WAYT? 11-18-2025

Episode Overview

• The episode analyzes the recent selloff in AI-related stocks, arguing that the market is shifting its focus from revenue potential to the immense costs, uncertain unit economics, and capital intensity of the AI arms race.
• It contrasts the communication styles of two private credit firms, Apollo and Blue Owl, using their earnings calls to illustrate the difference between transparent, realistic management and a defensive, investor-blaming tone.
• The hosts examine the role of retail investors, who have become a powerful market force by aggressively buying the dip, while also highlighting the extreme risks and speculation present in leveraged ETFs.
• Throughout the discussion, a central theme emerges: the market is entering a necessary "wall of worry" phase, re-evaluating risk and questioning the assumptions that drove the recent rally in technology and alternative investments.

Key Concepts

• The AI Cost Re-evaluation: The recent tech stock downturn is not driven by a slowdown in AI spending but by investor skepticism about the staggering capital expenditures required. The market is now questioning the depreciation schedules of chips, the path to profitability, and whether the return on investment justifies the cost.
• Capital Intensity of GenAI: An analyst assessment suggests it takes six times more capital to generate the same economic value with Generative AI compared to the initial cloud build-out, highlighting the challenging unit economics.
• Private Credit Scrutiny: A comparison of Apollo and Blue Owl's earnings calls reveals two different approaches to managing market stress. Apollo's CEO is presented as candid and straightforward, while Blue Owl's executives are seen as defensive and blaming investors for fund underperformance.
• The Role of Retail Investors: Data from Citadel Securities indicates that retail investors have become "the new price setters," engaging in one of the largest "buy-the-dip" events on record during the recent market weakness.
• Speculation and Leverage: The discussion points to high levels of market speculation, evidenced by South Korean investors flocking to leveraged ETFs and the catastrophic (over 90%) drawdowns seen in many single-stock leveraged ETFs.
• Illiquidity Mismatch: The challenges in the private credit space highlight the fundamental problem of marketing illiquid, complex products to individual investors who are unlikely to behave like stable, long-term institutions during periods of stress and redemption requests.

Quotes

• At 0:56 - "We are in a kayak headed over Niagara Falls." - Host Josh Brown recalls the specific, dramatic analogy he used to predict the market pullback.
• At 6:42 - "What is different about this particular selloff...is that this is calling into question a lot of the things that we believed two weeks ago. Hey, wait a minute, what's the depreciation schedule of these chips?" - Host Michael Batnick explains that the recent tech selloff is driven by a re-evaluation of fundamental assumptions about AI economics, not just a simple correction.
• At 7:12 - "We always assumed all along that the thing that would put this all in jeopardy was when one or more of the players decided they wanted off the carousel and they were going to stop spending. That didn't happen at all...the street is now saying maybe that's not the best idea." - Host Josh Brown highlights the surprising driver of the AI stock selloff: not a reduction in spending, but investors questioning the economics of the continued spending.
• At 8:51 - "[The analyst] said it takes six times more capital to generate the same economic value with GenAI as it did during the build-out of the early cloud era." - Host Josh Brown quotes an analyst's note that downgraded Microsoft and Amazon, highlighting the challenging unit economics of the current AI boom.
• At 10:01 - "It is way too early to look at the unit economics of these businesses. We have no idea what they're going to turn into... Imagine looking at Facebook in 2014 and jumping to conclusions." - Host Michael Batnick argues against premature pessimism on AI stocks, stating it's too early to judge the long-term unit economics of the emerging technology.
• At 29:28 - "What I think this all boils down to is what's changed in the last two weeks is not the fundamentals of the AI race... I think what's changed is what is the cost of it going to be?" - Josh Brown on the market's shift in focus from AI potential to its massive capital expenditure requirements.
• At 31:51 - "They calculated how much new revenue these companies would have to generate to justify spending $5 trillion... AI products would have to create an additional $650 billion a year in revenue indefinitely just to give investors a reasonable 10% annual return." - Josh Brown, quoting a JP Morgan model to illustrate the immense challenge of monetizing the AI arms race.
• At 45:21 - "Yes, undoubtedly, the opportunity set today is less attractive than it was one year, two years, three years ago. Hey, guess what? You could say the same thing for public equities." - Michael Batnick contrasting Apollo CEO Marc Rowan's candid earnings call commentary with that of Blue Owl's.
• At 49:00 - "This is what happens when you decide 'our target market for this is the wealth management channel.' ... when push comes to shove and you need them to act like institutions, they will not. They cannot. They're not institutions." - Josh Brown explaining why individual investors in illiquid alternative products will not behave like pensions and endowments during periods of stress.
• At 52:16 - "The merger came with significant benefits, such as the ability to own more liquid shares in OBDC." - Michael Batnick quoting Blue Owl's CFO, highlighting the contradiction of selling an illiquid product and then touting liquidity as a benefit when forced to merge funds.
• At 52:28 - "'There's no doubt that this is a no-brainer transaction at 95 cents,' said Lamb of the new merger." - Michael Batnick quoting Blue Owl's CFO, which Josh Brown finds hilariously out of touch with the market's perception.

Takeaways

• Shift your analysis of AI-related companies from focusing solely on potential revenue to scrutinizing their capital expenditures and path to achieving profitable unit economics.
• In any new technological cycle, expect a "wall of worry" to emerge where the market questions the initial optimistic assumptions; this is a natural and healthy part of market maturation.
• When evaluating asset managers, prioritize those who communicate with candor and realism during difficult periods over those who become defensive or blame investors for poor performance.
• Be cautious of highly leveraged and speculative investment products, as their structures can lead to devastating losses that may not reflect the long-term performance of the underlying asset.
• Recognize that the behavior of individual investors differs significantly from institutional investors, especially regarding liquidity needs and reactions to market stress in alternative assets.
• Be wary of narratives that contradict a product's core appeal, such as touting "liquidity" as a key benefit for a fund that was originally sold based on its "illiquidity premium."