Leopold Stays in the Game, Big Tech Earnings, OpenAI Slashes GPT-5.6 Prices | Diet TBPN

We have a guest co host today. Introduce yourself.

0:01

For those who don't know, Jordy's out again. I'm back.

0:04

Yeah, we got Tyler in the Ultradome in the hot seat. You're back. You know who else is back? Leopold Aschenbrenner's back. He says, you're gonna have to drag me out of salt. Out of Situational Awareness lp. Cause he's down but not out. Little beat up, but he shared a letter that's making the rounds. Thanks to some intrepid reporters on the DBPN team that posted this. He sent an LP letter that clarifies a lot of the questions yesterday. I mean, even internally, we were going back and forth on like, okay, he sold a bunch of the portfolio to Ken Griffin, to Citadel. Does this count as a liquidation? Does this count as blowing up? And these are like sort of vague terms like what, what does it mean to blow up? There was definitely a drawdown. The fund definitely was underperforming that month. But what does it mean? Is the fund gone forever? Is he going to work at McDonald's as some people were trying to make it seem like it was happening? Obviously that's not going to happen. He's going to have a long career. Lot of, lots of people are rooting for him. I'm certainly rooting for him. There are some facts in this letter that we should read through. So he writes, this is Leopold ochsenbrenner to the LPs of Situational Awareness LP. We let you down this month. We came closer to permanent capital impairment than is acceptable to us. While we ultimately found a solution that protected the fund and you as investors, that was the sale of the, of the public equity book to Citadel. There was some other structure going on to get liquidity. If you said, we ultimately found a solution that protected the fund and you as investors, our intention in running the fund is to never find ourselves in such a position in the first place. Volatility is the price of long term investment returns. Over the past two years, we have delivered outstanding results. That's 100% true. Is up what, a thousand percent at one point or something like that?

0:06

Yeah, something like that. I mean, it got up to what, 45 is the number.

1:48

45 billion a from an original raise less than two years ago, I believe up $250 million, which seemed crazy at the time. People were like, he's a young, he's a young first time hedge fund manager. He's got $250 million. That's crazy. Then pretty soon it was like, oh, he's got a couple billion, that's crazy. Then it was like, he's got tens of billions, then he's got half a centibillion. So he says over the past two years, we have delivered outstanding results despite occasional sharp pullbacks. Probably not the first time. There's been other pullbacks in the market and those have probably been amplified, but never gotten to this level of actually distressing the fund in this way. He said, but our fund must always be structured such that we can take a loss and fight another day. And that's a recurring theme in this. The writing in this letter is really good, very clear, very direct, not being dodgy, very upfront. I love the way it's written.

1:51

Almost kind of like there's that Fiji advice to like, write very clearly. Yeah, I think it was very for sure kind of in that line.

2:46

There's a lot of that in here. Yeah. So he says, I will make it my mission to ensure that we learn the necessary lessons from this experience. Here's where things stand. One, the portfolio experienced a significant drawdown over the course of July, which was exacerbated by extreme moves in core positions over the past week. Many AI names drew down by half or more, while our positive long, short spread reversed violently. While we could say much more about how unusual the, the month was, we hold ourselves to a higher standard irrespective of market conditions. Two, as these moves proceeded, we started to see increasingly adverse trading in names publicly associated with us. So this is the rumor that Martin Shkreli was talking about yesterday, this idea that there's blood in the water.

2:52

Unsurprisingly, you can kind of sniff out if someone's hurting and then.

3:36

Exactly. And then short. Sell those positions, sell those names, put some pressure on those downward pressure to actually intentionally hurt that fund. It's a knockout, drag out fight there on Wall street, clearly. But that's the game you're playing. That's why you get paid the big bucks if you can pull it off. So these dynamics are essentially similar to a bank run. Crazy to put that word in there. A lot of people would be dodging that. But very, very direct. I love it. Vulnerability begetting, more vulnerability. We worked to keep the portfolio within our risk parameters, but gradually this became more difficult as positions rapidly moved against us and market liquidity dried up. On Wednesday night, Thursday morning, we took decisive action to protect LP Capital. We traded a portion of our public portfolio in a block transaction to remove all leverage from the fund and prevent further losses. All shorts were Closed and reliance on portfolio financing removed. We currently manage a fully paid for public book, long stock and long fully paid for options with no margin liquidity risk. This restored stability and allowed us to preserve our private positions. So this feels like down but not out for sure. And he says I take full responsibility for these events. That's just the full paragraph. He just says I take responsibility, no equivocating. It's great. To be clear, this should rightly have been a very painful month in terms of the performance of our fund. When AI stocks draw down dramatically while AI technical business fundamentals are improving, you should expect our fund to be down a lot. We embrace volatility, but it should never jeopardize the fund. The fund was not shut down, it was not liquidated or transformed into a private only fund. This was something that a lot of people were speculating on was is this going to be private only? Are they only going to have their private book? Is just going to be the anthropic position that's going to be riding or is it just going to be liquidated and they're just going to return capital LPs and just say hey, we're going to start completely fresh, do something completely different. Even, even like, like an acqui hire, like the, you know, situation awareness becomes like a, a desk at another fund. None of that's happening. He's very clear about this. Situational awareness is not shutting down, it's not liquidating and it's not transforming into a private only fund. He says we are continuing to operate as a hybrid public private fund as before. However, we will manage our public book on a fully paid for basis while we draw the lessons from these developments. Most importantly, we took the steps that were necessary to fight another day. I love it. A rallying cry to both the LPs and the employees. I'm sure. In the coming weeks I will focus on putting in motion the national necessary changes across the portfolio management risk team and vigilance applied across the board to ensure a higher level of resilience going forward. I may continue to intensify market volatility for years to come. And that is something that is so clear outside of the situational awareness bottleneck trade, long tail, low market cap, high volatility stocks like I have never seen the Mag 7 trading like this where across earnings. We're going to get into this with recapping Meta, Apple, Amazon, Microsoft.

3:39

Yeah, I mean I think the stat was Microsoft had the biggest day ever, any public, the biggest move ever. Yeah.

6:37

So you're Seeing you're seeing trillion dollar companies move by 10%, 9%, 15%, it's insane that anything can happen at that scale. And so clearly there is going to be a lot of volatility. And I think he's right to point out that it is based on the AI trade. There's so much uncertainty about one little number about how the capex is going to trade back. You know, the investors in these, in these large companies, let alone the small ones, are moving the stocks significantly and that makes his job all the harder. He says these were very expensive scars but I am dedicated to ensuring they will be invaluable lessons for our organization and for myself as we move forward. My core promise to you is that we will not waste the opportunity to learn from these events on the portfolio itself. We are very optimistic about the current investment opportunity set. Of course, I mean the thesis still holds. The underlying fundamentals are accelerating at the very same time that prices have declined significantly. Thank you for your patience and your partnership. I'm fully invested alongside you. Virtually all of my capital is in the fund and I intend to work relentlessly to demonstrate that the events of this month have made me a wiser and stronger investor. He says he's available for calls, but he also says that the as an interim update, the current unaudited estimate of net month to date performance. This is for all of basically negative 67% sounds atrocious until you realize that net year to date they're still up 80% which is better than any investment fund ever. So people are definitely maybe down but not out. There's going to be a second act here which I think everyone's very excited for. A lot of people were praying for his downfall. It's very unfortunate to see.

6:43

I think this was really good letter. I mean this is like instills so much faith. Like yeah, he's completely level headed. He's not like freaking out.

8:31

You're calling it another billion dollar PDF.

8:38

That's going to be the second billion

8:40

dollar PDF might be. I mean Shelter agrees. Shelter had a great day, great position. What did he say?

8:41

He said prediction situation awareness will be bigger than Citadel by the end of the decade. Leopold has predicted the last two years better than anyone else. Now that he can combine that with very expensive lessons in risk. He will be unstoppable. He has my full confidence.

8:49

This is such a wild post. Kane Griffin sitting there being like, you

9:02

gotta ride with your boys, Sholto.

9:06

Like you're gonna take a shot at me like that bro. Really?

9:08

Really.

9:10

You're gonna come for me like that because I will die before I am not the biggest hedge fund manager in the world. Pull up a live view from the Citadel trading floor because we got some leaked video. This is not the vibe that Martin was articulating. Ken Griffin's wanting to be framed as, like, the savior, the legend of last resort, positive force.

9:11

This is the guy you want to

9:39

call, I guess, this guy right here. Dune. So good. Is this from Dune one or Dune two?

9:40

I think I want to say Dune one.

9:47

Yeah. Beautiful. It's very heavy.

9:51

So I think one of the big stories of the last, you know, few days is we've seen all these new Leopold photos. We've never seen these before.

9:56

Yes.

10:03

Brand new, rare Leopolds from Wall Street Journal.

10:03

This might be the biggest story of them all.

10:06

Yeah. Because, I mean, for a while, the only image of Leopold was basically there was, like, one headshot, and then it was just stills from Door Cash podcast.

10:08

Yeah.

10:15

And now we're just seeing all these new ones. Where did these come from?

10:15

There was one, and then there was a photo that was done, I think, for the Wall Street Journal. But then the New York Times writes up the whole story of the. Of the situational awareness deal with Citadel, and they just drop a banger new photo that they just had in the archive that they could have leaked. Let's pull it up. It's here. It's Leopold looking very pensive behind a glass wall. This one's in the Wall Street Journal today. This one's new, too. Everyone's been clamoring for this because the one that goes viral is him in that green suit.

10:18

This is the one. Yeah. I'm pretty sure that's AI.

10:47

That's AI. But this one is not. This is from the New York Times. They went and shot this and then never published anything. Like, the first time Leopold was mentioned in the New York Times was yesterday. And they used this photo. And so you have to wonder if they were, like, working on a profile.

10:49

Yeah, they just been sitting on it.

11:04

But Leopold's been so quiet with his public relations strategy. He's not talking to media, doing photo shoots, doing profiles constantly. Like, he certainly could be doing more in Bloomberg at Forbes and Fortune. Like, he could be doing a lot. But he's had a very narrow strategy, and I think it's worked very well for him. But it's funny that somehow all the mainstream media just has secret Leopold photos and dropping on the timeline. John Arnold is chiming in. He says, my philosophy, when I used to hire traders Was that the optimal number of past blow ups was one. He's not saying zero.

11:05

Yeah.

11:37

He says you got to learn your

11:38

lesson is how does the FTX future fund count? Does that?

11:39

I don't think that counts at all.

11:42

That it definitely doesn't count as a full blow up.

11:43

He wasn't a fund manager of it. Right. It wasn't it like donations and then FTX was just the one that was funding.

11:45

Yeah, it was like he was.

11:51

That seems, yeah, that seems completely separate. Is, is the wedding photo AI or is this real? And is he carrying an American flag? Let's pull up this image.

11:53

Yeah, this one I've never seen before until yesterday as well.

12:01

I mean like if it's the wedding, like the wedding's happening right now, this wouldn't exist.

12:03

But.

12:07

But I'm wondering if this like leaked onto the timeline from someone who was there. Also this photo hit like Wednesday and I think the wedding would be over the weekend. But it's cool that he's just rocking carrying an American flag. International. Yeah. The real lesson here is never travel internationally because he takes one day off, one weekend off to go to Europe and everything, everything blows up. Now of course this one I was laughing at before the show. Rambo says comparing Leopold Aschenbrenner to Bill Wang. Wang. Wang is the goat. Bill Wang's from arc of ghost. Wang is the goat of degenerates and Leopold is a sheep compared to him. Did you know that Wang turn 200 million into 36 billion and it was all personal capital. The guy literally led prayer circles in the conference room before trading day started. He had $160 billion of stock exposure on just 36 billion of capital. It's like 5 or 6x leverage. That's his blow up happened in two days and he literally caused the collapse of one of the most prestigious investment banks. Banks lost a total of $10 billion combined because of his collapse. Leopold is nothing compared to.

12:07

So get your numbers up.

13:15

Yeah, no, yeah. I mean that's the interesting thing here is that it is this sort of like dramatic unwind but at the end of the day it is just like an over the counter transaction with Citadel for a block of trades and block of equity positions.

13:17

Yeah. And the fund is still around. I mean they still seem to be like probably going to be doing very well.

13:30

Yeah, they'll be ok. Citadel will be

13:35

bigger than Citadel any day now.

13:37

And and importantly all of the, all of the prime brokers, the big banks, like they were not affected. There was not like a liquidity crisis. That contagion effect did not take root. Roy Driscoll says there's nothing to learn from the situational awareness situation about the AI trade. Leo was right in 2024 and based on the Amazon results, he's still right today. Hyperscaler capex continues unabated. There's obviously something to learn about risk management. Forex leverage with high beta stocks is a mistake in trading stocks. Half the battle is, is getting the trend right, but the other half is nailing the portfolio construction.

13:40

Well, I mean this is what Martin was saying yesterday, right? Yeah, like the underlying completely makes sense but like you get into these crazy psychology things where it's just like, yeah, who's really.

14:15

Everyone's focused on the leverage. It does also seem like they were like every time the 13F would drop it would be like 12 names, which is like not a lot of diversification. So I wonder, like right now the message from the letter is we're not using leverage right now. We're going to be learning the lesson. Maybe the lesson is hey, 2x leverage or 3x or something like that, or 4 in certain scenarios with smaller trades, not portfolio wide or something like that. But it will be interesting to see if there's a difference in if the lesson that's learned when the next 13F drops in a couple quarters we see, oh wow, he has like 100 names or he's using more options or less options or however it changes that will be interesting to see for sure. So Leopold still has Anthropic Maddox and fluid stack, tier one private companies. He can probably raise 2 to 3 billion more. It's not over for him by any means, says Zephyr. There's been this vibe of like it's too good to be true. He's too young.

14:24

Tall Poppy syndrome. You know, he's, he's the can't keep getting away with it wonder kid. Yeah, yeah.

15:18

You know, yeah. People, people hate to see a young, a young, a young goat, A young, young hedge fund manager run it up. Crazy. Alexi Guzzi says keep people keep making fun of Leopold on the timeline, but everyone one, everyone needs to get margin called once in their life. Is this true?

15:23

Delian had a similar take. Right. He said basically all the goats on Wall street have had some sort of blow up earlier in the career part of the game being live player on the field. So yeah, is that true?

15:40

I don't think that's actually true. I don't think Warren Buffett ever blew up. I don't even think Ken Griffin Ever really blew up. I think he had a really bad year in 2008 during the financial, during the housing crisis. The financial crisis. But early on I think he got his start sort of post.com and was doing convertible debt trading and never really like the entity has always been Citadel. There was no precursor to that. But it's a fair take that like clearly people can blow, can build back up after there's a. Yeah.

15:53

I mean there's a lot of comparisons to pt. Right?

16:24

Yeah.

16:26

They're saying, oh, this is also kind of.

16:27

Yeah.

16:29

Lose take. Right. Going to vc. Yeah. Then you can kind of do the long only thing.

16:30

The real, the real hack would be to just raise the smallest hedge fund ever, $10,000, lever it, blow it up and be like, wow, I'm post fall.

16:34

Oh yeah, he's post fall.

16:45

He's post fall. And so, but, but if you do it with like such a small amount of capital, but you can still be like, oh man, I learned so much. I was crazy. Those crazy, crazy times. I lost $500. Ready for the real fund now? No. Leo still made incredible returns. His fund will do incredibly well in the long term. Lots of people coming out in support. One person that's not in support, Joe Eisenthal is going back and forth with Tracy.

16:46

That's hilarious.

17:15

So Joe has been live tweeting this. He's been making a bunch of great points and just illuminating the deeper level of what's going on with prime brokerages and all these different aspects of what's going on. But Joe started by sharing Wall Street Journal article that said that Citadel buys situational awareness stock portfolio after big losses in AI. And Tracy says, why does he have to get bailed out at all? And this is another question like is this a liquidation? Is this a blow up? Is this a bailout? It would be. It would have been a very different conversation if this had been like a government bailout of situational awareness. That's not what happened.

17:16

Systemic risk.

17:50

Tracy says, why can't we just let the speculators fail? Joe Wiesenthal says, who says he's getting bailed out. He entered into a transaction with a Welling counterparty. And Tracy says, isn't that a bailout? Why not just keep managing the fund? Why not be Cathie woods and have a bad day and live to tell another tale? Except there were probably too many redemptions. So it was spiraling. Joe says he got margin called and Tracy says, so it is a bailout. Just let it bail. But maybe it was too Big and could see the contagion. Joe says, I don't get what you're saying. Someone gets margin called and they have to pay the broker. And the way they pay back, the broker is selling off shares to some other counterparty. How is that a bailout? Like he's just selling. And people associate every sale with a bailout now, I guess. But that's not what this is. This was not the government stepping in.

17:51

Yeah, yeah. He was not too big to fail.

18:34

No, not at all.

18:35

I mean, some people were saying that he could have been too big to

18:36

fail going in, but yeah, it doesn't seem like that's what happened. It seemed like there were significant losses and then they ran an auction and there were three, three parties bidding and they. And the bids came in above. Above, like, you know, liquidation level. So the fund is not liquidated and it remains. And so Joe, after fighting back and forth for several posts, he says, I think we might have a different definition of the term here. And I think you do. I think you do. Very fun. This is an interesting scoop from Berber Ginn over at the Wall Street Journal related to this Situational awareness tried to sell a three and a half billion dollar stake in Anthropic to a group of investors led by Green Oaks and Sequoia. Obviously there's a lot of demand for the stock. The parties reached a deal late Wednesday, but then situational awareness pulled out Thursday morning. Turned it down.

18:38

They turned it down.

19:26

They turned it down.

19:26

They were offered like 3.5 billion. Something like that.

19:28

Something like that. And they turned it down just to grind for the public equity book. They sold that to Citadel. That obviously cleared a lot of the risk out. And they said, hey, let's get keep this position. We're extremely excited about this. We're bullish. And so I don't know, I think. Will this be the subject of a book? Will this be the subject of an actual movie? Is it drama enough? Have we gotten the FTX movie yet? Because that's way more dramatic and I don't think that ever happened.

19:30

Yeah, I haven't seen it.

19:58

And then there was Infinity Machine. Not Infinity Machine. There was a Going Infinite.

20:00

Is that the one? That was the Michael Lewis book.

20:03

Michael Lewis book, but that was written like before the blow up. And so it was like sort of. It didn't really tell the story, like day by day, but like an in the room, fly on the wall, minute by minute account of this would be interesting, but it's not that dramatic because it doesn't end with an explosion. It ends with like a okay, we're back in the fight. Which is cool. I mean it's maybe more positive outcome. Big Tech's AI spending is continuing to produce blockbuster financial results even as investors have become increasingly selective about which companies they're willing to reward. Over the past two weeks, Microsoft, Apple, Amazon, Metta, Alphabet all reported quarterly earnings that largely exceeded Wall street expectations. It's very boring when you pull the did they beat on top line? Did they beat on bottom line? It's like everyone beats and then the Stock goes down 10% or up 10% based on CAPEX forecasts and also just messaging around AI diffusion and uptake. Microsoft led the group with shares surging after reporting fiscal fourth quarter revenue of $90 billion of 18% year over year and ahead of of the 87.4 billion that analysts were expecting. That was the consensus estimate. EPS came in at 474 versus expectations of 421. So they beat top line, beat bottom line. Azure revenue accelerated 43% over year over year.

20:05

Yeah, so they gained 450 billion in one day. 16%.

21:22

50 billion in one day.

21:27

That's for biggest one day market cap gain for any US company.

21:29

Look at that. Thank God. That's really, really impressive. It's up 25% over the month. Very impressive. Apple also beat expectations, reporting $109.4 billion in quarterly revenue. Earnings per share of 202 stock briefly pushed the company market cap above the $5 trillion mark. But it has been absolutely tanking today. Down what, 10% today or something like that? Down 9.47% last. We'll go through two more. Amazon has also impressed investors with revenue climbing 20% to 200 billion. 200.6 AWS growing 37% to 42.4 billion, sending shares sharply higher in after hours trading. Here's Amazon. We can pull that up as well. The market is up 13.76% and the day is looking pretty good of 15% today. The market's reaction wasn't usually universally positive. Meta posted stronger than expected revenue of 60.8 billion, up 28% year over year. But earnings per share fell $6.186.18. Fell short of the $7.22 analysts had expected. Investors focused on the company's 31.1 billion in quarterly capex along with 3.6 billion in one time legal and severance costs, sending the stock sharply lower. Let's see what Meta is doing down just a bit. Alphabet meanwhile, reported revenue of 119.8 billion, while earnings per share of $9.11 comfortably beating expectations. While Google Cloud revenue surged 82% year over year to nearly 24.8 billion. Even so, investors remained focused on the escalating cost of AI infrastructure as hyperscalers continue pouring hundreds of billions of dollars into new compute capacity. And here's. Here's Google so we can dig into this more. There's a whole bunch of deeper questions about what is the actual efficacy of meta spending on AI? How much are they spending on tokens? How much are they spending on headcount? All these things matter, but we'll dig into it another time. Take us through what's going on with OpenAI. Pushing the model frontier access across efficiency. What happened? They dropped the cost of Luna.

21:32

Yeah. So there's. There's Luna Terra. Sold. This is the cheapest model.

23:44

Yes.

23:47

Massively reduced cost. You can see on the kind of Purdue curve. This is like actually much cheaper than a lot of like open source models. Because we've been talking about this recently. It's like there's cost per. Per task, not just like, can it do it and how much do. Like it depends a lot how token efficient the model is.

23:48

Yeah. Because there you could measure it on. On cost per token, but if, if a certain model takes 10 times the amount of tokens, it's only half the cost. You wind up spending more.

24:03

Yeah.

24:12

Why is the Pareto frontier in this graph flipped? I feel like the Pareto frontier used to be this direction. Am I hallucinating that it's always been this way? You always want to be on the left side. I thought you wanted to be on the right side or something like that.

24:13

Well, it depends on where you are

24:27

in the pure frontier, I suppose.

24:28

I think I see what you're saying.

24:30

I suppose. Anyway, we also. I don't think we touched on this, but Arc Agiv 3, the leading labs have been going back and forth. Opus 5 put up a very, very impressive number. Then OpenAI fired back with 5.6. Sol used to solve open problems in mathematics. So why was it struggling with Arc AGI v3, which you at one point were in the top 10, right?

24:31

Yeah, I was globally ranked. Arc AGI v3, I don't think it's still up, but Arc AGI v3 player, that's up there.

24:56

You were like. You were Pro Am.

25:05

Yeah. Yeah, I would say.

25:08

You didn't go pro. You turned it down.

25:09

I turned it down.

25:11

The opportunity to be an archive.

25:11

They were going to give me like 10 more tasks, 5 more tasks. Something like that.

25:13

Something like that, yeah. But apparently OpenAI was able to investigate the low score of 5.6 SOL on RKGI V3, and the harness was not letting it remember what it had learned. We found that enabling two API settings tripled our scores with 6x fewer output tokens. So very interesting to watch these.

25:15

It's fascinating. I mean, we've seen this a lot over the past, like, I don't know, year and a half, almost where the harness really matters a lot. And if you have the wrong harness or it's like, limiting the model in some way, I mean, it can have, like, massive, like, effects on the downstream task.

25:35

Yeah. People were not expecting this. It was definitely like the model, the God model will be just one model and you'll just ask it to predict the next token and it'll just do it perfectly. There's a lot more that goes into the integration here. I still think Arc AGI v3. I mean, fantastic benchmark. Love the team. Obviously, Mike's been on the show multiple times, but it's also just a great way to actually illustrate AI progress to someone that maybe just doesn't want to build software or hasn't built software before and doesn't really. Can't really feel that visual vis. Vis. Visually, I can't say viscerally. I don't know.

25:49

Well, especially, you know, the famous, like, time horizon task, doubling every six meter. Like, that's basically like, we can't actually measure the high end now. It's, like, too hard. We don't have enough tasks to, like, measure it efficiently.

26:23

Yeah. And a lot of people are just like, what a task that takes me 12 hours? Like, what is that? I don't even know.

26:35

Yeah, it is a bit hard to

26:40

think of that off the top of your head. Like, what does that mean? Like, building a whole report or something? Or like, a lot of people work in, like, various ways. Like, yeah, 12 hours of meetings is that one task? I don't know. But if you show someone the Arc AGI v1 puzzle and it's very easy, and v2 is very, very, very easy. And then you. And then you walk them through the story of how AI has progressed on this and how hidden the answers are, you can pretty easily help someone feel the AGI, which is very, very, very, very fun. And we'll see you on Monday.

26:41