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 for those who don't know.

Jordi's out again, I'm back.

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 SAWP, out of Situational Awareness LP, because he's down but not out. A 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. Uh, 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 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. 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 Aschenbrenner 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 public equity book to Citadel. There were some other structure going on to get liquidity. He 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 2 years, we have delivered outstanding results. That's 100% true. It was up, what, 1,000% at one point or something like that?

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

Yeah, $45 billion AUM from an original raise less than 2 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 2 years, we have delivered outstanding results despite occasional sharp pullbacks. Probably they're 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.

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

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 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.

Yeah, you can kind of sniff out if someone's hurting and then—

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.

Yeah.

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 it 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 an, like an acquihire, like the, you know, situational 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 our portfolio management, risk team, and vigilance applied across the board to ensure a higher level of resilience going forward. AI 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 Seven trading like this, where across earnings, we're gonna get into this with recapping, uh, Meta, Apple, Amazon, Microsoft.

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

So 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 July, 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, you know, maybe down but not out, that 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.

I mean, this— 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.

So you're calling it another billion-dollar PDF?

Yeah, that's going to be the second billion-dollar PDF.

Might be. I mean, Sholto agrees. Sholto.

Yeah, Sholto had a great take, a great position.

What did he say?

He said, prediction: situational 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.

This is such a wild post. Caine Griffin sitting there being like, you gotta ride with your boy. Shulto, like, you're gonna take a shot at me like that, bro? Really? Really? 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 Griffins wanting to be framed as like the savior, the legend of last resort, positive force.

This is the guy you want to call.

I guess.

This guy right here.

Dune, so good. Is this from Dune 1 or Dune 2? I think Dune 1.

I want to say Dune 1.

Yeah.

Beautiful.

It's very heavy metal.

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.

Yes.

Brand new rare Leopolds from Wall Street Journal.

This might be the biggest story of them all.

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

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.

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

that's—

yeah, it looks—

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.

Yeah, they've just been sitting on it.

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 and 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 they've been 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 blowups was 1. He's not saying 0. Yeah, he says you got to learn your lesson.

Is how does the FTX Future Fund count? Does that—

I don't think that counts at all.

It definitely doesn't count as a full blowup.

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

Yeah, it was like philanthropy. He was doing philanthropy stuff.

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

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

I mean, like, if it's the wedding, like the wedding's happening right now, this wouldn't exist. 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 and 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 goes, everything blows up. Now, of course, this one I was laughing at before the show. Rambo says, comparing Leopold Aschenbrenner to Bill Hwang. Hwang is the GOAT. Bill Hwang is from Archegos. Hwang is the GOAT of degenerates and Leopold is a sheep compared to him. Did you know that Hwang turned $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 levered.

That's—

his blowup happened in 2 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 Bill.

So get her numbers up.

Yeah. No. Yeah. I mean, that's the interesting thing here is that like 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 a block of equity positions.

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

Yeah, they'll be— yeah, they'll be okay.

Citadel will be bigger than Citadel pretty soon.

Any day now. Yeah. And And importantly, all of the, all of the prime brokers, the big banks, like they were not affected. There was not, there was not like a liquidity crisis that— yeah, 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. Hyperscale CapEx continues unabated. There's obviously something to learn about risk management. 4x leverage with high beta stocks is a mistake in trading stocks. Half the battle. Is getting the trend right, but the other half is nailing the portfolio construction.

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—

everyone's focused on the leverage. It does also seem like there 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 4x 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 there's— he's using more options or less options or whatever, however it changes, that will be interesting to see. For sure. So Leopold still has Anthropic, Maddex, and Fluidstack, tier 1 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.

Tall Poppy syndrome. Yeah. You know, he's the AI wonderkid. Can't keep getting away with it.

Yeah.

Yeah. You know.

Yeah. People hate to see a young—

A young goat.

A young hedge fund manager run it up crazy. Lexi 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?

DeLeon had a similar take, right? He said basically all the GOATs on Wall Street have had some sort of blowup earlier in their career. Part of the game being live player on the field. So, but yeah, is that true?

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-dot-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, I mean, there's a lot of comparisons to PT, right? —and then they're saying, oh, this is also kind of Lou's take, right? Going to VC, then you can kind of do the long only thing.

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.

Oh yeah, he's post-fall now. He's post-fall now.

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. That was really crazy. Those were crazy, crazy times. I lost $4 million. $500. Ready? Ready for the real fun 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 Weisenthal, is, is going back and forth with Tracy. Hilarious. So Joe has been live tweeting this. He's, he's been making a bunch of great points and just illuminating the deeper level of like what's going on with Prime Brokerages and all these different aspects of what's going on. But Joe started by sharing the 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 blowup? 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. But like, risk— Tracy says, why can't we just let the speculators fail? Joe Weisenthal says, who says he's getting bailed out? He entered into a transaction with a willing 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 fail. 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. Yeah, yeah.

He was not too big to fail. No, not at all. I mean, some people were saying that he could have been too big to 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 3 3 parties bidding, and the bids came in 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, 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 Jin over at the Wall Street Journal related to this. Situational Awareness tried to sell a $3.5 billion 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. They turned it down. They turned it down. They turned it down.

They were offered like $3.5 billion, something like that.

Something like that. And they turned it down just to grind for the public equity book. They sold that to, to Citadel. That obviously cleared a lot of the risk out and they said, hey, let's keep this position. We're extremely excited about this. We're bullish. Yeah. 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, 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. Yeah, I haven't seen it. And then there was Infinity Machine— not Infinity Machine. There was Going Infinite.

Yeah, that was the Michael Lewis book.

Michael Lewis book. But that was written like before the blowup. 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 2 weeks, Microsoft, Apple, Amazon, Meta, 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 diffusion and uptake. Microsoft led the group with shares surging after reporting fiscal fourth quarter revenue of $90 billion, up 18% year over year and ahead of the $87.4 billion that analysts were expecting. That was the consensus estimate. EPS came in at $4.74 versus expectations of $4.21. So they beat top line, beat bottom line. Azure revenue accelerated 43% year over year.

Yeah. So they gained $450 billion in one day, 16%. $450 billion in one day. Yeah, that's for— biggest one-day market cap gain for any U.S. company.

Look at that. Thank God. 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, cap above the $5 trillion mark, but it has been absolutely tanking today, down, what, 10% today or something like that? Let's see, down 9.47%. Uh, last, uh, we'll go through two more. Uh, Amazon has also impressed investors with revenue climbing 20% to $200 billion, uh, $200.6 billion. AWS growing 37% to $42.4 billion, uh, sending shares sharply higher in after-hours trading. Here's Amazon. We can pull that up as well. Uh, 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 $6.18, 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.

Yeah. So there's, there's Luna. TerraSOL, this is the cheapest model. Massively reduced cost. You can see on the kind of the Pareto curve, this is like actually much cheaper than a lot of like open source models because you— because we've been talking about this recently. It's like there's cost per task, not just like can it do it and how much do it— like it depends a lot how token efficient the model is.

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

Well, it depends on where you are on the Pareto frontier.

I suppose.

I think I see what you're saying.

I suppose. Anyway, we also— I don't think we touched on this, but ArchiGIV3, 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?

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

That's up there. You were like, you were pro-am.

Yeah.

Yeah, I would say you didn't go pro. You turned it down. I turned it down. You had the opportunity to be an—

They were going to give me like 10 more tasks.

Yeah, more tasks. I'm like that. Yeah. But apparently OpenAI was able to investigate the low score of 5.6 SOL on ArcGPT-3, and the harness was not letting it remember what it had learned. We found that enabling 2 API settings tripled our scores with 6x fewer output tokens. So very interesting to watch. Yeah, this is 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 limiting the model in some way, I mean, it can have massive effects on the downstream task. 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 visually. I can't say visually.

I don't know. Especially, you know, the famous like time horizon task doubling every 6 months. Yeah, 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, basically.

Yeah. And a lot of people are just like, what's a task that takes me 12 hours? Like, what is that?

I don't even know.

Yeah, it is a bit hard to 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 ArcGIS 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, uh, very, very fun. And we'll see you on Monday.

See ya.

Goodbye. Rolling flashback.