Chit Chat Stocks - Investing Power Hour #78: AI Bubble Is Back; FTC Thinks $AMZN Is a Monopoly; $500 For Tinder???

Episode Date: October 1, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** Chit Chat Money is presented by Interactive Brokers. Switch the best brokerage in investing today: ibkr.com/info ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. This is the Investing Power Hour number 78. I think we're going to keep it as season one forever. We're never going to move on to any sort of season two. We're just going to keep going and going and

going until we hit a thousand. But my name is Brett Schaefer, and I am joined as always by Ryan Henderson. This is, I should say, Chit Chat Money, investing podcast talking about anything about stocks. On these episodes, we talk about basically an open-ended discussion on any sort of financial topics, any sort of business topics that come to mind, anything we want to talk about, and it's a very free-flowing discussion. If you're listening to this, we do them live. A few people join, but for those that do, they love asking a lot of questions. They can help spur of the conversation themselves. And we go live every Thursday morning or Thursday midday on the East Coast, Thursday morning on the West Coast. And it kind of depends where you're

listening around the world. But you can come join us, ask us questions. It's usually 930 a.m. Pacific time. But that is all I think I have for the intro. So Ryan, how are you feeling today? It has rained for about one week straight here in Seattle. So we got fall very early and it's not, it's not been the best, but at least the markets have been exciting. There's been tons of news this week. I, you know what, I kind of find the rain a little refreshing after, after a summer of pure sun. I, I, I don't know. It's kind of exciting to me, but yeah, after about a week, it starts to, I'm already tired of it. Yeah. Cause we got, we're in, we're in this for about next eight months but uh the yeah why don't yeah let's talk let's talk markets because no one

really gives no one cares about seattle weather um i don't know hey maybe they might but yeah why don't you go through one topic unless you have any sort of thing you want to talk about first while i kind of tweet out the links well uh government shutdown markets are down markets in turmoil yeah we'll never recover from this um Um, the, yeah, there has been a ton of news over the last week or so. You got the one that I really want to talk about, which is the FTC lawsuit, uh, which FTC lawsuit on Amazon, which seemed a little ridiculous. And there's some really good tidbits from that, but why don't we start with match groups?

New Tinder selects tier biggest news of the month. I'd say. for Match Group shareholders, certainly. Yeah. Match Group launched this new tier for Tinder called Tinder Select. It's a nice little measly $500 a month. The benefits aren't really that exciting, to be honest. The whole, I think, appeal here is that you are in an exclusive group, essentially. So they're not accepting everyone. You have to apply to be considered for Tinder select. And if you're accepted, then you can pay $500 a month. And basically from what I understand, it's just like the hottest people get accepted. I think it's based on like a likes

ratio or am I wrong? No, it's active. No. Most active? Oh yeah. That would make no sense, right? Come on. The hottest people don't have to pay for anything. that's that's fair i guess it's going to be like 90 men that are paying for this then yeah of course as always yeah i mean it's going to be frankly the ones that struggle the most right and the ones that are wealthiest i mean you're not going to have attractive people on there it's the ones that said it's the one percent most active which i think makes a lot of sense so the people that are on there a lot it didn't say the one percent most active it just said membership membership spots are limited to less than one percent of users yeah i thought when i

read an article when i wrote something up on this it said one percent of like their best users their top users so i'd say that's most active power users i basically i haven't seen anything that says that's what they're gonna do i mean in the conference calls they basically said we're trying to there are people that i mean it kind of makes sense so like there are people that have a much higher propensity to pay or propensity to spend and you're basically charging them the same as everyone else that doesn't really make a lot of sense they talked about power users in the conference call but yeah so you're saying yeah so the maybe we're you're thinking of the people that they're they're available to talk with but i'm thinking the ones that are going to pay so

you're are you saying could be but like okay so there's like the select mode which means you can only see other accounts that have select my thought here is why would you want to see 90 other dudes yeah so i think it's different the ones that are paying you're going to be different than the ones that are you're seeing yeah but i'm saying there's going to be like a mode where you can only see the people that are paying oh well that doesn't seem very valuable the the thing that i think is probably what people are going to pay for the most here is you can direct message people without matching with them. And you can actually go back to like, to your previous seven days of likes. So say you came across some account that was just like, you felt it was the magical one and you had

to message them and you liked them five days ago and they hadn't matched with you. And you, And just to be clear, that doesn't necessarily mean they didn't like you too. They might not have seen your account. You might not have been made available to them. They might not have noticed that you liked their account, so they just didn't get the chance. If you really wanted to match with them and you're willing to spend $500 to do so, you could apply to Tinder Select.

You could go back, check out your likes, send them a direct message without even matching with them. I think there are probably some people that would pay for that. Now I'm picturing 90% of the users here being really well off, like teens and 20 year olds that just have way too much money to spend and probably get quite a good allowance from their parents. Oh yeah. Just like mobile gaming or video games in general.

Yeah. And let me, since we've been kind of confusing here, I have a summary of the key points. $500 a month. And as Ryan mentioned, the key point here is messaging with people they have not matched with while the quote most sought after users will see their profiles. And then the third point is that Tinder is offering the plan to less than 1% of its users. It considers extremely active. So I think we're both right. Yeah. Matthias H puts in the chat, are they catering to sugar daddies probably well that might be unfortunately that might be the most common use case the now you can like opt out of receiving direct messages without matching so if

you're just getting spammed with crap like you can just opt out of that stuff the other thing that i think is kind of interesting here is there they're like you will have the option to display the select badge on your profile don't you think it's kind of a very weak look to be like yeah i pay 500 a month for tinder like no one yeah no one's gonna want to see that okay i want the one hand typically you want that they they don't broadcast that you're paying right because that shows the weird signal thing thing that goes on with dating you want to show that you're cool that you're not trying yeah you're not trying too hard that you're trying to that you need to pay right? But for this one, Matt H mentioned the, I don't know how to describe it. The fact that you

have the badge that shows you can afford $500 a month could be beneficial. So I think giving that option is nice. And what's interesting here is that I like that they priced it extremely high for their ultra premium tier, because you don't want too many people signing up for this thing. you also there's not going to be that many people that want to because of the no one wants you know there's only a select few people but it's going to have extremely high incremental margins and if you have so it's five hundred dollars a year so basically on a annualized basis six thousand dollars a year you know when you sign up for these things it's usually not on a yearly basis but people cycle through that means if they have and let me make sure i'm doing the math correctly here

tinder's probably got like 60 million monthly actives yeah so if you have to measure it basically 6 000 annualized times let's say they get 10 000 people to sign up that's 60 million dollars so that's not bad right if they get one if they got one percent of their users to pay for tinder select that's probably like i'm guessing that's 500 000 users yeah and And I would think it would be closer to like 0.2%, but that's still fairly meaningful. Yeah, I agree. They also did the classic, if you can just get 1%, everyone, you know, like the whole, like if they can capture 1% of their market, it's huge or whatever.

But no, what do you, what do you think of it? I guess. Yeah. Let's talk our opinions. Chit Chat Money is brought to you by Interactive Brokers. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies. They charge USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees. The ability to trade stocks, bonds, options, futures, commodities, and more with high

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for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. well my classic thing to do is anytime a company that i own announces something i rationalize the best case scenario and i think oh this could totally work out and then strategic partnership oh yeah remember tinder coin maybe that is the future anyway the i do think there's a market out there who and frankly it's probably a lot of the creepers Although they do have certain conditions that have to be met for your profile. You have to have five pictures, you have to have a real bio, and you have to have activity. I think there are a bunch of people that can pay for this and will pay for this.

I don't think it'll be that significant financially. Maybe I'm wrong. It's peer margin, basically. Yeah. Bernard Kim said he's had success with this at Zynga, where allowing your highest end users to pay egregious amounts helped them. And so he's seen the success of it. He says he's excited to try it on Match Group's properties, probably just starting with Tinder. The other thing that I potentially like here is it may be helpful to offset some of the really popular people that have gone to things like The League or what's the other one that's like for really like famous people? You know what I'm talking about? Raya. Raya.

Maybe if you can build this into the high-end, wealthy, exceptional, active users, and they can filter it to just select mode, it can replace some of the RIAs in the leagues of the world. I don't know. It might be helpful, but that's really kind of a small market. Yeah. I think it's a good plan, but not a game changer in TBD. But they're doing the right thing. All right. Let's do another topic.

I wanted to talk a presentation on short selling. This is kind of older. It's from Upslope Capital, a great short seller on Twitter, but I thought it was very relevant. And I had a note here that markets start dropping, so we talk about short selling. But I thought it was really interesting. For any listeners, I'm going to share the screen, but if you're listening, it'll be pretty easy to follow along. But I just want to show these so Ryan can see them as well.

the gist of it was that short selling isn't it gets a worse reputation than you think he has a starter slide here which basically says and he has some good pop culture stuff going along with it where like he has a you know the the old quip that everyone says did you know that shorts have unlimited potential for losses and your gains are capped at 100 and then he has jim chano saying i've seen a lot more companies go to zero than infinity which is definitely right because no company has ever gone to infinity and a lot of companies what is it like 90 percent no i think it's 60 70 underperformed something like that actually has the stat in here that's like the first picture i've seen of young jim chanos i know whatever the old looks so different that's

so funny the old 80s wall street people with they they wear the suspenders the big ties the white t-shirt they would look you know in their high in their high floor office yes exactly exactly okay so yeah actually here's the slide so here here's the number here most stocks have are underperform say the index whatever index you want to choose they use the russell 3000 here. So 66% underperformed the Russell 3000 and 40% of the stocks have negative absolute lifetime returns. And what this means is for anyone that doesn't know, if you're running a long short strategy, it's not necessarily that your shorts have to go negative, right? It's that they need to underperform the ones that you buy. It's great that if they go down a lot, but it's

not necessarily the end of the world as long as they underperform your longs and again there's some some math there there's the short interest you have to pay and then there's the stuff you can earn owning like treasuries on the cash you know that you take in something like that right but besides that's besides the point he does give some examples here there's a nice chart and i'll basically we don't need to describe the chart for anyone but here's what they say they like to focus on as short targets and there's two things here and he has a chart that goes for basically time needed uh or stress and mental health costs versus odds of being profitable and they like to focus on the ones that might be the most stressful but have the highest chances

of being profitable over the long term which are if you can find big time fads and frauds and he goes through two examples and i'll go through basically so i guess an example here for a fad actually was it a fad or a fraud i don't know it was tattooed chef and you looked at okay so many red flags that added up and this is why they wanted to target it one going after you know spax two talking about tam three uh accounting shadiness uh shady promoters liking it and pushing it um a lot of hazy data ratting a fat writing a fad which is like you know kind of the the trendy plant-based food you know that type of stuff remember the that kind of bubble we had with beyond meat and stuff like that and then obviously it was overvalued related

party nonsense is all added up to be really a easy short i would say over the long run even though it kind of ran up for a while and then i guess another thing he talks about here and maybe we can pause um after and do a little discussion and maybe continue if ryan has any thoughts here and i thought this was a perfect example i mean we've been we don't we we don't really short at all so but we've been kind of in the community that doubted tesla right we've been tesla doubters for a while and that's obviously been quite wrong but he says you don't need to be a hero which he says why fight mike tyson when you can kick granny in the shins which is a apparently from uh aris aristides capital chris brown on short so i don't know if that is a fake thing

or a joke, but that's real. And basically, he said, okay, you can target a company that's going to say they're going to go from zero revenue to $300 million in revenue in three years and hit 34% margins as long as we can figure out a way to file a 10K someday and get this at-the-money offering going. Or you can fight Mike Tyson, which is mostly self-funding. CEO has legal Immunity, Investor Baseball, YOLO, anything, and doesn't care. And the two CEOs were one, Arsimodo, which is that electric golf cart vehicle, which is apparently the easiest short ever, if those are the numbers there. And the second one was Tesla, which has ruined a lot of people shorting because of the examples above. So Ryan, maybe I stop there. Any thoughts on that

so far. I'm targeting the frauds and the fads for short selling. No, I think this is my first time looking at this. And I really liked the presentation because I think a lot of people, when they hear frauds and Dan McMurtry once said, we don't short frauds because if the one thing you learn about a public fraud is that they're probably pretty good at being a fraud. But I think a lot of people, when they think about frauds, think about the most high-profile ones, as opposed to the companies that are just scraping by, have shady accounting, happen to get public because they wanted to use public shareholders to finance their own operations. I think Tattooed Chef is probably a really good example of that. It might not be the biggest

outright fraud like, say, an Enron, but there's probably some fraudulent stuff going on. and it kind of fits into that fad trend i think that's i think that's probably a pretty good approach i like that the and it's one where the fundamentals aren't don't look even that good and i think one thing he talks about is wait for the break because there's going to be a lot of downside once it breaks interesting the the one thing that would concern me about that strategy is in an environment like a 2020, the frauds tend to have the biggest cults and you get really easy financing. And sometimes it feels like it can turn a fraud into a real business. But obviously if you're shorting at the end of 2022, it's good. You just don't know

how long that irrationally exuberant environment is going to last. Yeah. That's an interesting point. I think he covers some of that later in the presentation, which maybe we can go through. We do have a comment though from Matt H saying, when Druck says he's probably made no money shorting, does that mean he's just bad at shorting then? Possibly, because yeah, he can't be good at everything. He seems to be good at a lot of things, but maybe shorting is not one of them. I think what's interesting is, and again, people have this idea about short selling that you got to buy something and then it has to go to zero. One, and this wasn't true after the great financial crisis for a while, but it is true today. When you short sell something, you get cash in.

So you could either buy treasuries, earn 5% on that, or you buy another company. And if the spread on that is positive, you're going to make money. If you buy a company and it performs better than a stock that goes nowhere, you're going to make money. And again, I know we're not experts here but generally that that is true yeah i think this really kind of opens my mind up to it a little more because you do hear a lot of narratives of the riskiness associated with it when there's definitely some ways to kind of contain that risk the concern is more of yeah uh you see yeah you're i'm showing an example of the concern right here where the rc moto stock went to the moon for a little while there yeah and what's his name who's the australian fund manager

hempton another one seller does his quote around it was like shoot shorting in 2020 was like shooting fish in a barrel but sometimes the fish would shoot back yeah that's true i think that's where it like makes me worry is the cults that can get that can get behind some of these stocks can just yeah even though they have no real viability they can if you have promoters like a like like what we're seeing there on the screen yeah it might be a certain etf manager in front of the arsemoto car which is a hilarious absolutely hilarious site but i think here two things for that one you probably can't like going too much um i forget the industry term but basically having too much leverage when using this type of strategy can't do that right because you

don't that's that's a big risk of blowing up and second you probably need 30 to 40 positions that are all sized fairly small. But I think the good thing is about that is there are so many of these small mid-cap, really terrible companies out there that if you have a bigger team, I think it's not the hardest thing to do to find 30 to 40 of these things that are going to really underperform over the long haul. Yeah. I wish we adopted this approach earlier. I know it's easy to say coming out of 2020. What do you think? I mean, we're both different, but I feel like I'm still multiple years from able to employ any sort of this strategy with any confidence. I still need to learn a lot. Yeah. I just haven't really dedicated a lot of time to learning it, to be

honest. We've been running a long only fund. And so the focus has constantly been what works for us on the long side. I think before I put any real money to work on the short end, yeah, I'm probably a couple of years out. Yeah. At least. Yeah. That might be something I would do as I get older, but we're still young, so we're still learning along with all you guys. If I'm ever doing it solo, I don't know if I'd be doing it. That's right. It takes a lot of time. It takes a lot of, yeah. if i'm just putting money in my roth and wanting to look away for a while i don't think shorting is going to be my yeah because it takes a little more time and tracking i would say but here okay

let's let's keep going on the presentation so we looked at the one that said like the perfect target which was rc moto during bubble 2.0 um as the presentation says not a joke so the backstory was a complete and utter BS qualitative story about these three, it's kind of like these golf cart style electric vehicles that were super niche, and there was near zero chance of financial viability. They only had $7 million in revenue and negative $56 million in EBITDA. It was heavily promoted to retail and CEO cared a lot about shorts. So the presentation says, check, check, check, check. This is the target, right? That we want to go for a short. However, given the pump and dump here. He said, lesson learned, size carefully. I did not manage this one well.

I lost a modest amount of money, even though it's basically gone to zero. But he says, this is kind of a good lesson as it really doesn't get harder than this. So that's kind of the downside is like, okay, you can target something that's a clear zero, but you actually might not make any money. Yeah, that makes a lot of sense. That's a really good indicator of how much do management teams worry about shorts that's true that's true that's a positive and a negative because sometimes they can really try to i think screw you've seen that from time to time all right they can go ahead make you the enemy that their shareholders rally around yeah so here's golden rule for fad and fraud shorts size and manage your positions to survive no outsized positions

no shame stemming bleeding if you uh as needed walk away from the screen uh have patience wait for the break which basically means wait for the stock to break and wait for the fraud to break right except that you have to accept that even if it's a small like 70 basis point position really really small position and if it's headed to zero it is going to be a strong value add even if you don't resize it as you go down because again this you know as the shore goes down it becomes a smaller position in your portfolio a lot of people and this is what the game stop shorts got in trouble with tend to add to their short as they go down right um you know kind of pile into your position hopefully get more gains but what he says here is you want to make fads and

frauds boring fish in the right pond which is there's never a shortage of lousy stocks look for a pile up of red flags and look for the granny versus the tyson so don't go after elon musk who's going to who has a lot of power out there and then you want to size smaller than you than you think so lots of tiny positions which helps you keep your sanity all right if the ceo has more than 50 million followers on twitter don't go after it yeah that's true what were some of the most clear shorts i know this is kind of obvious now but where were a pile up of red flags do you remember any companies throughout 2020 2021 where we're like oh my gosh there's so many

rc moto i mean oh oh the one that we knew for a fact that we covered as a not so deep that was app harvest i mean we were like okay this is the easiest one but again well we talked to a friend who said he like lived near him he's throwing these massive parties every night yeah and here We have a comment from Andrew from Capital Mindset said, I know some YouTubers who are unironically super long RCMoto. In that presentation, Upslope says that that's actually an indicator that he looks for promoters on Twitter, promoters on YouTube that are like very, and it's different than say someone like us who is trying to discuss something.

It's like they're literally promoting the stock. That is an indicator that this is a company that he needs to look at as a potential short. and then andrew also says was just talking to one of my friends who works at a long short fund and says shorting is easier literally had just had this conversation with him um and maybe outside and the last comment he has here and maybe you can talk about this ryan too and we can have a discussion here is outside of the zerp era it's going to be a lot better for shorting looking for going forward yeah i think that's probably right i want to go back to some of the companies we're thinking about because there was also i remember throughout 2020 and 2021 having our podcast

i would get messages from like third parties that are that were like ads it was like will you talk about our stock yeah like you're selling you're not selling you don't want to advertise your product you want us to advertise your stock like i guess that is your product the other one i was thinking of was, what was it? Carparts.com. You know, it was honestly a red flag was when CEOs engaged with our podcasts, when they'd listen and be like, no, this stuff is wrong. I'm like, why are you, who cares? If you're listening to us and you're like, no one listened to them, they can't be right. It's like, dude, just run your business. Who gives a crap what we say? Yeah. And then another part on the media stuff is that when a, he said another red flag is when a CEO would go on the podcast circuit, which I got to say, Hey, you know, I don't mind that, but it can be a red flag. I'd say potentially if they're constantly going around, especially the more promotional type podcast, right. That could be one red flag, but I don't know.

but i i think honestly if someone wants to come on our show and they reach out to us to do that that's a red flag we but we usually have to reach out to them if we're going to get a ceo on our show we'll have them on the show but it's a red flag yeah and here's what he said though in the presentation i have to sneeze so that's why i'm looking like this um it sorry to listeners uh i almost said to sneeze there the he says you can't have one you have to that the red flags have to add up you got to have like six or seven hopefully as many as possible yeah tattooed chef was a big one pretty much all the chamath smacks were just a walking red flag yeah the appealing to the heartstrings is a big one the what was it virgin galactic

stuff where it's like we're not gonna give you returns but it's your investment is for the good of humanity app harvest was the same way beyond me was i'm guessing their s1 was like that too but it was kind of prior to covid yeah nicola oh gosh thank you julius caesar there he's back he's back um anyway yeah i think that was a good presentation i let me i'll put it in the comments here for anyone who wants to check it out because it's not something that's easily findable but i think that was fun i don't think anything else there do you want to talk ftc i want to talk ai first okay go right ahead do it so on monday i believe it was announced that amazon was going to invest up to four billion dollars in anthropic took me a while

to kind of figure out what all anthropic does but for from what i can understand very similar to chat gpt in that they have this ai assistant named cloud cloud cloud cloud like claude shannon the company was actually started by two former open ai executives they have a consumer facing application which is you know just similar to the chat gpt most of us think about and then they also have this ai assistant that they kind of sell to businesses to integrate in their workflows or add on top of whatever so like they have an integration with slack where you can add anthropic AI to your Slack page. And you can say like, you know, there's this long thread, summarize it for me, that kind of thing. So they're, they're investing $1.25 billion upfront and then a

potential additional 2.75 billion, if conditions, certain conditions are met $4 billion in total. This is by far the biggest investment acquisition, not really an acquisition, but investment they've ever made for AWS specifically. I mean, they've made big acquisitions and investments for the business overall, Whole Foods, MGM, probably missing some others. There was a lot of, I guess, I don't know, synergies you could call it. To be honest, some of the AWS nitty gritty is over my head. So they were talking about some of the integrations with Amazon Bedrock or AWS Bedrock, which is, from what I understand, kind of this generative AI for developers that helps them with their AWS customer experience. They're also going to use the Inferentia chips, which are like the AI-specific chips that Amazon rolled out,

which are apparently 30% lower cost. And they're going to use AWS Tranium to train all their AI models. I'm saying stuff that probably doesn't matter to most people. Well, my question to you, what do you think about them lobbying out potentially $4 billion on something, to be honest, we don't understand the synergies here, and it's the biggest sum they've ever done for AWS specifically? Yeah, well, I think… And it's a minority stake, so they don't really have control over the way the business is going to operate. Yeah. My thing is it's maybe not clearly, but I'm worried that it's a bubble and we'll get some other stuff here that might be a little more bubbly specifically with open AI. But I like with

the cloud providers that there's a margin of safety here because a lot of this money is basically saying, we're going to give you this investment, right? But it's essentially just a partnership to say, okay, you're committed to spending on our cloud platform or whatever you want to describe it, our cloud infrastructure. So a lot of the money is going to flow back to AWS. And I don't think it's a bad move. Yeah, it's kind of hard to say. I think you almost have to just say,

Andy Jassy, who ran AWS for the longest time, you kind of have to trust him with this stuff because he's proven it in the past. My only concern is, does it feel like you have to start acquiring or investing in other companies to add certain capabilities? That would kind of concern me. Other thing that's kind of tangential to this, OpenAI, parent company of ChatGPT, is apparently in talks to raise a secondary round, valuing the company at $80 to $90 billion. That's about- annual right now 90 times sales and it's a 2x 3x might be triple the valuation that microsoft

invested in them at eight months ago so microsoft's gonna beat earnings if this is true because they're gonna have to mark up their stake here's what i was thinking yeah 15 billion yeah so they uh they do this this new round right and we'll get to the employee part which i think is quite telling uh but we're doing they're going to get this new stake microsoft's going to have a big unrealized gain then that's going to make sure they beat their earnings per share which means that microsoft stock's going to rise which is going to create their momentum which is going to get the indexes to buy more which is going to just create this self-fulfilling cycle and yeah so the indexes are going to rise right to the end of the year just because of this could be

be very well could be if apple i mean honestly if apple and microsoft beat earnings it's the for at least a couple weeks it drives that momentum but that's a whole other topic that i actually might not know much about but there's another important part here that okay i want to hit right i think a lot of it is i think i'm remembering this correctly but i think a lot of it is employees selling stock not the company issuing which is maybe telling just in that it's they're using it as a liquidation event and other people are using it as a buying opportunity but yeah and a three-year-old company i mean the thing okay so i used to just hate on open ai not understand the value proposition then this week spotify announced this ai for podcast translation

where they're going to do kind of this real time well they will if you upload a podcast it's a pilot program right now, they're going to be able to translate your voice into a bunch of other languages using open AI technology. Some of those business applications of open AI tech gives me some sense that this could be really valuable. Now, is it 90 times sales valuable? Kind of hard to say, but I'm starting to get a better understanding of how it can be really useful in the real world yeah and it is yeah it's clearly got a lot of value i what i wonder though is how hard is it going to be for google to just replicate this how hard is it going to be for amazon aws services to replicate this with again you talked about them be kind of the third party

person to help other people do this and then also meta this week which we're probably not even talking about launched a bunch of stuff like this they could probably easily do it i'm forgetting others apple i guess seems to drop the ball on this type of stuff but either way i wonder how like given how expensive it is to do this stuff versus how big the competition is whether this is going to be an add-on feature similar to the voice assistance that actually don't create much shareholder value but it's something a lot of these companies have to do uh but as a uh you know as a i think it's a lot of that like spotify is providing a lot of value specifically maybe to us you know you could be listening to this in spanish a year from now could be quite interesting

and you know there's what over a billion spanish speakers in the world that's a huge value add for a ton of podcasts like ourselves plus we can hear ourselves speak fluently that would be nice the there i mean there's obviously lots of applications for it it's nice to see some real ones coming out. I think, though, the chat assistant, to me, still does not seem very valuable. If you really care about your work, it doesn't seem... Cheating on your homework is one thing, but just relying solely on the AI for answering real-world problems, is it that much better than just researching it and typing out yourself? Yeah, I agree. And here's, I think, an example that I'm thinking about from an investment perspective. Google came out with

Google Translate a while ago. It's gotten way better, right? They have the voice stuff that goes along with it. I'm sure given that they have the Google Translate stuff, they could do something like this, right? Like OpenAI is doing with the voice translation stuff. But Google does not charge anything for Google Translate because I think they understand that while they could do a little subscription service and probably get a million to 3 million people to sign up, maybe even more. That is, it's not what it's about. It's about driving people to their platform so they can sell ads and lock people in with these free services. Yeah. I think that's enough AI talk for the day. Let's talk antitrust. Okay. Yeah. I have some stuff here. There's a lot of

info. We're probably going to miss some things, but I'll try to sum it up. There's so much coverage out there of this and there's going to keep being coverage because there's going to be the stuff in front of all the lawsuits and there's lawsuits with google microsoft i mean i saw something that was really interesting maybe we can try to talk about another week about how microsoft under oath said that they've tried to pitch apple to be their search default for years but it's just uneconomical for them because the cost is twice as much as their actual ad revenue which i think is quite interesting but that's besides the point we uh because to this week on tuesday The FTC filed a lawsuit against Amazon, joined by 17 other states, accusing Amazon of interlocking

anti-competitive actions that it says have inflated pricers for consumers, harmed third party sellers in Amazon's marketplace, and made it nearly impossible for other e-commerce platform as retailers to compete. Long thesis? No. The lawsuit- I know. It's that classic-

oh no, there's a monopoly that's winning because it's the low cost provider. That's disgusting, where? Yeah, oh, that's good. I'm gonna steal that with this quote with the always sunny when his shirt off, what he's fat. Okay, but here are kind of the, some of the big points from the lawsuit.

Again, I'm not gonna try to ramble on with everything here, but I think it'll help spur discussion. Some of the lawsuit claims are that one, sellers on Amazon are forced to use Amazon's add-on services. Two, some say Amazon takes as much as 50% of every transaction. I'm sure we don't have any hard evidence of this yet, but I'm sure it'll come out during the trial. Third, the lawsuit alleges that Amazon has increased the number of ads and search results

over the years, making sellers feel that the only way potential customers will see their products at all is if they pay for Amazon for ads. four, Amazon won't let sellers sell for less on other websites while setting an artificially high price floor. Now, most of these, the things that they allege here seemed a bit weak because it's like, yeah, okay, they can offer these add-on services. That's not anti-competitive because you can go somewhere else. I think the only one that might have some merit is if they basically don't let you go under, if there's evidence of this. I don't think there really is because the evidence that Amazon gives out

is that their prices are the lowest out there. But if there is evidence that they set artificially high prices and if someone tries to go lower on another website, they can't and they kick them off. Basically, Amazon, who has about 50% market share, that can make sense. But as well, I don't think that actually,

it's not strictly anti-trust, anti-competitive behavior. It's kind of a weird red line, but it's going to be interesting to see what happens here. I'm curious if you read anything here and what your thoughts are, Ryan. So on the last one, let's say that you're not able, you're not allowed to undercut them on price. If you're also selling on their platform, just go sell somewhere else, right? Yeah.

Well, the thing is they are providing you the distribution. Yeah. Let's not forget that that's the value here. Like they're providing you billions, millions of customers by easily just uploading a couple of products. Secondly, oh no, they're forcing you to use the fastest shipping service in the world? In the country, yeah. In the country? First of all, they're not forcing you to.

It's just by far the most valuable. You can do slow weekly shipments if you want. If retailers are complaining that they're being forced to use all of these very helpful value-add services, Now, maybe on the advertising or the promoted listings, you could say it kind of dilutes the experience and it makes it difficult to compete. That's one thing. But with the shipping, if you want to offer slower times, go for it. They're just offering you the best option. I don't know.

Some of this stuff did feel weak. And they were like, they were talking about basically how it's anti-competitive that they're being the low cost provider, which isn't that like the opposite? They talked about how Amazon is lowering margins as an anti-competitive thing, right? Wasn't there that quote in the FTC suit? Let me go find it. Yeah. Okay. Okay. Yeah. It's, it's, it's, it's hard. Cause he, sometimes you kind of just keep

like, you go through back and forth, like, okay, then this, then this, and this, like, if they, if they sell this, whatever, like, what are they trying to entice people to do? I think what's interesting is that look, they're going to try to make an argument that and like Amazon for some reason is making it harder for these sellers and they're like charging. Okay. 50% of the transaction, right. On Amazon, if they use all of their services, But I don't know how egregious that really is because, okay, if you're literally taking the product from wherever it originates, and then you're being the demand generation, and you're taking it from the origination, like obviously you don't make the product, and then you get it to the customer, you're doing all that work. i don't think a 50 cut is out of the question there like that's not that's not unfair i don't i don't think but no i mean they're they're supplying you most of your sales yeah here

here's the quote that and again i would follow the best follow on this as kind of an expert because it's again i'm a bit i'm a bit over my head on all this stuff from all the legal stuff but i would follow modest proposal i was about to turn him yeah he's probably the best or they are Let me read this. I think we're about to read the same thing. The same thing. Okay, you go ahead. Yeah. It says, in effect, Amazon deters rivals from even attempting to compete with Amazon's first party retail business on price because rivals quickly learned that their price cuts do not result in greater market share or scale, only lower margins.

Yeah. So they're setting a low price. Yeah. Here's what I don't understand here is because if they say, and they talk about locking in with Prime, they talk about selling stuff at extremely low prices if that is true we should have an antitrust case against costco because they do a similar thing they have a subscription service they have the add-on card product and they have extremely low prices and and they squeeze suppliers costco squeezes suppliers way more than amazon does way more i i seriously as a consumer amazon has only ever helped it provides real low cost items that deliver in a day is sometimes the same day i don't see

can it really be anti-competitive if it only helps the customer once it starts to hurt the customer then maybe that's true that's true that's what team moves for yeah yeah the uh here's what But yeah, I think it's another interesting point is that it's, it's the, the claim here, you know, is they want to make it everything. Okay. They want to make sure company, like the goal of all this stuff in general from a higher level is to make sure companies are not squeezing people and everything is fair in that regard. Right.

But in this case, they're trying, like, they're saying that Amazon is so good at providing value to consumers. And it's almost like we need to make it better for these other companies who aren't making any money. And it's like, yeah, it's a very difficult business. Amazon is running it at a low margin and they're trying to add on these value add services, but it doesn't make them a monopoly. Yeah. You don't get to 35% e-commerce share by screwing people. You get there by providing the most value. Yeah. I think what's weird about this is that their, I think, slogan maybe, or motto is probably a better word of focus on the customer first, providing value to the customer. They took that so far by kind of not putting their business partners first. The

merchants are the ones that have a tough time because they make them be hyper-competitive against each other. They're very competitive against the other businesses out there, Shopify, Shopify, websites, blah, blah, blah. We all know that. But I would think that's what the FTC wants, right? They want the businesses to be hyper-competitive. And yeah, Amazon has this market share and just started really raising prices. That wouldn't make sense.

I mean, if we're looking at clear-cut antitrust, anti-competitive cases, look at Apple, Alphabet, and Microsoft. Those are the ones that actually do stuff that feels a little anti-competitive. Or, you know, that would be clear-cut antitrust cases. I mean, Alphabet and Apple's stuff is, some of that stuff is pretty clear-cut, I think. Yeah, it is interesting that Lena Kahn has basically just had this agenda to, it seems like, tear down big tech or, you know, try to raise awareness around monopolistic practices. And it's kind of every company, no matter what. And I read something that she had a thesis paper at Yale that was a flawed thesis paper that was about Amazon's monopoly.

And that's how she kind of got the job. Yeah, that's why she springboarded it. Yeah, it was a pretty famous paper. Yeah. It's funny, too, that the Wall Street Journal, the day this comes out, posts an article that says hedge funds are making tons of money betting against Lena Kahn. yeah the uh here's a here's a comment says the uh where is it betting against lena khan is a gift from the gods yeah it's providing us the ability to get in at lower prices frankly yeah i mean they usually don't go off that much but should we have a mount rushmore of ftc failures no no no no

I think that would be a little bit too cocky. But here's another thing that I would hope any investor thinks about is, okay, say the FTC tries to stop Amazon from the things they think are anti-competitive. Okay, now what? Okay, they could break up AWS. Nothing changes. Those businesses are already essentially separate. Okay, second, they say you can't have the price matching thing that restricts people from selling at lower prices. Take that out. Okay, no one's going to do that because if you try to sell at a 20% discount to Amazon

and you have a Shopify website, your own payment processor, your own shipping processing, your own warehousing, your own inventory management, you cannot sell at a 20% discount to Amazon given their economies of scale and actually make any money.

So no one's going to do that. Isn't this kind of a- Unless you're Timo and funded by, And it's absurdly or just crazy, which, again, is not a sustainable business model. So I don't know exactly what changes. Maybe here's one. Maybe the advertising business could be the one that's really under threat here. But if it is, OK, Kroger and Walmart should stop having slotting fees because it's not

really that different. And I can maybe the one I could hear an argument there about that being different because it's digital. But it also makes the experience a little. worse for a customer like yeah oh i gotta scroll a little further somewhat somewhat yeah they i think they're getting i could hear that argument for sure for yeah the thing i find kind of funny about this is isn't it in a way kind of roasting like shopify to say everyone has to sell on amazon like shopify's like well they don't you know they don't have to they can use our websites

and it's like no no it's it's their monopoly they have to sell on amazon it's like no people go there because they get the best service yeah well look you could like you could have complaints about amazon and stuff like that there is a giant company i think there's probably some things you know we we own the stock and they're not but you obviously do not optimize for profits yeah which We know that as shareholders. Yeah, and you can have like, just because you own a stock doesn't mean you have to put on the blinders and say, no, no, whatever this company and whatever the CEO says is perfect. But I believe after studying this company, reading both biographies, reading basically a ton of stuff over them over the last five years, they are the most, maybe the most misunderstood large company in America, I think, because they get so much hate. and look like, yeah, they have a million warehouse workers, right? Okay. And what six people peed in

a bottle once like, Oh, okay. Like this stuff is going to happen. As Buffett said, they have like 500,000 employees across their whole operations. And there's definitely going to be some fraud going on at some of them. You can't control that as you get bigger, there's going to be some things that go on, but here's two things. One, Amazon has invested like hundreds of billions of dollars into this country. So I'm thinking more of like a political perspective. Two, they provide extreme value to a lot of consumers out there that one, don't have to drive to places, right? And you don't have to worry about theft in these stores. It's a great value. And then third, they have driven up wages for hourly labor and hourly labor people significantly. I mean, they're the ones that

have set the standard and caused Walmart, caused Target, caused these other places to raise their minimum wage to $15 and higher. I mean, they're the ones that have done that. I don't, like- I've never understood. I've never understood the hate around that. Yeah. I've really never understood the hate around Bezos either.

Because he looks, I think he looks strange and has a weird laugh and he's just a meme now. He's like one of the most coldly rational people and one of the biggest contributors to advancing kind of modern commerce. Yeah, if anything, they've done so many dumb projects that their help, the consumer surplus is incredible. I remember one time, this was, I believe, the one when they had to go to trial during the pandemic when they were saying there was an evidence there that they were some sort of document, some sort of email that they were saying, hey, look, guys, we're selling these Alexa products, these Echo products below cost. We're losing money on every single one of these. We shouldn't do that. And the government was saying, hey, look, you can sell your products at below cost, like $30 for the $60 thing to consumers.

And it's like, yeah, that's a great, that's a lot of consumer surplus right there. Like, how is that any sort of, you know, complaint? It's funny if you circle back a century, what the anti-competitive lawsuits were, right? It was about Standard Oil, just price gouging because they could, because they had the deal, sort of the cut their deals with the railroads. Yeah. Right. Now we're suing for the opposite.

Their costs are so low or their prices are so low that something needs to be changed. It feels to me a bit like she felt like she needed to do this after having this stance prior to coming in to the FTC role. Yeah, they lost a lot of lawsuits here. And it's not surprising because they seem to be stretching. Here's a good question, maybe getting off of the lawsuit. Thoughts on Amazon replacing UPS, USPS, and FedEx? I would say maybe not replacing them because they're not going to get 100% market share, but there's going to be two worlds. One, the vertical integration at Amazon, who again is consistently, we talked about it in another episode, driving down costs.

They're making stuff cheaper. They're not doing surcharges on Q4 anymore this year. And there's going to be another world, which is the disparate parts of the Shopify type stores, which you can, you know, a lot of market share and, you know, use UPS, use third-party payments, use third-party warehouses, blah, blah, blah. So I don't think they're going to go in a way, but Amazon is going to be a big thorn in their side from a price perspective. And all they've done is drive down costs across these things. And given UPS's new labor stuff, it's going to be very, very tough for them. Yeah, I don't think they'll ever fully replace, but I think people should certainly expect that Amazon will eat a fair chunk of their market share over time. Yeah, and their goal is to drive all of their transactions off of UPS, I would say. well speaking of unsustainable business models which you mentioned earlier wish

is was in the news i guess a little bit because an activist is officially urging liquidation of wish now i haven't done any research on wish in a long time but i remember the last time we looked at it we thought there is no way speaking of a short they were selling beats for like 12 bucks fake beats and really okay this this platform's dead but timu's gotta kill amazon yeah it feels like wish 2.0 not to be too dismissive of every competitive threat to amazon i think timu is basically wish 2.0 it uh does this news surprise you that it's probably in liquidation scenario does not i am going to give you a little bit of a trivia here don't look no cheating Over the last five years, which I think it's just all time because they went public in late 2020, what do you think Wishes, or as they're known, their actual name is ContextLogic, what do you think their stock returns are?

Minus 99. Correct. Minus 99.4. What's a stock that's down 99% that goes down 99.5%? You know that saying, right? A stock that goes down, what's the difference between a stock down 99% and a stock down 95%? Yeah.

No, what's the difference with a stock that's down 99.5% and a stock that's down 99% is a 50% drawdown. So pretty bleak stuff for them. And I think that was another example of one that would fit that upslope capital short candidate. Right? Well, maybe not now in the liquidation scenario, but yeah, the, it certainly would have, but obviously that's with hindsight. What did you think about the target closing stores around theft concerns? Another bullish thing for another bullish thesis on Amazon this week. Everything's coming up Amazon. Yeah.

It's a lot harder to steal stuff from a distribution center. Yeah, yeah, exactly, exactly. That, unsurprising, I think a lot of these stores, people talk about the shrink there, which again, shrink equals theft. And yeah, that's probably true. And damage goods. And damage goods, yes.

Seattle, Portland, San Francisco, it makes sense, right? But I think another thing that people may not be factoring in is that these places have been a bit hollowed out from a demand perspective, from office vacancies, from people living in these areas, right? And that definitely hurts demand for these companies who have big real estate footprints there. So it's not surprising that I would say these places get out of downtowns and go to the suburbs.

Yeah. I did read some just really discouraging stats around shrink, just growing. It's like 1.6% of revenue. Oh, yeah. That is a huge cut into their margins. I think it's almost $100 billion a year across the United States. That could be the world, but it could be the United States as well. Yeah.

I mean, it would be so discouraging as a potential retailer going into a big city. You're taking a lot of risk. You're putting your employees at risk, or at least some of these cities that we've referenced here. What are you- In the article. Yeah. So we're at about 1030 here, and I want to have a closing question here. How, you know, we had some, I don't know if it wasn't a rant, but I say it was maybe a passionate discussion on how this FTC stuff doesn't really make sense against Amazon.

I'd say one, from an investing perspective, it really doesn't matter. Like the legal fees are going to be irrelevant, blah, blah, blah. Are you worried that we're going to have some cold takes here, some evidence comes out that Amazon is doing a little bit worse things than we think? How are you thinking about that maybe as we close out? So I really doubt it. I mean, I'm sure there's been some malpractice at some spot in the company, but from like a strategic perspective, don't you think margins would be higher if they were really optimizing to destroy their retailers? That's true. Yeah. Do you think there's going to be an email that comes out that says,

we need to put these blank, blank, blank out of business so we can then raise prices? I don't know. There could be though. Here's the thing though, that all the best evidence in these trials, they save, you know, because it kind of adds up right to the end. They wait to bring out their best evidence kind of in a blow for blow. Also, Amazon's been under pressure for a long time. I think the company knows to avoid saying certain things.

right it's been since 2017 right yeah i would be very surprised like some maybe someone sent a stupid email a long time ago but i think they're all on guard to not say something dumb that could be pulled up in a trial there's gonna be that one employee that's like scratching his head like oh my god what did i say yeah no it's like they see he sends an email and then the first response is hey keep it in the telegram keep it in the whatsapp okay we talked about this Just give me a call. Yeah. What did the CEO of Binance say?

He's like, don't put any of our stuff in email. Oh, yeah. There's been some great stuff. Sounds like something that's not going to be suspicious. Yeah. There's been some great stuff on crypto lately, which I wish we could talk about, but that's usually more of a boring topic. Plus, we got some hate from it. That's true.

Although, I would say that I think every week we're getting proven more and more right, but who knows? TBD. No one likes talking about it anymore. And I think that's kind of the evidence we need. But we're running long. That's going to do it for this episode. Thank you, everyone, for tuning in. Really had some good comments out there.

And again, we go live Thursday mornings, but you can listen to the replays wherever you get your podcasts, YouTube, Spotify, Apple. Just search Chit Chat Money. Follow us there. As a disclosure, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital, and clients may hold securities discussed in this podcast.

Thank you, everyone, for tuning in, and we'll see you next time.