Steve Eisman: One Company Could Break The AI Boom

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1:01Megan Rapino here. This week on Why Are You Like This? I am talking with Jaden Shaw. We're diving into the highs, the lows, the unexpected turns, the Gotham midfielder has gone through in her career. I'm also weighing in on the latest USW and T roster to drop on their road to the World Cup next summer. Check out the latest episode of Why Are You Like This, where we get your podcasts and on YouTube. Listen to me. Markets are bigger than what you have here. It's a structural change in the world. If you should cash, it's trash. Stocks look pretty attractive. Some things going to break. Forget about it. 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.

2:02Those 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're 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, 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 humorous threats from these AI companies, saying that 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. The idea that this whole Terminator thing is nonsense.

3:05So 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 modes around their business whatsoever. And they're trying to manufacture a crisis that will create regulation. And that they think they can then manipulate to create the modes, to create the duopoly that they want. Talk more about what you mean by all of that. I didn't know that one viral. Thanks for letting me know. Thanks for letting me know. 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 that's funny, but I think also true.

4:08I mean, the idea that AI, first of all, there's absolutely no evidence whatsoever that AI is anywhere close to a GI. None. Absolutely none. I mean, what AI is, is like a next word retrieval model. That's what it is. It doesn't think. And there's no evidence at all that it's ever going to think. Now, maybe one day it will. But even so, the idea that somehow that is going to literally create Terminator, I think is insane. By the way, I rewatch Terminator 1 and Terminator 2. Still good. 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 ask myself, okay, if they really don't believe that the world's going to end,

5:09I mean, maybe some of them do, but I don't think any of the senior people really do. What's really going on? And, you know, what has changed in the last six months or so is, you know, if we were going back six months, token maxing was going crazy. I mean, employees at firms were basically told, use AI till you're ill. And then use it some more. I'm going to track you and I'm going to put you on a leaderboard. I'm going to track you to make sure that you were using AI 24-7. And what happened was they blew through their budgets within months. So sometime this summer, I think, token maxing probably ended. Everybody 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.

6:10And as far as I can tell, I'm starting to take very, very large market share. So if I was in Thropic and Open AI, 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 it doically. And that's what I think this is really all about. 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.

7:11But their operating losses came out to more than $8 billion. And their net loss, which has a giant caveat, which is that a big portion of this number was a non-cash charge tied to re-valuing these financing instruments. But still, the net loss was almost $42 billion. $8 billion on an operating basis. So we should probably pay most of our attention to the $8 billion operating loss. $8 billion bad enough. We don't need to pursue the 40. Yes. We'll stick with the 8 because there are no asterisks, there are no caveats. That is a real number. That is how much they're losing or they lost, lost yet 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 this crisis manufacture? I don't think the 2025 numbers matter.

8:11I think what I want to say is I actually have another conspiracy theory, which is the reason why anthropic is going public now. And I'm not 100% sure I'm right here, but if I am right, it's a good one, which is that I think anthropic is my might be going public now, because the first half of the year looks really good because of token maxing in the lack of open-weight models. And maybe, maybe, 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 quarter will be too early, the third quarter numbers might show something of a slowdown because at the end of token maxing, I actually think by the fourth quarter will definitely see a slowdown. And so I think they needed to go public now. I'm more interested in comparing the first half of 2026 versus the second half. Do you take anything from the 2025 numbers or do you think that we purely need to understand what's going on right now?

9:16Because to be clear, 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 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? 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 want to compare what the company is saying by the second half versus the first half of 2026. I think that's the most relevant. 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?

10:18I really don't know. I think they're nervous. You know, how in trouble are they at this point? I don't know. I think they see that they're losing market share. I think that 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 modes, I think is really true. You know, Google with its search at a mode that was insurmountable for decades. None of these companies have any modes. One day, one model is up, next day, another model is up. One day, it uses up, the next day, somebody else will be up. There's nothing protecting what you're doing. Does that indicate then the possibility of a bubble? I mean, you are famous for predicting the bubble in 2008. Where are you in your perspective on the possibility of the existence of an AI bubble at this point?

11:19What worries me is the concentration risk. If you look at Nvidia, for example, and Nvidia had revenue growth of over 100%, but 70% of their accounts receivable were from five accounts. If you look at the hyperscalers, 70% of their AI revenue is from OpenAI and Anthropic. The whole chain basically flows to Anthropic and OpenAI. If those two companies succeed, we'll be back in a year from now and say, wow, AI is really triumphant. If there's a problem with those two companies, then I think the whole chain is in trouble. What you make of current valuations in tech, because I have been thinking about and looking at the circular financing problem for a long time, and the concentration risk problem, which, to me, seems like a very big deal. But I wonder the extent to which that is actually priced in.

12:21Something we've been talking about on the show is the fact that Nvidia on a Ford 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? I love when people ask me that question, because my answer to that question is, I have no freaking idea. My answer is, we would need to have a massive group therapy session. We're all 1 million of us are in a room, and we pass the baton and say, hey, what are you thinking? I literally never know what isn't is not priced into the market. Never. What I do think is that there's a narrative about AI that's positive, and 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. Would you not say that in 2008, you did have an understanding of what was priced into the market specifically that there was a lot that wasn't.

13:28Price didn't. Oh, absolutely. I learned this because 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 cell site 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 to floors, go talk to your own desk. And what I realized was that the reason 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.

14:32And this is a tech story, which will, you know, I think everybody understands is there's massive concentration risk. I mean, I think even the people who are very bullish would say that. And at the end of the day, I think the statement that at least for now, it depends on open AI and anthropic being successful. And it's true. Now maybe it'll be successful and it'll all be okay. And then again, maybe not. I don't know yet. You've also talked about some of the off balance sheet debt issues that are becoming more and more pervasive at scenes 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. 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.

15:39I 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 you can get it off balance sheet. It's like puff magic. It doesn't exist. And you know, the rating ratings agencies won't count it. I've seen this movie before. You've been in that movie before. 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 is 10k, there's an entire like three or four paragraphs where the auditor goes through a torture description.

16:46I mean torture doesn't even begin to tell you what's going on here, but a torture 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 me translate this into plain English to tell you what's really going on here. What the auditor is really is really saying is we really don't know if this thing should be off balance sheet or now. 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. And so we said, okay, we chilled. And that that's basically what the 10k said. You know, that's what happened in N run. That's what happened in the the Sivs that the Wall Street created to get a lot of stuff off balance sheet. And I like it like it's I've seen this drill before. I mean, presumably it doesn't end well. It seems that the problem whenever a pro 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 company is 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.

18:12And 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 I don't know how much is off balance sheet at this point that that's my only caveat to it. Meaning you're not ready to determine. I don't know the size of it yet. I'm trying to figure out, you know, I have the 500 billion. How much of is if it is off balance sheet and how much of it is on balance sheet. I don't know yet. And depending on how large that number is, what will that mean for your analysis? 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 want to just to agree that it's off balance sheet. So be it. That's what I think it means. 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.signal award.com.

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22:43We'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 could be. Nobody let's be clear. Nobody ever knows until after the fact. 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? What does a 10 year at 5% plus mean for everybody? Obviously it hurts housing because you would take it out of 6% more good before. Now it's 7.7% and they have percent. You're not taking out a mortgage so fast. You're not going to buy a house.

23:51That hurts the entire housing sector. The housing sector hasn't been doing too great anyway but it's one more nail in the coffin. Then any corporation that's going to raise debt is more expensive. All this data center debt, core we've raised debt six months ago at 9%. Today it would probably be 11%. Things get more expensive. The economy gets creaky when rates start to go higher. I think that's what's making everybody nervous because it makes the deficit bigger. It makes AI debt more expensive. It makes everything more expensive. 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 increasingly this AI data center build up is becoming dependent on debt issuance.

24:58I guess these companies have a lot of money but there are companies like Core Weave which have a lot less money than the big tech companies and the hyper scalers, the true hyper scalers. 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. I agree. I mean, they were this way. Let's imagine a company that has an LLM model or an agentech A model. They've entered the ton of money in it but they're expecting a return of multiples of what they invested. Otherwise, why do it? When you're building a core Weave and you're building a data center, there's only so much you can charge to whoever is going to employ the data center. There's a return. This is real estate. This is a real estate transaction. If rates are 100 basis points higher, it just makes the transaction more difficult. You can have to charge your customer or as a customer going to want to pay. I don't know. It just makes it more difficult.

26:10There were some other data center news that was quite interesting to us. One of them was the fact that Oracle sent this force-major notice to Blue Owl that was building their data center, Kamasin, New Mexico project Jupiter, I believe. What did you make of that news? Essentially what it meant is that they're saying that if something bad happens, we're not liable as my understanding. What did you make of that news? I think Oracle pet your father. They're credit rating. Right now, Oracle's credit rating is triple B minus. Triple B minus is one level above junk. Oracle does not want to get downgraded to junk. They do not. They're going to try and do everything they can to protect their credit rating. I think that's what that was about. Is that company, would you say Oracle has the weakest balance sheet in the AI trade right now? I don't know if it's the weakest amongst the larger companies. It's the weakest. If I were to compare it to Core, we were somebody to buy it else. I don't know if I would say it's weaker than those companies.

27:15But like I said, when your rate of triple B minus, things can get ugly. How close to 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 met Google, Microsoft, you're okay. I think at this point they are. I don't go sleep over those companies. I worry about Oracle, CoreWeave, and all the other companies at this point. But like I said, if something bad ever happened to an anthropic or open AI, there'll be no place to hide. They're just too important to the entire AI ecosystem. Just in terms of macro, I mean, getting away from the AI stuff, we had inflation and was lost at 3.4%. We had our first rate hike.

28:16What were your takeaways from that rate hike? And it seems that we're probably going to get another one. What is it have you thinking about? Were you surprised by it at all? What are your reactions? For a time, the inflation numbers were actually getting a little bit better. But well 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. 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 crowning out effect of the treasury markets. If there was no AI, none. The 10-year would be much lower. Could you spell out why that would be the case for us?

29:16If you're Microsoft or Meta, Google, well not Meta, but Google. And you're building a data center. That's a long-term project. 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 has a $6 trillion deficit this year. Now on 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 think one of the reasons why the 10-year is as high as it is, because like I said, there's a crowning out effect, where AI debt is crowning out treasury, which is a crazy statement because nobody ever granted our treasury before. But now they are. And that's why Scott Besson tried to pull a rabbit out of the hat by trying to buy $6 billion worth of long-term treasuries and something called Operation Twist, where he would issue short-term debt to buy long-term treasuries.

30:21And 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. Yeah, what do you make of his comments about that buyback program because his view is that yields were wrong. The markets were 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? I think it's a weird argument. 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? That's a war going on. The oil prices are higher. Diesel fuels at an all-time high. I mean, what exactly is he? I don't know what he's talking about because 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. They really don't.

31:34So, just in terms of this AI bubble story, which has been around for a very long time at this point. Let's not get carried away. It's been around for six months, which in our world feels like an eternity. In this scheme of human history, it's pretty short. I would put it to beyond six months. I would say maybe like a year ago was when people started to... So it's a year. But like I said, history is long. Like I said, because you and I are immersed in the markets every single day. A one-year story feels like an eternity. But clearly, it's not an eternity. 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 podcast, 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 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.

32:52But we haven't really seen that. I'd be interested to get your views on whether this is surprised you, how resilient the market has been, or if this is sort of par for the course. But what has surprised me at all, I mean, the lesson I think that people have taken since the .com crash is that nine times out of ten, the new new thing becomes usually successful. Whether that's Amazon or its Google or its meta, or you name it, whatever it is, nine times out of ten, it's a winner. And this is the new new thing. And everybody's just taken out the playbook and saying, this is Amazon's circuit 2001 or pick your stock. And let's play ball. And by the way, I've played ball too. I've invested in these companies. I've taken some risk down.

33:52But my nervousness about the story is the incredible concentration, 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 again, maybe not. But I don't think anybody knows at this point. How have you reduced your risk in the past year or so? What steps are you taking to protect yourself? Well, in the past month, I took four of my AI type stuff and I just short part of it against the box. Would you recommend not as a hedging strategy? 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.

34:57Yeah, what do you make of valuations overall at this point across the S&P? Because we have the Chile capers around 41 second highest reading ever. The only time it was high was in late 99. I mean, the market on certain valuation metrics does seem quite expensive right now, but at the same time earnings are exploding. AI does seem to be 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? I don't. It's not my bug a book. I think that narrative is a far more powerful force evaluation. 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 that wouldn't matter what the valuations are higher low, it would get crushed.

36:04So I think it's much more important to try and figure out what's going on fundamentally and is the narrative going to change then 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. What are some of the ways that you personally check in on and analyze the narrative? What kinds of things are you focused on? 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 I'm dying to see the S1 of entropics. I can figure out what the hell's going on. We'll be right back and for even more markets content, sign up for our newsletter at profgmarkets.com. Support for this podcast and the following message is brought to you by E-Trade from Oregon Stanley. Simplify your finances and discover the convenience of investing in banking all in one place with E-Trade from Oregon Stanley. Choose from a wide range of investment choices and award winning banking solutions together in one platform.

37:07Plus get up to $1,500 when you open a brokerage account with a qualifying deposit today. Learn more at e-Trade.com slash offer. Banking products and services are provided by Morgan Stanley Private Bank National Association member FDIC. Terms and other fees apply investing involves risks. Morgan Stanley Smith Barney LLC member SIPC. Interrupted sleep headaches constant fatigue for a lot of women these aren't three separate issues. In Perry, Menopause and Menopause, they're often the same hormonal story. And you don't have to quietly push through. Midi can help because your symptoms have answers. Visit joinmitty.com with codevox right now to book your first visit today. That's joinmid.com. Codevox to book your first visit. Joinmitty.com. Codevox. Insurance coverage varies. Check with your plan for coverage.

38:09So like any good millennial, I have a love hate relationship with Gen Z. It's the phenomenon rattling millennials. They just look at you. They want something bigger themselves. Lifestyles of priority. Motivation is being inspired. But regardless of how you feel about Gen Z, it's undeniable that they're changing national politics. Generation Z is increasingly showing less loyalty to traditional political parties. Many now more likely to identify as independent. So what is going on with the kids? I think the biggest misconception about Gen Z's politics right now is that all of a sudden they're all socialist. That is just not the case. Yeah, they are embracing candidates who are offering new bold ideas in the absence of those ideas from establishment Democrats. This week on America actually, Gen Z researcher Rachel Jemphazzo joins us to separate Gen Z fact versus fiction. It's not rocket science. And this is, you know, I keep saying like young voters aren't that complicated after all. It's pretty simple. Catch us every Saturday on YouTube or wherever you get your podcast.

39:17We're back with profty 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? My biggest takeaway is that the market's been unbelievably resilient. Despite everything that's been thrown at it, there's been a war. There's more inflation. But US growth is still quite strong. So the market's been very resilient. It really needs to be respected. 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 AI narrative is very important. But right now it's not as important. What's much more important is oil prices and interest rates.

40:17If the war were to ever end, I think we would get back to some sort of more normal narrative. Is there anything that investors can do or can there anything that we can act on as it relates to oil prices and interest rates? It's one of those things that it's so funny because 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? I think you're supposed to do nothing because I mean if you went out on a limb and did something that would do well with oil prices went up a lot. Just let's just say the worker then 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.

41:24So what is your strategy looked like these days? I know that you are short one company. I'd be interested to hear more about that. I heard that on CMV. Yes, well, it happened something happened today. Tell us a little bit about how you're investing right now. 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 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 at all. I mean it may, but I think making that call is pretty mature. Can you tell us about your your FICO short? That's what I heard about in CMVC. So FICO for those of you 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?

42:25And FICO has a credit score for Steve Eisman and Elson 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 as it has existed. And the company got very, very greedy. In the past they didn't charge that much for 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. And I think they angered the entire mortgage ecosystem, including Bill Pulti, 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 just really dumb.

43:25And so Bill Pulti 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 now, Vantage Score probably has a market share of around 8%. And it's possible within a few months they could have 50% because this morning rocket mortgage, which is probably the largest mortgage originator in the United States. And now that they were just going to use Vantage Score from now on. Wow. So the stocks down, I think almost 20% was down to almost 20% before the market opened. I mean, basically what's the short thesis is you had him inopoly and you're not going to have him inopoly. How do you identify short positions like FICO as an example? How did you discover that?

44:31And 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. So my 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. Well, put me on to it was just many, many months ago, Pultigat on X and sent something really obnoxious about the bike. I said, I love you now. I've seen this, you know, once in a blue moon, a financial services company really angers their regulator and the net result is never good. What he's going to do, I don't know, but you know, then over time it became clear that he was looking, he wanted an alternative to FICO and he was going to make sure there was one. You are generally long. This market would be the right way to describe your position just not as long.

45:33Do you think that that is a popular strategy at this point? I have absolutely no idea. I just know I sleep fine. To what extent is sleeping fine? Play a role in your investment strategy at this point. Oh, it's huge. It's absolutely huge. When I don't sleep, I start to go crazy. I need to do something to sleep. You need to be comfortable with your positions. You can't walk around all day in a panic. I think that's true for everybody. And you know, 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. How did you sleep in 2008? I generally sleep fine. It wasn't the sleep that was my issue. My issue was I literally thought planet Earth was going to burn.

46:34I swear to God, people would come to my office and I would tell them what was going to happen and they would leave in tears. I mean, it was just I was that freaked out by where how bad I thought things were. And the thing that freaked me out the most and I 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 a guy. It seems significant. You don't feel that we're at that moment yet. No, I don't. Is there anything that you would you would expect to see if we were to get to that moment? Like I said, you need to focus on an anthropic and open AI. If anything bad happens to one of those two companies within the next year.

47:34You 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, hyper scale revenue comes purely from anthropic and open AI. That's incredible concentration risk. So if one of these two companies gets into trouble, everybody's in trouble. Could you see them developing some sort of too big to fail positioning where the government says they can't fail? I certainly hope not. I really don't want to go down this road again. Do you think that it could though? I mean, if the whole system is dependent on these two companies not going under. 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 when the topic 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.

48:41You 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 open AI going down is painful. Don't get me wrong, but it's not the end of the world. anthropic will go public. People are saying around two trillion dollars 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 have any interest in investing? Zero. I mean, it's like SpaceX. You know, I had no interest in SpaceX. Although I did find it amusing that's been SpaceX. That one of the things that SpaceX wanted to do was asteroid mining, which I was very happy about that because you know, there's a wonderful show on Apple called For All Man Kind, which I recommend very heavily.

49:41Where asteroid mining actually plays a major theme. And so maybe maybe Elon was watching the show and just tied to shove that into the S1. I think that's probably right. I think that's how he comes up with it. Yeah. It's a fun story. You just find a giant pile of gold on some rock flying across the sky. Well, look, he's he's totally into sci-fi. That's the, you know, I don't know if you know the origin of the rock, the word grog. I don't. Oh, I'll tell you. So, you know, so grog is his AI company within SpaceX. So the word grog, the origin of it was in the early 60s. It 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 mess of Yonic figure. I read this in the 70s when I was in high school, by the way. And grog in the novel basically means like some very, very, very deep understanding.

50:46That's the origin of the word. Heinlein made up the word himself and and Elon took the word and called his AI company after grog. I think we're going to need to figure out some sort of commission fee for all these sci-fi authors because they seem to be the real. Well, Steve, we always appreciate your time. Just a 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. We'll just keep paying attention to the AI narrative and see which way it's going to go. I mean, the problem with the market outside of interest rates and oil, you know, whatever we go back to a normal market is it's basically all one trade. The only sectors that are not AI-ish, if the lack of a better word, I think would be staples in healthcare, which combined is something like 14% of the S&P.

51:51So the remaining A6 of the S&P to one degree or another is AI-ish. So that's the only narrative that matters. Steve Isman 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 chronicle in the big short. Steve founded and managed Emirates partners a long short equity fund focused on fundamental analysis. In 2014, he joined Newburger Berman as managing director and portfolio manager. Now, Steve is the host of the real Isman Playbook, a weekly financial podcast. Steve, really appreciate your time. Steve Isman has a really appreciated time. Have a good day. Steve This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Cardi. Our research team is Dan Chalan, Christian Adonio and Mirsil Vario. Jake McPherson is our social producer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to ProfG Markets from ProfG 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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