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Today's number 13 million.
“That's how many views a video of RFK Jr jumping into a pool with jeans on received last week.”
The bizarre clip was designed to encourage Americans to "get active", but it ultimately drove viewers to "get therapy" instead. If money is evil, then that building is hell. Welcome to Proft View Markets. I'm Ed Nelson. It is February 25th.
Let's check in on yesterday's market vitals. The major indices all climbed as tech rallied out of Monday's cell-off AMD led the way climbing 9% after metasigned a multi-year deal to buy their chips. Meta will also have the option to take 10% stake in the chipmaker over a period of time
Meta's stock was actually flat on the news, meanwhile gold declined, and finally Bitcoin fell
below $63,000. Okay, what else is happening? A new sub-stack piece has sent software stocks into yet another freefall. An article entitled The 2028 Global Intelligence Crisis published by Citrini Research on Sunday outlines a nightmare scenario,
“and that is what if AI leads us into a financial crisis?”
The premise is simple. By 2028, AI displacement has caused unemployment to hit 10% spending plummets the S&P slumps, and the economy becomes unrecognizable. After this piece was released, the Dow fell as much as 2% and software stocks fell 5%. So hit a breakdown, this Citrini Research article and the chaos that ensued was
speaking with Josh Brown, CEO at Rick Holtz, and host of the compound and friends podcast. Josh, good to see you. I want to get your reaction to this Citrini Research blog post.
This is like the second blog that's gone mega viral in in three weeks related to AI.
And now is seeing just crazy selling in the markets. Do you agree with the markets reaction? Are you as worried as other investors seem to be? Not really, but I love the piece. I think it's fascinating. We have people submitting their creative writing projects, like it's a college and the market instantly starts reprising MasterCard in Visa by 10%
I think it's fucking hilarious. I think it was very well written and I appreciated that ability to try to think two years ahead and all the knock-on effects. The thing is, I've seen this before and I'm not going to finish that sentence by saying I know how it turns out. I just know it turns out differently than every single negative pilot on top of each other without an offset
“insight. That is very rarely how these things end up. And so I think it's important for us to think”
through the issues that Citrini raises, but I think it's highly unnecessary for us to all conclude. Oh yeah, it'll probably shake out just like this. Every possible terrible externality will occur all at once and it'll be game over for the economy. Obviously, that's not the way these things play out. Yeah, 100% agree. It was so well written. It was so interesting. It carried through the whole narrative. It collected all of the details, all of the relevant details that we should be talking about.
Then the part where it lost me was when the market decided to sell pretty muc...
or at least everything in software software was down 5%, you saw very big names falling
“door dash fell as much as 6%, because this guy wrote that AI would essentially replace it.”
What do you make of the actual argument of the piece? Which is essentially that AI is going to be so incredible, so productive that actually it's going to destroy our economy in all of these unexpected ways. GDP will grow. There will be a lot of output, but the economy itself will be in a state of structural
crisis. This could only be written by someone who employs no people and has no customers and has never
really been in business before. It's a, it's like a Gen Z slash millennial think piece written by very bright people, of course, who don't understand that the frictions in the economy are not just like these annoying things with a friendly fit. The relationships in the real world are not just like, oh, here is a friction, but we put a salesperson in front of it and therefore it'll
“persist forever. Because the thing that business owner is understand is that, and I don't mean”
business owners like I want to hedge fun. I sit in front of a Bloomberg all day. I mean like
people that actually run businesses where there is like face to face interaction. The thing that we all
implicitly know is that every business effectively is a solution to a problem. Yes. Even like like even like the most abstract example, because the the examples that are right at my fingertips, a hospital is a business and it's solving the problem of people being sick and wanted to get better. Okay, that's easy. What is the four seasons? It's a solution to a problem. People want to be entertained slash they want to travel to places, but they have the means and the standards that are
high enough where a regular hotel won't do. So like if you think of businesses as just solutions to problems, which is really all they are, then what this is this piece of saying is that we're going to run out of problems. Right. Come on. In a hundred thousand years of of the evolution of human society, do we ever actually run out of problems to solve? So this idea that we're in a post-labor economy and people aren't going to have to work anymore because there's nothing for them to do.
Like are we losing our collective minds? There will always be problems to solve and every wave
of technology solves all problems introduces new ones. And this idea that we'll be able to just turn everything over to agents who will solve problems on our behalf. Okay. I'll buy that a lot of what's going to happen is that great. And you think we're just going to sit in a room quietly and read a book. Right. No, we'll be out creating new problems. Think about a, think about a lawyer. The fundamental constraint of a lawyer filing lawsuits is he doesn't have enough associates to do
the paperwork. What if that constraint will remove and utilizing agedic AI? He could file paperwork till his heart's content. Is he filing more or less lawsuits in that scenario? Right. iling more. Obviously more and more lawsuits means more people defending themselves against lawsuits. And you see how this, I didn't come up with this, I didn't come up with this concept but it's a very important one. Someone said in 1955 the work will expand to fit the time available. Like
the more time we have, the more work we will create for ourselves. And until you process that, you're not going to understand just how misguided these types of sci-fi writings really are. Yeah. It seems to also say that this idea of friction friction that we experience in our daily lives
“is going to be just totally eliminated as a concept because of AI. I think you will see it less”
in our daily lives. Maybe a little bit, but even so, I mean, the friction still being handled by someone. It's just being handled by an AI now. So that's still a business. That's still going to create value. That's still going to create a whole lack of system in an economy around it. And there were people who used to sit on an elevator all day and they would wear a uniform and a special cap. It was literally only the elevator guy could wear this cap and he stood there
and he pressed people's floors for them. The operator to the elevator or maybe this is before buttons and he used the lever. Is anyone like what happened to all the good elevator operator jobs? There were trucks that drove around Brooklyn. They were knife sharpening trucks.
They had the same bells as like an ice cream truck and they would roll slowly...
and all the women would come running out of their kitchens, aprons on with an armful of
knives that needed sharpening. And then the technology improved to the point where we don't actually need to sharpen knives. We throw them out and buy new ones. It's like, of course, we're going to have disruption and entire categories of job as being lost. The thing that people worried about is that they all happen at once. The more realistic scenario is that this roles industry through industry and as each industry sees lots of jobs be disrupted, it creates
“new ones in their wake. And look, I think what most people end up realizing is that AI is a better”
compliment to experience workers than it is a replacement. It doesn't mean no one gets replaced.
It means the people that don't get replaced utilize AI and do bigger business. And that
leads to more job creation in other areas of the economy. It happens every time it'll happen this time. It'll be uncomfortable in certain pockets. Nobody is a nobody's delusional about that. Exactly. And the time frame, the time frame is the question. It's like how many jobs will be replaced displaced within a certain time frame, how many of them in that time frame, that's going to be the disruption. But the idea that this has structurally changed
the entire fabric of the universe. That's where it's started to get lost. I do need to wrap us up here. I think a big piece of this, or at least something that is very interesting to me,
“is, again, the market's reaction to a blog that was posted on Substack by, as you call it,”
it was a think piece by a very small person who wrote a very, very interesting and creative article.
An inspired and credible selling pressure, incredible value destruction, which to me says
something about how investors are feeling right now. Exactly. You have described, you can't put this term halo, which stands for heavy assets, low-obsolescence, which is the new type of company that investors seem to like right now, which is companies that have nothing to do with AI. I won't even touch it. So before we go, could you just describe this halo term that's gone pretty popular, Wall Street Journal wrote an article about it,
it's your term. Just describe what that means and how investors feel right now. So in early February, I was talking about the types of stocks that were on the 52 week high list, and what they all had in common was, they have heavy assets on their balance sheets, and they have low-obsolescence risk. And it occurred to me that this was a reversal of the entire post-financial crisis period where we fetishized the opposite asset-life businesses. We wanted
companies with subscription revenue, ARR are very little cost of doing business, and almost no assets on their balance sheet. And now it's flipped, it's the reverse. You look at stocks that gain high-serbush, Coca-Cola, Pepsi, you cannot type. I want to die at Coke into a prompt and have somebody else create that product. It is not disruptable. Natural gas transmission lines, utilities, caterpillar deer, most stocks that are related to heavy industry, in fact, completely halo.
And there were some really fascinating examples inside of one industry. You can say Expedia is highly disruptable by AI. You can plan trips, you can book flights, you can have an agent that scours these airline websites and find the optimal trip for you, putting Expedia out of business. But within the same sector, there's Delta. Can you prompt yourself a fucking airplane? Obviously not. So this is a really interesting market. What this does add just to sum up, it throws out all these
old paradigms that people think about in the stock market. It crushes the growth versus value thing that's now irrelevant. It gets rid of cyclical versus defensive. That's irrelevant too. It even breaks the tech versus non-tech idea because certain tech stocks like Apple are extremely halo. You cannot get around the physical iPhone device and chat GPT is probably just going to become a plug-in to the iOS ecosystem. So Apple is halo while Adobe is not. So I think that that's a
“really important prism through which to view the stock market and I think that dynamic will remain”
important throughout the rest of the year. Absolutely. Lots more that we could discuss. I mean again, my takeaway, people have very confused and very anxious right now. All of the paradigms that they've been following are just being thrown out the window and it's very confusing to see which one's actually what. If everybody could do it, get used to it. That's exactly right. Just brown.
Thanks very much for your time.
And for even more markets insights you can subscribe to my weekly newsletter simply put
at edwardlson.substack.com. We're back with property markets. Blue Owl capital is at the centre of a new panic over private credit. In recent weeks investors have attempted to pull their money from the asset manager. Those requests are driven in part by concerns over the company's exposure to software borrowers. Now following the increased demand for withdrawals, Blue Owl is shutting the gates on one of
its private credit funds. Investors will no longer be able to ask to withdraw their money every
quarter. Instead the firm will sell assets and offer limited liquidity on a quarterly basis.
Shares of Blue Owl plunged 10% on the news and the sell off rippled across other alternative
“asset managers as well. Eris, Apollo and Blackstone fell more than 5%. So what exactly is Blue Owl?”
And why is it preventing its investors from withdrawing cash here to help us answer these questions? We're speaking with Robert Armstrong, US financial commentator for the financial times. Rob, welcome back to property markets. I want to get into Blue Owl with you. I keep on seeing this name in the news. I kind of know what they do, but not really. Can you just start off for us?
What is Blue Owl? Why should we even care about them? Blue Owl is a large
one. What would I call them? Fixed income investor. So they run assorted funds that manage credit investments on behalf of investors in various different ways. And they're a
“big player in the space that's been around for a long time and they've made a lot of money.”
So they're a meaningful player, especially in private credit, which is of course kind of the asset de-jure of the last couple of years. So talk a little bit about how it is the asset de-jure, because I think that's a big piece of the story here. The reason why it probably matters to people is because private credit is suddenly a big deal. And I used to not be. You used to not be, and it's not so often that a new asset class kind of appears, right? The
last, you know, private credit is now something that an institution say, you know, a respectable institution will have a private credit allocation in their portfolio. And that might not have
“been true three or four or five years ago. And you know, you have to go back 30 years before that”
when kind of junk bonds became a like this new asset class that people were getting into. And I think the magic of the asset class has two parts. One is that it is reputed to have fixed income like returns, like the returns you might get from high yield bonds. But with a little bump, because you are lending to a special class of borrowers. These funds are lending to borrowers who for one reason or another would like to avoid public
markets. Either they don't want, you know, they want to buy ladder relationship with their lender or their businesses such that it's hard for larger markets to understand or their cash flows or uneven or for whatever reason. They don't want to be buffeted by the daily grind of of the high yield bond market. So they do a bilateral deal with a lender who charges them a little bit more. So let's say you are getting 8% on your high yield bond part of your portfolio
and institution. Maybe the private credit guy offers you 10. Let's say I'm just kind of picking those up, but you get a little edge there. And that is called reaping an illiquidity premium, right? You're not in the bond market. You can trade in and out all the time. You go to private credit. In theory, you get a couple more percentage points of yield, but you're like locked into this fund for five years. And everybody likes this. Extra yield, everybody loves it. So what we have here is this massively
growing asset class. That is interesting to a lot of people for various reasons. One of them being
They might not want to go to the public markets.
because they don't want to. For the borrowers. For the people who are lending the money, they're making
a lot of money. Yeah. There's a very important point which I, I, it's got to come up in this conversation
“which I think I should mention. Please, which is that the value of the funds that have these”
private loans in them are not marked to market every day. Yes, right? They're marked every quarter or so or however, very infrequently. And one of the things institutional investors love about this is that just because of the way the math works, this means that the returns from private credit look uncorrelated to public markets. And without boring you with the mathematics
of portfolio construction, it's better to have an uncorrelated portfolio. The returns from different
things in your portfolio, moving in different directions makes the whole thing the return for the level of risk superior in an uncorrelated portfolio. Now, it may not really be uncorrelated. The appearance of uncorrelated is created by the fact that the thing isn't marked to market every day like your bond, your junk bond portfolio or your equity portfolio or whatever else. But that's
“a very important feature of why people like this product so much. And I think this gets to the core”
of why this is important and perhaps could be a real problem and people beginning to talk about this.
And I think it all comes down to the name, which is private credit, which is you don't know what is
really going on. You don't see it's not marked to market. You don't see what's really happening. You don't see really the revampions. You don't really see the performance of these investments. And this is now becoming a real issue, especially in the AI world where blue owl has been a huge player loaning out tons and tons of money to build all of these data centers. And then we're posed with the question. It's like, well, we don't really know what all of that deck is and the big question
that investors have been worried about is how much debt is being used to build out this infrastructure. And this brings us to the conversation that we were speaking with Josh Brown on this. There was obviously the the the the satrini blog post that went absolutely haywire this week that brings up this issue of what what AI and private credits association with AI could do to the private credit ecosystem and how much default we might see in this ecosystem. So I mean a lot there
you can speak to. Let me give our given us a lot to think about. Let me complicate it even further.
“The the point there is two issues there. One of them is with private credit that you need to”
try to keep separate. One of the issues is lack of transparency. How much do we know about the performance of the underlying loans and how much do we know about what they are worth when they are not marked to market every day. And you know, you might have greater or lesser transparency depending on the product. Liquidity is a separate issue. Right. But the two kind of converge. Right. Because when people get nervous, rightly or wrongly, maybe this AI thing is really worth worrying
about and maybe it's not. But as long as people are nervous, then the liquidity thing becomes an issue. Right. Yes. Because if, you know, a couple people head for the exit. And the fund says and something like this happened to want to blew our funds. And the fund has a limit on how many people can come or leave. As we said at the beginning of the discussion, these are long term loans, bilateral agreements. You can't just liquidate when investors want to leave. So there's gates
on a lot on a lot of these private credit funds. And only so many people can leave. In a given quarter or so forth. But anyway, the instant anybody gets told, actually, we're up to our limit. Nobody else can leave. That is the moment where everybody wants to leave. Which is exactly what has just happened this week. Yes. Exactly. And it's exactly what happened to Silicon Valley Bank. It's a bank. But you know, it's been Silicon Valley Bank. They don't
have. You can take it to posit out of a bank any time. But the point about a private credit fund is it says right on the wrapper. You're only going to have an access access to your money back in the case of an institution. It might be years. And you kind of know that going in. And so you
Have to write it out with them.
institutional product with the kind of low liquidity that institutions are designed to handle,
they have an infinite life. They have a diversified portfolio. And you say, wouldn't it be great to sell this wonderful product to retail investors? Because after all, where the real money is is selling a product to retirees. That's the biggest pile of money there is. And so you take this product with low liquidity and you sell it to retail investors, they actually have higher demands for liquidity. And now you're trying to kind of square the circle. You've got investors who are retail investors,
not institutional investors who want and need liquidity. And you have a product whose very identity is not providing liquidity. And then you mix in the AI stuff you're talking about. And it can be
“quite a combustible mixture. I know that was a lot, but I think the liquidity issue becomes live.”
As soon as there's even questions about the credit quality issue. Yes, 100%. And that is what we're seeing shows a blue owl plunging 10% on this news. I think this is a story that many of us are not fully tackling because there are so many complicated moving parts. But it is getting to that point. It seems that we do need to be talking about blue owl. Yeah, I think we do. And but and the important point I'd like to make to you and to your listeners is that you can get in trouble.
A product, you know, a fund kit and get in trouble at times like this, even if the underlying loan quality is good. And I think there's good reason to think maybe the loans in this blue owl product that, you know, they were going to merge and they didn't and they stopped redemption so forth. Maybe the loans are fine. Yeah, right. But because you are taking this product that is designed for institutional investors and selling it to retail investors and trying
to give them a little bit of liquidity, you're setting yourself up for trouble, right? Nobody waits around to see how bad the trouble really is. Exactly. I want to end here with a quote from the this guy on Lando Games chief investment officer for asset management. He said quote, the red flags we are seeing in private credit today are strikingly familiar to those of 2007.
“This is a comparison we're seeing more and more. Yeah. What do you think of this statement?”
It seems pretty strong. I mean, the weird thing, you started, you started this out with concerns about AI investment. And the thing about those concerns have companies over invested, will the loans come good? Is AI going to undermine the software businesses? We know it, et cetera, et cetera. All those are concerns in kind of the medium to long term. So it's this weird situation where the companies you're dealing with or the the data centers you're financing or whatever,
like they're making their monthly payments earnings is coming in as expected. There's just this thing on the horizon that you know it's a thing and you're worried about it. But it's not today. It's not showing up in earnings or cash flows or interest payments today. Yeah. But what about tomorrow? And that makes the situation really hard to judge. In 2007, the wheels were coming off and there was no cash flow today. That that problem happened very much in the present. Whereas we're having
anxieties about the future. And I think that's an important difference. All right, Rob Armstrong, US financial compensating financial times. Rob, we appreciate you taking us through a complicated topic. But I think it's simplified. Thanks. Cheers. All right. Before we end here, let's return to this satrini research blog that
took the internet by storm and took the markets down with it. This is the second viral blog post
in three weeks that has erased hundreds of billions of dollars in market value overnight. Which tells you more about how investors are feeling than about the blogs themselves because
“what you have to remember here is that these blogs aren't actually telling us anything new.”
They are simply synthesizing existing information in a creative and interesting way. And it's the feeling they are arousing within us, not the information that is causing these massive corporations to lose as much as 567% of their value within just a few hours. So let me give you my
perspective on this viral blog that sent the markets into meltdown yet again. So first off,
It's a really good blog.
And the reason it's so good is because it ties together all of the relevant issues that could
“materialize because of AI, not just how it might disrupt software, but also how it might disrupt”
the job market and the consumer economy and the debt markets and the insurance industry and so on and so forth. It illustrates how AI is calling into question all of the little pieces in our system that we tend to take for granted. Another way to put it is that it describes the catastrophic risks that Asworth Demodarin was warning us about in our episode on Friday. And so in that sense,
it is a really good read and I encourage you to read it. But does it warrant the cataclysmic
reaction that we saw from the markets? No, it doesn't. Because again, it doesn't tell us anything new. In fact, it simply describes a hypothetical situation which sounds like an absolute because of the way it was written. And that is, it's written in the past tense. As if all this stuff actually happened, which makes it feel scarier, but let's be very clear. The entire post, top to bottom, is conjecture. It's informed conjecture, but it is conjecture nonetheless. In addition,
“it also misses several key points. For example, the premise of this blog is that all the companies”
that handle friction, so law firms and software companies and payments processes, they will all die a slow death because AI will eliminate the business of handling friction. Agents will be doing everything for us. Now that might be kind of true, but if that is the case, then the friction handling business won't actually be eliminated. It will simply be transferred to a new set of players, namely the companies that own the agents. Now that might be a new set of companies, it could be
open AI could be anthropic. That would cause some disruption, or it might just be the existing
“set of companies. It could be big tech, in which case those companies that embrace AI are going”
to get very, very rich. Put another way. Yes, this technology is unique to this era. But the general rules of disruption remain the same. Just as VISA eliminated the friction of paying by check, it ultimately created a whole business around that in credit cards, which did employ people and did generate value and ultimately created an ecosystem just like any other market. This blog seems to conveniently ignore that reality. It's very descriptive about the value destruction
that AI could inspire. But it's almost silent on the value creation that it could also inspire. There are some more blind spots in the blog that we can maybe discuss another time, but the net net
is this. It was an excellent, creative, interesting blog that also shouldn't have a race 300 billion
dollars in value. But it did, which tells you how investors are really feeling right now. Anxious, apprehensive, and very, very confused. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Paterson and engineer by Benjamin Spencer. Our video editor is Brad Williams. Our research team is down Shalom. Isabella Kinsel, Chris Nodon, Hugh and Mia Sovario,
and our social producer is Jake McPherson. Thanks for listening to Proftly Markets from Proftly Media. If you like what you have, give us a follow. I'm Ed Alison. I will see you tomorrow.
