The Week: How Leverage Broke the AI Trade

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**George Hahn** (1:31)
Welcome to The Week from Prof G Media, where we break down what mattered and what it all means. I'm George Hahn and it's Friday, August 7th. Today, a hedge fund blew up. South Korea's stock market plunged 44 percent, and the AI trade found its floor. Then, why a generation locked out of financial security is taking bigger risks to get ahead? And finally, Sam Harris on what's actually worth your attention.
Let's get into it.
Last week, the debt that was propping up the AI boom finally came into view. This week, we found out what it does to people. On Friday's Prof G Markets, Scott and Ed sat down with Jim Chanos, the short seller who called Enron, and who now teaches a course on the history of financial fraud.

**Jim Chanos** (2:26)
The fraud cycle follows the financial cycle with a lag. And the longer the financial cycle goes on, the more amount of fraud is ultimately uncovered on the down cycle. So I've already dubbed this the golden age of fraud. And I suspect that when we're on the down part of this cycle, the bodies will float to the surface as they always do. But remember, the other, the corollary to that is, is the harshest prosecutor and the staunchest defense attorney of a company is its stock price. Nobody goes after frauds at all time highs.
They only go after them after investors have lost money, because these kinds of things are political.

**George Hahn** (3:15)
So why does the boom still look so healthy on paper? Chanos says the accounting is doing the work.

**Jim Chanos** (3:22)
And that's a big question, because like the.com boom, we have an accounting identity problem that follows these CapEx booms, namely that the companies that are spending the money do not expense immediately most of that money that's being spent. It's capitalized and depreciated over five to ten years.
The companies receiving a lot of that money, the NVIDIAs of the world, the Caterpillar tractors of the world, the utilities, they're receiving in terms of revenues and profits immediately. So the same dollar is basically contributing to profits in a far greater extent than it does in a more normalized economy, where it would be recognized as revenue by one company and expense by another. And that's what we're seeing, and that's why S&P profits have taken off in the last two years. It's because of this mismatch.

**George Hahn** (4:25)
That was the theory. This week we saw it play out.
Leopold Aschenbrenner is 24 His fund, Situational Awareness, was up 439 percent for the first half of the year, swelling to roughly $45 billion. He told investors the sell-off had created an unusually attractive opportunity. Six days later, after mounting losses and margin calls, the fund sold most of its public stock portfolio to Ken Griffin's Citadel in a fire sale. Situational was left managing roughly $10 billion.

**Ed Elson** (5:02)
Last week, we learned a truth bomb, which is that it turns out he was 5X levered up. He was then margin called, and then he was forced to liquidate his entire public equity portfolio, and supposedly he's also selling his stake in Anthropic too.
It is remarkable because if you've been online, if you've been on Twitter and you're plugged into the investing community, this guy was considered AI Jesus. He was like the savant of our time. He could predict the future. He knew everything that was going to happen. And literally overnight, the whole thing has collapsed. And what is it? It's a story of leverage once again. He was levering up into the hottest stocks, into the hottest momentum trades in the world, looked really smart until suddenly he didn't.