Transcript
0:00 It's great to have you both here. >> Great to be here. >> Dryden, kick us off. First of all, what are your thoughts on on the Mag 7 type of big tech I don't like the word hyperscalers, but are these companies that you own or have been avoiding? Just so we get a sense for how they these commitments might factor into your your views on the market? >> short answer is yes, we own them. And for a long time I've been saying buy chips on dips because we think that this is this is just the infrastructure build out of AI.
0:26 And so when we look at all these large numbers, we're recognizing we're going through a transformation for our economy that's as as big as a transcontinental railroad. We're spending about 2 to 2 and 1/2% of our total GDP >> Mhm. >> on on the AI build out, maybe a little bit more. Well, that's about what we spent on the transcontinental railroad from 1850 to 1860. >> my memory, which were the right railroad railroad stocks to bet on during that time?
0:47 >> Not all of them. >> Not all of them. And that's true. Not everybody is going to knock the cover off the ball. But you have this insatiable desire for being in front of what's really important. I mean, it only matters if it increases labor productivity. If AI doesn't increase labor productivity, it's a cute game. >> don't care if it's 600 billion here or whatever trillion in the future. As long as they're spending on the railroad boom, you're okay owning these stocks.
1:10 >> We're we're spending on the AI boom and and we're spending we're going to in 2027 we're going to spend more on AI and the and that boom than we do on the Department of Defense. >> Here's the thing that Tom I wonder about the Wall Street Journal article because when I see all that off-balance sheet financing, I start to remember Enron and all the off-balance sheet financing. And it's on top of that, you've got these structures with a private credit funds that have holding company that's in the JV and then there's a third company that actually is issuing the bonds. So in the end, who's holding the bag and is that more obfuscation than actual good business? And should we be worried about what seems to be a lack of transparency in terms of who's really lending the money and who's going to be stuck with it in the end?
1:55 >> it's great question because I was a tech analyst during the dot-com and fiber boom of the '90s. And the people investing capital at time were not of the same ilk and caliber of the Mac 7. You know, these were companies that were digging up railroad lines and doing those IRUs, you know, which was actually >> IRU? >> It was a revenue swap between fiber companies.
2:26 So, you could create hundreds of billions of dollars of contractual revenue. And today we have companies with fairly sizable moats and some of the highest profit margins and return on capital history and have as the Bezos metric have delivered trillions of dollars of shareholder return that are now directing their investment on building a new moat around AI. So, I have a lot more confidence that these are high-level board well-reasoned companies investing, but they're eye-popping numbers. But, the reality is >> do it on balance sheet?
3:03 Well, one, they could do it on balance sheet, but if they did, they would be taking up all the capital of the world and all the risk and therefore actually make it harder for any I would argue that that would make it harder for to to democratize AI. >> accounting question? We're We're recording this off I did get a accounting. I got to see, so I need to ask all of you to make sure I'm understanding this.
3:29 They have off-balance sheet commitments because they're future commitments. Is that right? These are They're not hiding anything. >> Yes. >> They They're not on the balance sheet because they don't flow through the balance sheet until the building actually begins. So, in other words, are they This is just a different way to look at But, if they say, "Okay, we're going to spend whatever amount in 2027 to Can you explain to me exactly what these commitments are and why they're not on the balance sheet and when they will be.
3:52 >> Yeah, well, I think maybe a good place to start is I think that the revelations from the journal article are actually helpful, but they're giving people an incomplete picture of how financial systems work because if you do you know, the gross obligations of the financial system, it's multiple times the underlying assets. >> Always or just today? >> Always. In fact, that's why Warren Buffett used to call credit derivatives, you know, the weapons of mass destruction financial.
4:22 >> derivatives that we're talking about though, or these are just future spend commitments? >> It's the same. Arguably, it's not that different because if you did like gross exposure of swaps or options, like look at an any day options contracts are multiples of cash underlying. So, if someone says, "Oh, there's a hidden off-balance sheet risk that retail investors have 20 times the size of the stock market in bets." We'd be like, "Well, there's the offset." So, I I would say when we look at these numbers, it's giving a distorted view of the actual risk.
4:56 >> Let me just press this analogy one more. In other words, do you think that the spending is representing multiple possibilities of spend that's only going to manifest in one way? >> I think to me, none of these contracts like are going to lead to criminal liability. Like, in other words, like a company can decide to cut spending in the future and the contract should be So, like, the three trillion isn't like you know, people have to like sign over their kidneys to to meet these >> And Dryden, how should investors think about this? I mean, should they be worried or should they be encouraged that, "Wow, it's not just $600 billion going It's actually an additional, you know, 1.4 or up to 3 trillion, and so therefore that's a good sign about the future of AI." How should investors interpret all this?
5:38 >> I I think it's a good sign because companies are making a lot of money, free cash flow. And what were they doing before? They were buying back their own stock. They were They didn't have anywhere to go with the money that they were making. And so I like it when someone's No, I'm not going to buy back my stock because I'm going to actually put it into thing that I do best, which is grow and do these things. So I like that the capital is being redeployed into what these companies do because that's their core business. They're not hedge funds.
6:06 They need to be out there putting their money to work in what they do. So as a a growth investor, I like it. I like CFOs and I like CEOs and I like boards going like this is our fastball. We're Microsoft. >> talked about the >> >> productivity litmus test. A lot of this, particularly the bonds, are based on revenue expectations in two to three years that are ginormous compared to what they are today. Do you think we get there based on what you're seeing?
6:31 >> of the companies today have an AI account, but the only about 30% of them are I mean 30% of them say, "Hey, I'm seeing increased labor productivity." And only 7% say we fully implemented. So you have all of these companies that have yet to play. You have all these companies that are just now scratching the surface. We're moving from We're moving from infrastructure to implementation. We're moving from proof of concept to rapid adoption. And this is an area time where we think, you know, margins are good.
6:58 you know, the wide moats are getting wider. >> You think that can happen without a dramatic rise in unemployment? >> Yes. >> That those productivity gains cuz productivity gains come in some ways by replacing workers with AI. >> Well, this this this is true, but you've seen this every time. I mean, you know, people got upset The The guys who were shoeing horses got upset when the Model T came out. But next thing you know, they got a they got a perfectly good job working in the factory and they were making more money when it was over with.
7:24 So I think that that we see this transition, but I think it's it's positive. This It's Jevons paradox. And >> So it's a it's a J curve. You don't see the bottom of that J curve being too severe. >> No, I don't. No, I don't. And And we only need about 30 to 40,000 jobs a month to maintain our unemployment rate now anyway. So the the break-even point is less, the adoption's more, labor productivity is greater, and that increases profit margins.
7:48 >> I'll end by put throw another major concern on the table. I mean, why not? Do you Tom, 40 trillion in the national debt last night? Do what is your reaction to or take on that? >> I mean, it's pretty shocking that we're in a booming economy and the deficit's growing. so, >> Missiles are expensive. >> Yeah. >> Yeah. >> Interest is expensive. >> Yeah. Yeah, it it seems like there's a lot of like outflows. I I agree with the folks who think that this is a structural concern.
8:17 But, the bond market today is signaling that it's completely okay with it. So, I think as long as it's okay with it, the stock market is fine. >> So, that that that little blip in the 30-year, we saw those like, "Oh, oh, the deficit's suddenly a an issue that we saw last week with that that sale." You don't think that that was really a big move or that that's going to continue. >> Yeah, I mean, it's it is a symbolic rate cuz as you know, maybe more companies are dependent on the spread to the 10-year. So, that's the more important rate to watch, but again, like I I don't think it makes any sense to not be fiscally sound as a nation. So, it is trouble.
8:52 >> It's really hard to figure out >> You know, what's amazing is that 10-year range has been so tight for so long and and you know, everything tells you that that should be higher you know, but but it's it's >> crazy part. It was sub four. I'm I'm I'm stealing Rick's lines from his mouth. We were below 4% on the 10-year right before the Iran war broke out and oil prices went But, now the oil price is back down and the 10-year is at 4.71.
9:16 >> Right. And you could argue oil should be higher today and everything else, but it's not. >> Yeah. Jared, a quick final thought? >> Well, the the short answer is is oil in the '80s, we're fine. At low '80s, we're fine. The economy works fine. And then if you get down into the '70s, we get to $3 gas again. So, I think that we at some point this resolves. Look, you know, economics beats politics every time.
9:37 >> I don't know about that. >> And sooner and and sooner or later we're going to be able to be in a situation where we'll have better economics. >> Dryden, I want to believe you. I will hope to believe you. Tom, thanks so much for joining us. Guys, we appreciate it.