NCI: Ladies, Leverage and Leopold

NCI Ladies, Leverage and Leopold

Speaker1: [00:00:00] All right. Welcome to our next edition of Lumida Non-Consensus Investing. I am joined by one of my favorite guests, Michael Perec. He's no stranger to the pod. Thank you, Michael. Michael was the lead internet analyst at Goldman Sachs, so he's seen several cycles under his belt. And Michael has really covered this topic extraordinarily well.

He's on social media. He's got a terrific Substack I recommend you all check out as well. So last time Michael and I met was in February, and the topic was, is AI a bubble or not? Now, interestingly enough, a few things have happened since then. One, you saw the public listing of Fundrise. There's a closed-end fund, and it has Anthropic, it has OpenAI, it has SpaceX, it's got Databricks, and it's down a lot since then.

So on the private market side, we've seen valuation compression. On [00:01:00] public markets, we saw an incredible rally, but we've also seen other things like the Leopold blow up. We'll talk about that. We'll talk about data center earnings and cloud earnings and meta earnings. We'll talk about where are we in the AI cycle AI beneficiaries Anthropic, China, open weight, close weight models.

There's quite a lot to get into. Michael, welcome back. How are you? 

Speaker2: Wonderful. Great to see you, and I'm good to be back. Nothing is going on, Ram. Very boring. 

Speaker1: The world never changes. Here we are. Nothing. The world just doesn't change, huh? What's the expression? The volatility, 

Speaker2: it's... 

Speaker1: Sometimes in 10 years nothing happens, but in 10 weeks- Nothing happens

something happens. 

Speaker2: Decades. L- good old Lenin. Okay. He had a way with words. 

Speaker1: Exactly, right? So let me, let's get right into Leopold. So I'll give you a couple of facts, and I'd love to get your perspective. So Situational Awareness, this is the hedge fund started by 24-year-old [00:02:00] wunderkind, Columbia valedictorian who just had his wedding this past weekend.

Speaker2: Coming, yeah. 

Speaker1: Yeah. Oh, is this coming? It's coming. Is this coming weekend? 

Speaker2: I think I'm looking at a story in the Journal. It's ab- I- if I'm not mistaken, it's this weekend, where his guests- It's this weekend ... are all coming. I believe so. 

Speaker1: It's a Greek tragedy or he's still young. This 

Speaker2: is a movie.

Speaker1: We'll 

Speaker2: see. This is a movie. It's a movie. He's fine. He's 

Speaker1: fine. He's fine. He's young. He'll do well. So 

Speaker2: take 12- The article talks about his mansion, mansion- ... in the hills of Nob Hill in San Francisco. Already? Oh, he's had it. 

Speaker1: Okay. 

Speaker2: Okay. He already- He's running $45 billion. Ram, he's running $45 billion.

Speaker1: He was running $45 billion. 

Speaker2: Yeah, but, he's got the big backers in San Francisco. Every- the who's who are all in it. 

And so he's had the life. 

Speaker1: He's had it. $45 billion at peak, down to 10 billion AUM, forced to liquidate his entire book to Ken Griffin at Citadel over the last few ba- few days.

That appears to have [00:03:00] marked a bottom in semiconductor stocks. We'll get back to that topic in a bit, too. He reportedly ran leverage up to 400% and had a concentrated bet on AI names. So he was, it was a Degen concentrated bet. He was up in the first half of this year 439% net of fees based on investor letter dated not too long ago, a few w- weeks ago, and up a 10X since the 2024 inception before he gave it all back.

Or at least it's a 2X now if you're an initial investor. Michael, what does this tell us about the AI infra trade, if anything? 

Speaker2: Al- always pay attention to the leverage. A lesson as old as investing going millennia, leverage works both ways. And and what-- unfortunately, look, the world is looking at this twenty-four-year-old, is a billionaire.

A lot of sch- schadenfreude here [00:04:00] on Ashen Brener. He's from Berlin, young kid got into the right circles and obviously super smart and it's amazing. And so there is a schadenfreude. But at the same time, what he's experiencing, ironically is what's happening on the other side of the world as well in, in South Korea.

Fifty-four million people in that country, over five million have experienced a margin call in the last couple of weeks because they all jumped in- Ten percent 

Speaker1: of South Korea has a margin call? 

Speaker2: Yes. That's extraordinary. Five million-- fourteen million have been investing- Okay ... in ETFs The government, which had a big change and they had a big controversy, so they said, "Hey, everybody, start investing in the stock market," which they did last year.

And young people, in the millions, took money out of their insurance and other annuities and put it in the stock market. April this year, the government for the first time allowed leveraged ETFs, 1X, 2X, 3X leveraged ETFs. So they all jumped in, [00:05:00] and they bought Samsung and SK Hynix, which constitutes fifty percent of the KOPSI, the Korean market.

I'm going into these details because what's happening there is what happened to Leopold, concentrated bets. Yes. 

Speaker1: Yes. 

Speaker2: Exactly. The whole country that basically makes pretty much sixty percent or more of all the memory that makes AI works and that makes every phone and gadget, including my Xbox, work, basically, those are two companies.

Those have gone up several hundred percent, just like some of the concentrated holdings in Leopold's portfolio, and it was all wonderful on the way up. But when you had volatility, and both companies reported this week with earnings season that we'll talk about shortly- ... and both had very good re-results, and their demand picture, they're sold out through '28 to 2030 minimum.

But- Yeah ... there's a lot of volatility because as you and I know, being in the public markets for decades- 

... 

Speaker2: Markets basically presume things that are [00:06:00] years away and compress them in the next two years, and the volatility is immense. So when you have 2X, 3X, 4X leverage, as Leopold did, you're gonna have margin calls, and he- Yes

had the mother of all margin calls. And Ken Griffin, hats off, who is not an AI believer, but he is one of the best, great of all time in terms of investing, he swooped in just like the movie Wall Street. He can buy them over several times kind of thing, and he did. Pennies on the dollar for the public positions and again, a movie will be done probably or a book at least or a miniseries on Netflix.

But that's what this is, and it's just leverage. It's extraordinarily difficult to invest for the long term. Warren Buffett has done it, but Lon-- Warren Buffett, when he used leverage, he used it in a very different way in his positions in a in the context of preferreds and all these other things, not in the context of very concentrated bets.

So Buffett- So anyway, a lot of lessons ... 

Speaker1: Buffett and Munger have this [00:07:00] expression that what'll de is ladies liquor and leverage. So we have leverage of the lady. He is engaged to wed the chief of staff to the- Chief of staff to Dario at Anthropic 

Speaker2: Correct. 

Speaker1: So you just need to look, do liquor, do gummy bear multivitamins, do psychedelics.

So at least two out of three is there. So really extraordinary. I have a pet theory. I don't know if we can share it on the screen, Paul that played an extraordinary role in this market for semis. Is that sharing, Paul? There we go. So we saw from his thirtieth release, which was the bottom of the market, that was end of Q2.

His positions were published, at least on the long side, in the thirteen filing. We saw that he had significant hedges on Nvidia, AMD, which went up by a percent, Oracle, Broadcom, [00:08:00] and they were of significant size. So my theory is he was hedged in March thirtieth. We know that he was at least partially hedged sometime in April.

They had to cover. Now, when you're covering, you're buying securities, and now he's lagging on his own theme. So then he takes out excessive leverage and creates another bid. Now, fun fact, the movements we saw in the S&P have lacked-- exemplify percent of market behavior. It's a really extraordinary market behavior.

Then in June, we saw come out about Leopold stocks going up, and then obviously you had a correction on earnings, maybe about the dip. Anyway, that's my pet theory. Any reaction? 

Speaker2: You're breaking up a little bit on the audio, so I just want to make sure I'm answering the [00:09:00] question correctly. If you could just repeat one more time.

I heard everything else right. 

Speaker1: Sure. Any thoughts on that theory? 

Speaker2: Repeat the theory. Sorry, I-- that's what broke 

Speaker1: up so the theory is that he was forced to buy securities that he had been hedging or shorted- 

Speaker2: Correct. Correct. Sorry ... 

‍