like three or four paragraphs where the auditor goes through a tortured description.

• 16:40Speaker 06

  I mean, torture doesn't even begin to, to, I'd tell you what's going on here, but a tortured description of this transaction and why it's off balance sheet. So in my rap for last week, I, I quoted the entire, all four paragraphs. I mean, it took me about three or four minutes to read the whole thing. And then I said to my viewers, let, let me translate this into plain English to tell you what's really going on here. What the auditor is, is really saying is, we really don't know if this thing should be off balance sheet or not. We probably think it shouldn't, but Meta told us that it's okay. We're really nervous about it, but Meta said chill, bro.

• 17:24Speaker 06

  And so we said, okay, we chilled. And that, that's basically what the 10K said. You know, that's what happened in Enron. That's what happened in the, the sieves that Wall Street created to get a lot of stuff off balance sheet. You know, like, like I said, I've seen this drill before.

• 17:42Speaker 05

  I mean, presumably it doesn't end well. It seems that the problem, whenever something goes wrong, whenever there is a problem in the market, it's because there is a lack of accountability on anyone's part, whether it's the companies not taking accountability for their own, as you call it, shenanigans, or the auditors and the ratings agencies, whose responsibility is to accurately assess what level of risk these companies are taking on. And if it's your view that the auditors are saying, we don't really know, they told us it's fine, so it's fine. I guess the question is, how large of an issue is that?

• 18:17Speaker 06

  I don't know how much is off balance sheet at this point. That's, that's my only caveat to it.

• 18:23Speaker 05

  Meaning you're, you're not ready to determine?

• 18:26Speaker 06

  I don't know the size of it yet. I'm trying to figure out, you know, of the 500 billion, how much of is, of it is off balance sheet and how much of it is on balance sheet? I know, I don't know yet.

• 18:36Speaker 05

  And depending on how large that number is, what will that mean for your analysis?

• 18:41Speaker 06

  I think what it would mean is that these companies are very, very nervous about their credit ratings. And they're trying to do everything they can to preserve them. And if that means creating off balance sheet vehicles that really shouldn't be off balance sheet, but they get their auditors to agree that it's off balance sheet, so be it. That's what I think it means.

• 19:03Speaker 05

  We'll be right back after the break. And we have some exciting news. We have been nominated for three Signal Awards. So please go vote for us at vote dot signal award dot com. Type in Prof G markets in the search bar and there you can vote. We've been nominated for best money and finance podcast, also best daily podcast and also best video podcast. Please vote for all of them. We really appreciate it. We'll also leave a link in the description to make it easy for you.

• 19:38Speaker 00

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• 22:44Speaker 05

  We're back with Prof G Markets. Increasingly, the story of stocks seems to really be actually a story of bonds or a story of yields and rates. You wrote that the 5% on the 10-year is the, quote, "Rubicon for the market."

• 23:00Speaker 06

  Could be. No, nobody, let's be clear, nobody ever knows until after the fact.

• 23:06Speaker 05

  Yes. You said, quote, "Unless something happens that pushes rates back below 5%, a market correction seems imminent." Could you explain what you mean by that? Why is it that these high yields could result in a market correction?

• 23:23Speaker 06

  What does a 10-year at 5% plus mean for everybody? So, obviously, it hurts housing because, you know, you were taking out a 6% mortgage before, now it's 7, 7.5%. You're not taking out a mortgage so fast, you know, you're not going to buy a house. So that hurts the entire housing sector. Now, the housing sector hasn't been doing too great anyway, but it's kind of like, you know, one more nail in the coffin. You know, then any corporation that's going to raise debt, it's more expensive. And, you know, the, all this data center debt, you know, CoreWeave raised debt six months ago at 9%.

• 24:08Speaker 06

  Today, it'd probably be 11. So, things get more expensive. They just get more expensive. The economy gets creaky when rates start to go higher. So, I think that's what's making everybody nervous because, you know, it makes the deficit bigger and it makes AI debt more expensive. It makes everything more expensive.

• 24:33Speaker 05

  Do you see the AI debt problem as the largest problem in terms of how higher yields could affect the economy? Because as you point out, you know, increasingly, this AI data center buildup is becoming dependent on debt issuance. And I guess these companies have a lot of money, but there are companies like CoreWeave which have a lot less money than the big tech companies and the hyperscalers, the true hyperscalers. And so, you'd have to assume that if they're paying more and more for, on interest for the debt that they're issuing to build the data centers, at some point, that might not be sustainable anymore.

• 25:14Speaker 06

  No, I agree. I mean, think of it this way, let's imagine, you know, a company that has an LLM model or an Agentic AI model, you know, they've invested a ton of money in it, but, but they're expecting a return of multiples of what they invested. Otherwise, why do it? When you're building a, when you're CoreWeave and you're building a data center, there's only so much you can charge to whoever is going to, you know, employ the data center. You know, there's, there's a return. This is real estate. This is a real estate transaction. So, if rates are 100 basis points higher, it just makes the transaction more difficult.

• 25:58Speaker 06

  You know, you're going to have to charge your customer more, is a customer going to want to pay? I don't know, but it, it, it just makes it more difficult.

• 26:04Speaker 05

  There was some other data center news that, that was quite interesting to us. One of them was the fact that Oracle sent this force majeure notice to Blue Owl that was building their data center campus in New Mexico, Project Jupiter, I believe, was the name of the data center.

• 26:23Speaker 06

  Yeah, Jupiter.

• 26:24Speaker 05

  What did you make of that news? Essentially, what, what it meant is that they're saying that if something bad happens, we're not liable, is my understanding. What did you make of that news?

• 26:34Speaker 06

  I think Oracle is petrified of their credit rating. You know, right now, Oracle's credit rating is triple B minus. Triple B minus is one level above junk. You know, Oracle does not want to get downgraded to junk. They do not. And they're going to try and do everything they can to protect their credit rating. I think that's what that was about.

• 26:51Speaker 05

  Is that company, would you say Oracle is, has sort of the weakest balance sheet in the AI trade right now?

• 26:57Speaker 06

  I don't know if it's the weakest amongst, amongst the larger companies, it's the weakest. You know, if I were to compare it to CoreWeave or somebody else, I don't know if I would say it's weaker than, than those companies. But, you know, like I said, when you're rated triple B minus, things can get ugly.

• 27:15Speaker 05

  How close to that, that, those levels do you think some of these larger tech companies are? Because my understanding is that they're pretty well off unless this off-balance-sheet stuff is a lot larger than we think. My understanding is if you're Meta, Google, Microsoft, you're okay?

• 27:35Speaker 06

  I think at this point, they are. Yeah, I don't, I don't lose sleep over those companies. I worry about Oracle, CoreWeave, and all the other companies at this point. But, you know, like I said, if something bad ever happened to Anthropic or OpenAI, there'll be no place to hide because it's just, they're just too important to the entire AI ecosystem.

• 27:58Speaker 05

  Just in terms of macro, I mean, getting away from the AI stuff, we had inflation was lost at 3.4%. We had our first rate hike. What were your takeaways from that rate hike? And it seems that we're probably going to get another one. What does it have you thinking about? Were you surprised by it at all? What are your reactions?

• 28:24Speaker 06

  You know, for a time, the inflation numbers were actually getting a little bit better. But, you know, oil prices are higher, so I think the Fed was basically taking out some insurance. They may take out some more insurance. I'm much more concerned by what's happening with the 10-year. And I think part of the reason why the 10-year is so high, other than that, you know, the oil prices are up and people are nervous, is that AI is a $500 billion issuance this year, and it's having a crowding out effect of the Treasury markets. You know, if there, if there was no AI, none, the 10-year would be much lower.

• 29:06Speaker 05

  Could you spell out why that would be the case for us?

• 29:10Speaker 06

  If you're Microsoft or Meta, Google, well, not Meta, but Google, and, and you're building a data center, that's a long-term project. You know, that's, that you're not, you're not raising overnight debt, you're raising long-term debt, you're raising 10-year debt, something like that. So, you know, the Treasury is, is, has a $6 trillion deficit this year. Now, add on top of that 500 billion in AI debt, and there's a bit of a competition, which didn't exist before. So, I, I think one of the reasons why the 10-year is as high as it is is because, like I said, there's a crowding out effect where AI debt is crowding out Treasury, which is

• 29:54Speaker 06

  a crazy statement because nobody has crowded out Treasury before, but now they are. And that's why, you know, Scott Besson tried to pull a rabbit out of the hat by trying to buy $6 billion worth of long-term Treasuries in something called Operation Twist, where he would issue short-term debt to buy long-term Treasuries. And it's failed miserably. So, the Treasury Department has lost a lot of credibility because when he started, I think the 10-year was like at 4.75, and now it's at 5.21.

• 30:26Speaker 05

  Yeah. What do you make of, of his comments about, about that buyback program? Because his view is that yields were wrong, that the markets were, were saying, incorrectly saying something about the sustainability of the US economy that wasn't true, and he was trying to correct it back to the truth. Do you agree with him? What do you make of his comments?

• 30:53Speaker 06

  I think it's a weird argument. I mean, I, the Treasury markets are pretty efficient. They're more than pretty efficient, they're really efficient. So, to say that they're wrong, what are they wrong about? I mean, there's a war going on, the oil prices are higher, you know. Diesel fuel is at an all time high. I mean, what exactly is he? I don't know what he's talking about because I, what is he saying? That inflation is about to come down? Well, if inflation is about to come down, then treasury yields will come back down when that happens. I mean, I don't get the argument. I really don't.

• 31:28Speaker 05

  Just in terms of this AI bubble story, which has been around for a very long time at this point.

• 31:35Speaker 06

  Let's not get carried away. It's been around for six months, which in our world feels like an eternity.

• 31:42Speaker 05

  Yeah.

• 31:43Speaker 06

  But in the scheme of human history, it's pretty short.

• 31:47Speaker 05

  I would put it to beyond six months. I would say maybe like a year ago was when people started

• 31:52Speaker 06

  to. All right. So it's a year. But like I said, it's not, you know, history is long.

• 31:57Speaker 05

  Yes.

• 31:57Speaker 06

  One year, a one year story. Like I said, you know, because we're, you and I are immersed in the markets every single day. A one year story feels like an eternity. But, but it, but clearly it's not an eternity.

• 32:08Speaker 05

  But I do think that for a lot of people who are interested in the markets, I mean, now that we're on social media all the time, we're listening to podcasts, we're watching CNBC, I would imagine that for a lot of listeners, it feels like it's been a long time to them as well. In bubble cycle terms, it is, it is a blip. My question is, have you been surprised at all by the resiliency of this market despite these risks? And to be clear, none of the risks that we have been pointing out have been wrong. Everything we've simply been stating facts that could lead to a correction. But we haven't really seen that. I'd be interested to get

• 32:50Speaker 05

  your views on whether this has surprised you, how resilient the market has been, or if this is sort of par for the course.

• 32:58Speaker 06

  Oh, it hasn't surprised me at all. I mean, the lesson I think that people have taken since the dot com crash is that nine times out of 10, the new new thing becomes usually successful. Whether that's Amazon, or it's Google, or it's Meta, or, or, you know, you, you name it, whatever it is, nine times out of 10, it's a winner. And this is the new new thing. And so everybody's just taking out the playbook and saying, this is Amazon circa 2001, or, you know, pick your, pick your stock and let, let's play ball. And by the way, I've played ball too. I've invested in these companies.

• 33:43Speaker 05

  Yeah.

• 33:45Speaker 06

  I've taken some risk down. But my, my, my nervousness about, about the story is, is the incredible constant, the incredible, incredible concentration. Now, maybe a year, two years from now, that will no longer be true. It'll be much more diversified and it'll all be fine. And then, and then again, maybe not. But I don't, I don't think anybody knows at this point.

• 34:11Speaker 05

  How have you reduced your risk of in, in the past year or so? What are you, what steps are you taking to protect yourself?

• 34:19Speaker 06

  Well, in the past month, I took four of my AI type stuff and I just shorted part of it against the box.

• 34:31Speaker 05

  Would you recommend that as a, as a hedging strategy?

• 34:35Speaker 06

  I'm not recommending that to anyone. What I did say to my viewers was that this is an option that you can do, but that if you do it, you have to unwind it by the end of January because otherwise the IRS will treat it as a sale.

• 34:51Speaker 05

  Yeah. What do you make of valuations overall at this point across the S and P? Because we have the Shiller Cape is around 41, second highest reading ever. The only time it was higher was in late 99. I mean, the, the market on, on certain valuation metrics does seem quite expensive right now, but at the same time, earnings are exploding. AI does seem to be, you know, advancing quite significantly. And there is a possibility that it could be, as Trump says, the golden goose. What do you make of valuations across the market at this point?

• 35:35Speaker 06

  I don't. That's not my bugaboo. I think that narrative is a far more powerful force in valuation. So if the AI narrative continues, the stock market will go up. And if the AI narrative breaks, the stock market will have a huge correction and what, and, and that it wouldn't matter what the valuations are, high or low, it would get crushed. So I think it's much more important to try and figure out what's going on fundamentally and, and is the narrative going to change than to, than to sort of sit there on your high horse and say, I think the market's too expensive, so I'm not going to invest.

• 36:11Speaker 05

  What are some of the ways that you personally check in on and analyze the narrative? What kinds of things are you focused on?

• 36:19Speaker 06

  I'm trying to figure out what, what share open weight models are taking from the more expensive models. That's one big thing. And then I'm dying to see the S1 of Anthropic so I can figure out what the hell is going on.

• 36:33Speaker 05

  We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

• 36:47Speaker 00

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• 38:30Speaker 05

  We're back with Prof G Markets. As we enter the fourth quarter here, do you have any predictions for what we might see? And also, what are your reflections on 2026? Looking back over the past three quarters, what have been your biggest takeaways?

• 38:49Speaker 06

  My biggest takeaway is that the market's been unbelievably resilient despite everything that's been thrown at it. You know, there's been a, there's a war. There's more inflation. You know, but US growth is still quite strong. So the market's been very resilient. It really needs to be respected. You know, what will happen in the fourth quarter? I have no idea. Right now, it's a very weird time in that the only two variables that matter are oil prices and interest rates. So, you know, the, the AI narrative is very important, but right now it's not, it's not as important. What's, what's much more important is oil prices and interest rates. If the war were to ever end, I think we would get back to

• 39:33Speaker 06

  some sort of more normal narrative.

• 39:36Speaker 05

  Is there anything that investors can do? Or can, are there anything that we can act on as it relates to oil prices and interest rates? Like, it's one of those things that it's, it's so funny because, you know, the job of the investor is to kind of look at stocks and look at earnings. And then suddenly everyone's asked to be a geopolitical analyst because as you point out, it really matters. But we're not geopolitical analysts. So I feel like there's a question for investors right now, which is like, what are you even supposed to do about any of this?

• 40:08Speaker 06

  I think you're supposed to do nothing. Because, I mean, if you went out on a limb and did something.

• 40:17Speaker 06

  That would do well if oil prices went up a lot. Just let's just say the war could end tomorrow. So you'd be screwed and vice versa. So I don't think anybody can predict this at all. So better to just hang tight. And you know, if you want to reduce some risk, reduce some risk, but otherwise I wouldn't do anything.

• 40:37Speaker 05

  So what is your strategy look like these days? I know that you are short one company. I'd be interested to hear more about that. I heard that on CNBC.

• 40:46Speaker 06

  Yes, well, it happened. Something happened today.

• 40:51Speaker 05

  Yeah. Tell us a little bit about how you're investing right now.

• 40:54Speaker 06

  I mean, look, I have some shorts. I'm mostly long. I took down some risk because I think like everybody else, I'm kind of nervous about the whole AI narrative, but I'm I am not willing to make some major call that, you know, the whole AI story is going to implode. I'm just not willing to do that. I don't I mean, it may, but I think making that call is premature.

• 41:19Speaker 05

  Could you tell us about your your FICO short? That's what I heard about on CNBC.

• 41:25Speaker 06

  So FICO, for those of viewers who don't know, is a company where, let's say you wanted to get a mortgage, the lender basically calls FICO on the phone and says, hey, what's this person's credit score? And FICO has a credit score for Steve Eisman at Ellison has a credit score for basically every single person in the United States of America. And depending upon what your FICO score is, you'll either get a mortgage or you won't get a mortgage. And that's basically the mortgage system. And FICO has had a monopoly on this forever. Well, like as long, basically as long as it has existed. And the company got very, very greedy, you know, they in the past, they didn't charge that much for

• 42:08Speaker 06

  the service. And over the past five years, they raised prices. Get this, 1,600%. I'll say that again. They raised prices 1,600%. That's a lot of percent.

• 42:21Speaker 05

  Yeah.

• 42:21Speaker 06

  And I think they angered the entire mortgage ecosystem, including Bill Pulte, who's the regulator of Fannie Mae and Freddie Mac. And one of the great lessons in life that I have learned over the years is don't piss off your regulator, because it's just it's really dumb. And so Bill Pulte has create has helped create an alternative score called Vantage Score. And the announcement yet last night, which he did on X, I love this guy. He puts out major announcements about the industry on X. To make a long story short, gives an advantage to Vantage Score over FICO in terms of scoring. So, you know, right

• 43:05Speaker 06

  now, Vantage Score probably has a market share of around 8%. And it's possible within a few months, it could have 50% because this morning Rocket Mortgage, which is probably the largest mortgage originated in the United States, announced that they were just going to use Vantage Score from now on.

• 43:22Speaker 05

  Wow.

• 43:23Speaker 06

  So the stock's down, I think, almost 20%. It was down to almost 20% before the market opened. I mean, basically, what's the short thesis is you had a monopoly and you're not going to have a monopoly.

• 43:35Speaker 05

  How do you identify short positions, like FICO as an example? How did you discover that? And at what point do you decide to actually take that short position, which is relevant because as you point out, you're not taking a big short position on this AI trade. To you, it's we're not there yet. It's not it doesn't it doesn't warrant it.

• 43:56Speaker 06

  I what's nice about the FICO short is that it's not economically dependent. It's not AI dependent. It's it lives in its own universe that literally has nothing to do with anything else in the whole world. What put me on to it was just many, many months ago, Pulte got on X and said something really obnoxious about FICO. I said to myself, you know, I've seen this, you know, once in a blue moon, a financial services company really angers their regulator and the and the net result is never good. What is going to do? I don't know. But, you know, then over time, it became clear that he was looking, he was he wanted an alternative to FICO, and he was going to make sure there was one.

• 44:37Speaker 05

  You are generally long. This market would be the right way to describe your position.

• 44:45Speaker 06

  Just not as long.

• 44:46Speaker 05

  Do you think that that is a popular strategy at this point?

• 44:51Speaker 06

  I have absolutely no idea. I just know I sleep fine.

• 44:55Speaker 05

  To what extent does sleeping fine play a role in your investment strategy at this point?

• 45:00Speaker 06

  Oh, it's huge. It's absolutely huge. When I don't sleep, I start to go crazy. And so I need to do something to you need to sleep. You need to be you need to be comfortable with your positions. You can't you can't walk around all day in a panic. I think that's true for everybody. And, you know, if the result is to sell something or take down some risk or short something just to make yourself feel more comfortable, that's what you should do.

• 45:30Speaker 05

  How did you sleep in 2008?

• 45:33Speaker 06

  I generally sleep fine. I it wasn't the sleep that was my issue. My issue was I literally, I literally thought Planet Earth was going to burn. I swear to God, I would

• 45:51Speaker 06

  people would come to my office and I would tell them what would happen was going to happen and they would leave in tears. I mean, it was just I was that freaked out by how bad I thought things were. And the thing that freaked me out the most, and freaked out my partners as well, is, you know, in 2008, we all said to each other, surely the government knows what we know. And if they know what we know, they're going to do something. And it turned out we were wrong. The government did not know what we knew. They had no idea. They were completely ignorant. And that's why it got as bad as it got.

• 46:27Speaker 05

  But it seems significantly you don't feel that we're at that moment yet.

• 46:31Speaker 06

  No, I don't.

• 46:32Speaker 05

  Is there anything that you would you would expect to see if we were to get to that moment?

• 46:37Speaker 06

  Like I said, you need to focus on Anthropic and OpenAI. If anything bad happens to one of those two companies within the next year, you know, if it's five years from now, the business will be much more diversified. But within the next year, given the concentration levels, you know, again, something like 70% of AI hyperscaler revenue comes purely from Anthropic and OpenAI. That's incredible concentration risk. So if one of these two companies gets into trouble, everybody's in trouble.

• 47:11Speaker 05

  Could you see them developing some sort of too big to fail positioning where the government says they can't fail?

• 47:18Speaker 06

  I certainly hope not. I really don't want to go down this road again.

• 47:25Speaker 05

  Do you think that it could though? I mean, if the whole system is dependent on these two companies not going under?

• 47:32Speaker 06

  The whole system is not dependent upon these two companies. However, if I'm just, I'm not saying this is going to happen. Let's just say tomorrow, Anthropic went bankrupt. I think the US economy would probably either be in or very close to a recession very quickly. That is not, though, systemic risk. That's just a recession. You know, we'll be fine. It may take a year to get out of it, but it's not the end of the world. JP Morgan going down, that's the end of the world. You know, people not being able to get their money out of the bank, that's the end of the world. You know, Anthropic or OpenAI going down is painful. Don't get me wrong, but it's not the end of the world.

• 48:16Speaker 05

  Anthropic will go public. People are saying at around $2 trillion is the expectation. It would make it one of the largest, most valuable companies in the world. What do you make of that valuation? Would you be have any interest in investing?

• 48:31Speaker 06

  Zero. I mean, it's like SpaceX. You know, I had no interest in SpaceX, although I did find it amusing that SpaceX, that one of the things that SpaceX wanted to do was asteroid mining, which I was very, I was very happy about that because, you know, there's a wonderful show on Apple called For All Mankind, which I recommend very heavily, where asteroid mining actually plays a major theme. And so I thought maybe maybe Elon was watching the show and just tried to shove that into the S1.

• 49:05Speaker 05

  I think that's probably right. I think that's how he comes up with it. Yeah, it's a it's a fun story. You just find a giant pile of gold on some rock flying across the sky.

• 49:16Speaker 06

  Look, he's he's totally into sci fi. That's the, you know, I don't know if you know the origin of Grok, the word Grok.

• 49:22Speaker 05

  I don't.

• 49:23Speaker 06

  Oh, I'll tell you. So, you know, so Grok is his AI company within SpaceX. So the word Grok, the origin of it was in the in the early 60s, there was a novel written by Robert Heinlein, who was a very famous sci fi author called Stranger in a Strange Land. And Stranger in a Strange Land was about a young man from Mars, human, who comes back down to earth and is kind of like a messianic figure. I read this in the 70s when I was in high school, by the way. And Grok, in the novel, basically means like some very, very, very deep understanding. That's the origin of the word. Heinlein made up the word himself and Elon took the word and called his AI company after Grok.

• 50:06Speaker 05

  I think we're gonna need to figure out some sort of commission fee for all these sci fi authors because they seem to be the real architects.

• 50:13Speaker 06

  They're all dead.

• 50:13Speaker 05

  Yeah, right. That's why it works out. Well, Steve, we always appreciate your time. Just final question. Is there any advice that you would give to anyone who's thinking about all of this heading into the final quarter of 2026? Anything you think that our listeners should be thinking about or paying attention to?

• 50:33Speaker 06

  I would just keep paying attention to the AI narrative and see which which way it's going to go. I mean, the problem with the market outside of interest rates and oil, you know, if we whatever we go back to a normal market is it's basically all one trade.

• 50:48Speaker 06

  You know, the only the only sectors that are not AI ish, if to the lack of a better word, I think would be staples in healthcare, which, you know, combined is something like 14% of the S and P. So the remaining 86 of the S and P, to one degree or another, is AI ish. So that's the only narrative that matters.

• 51:13Speaker 05

  Steve Eisman is an investment analyst and portfolio manager with decades of experience in financial markets. He is best known for his pivotal role in predicting and profiting from the 2008 subprime mortgage crisis chronicled in The Big Short. Steve founded and managed Emeris Partners, a long short equity fund focused on fundamental analysis. In 2014, he joined Newberg and Berman as managing director and portfolio manager. Now, Steve is the host of The Real Eisman Playbook, a weekly financial podcast. Steve, really appreciate your time.

• 51:42Speaker 06

  Have a good day.

• 51:45Speaker 05

  This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalane, Kristin Adonahue and Mia Silverio. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on the markets on Monday.

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