November 14, 2025 • 36 mins
In this episode, Jon G. Sanchez reviews Jim Morrow’s perspective on the current AI-driven market environment. The conversation outlines why Morrow describes artificial intelligence as the most crowded trade in market history and examines why he views the pace of a potential unwind as gradual before accelerating.
The discussion also explores the accounting considerations influencing companies such as Meta and Oracle, along with an overview of why several high-profile trillion-dollar deals appear more aligned with short-term trading behavior than long-term investment positioning.
These themes offer additional context for listeners following market trends, retirement planning conversations, and wealth management Reno topics.
👉 Watch this episode on YouTube: www.youtube.com/@thejonsanchezshow
👉 To learn more about retirement planning and wealth management in Reno, visit: sanchezgaunt.com
Compliance Disclosure: This program is for informational purposes only and should not be considered investment, tax, or legal advice. The views expressed are those of the participants and may not reflect the views of Sanchez Gaunt Capital Management. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Always consult with a qualified financial professional regarding your individual situation before making financial decisions.
The discussion also explores the accounting considerations influencing companies such as Meta and Oracle, along with an overview of why several high-profile trillion-dollar deals appear more aligned with short-term trading behavior than long-term investment positioning.
These themes offer additional context for listeners following market trends, retirement planning conversations, and wealth management Reno topics.
👉 Watch this episode on YouTube: www.youtube.com/@thejonsanchezshow
👉 To learn more about retirement planning and wealth management in Reno, visit: sanchezgaunt.com
Compliance Disclosure: This program is for informational purposes only and should not be considered investment, tax, or legal advice. The views expressed are those of the participants and may not reflect the views of Sanchez Gaunt Capital Management. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Always consult with a qualified financial professional regarding your individual situation before making financial decisions.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Good Friday afternoon to you. Welcome to the John Sanchez
Show on News Talk seven eighty k which it's a
pleasure to be with you. Tgif I'm gonna give this
one about five exclamation points, I hope you had a
great Friday. I hope you're gonna have an excellent weekend
coming ahead of you. Flying solo this afternoon, mister Gunn
has the afternoon off, I will grab the helm of
the ship and drive this thing through some stormy waters.
(00:21):
And boy were they stormy waters. Today started off just
like the last couple of days, Dow coming down, Nazak
coming down. But what made things different is we actually
finished down well off the lows of the Dow. We
were doing much better going into the clothes than we
sold off in the last couple of minutes. Finished down
about three hundred and ten to be exact, but weaked
out a very small game of about thirty points on
(00:42):
the Nasdaq. Okay, now, why am I telling you this already?
Because this ties into exactly what we're going to be
discussing this Friday afternoon. You know, I'm gonna take you
back a little bit into some of the other things
I've been talking about Jason and I have been talking about,
and I bet it's been probably about a month month
if I remember correctly, were we brought up this term
(01:03):
to you called circular accounting. Now, don't change the station
on me here. Okay, I'm not going to bore you
with a bunch of accounting terminology, but it's very important
because if you have money in the stock market, circular
accounting may be impacting the performance of your four oh
one K, your brokerage account, so on and so forth,
(01:23):
because it's impacting the market. We've talked also a lot
about a potential bubble forming, you know, not just us,
but a lot of portfolio managers on Wall Street talking
about bubbles forming due to the AI situation, lofty levels.
Can they sustain the valuations that the stocks are trading,
app all those normal things. We've also talked a lot
(01:47):
about similarities of this market going back to the dot
com era of ninety nine two thousand, A lot of differences,
a lot of similarities. And so for the last few
weeks we've talked a lot about again is this different
this time around? Well, once again, the comparison in the
(02:08):
contrast of current times to years past ninety nine two
thousand can be quite vast, or they can be very similar.
Let's talk about some of the similar situations. You've got
AI driven stocks that seem to to be able to
do no wrong. You've got AI stocks that everybody from
the institutional level all the way down to the retail
(02:30):
side wants to own. You've got extreme optimism that, again
they can do no wrong. They're spending so much money
they've got to grow, you get my picture. You contrast
that too, stocks that have valuations that are in some
cases strat In the stratosphere, you have huge sums of money,
(02:56):
much greater than in the dot com era, huge sums
of money capital being deployed into data centers, not only
the physical construction of the data center, but also those GPUs,
the chips, everything that goes inside the data center. You
(03:16):
also have concerns about how's all this being paid for
and who's paying for Folks, there's only a handful of people,
meaning companies, that are paying for these data centers that
we've seen spring up. You got Microsoft, You've got Google,
let's see Microsoft. Google. You've got Meta of course, you
(03:36):
have Navidia, You've got Oracle. Those are your major players.
There a little bit of Palenteer. Those are the major players,
but one thing they have in common, they're all tied
together in some sense. And see, we spent a lot
of time talking about how Navidia kind of is buying business, right,
like the deals they struck with open Ai. That's the
other company obviously right in the center of this whole thing.
(03:59):
So if you look at the lit names I just
mentioned in the center, is Navidia, right, They are the ones.
They are the ten thousand pound gorilla producing the GPUs
and the chips that are in the data centers. But
what are they doing is we heard many deals announced
earlier this month or actually last month. Hey buy one
hundred billion dollars worth of our chips and we're not
(04:20):
going to charge you right now, but you can pay
us over time. He's doing that to companies that can
open ai and not even a publicly traded company. Massive
profits so far, but significant amount of debt they're taking on.
So just to refresh your memory, that's what we've kind
of dealt with up to this point. And it's you know, honestly,
(04:42):
it's brought a lot of concern to me. I you know,
my job in Jason's job as fiduciaries of our client's
money is to always be second guessing things. Right, if
something's going up, why, if something's going down? Why? We
have to understand that for our clients, and we do
our very best to do that, and then we relay
that over to you, our radio audience. So that brings
(05:05):
us up to today's topic. And I've titled today's show
the cheating Depreciation Schedule. Whoa cheating depreciation? What in the
world's going on? Well, this is where I'm gonna get
a little bit heavy with you after I do my
(05:26):
stock market recap, because I'm gonna take you into the
world of accounting, right, not so much circular that's a
whole nother issue. Circular accounting again. Where I have a product,
I want you to buy it. You can't afford to
buy it, so I'm gonna give it to you. But
in turn, you're gonna do business with me. Not only
are gonna pay me back for the product that I
(05:46):
gave you, but you're gonna do business with me, and
therefore we'll both make money. Is it legal? Yeah? Is
a little bit you know, pushing the envelope. Yeah? Does
again a representation of honest, accurate earnings. That's what's up
(06:07):
for debate. But how about this thing called depreciation. You see, folks,
if you never took an accounting class, I'll explain depreciation really,
really easy. Most of you have bought a new car
at some point. You've all heard the adage go to
the new car lot. You buy a car for fifty
thousand dollars and the minui you drive it off, it depreciates,
it's worth whatever. Pick a number, forty thousand, forty five,
(06:30):
definitely going to be worth less than what you just
paid for it five minutes ago. So depreciation is a
schedule of an asset losing value over a specified period
of time. And you see, the IRS assigns a depreciation
schedule to different assets. But when it comes to GPUs
(06:52):
in semiconductor chips and so on and so forth, it's
kind of left up to the eyes of the beholder,
meaning the company that bought those GPUs and the chips,
et cetera. IRS really leaves it up to them to
disclose how long they're going to depreciate those assets. Okay,
(07:15):
now follow me so far. The company must then if
and when they get audited by the IRS. They must
then justify to the IRS that they depreciated those aforementioned
items over a specified period of time according to their
(07:37):
use of the item. So the IRS may say, you
got a tenured depreciation schedule on a GPU. So GPU
again not familiar. It's just you have all of you
have a computer that's your CPU, GPUs, this different version,
higher end version, et cetera. Just leave it at that, Okay.
But it's up to the company that bought the GPU
(08:00):
and those chips from Navidia and other manufacturers advanced micro
devices and tel etc. It's up to the company that
bought those to say, here's how long we think those
chips are going to last in their useful life. So
let's give you an example. Let's say I sell a
chip to Sally. Okay, Sally's company. Let's say I sell
(08:24):
that chip for one thousand dollars. Okay. Sally then goes
to her accountant or her accounting department and says, Okay,
we just paid Sanchez Electronics one thousand dollars for this chip.
Put it in our books. Right. That's an expense of
the business that reduces their income. So there's one thousand
dollars I just spent on a chip. Now I can
(08:47):
turn to the IRIS depreciation schedule table and go, oh,
a chip has a life expectancy of again, whatever it is,
let's just say six years. But then, so what that
means is that thousand dollars that I just paid for
that I just paid for that chip. Let me bring
(09:08):
up my calculator, because my brain's pretty dead this time
of the week. Ten thousand dollars if i'd of buy
six years, so that means I would write off one
hundred and sixty six dollars and sixty seven cents of
that thousand dollars purchase every year for the next six years.
After my six years are up, I fully depreciated that chip.
And if it's still running, yeah, okay, cool, I get
no tax benefits because you see, folks, as a business owner,
(09:30):
one of your greatest things that you can do is
have this thing called a phantom expense to appreciation. See it,
appreciation doesn't cost you anything. It's almost like the government
paying you to buy something. Why do you think business
owners towards the end of the year go out and
start a big contractor they're going to go out and
go buy a whole bunch of brand new trucks. Either
(09:50):
they're going to pay the government, you know, a million
dollars in income, or they're going to go spend a
million dollars on trucks. And I'll complicate it even further.
You now can depreciate up to what we call a
section win seventy nine expence. Take that about what was
at one point two one point three right around there.
You don't even have to depreciate it. You get to
write it off the year you buy it. Even better,
(10:11):
let's say they wanted to depreciate it, so they take that,
divide it by the depreciation schedule, and they get to
write off that million dollar purchase. You know, if it's
five years every you know, one to fifth every single year.
So back to my chip. Example, Sally bought my chip
for one thousand bucks. She goes to our accounting department says, okay,
we just bought this chip from Sanchez Electronics. Accountant goes, okay, cool,
we're gonna write this off. And again, let's just say
(10:33):
it's a six year depreciation schedule. We're gonna write off
one hundred and sixty six dollars and sixty seven cents.
And where I got that number one thousand dollars divided
by six years, So we're gonna write off one hundred
and sixty six dollars and sixty seven cents every year.
That one hundred and sixty six dollars reduces Sally's business income. Okay,
it's a phantom expense, as she bought the chips, but
(10:53):
hopefully they're making her money. But the government's allowing her
to basically write off that entire acquisition costs. Okay, pretty
simple so far. But where the waters get muddied is
what I said a moment ago. The IRS pretty much
allows these companies to determine, based upon the amount of use,
(11:14):
how long that chip is gonna last. You see, if
John Doe's company is just a go get her and
that chip is, you know, working twenty four hours a day,
seven days a week, and Frank Doe's company maybe they're
an upstart, maybe they don't have a lot of activity
going on, the chips aren't working that hard. Who do
you think chip's gonna last longer? Frank Doe's company, His
(11:36):
chips are gonna last longer, they're not being used as much.
But if you take a company like an open AI,
a Microsoft, A, Google, an Amazon, and so on and
so forth. Those chips are running hard every single day.
Which one does he think is gonna last longer? Frank
does chips, right, So should he have the same depreciation
schedule as the other guy? That's up to the company. Well,
(11:58):
the point I'm getting to with all this now you
understand basically how depreciation works. Now, what I'm getting to
is the following, if I am able to I'm just
going to pick a company. I'm not saying they're involved,
they're doing this. I was gonna pick a company. Let's
say that I'm Microsoft. If I'm able to depreciate that
chip that I just bought for one thousand dollars from
Sanchez Electronics out over six years, that has less of
(12:21):
a negative impact to my earnings per share, to my
net profit of my company, which then for is reflected
in my stock price. Right, So if I can go
I bought this chip for one thousand, I can I'm
going to write off one hundred and sixty six dollars
over six years. Cool, But in reality, will that chip
really last six years? And this is what you're going
(12:43):
to be learning about this afternoon with me. This is
called cheating the depreciation schedule. In reality, one thousand dollars
chip that Microsoft just bought from Sanchez Electronics. It may
only last a year, but yet the company is depreciated
out over six years. Why are they doing that because again,
as a company, you want to spread out that depreciation
(13:07):
so you're not taking a big hit on your earnings.
So if I wrote off that chip because it's you know,
it's only good. Technology is changing. That chip's only good
for the first year, imagine the size of write off
that my company would or Microsoft in this example, would
take massive. I'm giving you a simple example. We're talking billions,
hundreds of billions of dollars. These all these different companies
(13:29):
are spending on chips. So they write it off this
year or in one year. Big hit to the bottom line.
Big hit to the bottom line means Waltree's gonna look
at it and go, oh, your expenses are out of whack.
Let's sell off your stock. But if the company goes
uh uh uh, I'm going to depreciate that over six years,
less of a hit, not affecting the bottom line. Stock
(13:50):
does well. That, folks, is what we call the depreciation
schedule cheating. But We'll go into more details when we
come back. It's a fascinating topic that a could impact
your portfolio. Turned over to Christenstone right now traffic center. Hello, Kristen,
Welcome back to the John Sanchez Show on News Talk
seven eighty k which Happy Friday to all of you.
(14:12):
All right, let's get down to the stock market. Then
we're going to come back to our topic cheating the
depreciation schedule and what's going on from an accounting standpoint,
therefore an earning standpoint potentially with these AI companies. All right,
hit the stock market side, tough day all the way
across the board, at least that's the way it was
this morning. We were down worst level just us mention,
I think five eighty five ninety if I remember negative,
(14:33):
it's almost a six hundred point loss on the doubt
our worst level. We made our ways back, unfortunately, kind
of hit a pocket of selling pressure going into the close,
and we finished down three to ten on the Dow,
a point sixty five percent lost to forty seven. Now
I was like though, a thirty point gain, closing at
twenty two thy nine hundred SMP down three, finishing the
(14:55):
day at six thousand seven hundred and thirty four come out?
How do I strong day? For oil? Dollar thirty four
sixty eight a barrel down ninety nine dollars and eighty
cents on gold at four ninety five seventy ounce, four
basis point increase on the tenure, you'll close four fifteen
For the week, the tenure treasury was up six basis points.
Now why were we down so much? Why did we
come back a bit? Well? When we were really down
(15:17):
towards the bottom of the barrel. Today on the Dow
side of things, we had technology names. It's been a
tough last couple of days for the members of the
Dow because of technology, because of the FED. And it
was no different today. Early this morning you had all
your big names that were down. And then all of
a sudden, out of nowhere, like I always tell you, you
just never know, here comes to buyers right stocks at
(15:37):
some cheap levels according to the algorithms, et cetera. They
started buying them. So we started to see the likes
of Microsoft in the Vidia Oracle start making their way back.
That propelled the Dow higher. But then again going into
the close, things began to weaken, and like I said,
they sold it off. I had a lot of pressure
in the healthcare area today. United Health was down twelve
dollars and forty cents, bottom of the Dow list. You
(15:58):
had some financial stocks this whole Jeffrey Epstein email release
and all that crop that's going on in Washington. Trump
midday to day makes comments that he wants the DOJ
to start investigating a bunch of people, including JP Morgan,
where I guess Epstein had money. And so literally soon
as they said that JP Morgan began to sell off.
(16:20):
It finished the day down five dollars and nine cents. Again,
you just never know anymore. All it takes is a
certain post and company can just you know, unravel. That's
kind of the way it was today. But the good news,
here's the bright side. Glad to see the buyers came
back in some of the beating up tech names of
this week. Right, So Micron today, here's just a few names.
Nine dollars and eighty eight cent gain four point one
seven percent, two forty six eighty three. The video rose
(16:41):
three dollars and thirty one cents one hundred and ninety seventeen,
not a one point seven seven percent gain. Microsoft on
the upside by six dollars and eighty nine cents to
five ten eighteen, and Oracle rising five dollars in twenty
eight cents to two twenty two eighty five. Energy sector,
as I said, thanks to oil one of the top performers.
The group itself up two point three percent after yesterday
four point one percent slid. I shouldn't say the group,
(17:02):
but oil prices. Let me kind of go down my
list here. See what else really was a standout? Eh,
not too much. Let's talk to FED. I told you
yesterday on the show we had two, we had three
FED members make comments that were digested by investors that
the FED is in no hurry to raise interest or
(17:24):
excuse me to cut interest rates come to December meeting.
Two of the three were voting members, so they carry
a little bit more weight than the third person. But
the bottom line, you had three FED members yesterday in
the roundabout way saying we're in no hurry to cut
interest rates in December. Well, if that wasn't enough, here
we come today. So let's see we had let's see,
(17:44):
I know we had Neil cash Karian. He made some
comments about that. Let's see, he's a non voting member.
He said he did not support the October move, meaning
the quarter percent cut, and he remains unsure about December.
Then you had Kansas City FED President Schmidt, who is
a voting member, said well, he is inclined to oppose
a December cut. So here's the game the Fed's doing
(18:05):
right now. They're sending out all these FOMC members doing
their lunch and dinner speeches, as I like to call it,
and some of them are going to say not favor
of the December cut. You're gonna get some probably next
week that are saying, oh, I am in favor, so
that the market is left guessing what's going on, what
the Fed's gonna do. Remember, we had dr own Palettes
(18:26):
FED meeting a few weeks ago basically say don't count
on us cutting rates in December, and that's kind of
when all the selling really started, kind of bringing us
down to where we are now. So it's really simple
to summarize what's going on in the market with your portfolio.
It's valuations you're going to learn even more about when
we come back from break, and it's guessing what the
FED is going to do in December. Now, the last
(18:48):
thing I'll mention about the FED, is what's the probability
right now that we are going to get a quarter
percent rate cut in December. Well, just to give you
a brief example, a week ago, the FED seeing FED funds,
FED watch tool indicated that a ninety four point four
percent probability a week ago that we're going to get
a quarter percent cut yesterday fifty point one percent chance
(19:09):
today forty five point nine. So you see, it's just continuing,
obviously to decline as far as the probability of a
quarter percent cut, and a lot of that's attributed to
what I just mentioned a moment ago where you get
all these FED members coming out and talking the book
up basically is what we call it, saying hey, we
really don't want to do a FED cut. So I
think the Fed's going to have themselves one hell of
(19:30):
a mess, to be honest with you, sir, for my
French come December if they don't give this market a
quarter percent cut to wrap up the year. I really
do so hopefully things will change. Still long ways away,
but we will see how it transpires. Okay, you're up
to date on the market, on the Feds, the bonds,
the commodities, et cetera. Now, when we come back, get
a big cup of coffee. I'm going to take you
into the world of cheating that appreciation schedule and what
(19:52):
may be going on. I'm gonna I'm just going to
say what may be going on. It is going on
in the world of AI and accounting the performance of
their stocks. When we return, start out to Jack Sabing,
he's got news traffic on weather Jet. Welcome back to
the John Sanchez Show on Newstalk seven eighty KO, which
(20:13):
Happy Friday to all of you once again. We lost
three ten on the Dow, up thirty on the NAS deck,
and a three point decline on the SMB five hundred.
All right, I need to squeeze out a few more
bits of energy out of all of you. I'm going
to take you into the world of accounting and how
it relates to those of you that may own some
of the chip related stocks out there, the AI related stocks,
then the videos of the world, et cetera. Or you're
(20:35):
just an investor, which probably most of you are, I'm guessing.
But before I do, and I get into this story
about this, there's two things. As I went through the
first segment of the show talking about how depreciation works
and what's going on with the AI segment in regards
to how quickly or how long they're depreciating their hundreds
of billions of dollars of chips. The industry is buying
(20:59):
this article on to share with you here in a moment.
This is where I got the idea to talk about this,
even though it had been on my mind. I came
across it last night, it was about nine o'clock and
found this article and I'm like, oh my god, this
is just so perfect for the show on Friday. This
is a somewhat of a story with a gentleman that
(21:19):
some of you may know, may know his name, you
definitely have probably know the movie that was made about him.
I'm talking about Michael Burry. Michael Burry. Now, Michael Burry
was the gentleman that the movie, the movie The Big
(21:40):
Short was created after. Now, if you don't have anything
to do this weekend, find it. I don't know where
it is. I'm gonna look. I'm gonna watch it again
this week. It's been a few years. I always like
to watch it. A couple of years. Michael Burry was
the gentleman that called the housing crash in two thousand
and eight his hedge fund. He made a personal profit
(22:00):
of one hundred million dollars from his correct prediction when
he bet against the USI US subprime mortgage market. Total
profit for his investors more than seven hundred million dollars.
His hedge fund Sion Capital, which he shut down in
two thousand and eight do to do. Investor backlash and
a desire for privacy, generated net returns a four hundred
and eighty nine point three four percent between its inception
(22:22):
and November of two thousand and when it closed at
two thousand and eight. Again, this book, this story by
Michael Lewis The Big Short, is all about this gentleman
I'm going to tell you about and what he thinks
is going on with depreciation with these AI companies. Okay,
this article I'm going to share with you. It's going
(22:44):
to serve you best if I just read through it.
I'm going to stop make some comments because there's a
pretty long article, but it's just chalk with information you
need to know, and I just could not paraphrase it
well enough to make sure you get all the points.
So this is out of this is out of Forbes.
By the way, give them all the credit, all right.
So the big short investor betting one billion dollars against
the AI of bubble says Meta and oracles accounting is
(23:06):
hiding the brutal truth. It'll happen slowly and then all
at once. That's how Jim Morrow, founder and chief investment
officer of Caladine Capital, describes the eventual, inevitable unwinding of
what he calls the most crowded trade in history. Of course,
he isn't just paraphrasing Ernest hemuway. He's talking about the
(23:27):
AI race and the trillion dollar deals so overstretched they're
better described as knots than trades. And he's not alone
and sounding the alarms. Michael Burry, the investor of Big
Short fame who famously predicted the two thousand and eighty
housing crisis, broke a two year silence this week to
say nearly the same thing. The big tech AI era
(23:49):
profits are built on one of the most common frauds
and modern era stretching the depreciation schedule, some including Bury,
would say, cheating appreciation schedule, and it landed with extra
weight early this week. Bury quietly deregistered. Now this is
this week, folk, This is all like very very fresh information.
(24:11):
Earlier this week, Burry quietly deregistered his investing firm Science
Asset Management, effectively stepping away from managing outside money or
filing public disclosures. Some analysts interpreted the move as less
of an omnimous sign and more as a Bruno Schneller,
Managing director of Early Capital Management, told CNBC, stepping away
(24:32):
quote from a game he believes is fundamentally rigged onto
much better things. Burry hinted on X with a new
launch expected on November twenty fifth. Freed from the obligations
of reporting and client management, Burry returned to X with
a message that cuts straight through the current AI euphoria
you see. To him, the boom and GPUs data centers
(24:54):
and trillion dollar AI bets is an evidence of an
unstoppable growth. It's evidence of a financial cycle that looks
increasingly distorted, increasingly crowded, and increasingly fragile. Berry put the
numbers to it in a post on X. The investor
estimated that big tech will understate depreciation by one hundred
(25:16):
and seventy six billion dollars between twenty twenty six and
twenty twenty eight, inflating their reported profits by twenty six
point nine percent at Oracle, inflating route profits by twenty
point eight percent at Meta. Just to name two of
his specific targets. I'm gonna stop right there. I should
(25:40):
tell you Wall Street's trying to figure out we think
that he has shorted these names, you know, I meaning
he wants them to go down. So I always got
to keep that in mind. With these heads. Fund managers
make these predictions. Nine times out of ten, it's what
we call talking up their book. They're talking negative, they're
probably short. If they're talking positive, they're probably long. So
everyone's trying to decipher. But now that he he registered
(26:00):
as of I think yesterday it was you can't get
access to his SEC filings, okay, so keep that in mind.
Meta did not respond to your request for comment. Oracle
decline to comment. He spot on Morotel's fortune. Moro has
been making the argument for months, warning that a tsunami
of depreciation could quietly flatten big Texai profits behind the
(26:22):
trillion dollar boom and chips. Data centers and model training,
he argues, lies a simple but powerful illusion. Companies have
quietly changed the length of time they account for their
machines and their semiconductor chips wearing out and depreciating. Now,
I'm going to stop there. During the break, I went
into the IRS regulations, and just as I said earlier,
(26:43):
I just wanted to verify because it's been a while
since I've taken accounting course. IRS allows companies to depreciate
computers and peripheral equipment over a five year depreciation cycle
or five year time period. Right. General manufacturing equipment falls
between five to seven years, So that's how long they
allow you to depreciate it out. Okay, and then it
(27:03):
gets a little more complicated you get into the Chips
Act Investment Credit blah blah blah. But anyways, just let
you know on that, all right. This is a quote
from mister Morrow. Companies are very aware of it. Morrow
claims they've gone to great lengths to change their accounting
and appreciation schedules to get ahead of it, to effectively
avoid all the cap ex or capital expenditure hitting their
(27:24):
income statements. So let's stop there. So again, when the
company goes out spends a billion dollars on chips, that's
a hit to their income statement. But again, instead of
spending showing that billion dollars they spend, now they get
to depreciate it out longer they depreciate it out, the
less hit to the financial statement. Like I told you
in the first segment, Burry's post drew viral attention. Marrol's
(27:46):
been making the case longer, but he thinks the sudden
resonance means investors are finally waking up to something fundamental.
Quote these aren't small numbers, They're huge, and the fact
that someone like Burry is calling it out tells you
people are starting to notice what's happening between the lines
of the balance sheet. Here's how deppreciation works or doesn't.
When tech giants like Microsoft, Meta Oracle build AI data
(28:09):
centers that by tens of billions of dollars in GPUs
servers and cooling systems. Now, normally those assets lose value fast,
which cuts into profits. But recently Bury claims many companies
are quietly extending how long they claim those machines last,
from not fully three years to as many as six.
That simple change lets than spread out their cost and
(28:30):
report fatter earnings. Now quote have they not made those changes?
Moro says their earnings would be dramatically lower, and of
course we all know farnings are stock prices generally go lower.
Meta's filings, for one, seem to at least corroborate the
directionality of Burrow and Moros claim until the year twenty
(28:51):
twenty four, servers and network gear were depreciated over four
to five years. Effect of January twenty twenty five, Meta
said they would quote extend the US useful lives of
certain servers and network assets to five point five years.
They may think, okay, big dealer are going to go
from five years to five point five top folks, And
we're talking billions of dollars hit to the bottom line
(29:11):
or not. That's significant. Quote Depreciation expense on property and equipment,
Meta rote in its annual filing for twenty twenty two
was eight This is so good to listen to. This
depreciation expense on property and equipment. Meta rote in its
annual filing for twenty twenty two was eight point five billion.
(29:31):
In twenty yeah, eight point five billion, in twenty twenty
one it was seven point five six billion, and in
twenty twenty it was six point three nine billion, respectively.
In other words, depreciation was a major cost already, and
management clearly chose to stretch the timeline over which the
cost will recognize. The policy change doesn't prove Buri's dollar
(29:53):
total cross firms, but it's marketingly moves reported earnings in
the direction he describes by lowering near ti termed appreciation
expense and pushing more of it into later years. Marrow
argues that the time he makes little sense as the
pace of technological change accelerates. Navidian and listen closely. This
is one of the most important things I'm going to
share with you. Navidia now releases new chips every twelve
(30:17):
to eighteen months instead of every two years, which means
the hardware becomes absolute faster, not slower. It's like any
old technology take laptops. Imagine trying to run the newest
version of Adobe Premiere Pro on a twenty eighteen MacBook.
Sure it might boot up, but it's going to overheat,
lag or crash because it simply wasn't built for today's
computer demands. Old chips are the same way. They don't
(30:37):
stop working, but they quickly lose their economic value as newer,
faster models render them functionality obsolete. Morrow argues, to be sure,
Marrow's expertise is in the value investing in high dividend
companies as opposed to the trendier high growth tech stocks.
In fact, he says he has no long positions in
technology broadly, so he benefits if big tech multiplies multiples
(30:58):
can press, or if the markets begin to price the
cost of that's very buried in AI spending. Still, his
critique aligns with growing and knees from other analysts. Richard
Jarik and analyst that uncovered Alpha, has raised similar alarms
about the mismatch between AI chip life cycle and corporate accounting.
And I want to stop there before I go to break,
and I want to just go back to something very important.
I said. So I'm covering a lot here, and I
(31:19):
apologize for being a Friday doing this to you. So
once again, Navidia now is producing these chips every twelve
to eighteen months, right before it used to be two years. Now,
why are they doing that? Whole nother show. But the
bottom line is, if I bought a chip from Navidia
a year ago and we're fast forward to you know
where we are today, that chip's just about obsolete. Does
(31:41):
it were run yes, but it is worth the same
value as it was when I bought it. Absolutely not,
because technology changes and it improves. So therefore they should
not be able to meta a Microsoft. They shouldn't be
able to appreciate it at over six years. If that
chip's no good and I've got to move on to
the next new chip coming out of the video, I
should take that full depreciation that first year because the
(32:03):
chip's now almost basically worthless to me. But again that
would be a major hit to my bottom line. So
therefore I depreciate that over six years, and their finances
look stronger than what they really they should be because
there should be much more depreciation schedule, all right or
expense all right, continue on, Let's wrap it up a
Christmas Snell right now traffic center. Hello Christen, Welcome back
(32:25):
to the John Sanchez Show on Newstalk seven eighty koh.
All right, we're talking once again about cheating the depreciation schedule. Again,
very very wonderful article and fortune written about kind of
the strategy of Michael Burry again, the guy who created
the movie was about him, the big short and then
some other gentlemen in the industry that are all coming
(32:47):
up with the same concern that some of our big
tech companies that we all love may not be doing
accounting properly when it comes to depreciating their chips. Once again,
we kind of left off with the videos coming out
with nuts every twelve to eighteen months. But how can
these companies appreciate the chips over six years those new
chips come out, they got to get rid of the
(33:11):
ones they just had twelve twenty four months cycle. So
is this right accounting? So let's go back to the
article I left off with the Richard Jarkin, analyst that
Undercover Alpha, has raised similar alarms about the mismatch between
AI chip life cycles and corporate accounting. He has said
that the latest generation of GPUs where's out faster than
companies amortization schedules suggest well. Some point to the continued
(33:35):
use in the video's eighth one hundred chips released three
years ago as evidence of longer utility. Jerk says that's misleading.
Demand remains largely high because a handful of companies are
subsidizing compute costs for end users. A dynamic and this
is reference to what I keep saying the circular accounting
A dynamic that depends upon investor cash flow rather than fundamentals.
(33:57):
Dark argues more important than the video has now shifted
for releasing new chips every eight to twelve every eighteen
to twenty four months to now an annual cadence, and
that context, Jark says, treating GPUs as though remain valuable
for five or six years is unrealistic. Their true economic life,
he estimates, is closer to one or two years. The
(34:17):
recent sell off of megacap ai names, the team led
by vivik Ariya wrote, was driven by correctable macro factors,
shut down, genderous week job data, tariff confusions over misinterpreted
open AI comments, rather than any real deterioration in AI demand.
In fact, I, for one, pointed to surging segments like
memory and optical of fourteen percent last week, as well
as Nvidia's disclosure of a five hundred billion dollars plus
(34:40):
twenty twenty five twenty twenty six data center order assigns
the underlying spinning cycle remains robust. Let's see every month
thirty five billion dollars stack of GPUs sits without power.
That's a billion dollars a depreciation, just burning a hole
in the balance sheet, this analyst said, So of course
they're panicking and they're ordering their own on turbin. So
(35:00):
the article goes on to talk about that. You get
the gist of it, right, There's always something going on.
But I think this article makes us all begin to
sit back and think about always do your research, Always
do your homework before you get involved in different types
of technology and things. Is it here to stay as
it wonderful? Absolutely? We just don't want to get caught
like we did in two thousand, two thousand, two thousand
(35:21):
and one, ninety nine, that whole era where all of
a sudden, some accounting the regularity shows up and are like,
uh oh, and that's what happened in two thousand and eight,
which is a whole other topic. All right, folks, thanks
so much for sticking with me this Friday afternoon. I
wish eaching one of you a great week, and we'll
see you on Monday. Gobbas. John Sanchez is a registered
(35:42):
investment advisor, and the opinions expressed by Sanchez Gone Capital Management,
LLC on the show or their own and do not
reflect the opinions of News Talks seven eighty or its
pairing company, Cumulus media. All statements and opinions expressed or
based upon information considered reliable, although it should not be
relied upon, as any statements or opinions are subject to
(36:02):
change without notice. Information presented is for educational purposes only
and does not intend to make an offer or solicitation
for the sale or purchase of any specific securities, investments,
or investment strategies. Investments involve risk, and, unless otherwise stated
or are not guaranteed. Information expressed does not take into
account your specific situation or objectives, and is not intended
(36:25):
as recommendations appropriate for any individual. Listeners are encouraged to
seek advice from a qualified tax, legal, or investment advisor
to determine whether any information presented may be suitable for
their specific situation. Past performance is not indicative of future performance.
Good Friday afternoon to you. Welcome to the John Sanchez
Show on News Talk seven eighty k which it's a
pleasure to be with you. Tgif I'm gonna give this
one about five exclamation points, I hope you had a
great Friday. I hope you're gonna have an excellent weekend
coming ahead of you. Flying solo this afternoon, mister Gunn
has the afternoon off, I will grab the helm of
the ship and drive this thing through some stormy waters.
(00:21):
And boy were they stormy waters. Today started off just
like the last couple of days, Dow coming down, Nazak
coming down. But what made things different is we actually
finished down well off the lows of the Dow. We
were doing much better going into the clothes than we
sold off in the last couple of minutes. Finished down
about three hundred and ten to be exact, but weaked
out a very small game of about thirty points on
(00:42):
the Nasdaq. Okay, now, why am I telling you this already?
Because this ties into exactly what we're going to be
discussing this Friday afternoon. You know, I'm gonna take you
back a little bit into some of the other things
I've been talking about Jason and I have been talking about,
and I bet it's been probably about a month month
if I remember correctly, were we brought up this term
(01:03):
to you called circular accounting. Now, don't change the station
on me here. Okay, I'm not going to bore you
with a bunch of accounting terminology, but it's very important
because if you have money in the stock market, circular
accounting may be impacting the performance of your four oh
one K, your brokerage account, so on and so forth,
(01:23):
because it's impacting the market. We've talked also a lot
about a potential bubble forming, you know, not just us,
but a lot of portfolio managers on Wall Street talking
about bubbles forming due to the AI situation, lofty levels.
Can they sustain the valuations that the stocks are trading,
app all those normal things. We've also talked a lot
(01:47):
about similarities of this market going back to the dot
com era of ninety nine two thousand, A lot of differences,
a lot of similarities. And so for the last few
weeks we've talked a lot about again is this different
this time around? Well, once again, the comparison in the
(02:08):
contrast of current times to years past ninety nine two
thousand can be quite vast, or they can be very similar.
Let's talk about some of the similar situations. You've got
AI driven stocks that seem to to be able to
do no wrong. You've got AI stocks that everybody from
the institutional level all the way down to the retail
(02:30):
side wants to own. You've got extreme optimism that, again
they can do no wrong. They're spending so much money
they've got to grow, you get my picture. You contrast
that too, stocks that have valuations that are in some
cases strat In the stratosphere, you have huge sums of money,
(02:56):
much greater than in the dot com era, huge sums
of money capital being deployed into data centers, not only
the physical construction of the data center, but also those GPUs,
the chips, everything that goes inside the data center. You
(03:16):
also have concerns about how's all this being paid for
and who's paying for Folks, there's only a handful of people,
meaning companies, that are paying for these data centers that
we've seen spring up. You got Microsoft, You've got Google,
let's see Microsoft. Google. You've got Meta of course, you
(03:36):
have Navidia, You've got Oracle. Those are your major players.
There a little bit of Palenteer. Those are the major players,
but one thing they have in common, they're all tied
together in some sense. And see, we spent a lot
of time talking about how Navidia kind of is buying business, right,
like the deals they struck with open Ai. That's the
other company obviously right in the center of this whole thing.
(03:59):
So if you look at the lit names I just
mentioned in the center, is Navidia, right, They are the ones.
They are the ten thousand pound gorilla producing the GPUs
and the chips that are in the data centers. But
what are they doing is we heard many deals announced
earlier this month or actually last month. Hey buy one
hundred billion dollars worth of our chips and we're not
(04:20):
going to charge you right now, but you can pay
us over time. He's doing that to companies that can
open ai and not even a publicly traded company. Massive
profits so far, but significant amount of debt they're taking on.
So just to refresh your memory, that's what we've kind
of dealt with up to this point. And it's you know, honestly,
(04:42):
it's brought a lot of concern to me. I you know,
my job in Jason's job as fiduciaries of our client's
money is to always be second guessing things. Right, if
something's going up, why, if something's going down? Why? We
have to understand that for our clients, and we do
our very best to do that, and then we relay
that over to you, our radio audience. So that brings
(05:05):
us up to today's topic. And I've titled today's show
the cheating Depreciation Schedule. Whoa cheating depreciation? What in the
world's going on? Well, this is where I'm gonna get
a little bit heavy with you after I do my
(05:26):
stock market recap, because I'm gonna take you into the
world of accounting, right, not so much circular that's a
whole nother issue. Circular accounting again. Where I have a product,
I want you to buy it. You can't afford to
buy it, so I'm gonna give it to you. But
in turn, you're gonna do business with me. Not only
are gonna pay me back for the product that I
(05:46):
gave you, but you're gonna do business with me, and
therefore we'll both make money. Is it legal? Yeah? Is
a little bit you know, pushing the envelope. Yeah? Does
again a representation of honest, accurate earnings. That's what's up
(06:07):
for debate. But how about this thing called depreciation. You see, folks,
if you never took an accounting class, I'll explain depreciation really,
really easy. Most of you have bought a new car
at some point. You've all heard the adage go to
the new car lot. You buy a car for fifty
thousand dollars and the minui you drive it off, it depreciates,
it's worth whatever. Pick a number, forty thousand, forty five,
(06:30):
definitely going to be worth less than what you just
paid for it five minutes ago. So depreciation is a
schedule of an asset losing value over a specified period
of time. And you see, the IRS assigns a depreciation
schedule to different assets. But when it comes to GPUs
(06:52):
in semiconductor chips and so on and so forth, it's
kind of left up to the eyes of the beholder,
meaning the company that bought those GPUs and the chips,
et cetera. IRS really leaves it up to them to
disclose how long they're going to depreciate those assets. Okay,
(07:15):
now follow me so far. The company must then if
and when they get audited by the IRS. They must
then justify to the IRS that they depreciated those aforementioned
items over a specified period of time according to their
(07:37):
use of the item. So the IRS may say, you
got a tenured depreciation schedule on a GPU. So GPU
again not familiar. It's just you have all of you
have a computer that's your CPU, GPUs, this different version,
higher end version, et cetera. Just leave it at that, Okay.
But it's up to the company that bought the GPU
(08:00):
and those chips from Navidia and other manufacturers advanced micro
devices and tel etc. It's up to the company that
bought those to say, here's how long we think those
chips are going to last in their useful life. So
let's give you an example. Let's say I sell a
chip to Sally. Okay, Sally's company. Let's say I sell
(08:24):
that chip for one thousand dollars. Okay. Sally then goes
to her accountant or her accounting department and says, Okay,
we just paid Sanchez Electronics one thousand dollars for this chip.
Put it in our books. Right. That's an expense of
the business that reduces their income. So there's one thousand
dollars I just spent on a chip. Now I can
(08:47):
turn to the IRIS depreciation schedule table and go, oh,
a chip has a life expectancy of again, whatever it is,
let's just say six years. But then, so what that
means is that thousand dollars that I just paid for
that I just paid for that chip. Let me bring
(09:08):
up my calculator, because my brain's pretty dead this time
of the week. Ten thousand dollars if i'd of buy
six years, so that means I would write off one
hundred and sixty six dollars and sixty seven cents of
that thousand dollars purchase every year for the next six years.
After my six years are up, I fully depreciated that chip.
And if it's still running, yeah, okay, cool, I get
no tax benefits because you see, folks, as a business owner,
(09:30):
one of your greatest things that you can do is
have this thing called a phantom expense to appreciation. See it,
appreciation doesn't cost you anything. It's almost like the government
paying you to buy something. Why do you think business
owners towards the end of the year go out and
start a big contractor they're going to go out and
go buy a whole bunch of brand new trucks. Either
(09:50):
they're going to pay the government, you know, a million
dollars in income, or they're going to go spend a
million dollars on trucks. And I'll complicate it even further.
You now can depreciate up to what we call a
section win seventy nine expence. Take that about what was
at one point two one point three right around there.
You don't even have to depreciate it. You get to
write it off the year you buy it. Even better,
(10:11):
let's say they wanted to depreciate it, so they take that,
divide it by the depreciation schedule, and they get to
write off that million dollar purchase. You know, if it's
five years every you know, one to fifth every single year.
So back to my chip. Example, Sally bought my chip
for one thousand bucks. She goes to our accounting department says, okay,
we just bought this chip from Sanchez Electronics. Accountant goes, okay, cool,
we're gonna write this off. And again, let's just say
(10:33):
it's a six year depreciation schedule. We're gonna write off
one hundred and sixty six dollars and sixty seven cents.
And where I got that number one thousand dollars divided
by six years, So we're gonna write off one hundred
and sixty six dollars and sixty seven cents every year.
That one hundred and sixty six dollars reduces Sally's business income. Okay,
it's a phantom expense, as she bought the chips, but
(10:53):
hopefully they're making her money. But the government's allowing her
to basically write off that entire acquisition costs. Okay, pretty
simple so far. But where the waters get muddied is
what I said a moment ago. The IRS pretty much
allows these companies to determine, based upon the amount of use,
(11:14):
how long that chip is gonna last. You see, if
John Doe's company is just a go get her and
that chip is, you know, working twenty four hours a day,
seven days a week, and Frank Doe's company maybe they're
an upstart, maybe they don't have a lot of activity
going on, the chips aren't working that hard. Who do
you think chip's gonna last longer? Frank Doe's company, His
(11:36):
chips are gonna last longer, they're not being used as much.
But if you take a company like an open AI,
a Microsoft, A, Google, an Amazon, and so on and
so forth. Those chips are running hard every single day.
Which one does he think is gonna last longer? Frank
does chips, right, So should he have the same depreciation
schedule as the other guy? That's up to the company. Well,
(11:58):
the point I'm getting to with all this now you
understand basically how depreciation works. Now, what I'm getting to
is the following, if I am able to I'm just
going to pick a company. I'm not saying they're involved,
they're doing this. I was gonna pick a company. Let's
say that I'm Microsoft. If I'm able to depreciate that
chip that I just bought for one thousand dollars from
Sanchez Electronics out over six years, that has less of
(12:21):
a negative impact to my earnings per share, to my
net profit of my company, which then for is reflected
in my stock price. Right, So if I can go
I bought this chip for one thousand, I can I'm
going to write off one hundred and sixty six dollars
over six years. Cool, But in reality, will that chip
really last six years? And this is what you're going
(12:43):
to be learning about this afternoon with me. This is
called cheating the depreciation schedule. In reality, one thousand dollars
chip that Microsoft just bought from Sanchez Electronics. It may
only last a year, but yet the company is depreciated
out over six years. Why are they doing that because again,
as a company, you want to spread out that depreciation
(13:07):
so you're not taking a big hit on your earnings.
So if I wrote off that chip because it's you know,
it's only good. Technology is changing. That chip's only good
for the first year, imagine the size of write off
that my company would or Microsoft in this example, would
take massive. I'm giving you a simple example. We're talking billions,
hundreds of billions of dollars. These all these different companies
(13:29):
are spending on chips. So they write it off this
year or in one year. Big hit to the bottom line.
Big hit to the bottom line means Waltree's gonna look
at it and go, oh, your expenses are out of whack.
Let's sell off your stock. But if the company goes
uh uh uh, I'm going to depreciate that over six years,
less of a hit, not affecting the bottom line. Stock
(13:50):
does well. That, folks, is what we call the depreciation
schedule cheating. But We'll go into more details when we
come back. It's a fascinating topic that a could impact
your portfolio. Turned over to Christenstone right now traffic center. Hello, Kristen,
Welcome back to the John Sanchez Show on News Talk
seven eighty k which Happy Friday to all of you.
(14:12):
All right, let's get down to the stock market. Then
we're going to come back to our topic cheating the
depreciation schedule and what's going on from an accounting standpoint,
therefore an earning standpoint potentially with these AI companies. All right,
hit the stock market side, tough day all the way
across the board, at least that's the way it was
this morning. We were down worst level just us mention,
I think five eighty five ninety if I remember negative,
(14:33):
it's almost a six hundred point loss on the doubt
our worst level. We made our ways back, unfortunately, kind
of hit a pocket of selling pressure going into the close,
and we finished down three to ten on the Dow,
a point sixty five percent lost to forty seven. Now
I was like though, a thirty point gain, closing at
twenty two thy nine hundred SMP down three, finishing the
(14:55):
day at six thousand seven hundred and thirty four come out?
How do I strong day? For oil? Dollar thirty four
sixty eight a barrel down ninety nine dollars and eighty
cents on gold at four ninety five seventy ounce, four
basis point increase on the tenure, you'll close four fifteen
For the week, the tenure treasury was up six basis points.
Now why were we down so much? Why did we
come back a bit? Well? When we were really down
(15:17):
towards the bottom of the barrel. Today on the Dow
side of things, we had technology names. It's been a
tough last couple of days for the members of the
Dow because of technology, because of the FED. And it
was no different today. Early this morning you had all
your big names that were down. And then all of
a sudden, out of nowhere, like I always tell you, you
just never know, here comes to buyers right stocks at
(15:37):
some cheap levels according to the algorithms, et cetera. They
started buying them. So we started to see the likes
of Microsoft in the Vidia Oracle start making their way back.
That propelled the Dow higher. But then again going into
the close, things began to weaken, and like I said,
they sold it off. I had a lot of pressure
in the healthcare area today. United Health was down twelve
dollars and forty cents, bottom of the Dow list. You
(15:58):
had some financial stocks this whole Jeffrey Epstein email release
and all that crop that's going on in Washington. Trump
midday to day makes comments that he wants the DOJ
to start investigating a bunch of people, including JP Morgan,
where I guess Epstein had money. And so literally soon
as they said that JP Morgan began to sell off.
(16:20):
It finished the day down five dollars and nine cents. Again,
you just never know anymore. All it takes is a
certain post and company can just you know, unravel. That's
kind of the way it was today. But the good news,
here's the bright side. Glad to see the buyers came
back in some of the beating up tech names of
this week. Right, So Micron today, here's just a few names.
Nine dollars and eighty eight cent gain four point one
seven percent, two forty six eighty three. The video rose
(16:41):
three dollars and thirty one cents one hundred and ninety seventeen,
not a one point seven seven percent gain. Microsoft on
the upside by six dollars and eighty nine cents to
five ten eighteen, and Oracle rising five dollars in twenty
eight cents to two twenty two eighty five. Energy sector,
as I said, thanks to oil one of the top performers.
The group itself up two point three percent after yesterday
four point one percent slid. I shouldn't say the group,
(17:02):
but oil prices. Let me kind of go down my
list here. See what else really was a standout? Eh,
not too much. Let's talk to FED. I told you
yesterday on the show we had two, we had three
FED members make comments that were digested by investors that
the FED is in no hurry to raise interest or
(17:24):
excuse me to cut interest rates come to December meeting.
Two of the three were voting members, so they carry
a little bit more weight than the third person. But
the bottom line, you had three FED members yesterday in
the roundabout way saying we're in no hurry to cut
interest rates in December. Well, if that wasn't enough, here
we come today. So let's see we had let's see,
(17:44):
I know we had Neil cash Karian. He made some
comments about that. Let's see, he's a non voting member.
He said he did not support the October move, meaning
the quarter percent cut, and he remains unsure about December.
Then you had Kansas City FED President Schmidt, who is
a voting member, said well, he is inclined to oppose
a December cut. So here's the game the Fed's doing
(18:05):
right now. They're sending out all these FOMC members doing
their lunch and dinner speeches, as I like to call it,
and some of them are going to say not favor
of the December cut. You're gonna get some probably next
week that are saying, oh, I am in favor, so
that the market is left guessing what's going on, what
the Fed's gonna do. Remember, we had dr own Palettes
(18:26):
FED meeting a few weeks ago basically say don't count
on us cutting rates in December, and that's kind of
when all the selling really started, kind of bringing us
down to where we are now. So it's really simple
to summarize what's going on in the market with your portfolio.
It's valuations you're going to learn even more about when
we come back from break, and it's guessing what the
FED is going to do in December. Now, the last
(18:48):
thing I'll mention about the FED, is what's the probability
right now that we are going to get a quarter
percent rate cut in December. Well, just to give you
a brief example, a week ago, the FED seeing FED funds,
FED watch tool indicated that a ninety four point four
percent probability a week ago that we're going to get
a quarter percent cut yesterday fifty point one percent chance
(19:09):
today forty five point nine. So you see, it's just continuing,
obviously to decline as far as the probability of a
quarter percent cut, and a lot of that's attributed to
what I just mentioned a moment ago where you get
all these FED members coming out and talking the book
up basically is what we call it, saying hey, we
really don't want to do a FED cut. So I
think the Fed's going to have themselves one hell of
(19:30):
a mess, to be honest with you, sir, for my
French come December if they don't give this market a
quarter percent cut to wrap up the year. I really
do so hopefully things will change. Still long ways away,
but we will see how it transpires. Okay, you're up
to date on the market, on the Feds, the bonds,
the commodities, et cetera. Now, when we come back, get
a big cup of coffee. I'm going to take you
into the world of cheating that appreciation schedule and what
(19:52):
may be going on. I'm gonna I'm just going to
say what may be going on. It is going on
in the world of AI and accounting the performance of
their stocks. When we return, start out to Jack Sabing,
he's got news traffic on weather Jet. Welcome back to
the John Sanchez Show on Newstalk seven eighty KO, which
(20:13):
Happy Friday to all of you once again. We lost
three ten on the Dow, up thirty on the NAS deck,
and a three point decline on the SMB five hundred.
All right, I need to squeeze out a few more
bits of energy out of all of you. I'm going
to take you into the world of accounting and how
it relates to those of you that may own some
of the chip related stocks out there, the AI related stocks,
then the videos of the world, et cetera. Or you're
(20:35):
just an investor, which probably most of you are, I'm guessing.
But before I do, and I get into this story
about this, there's two things. As I went through the
first segment of the show talking about how depreciation works
and what's going on with the AI segment in regards
to how quickly or how long they're depreciating their hundreds
of billions of dollars of chips. The industry is buying
(20:59):
this article on to share with you here in a moment.
This is where I got the idea to talk about this,
even though it had been on my mind. I came
across it last night, it was about nine o'clock and
found this article and I'm like, oh my god, this
is just so perfect for the show on Friday. This
is a somewhat of a story with a gentleman that
(21:19):
some of you may know, may know his name, you
definitely have probably know the movie that was made about him.
I'm talking about Michael Burry. Michael Burry. Now, Michael Burry
was the gentleman that the movie, the movie The Big
(21:40):
Short was created after. Now, if you don't have anything
to do this weekend, find it. I don't know where
it is. I'm gonna look. I'm gonna watch it again
this week. It's been a few years. I always like
to watch it. A couple of years. Michael Burry was
the gentleman that called the housing crash in two thousand
and eight his hedge fund. He made a personal profit
(22:00):
of one hundred million dollars from his correct prediction when
he bet against the USI US subprime mortgage market. Total
profit for his investors more than seven hundred million dollars.
His hedge fund Sion Capital, which he shut down in
two thousand and eight do to do. Investor backlash and
a desire for privacy, generated net returns a four hundred
and eighty nine point three four percent between its inception
(22:22):
and November of two thousand and when it closed at
two thousand and eight. Again, this book, this story by
Michael Lewis The Big Short, is all about this gentleman
I'm going to tell you about and what he thinks
is going on with depreciation with these AI companies. Okay,
this article I'm going to share with you. It's going
(22:44):
to serve you best if I just read through it.
I'm going to stop make some comments because there's a
pretty long article, but it's just chalk with information you
need to know, and I just could not paraphrase it
well enough to make sure you get all the points.
So this is out of this is out of Forbes.
By the way, give them all the credit, all right.
So the big short investor betting one billion dollars against
the AI of bubble says Meta and oracles accounting is
(23:06):
hiding the brutal truth. It'll happen slowly and then all
at once. That's how Jim Morrow, founder and chief investment
officer of Caladine Capital, describes the eventual, inevitable unwinding of
what he calls the most crowded trade in history. Of course,
he isn't just paraphrasing Ernest hemuway. He's talking about the
(23:27):
AI race and the trillion dollar deals so overstretched they're
better described as knots than trades. And he's not alone
and sounding the alarms. Michael Burry, the investor of Big
Short fame who famously predicted the two thousand and eighty
housing crisis, broke a two year silence this week to
say nearly the same thing. The big tech AI era
(23:49):
profits are built on one of the most common frauds
and modern era stretching the depreciation schedule, some including Bury,
would say, cheating appreciation schedule, and it landed with extra
weight early this week. Bury quietly deregistered. Now this is
this week, folk, This is all like very very fresh information.
(24:11):
Earlier this week, Burry quietly deregistered his investing firm Science
Asset Management, effectively stepping away from managing outside money or
filing public disclosures. Some analysts interpreted the move as less
of an omnimous sign and more as a Bruno Schneller,
Managing director of Early Capital Management, told CNBC, stepping away
(24:32):
quote from a game he believes is fundamentally rigged onto
much better things. Burry hinted on X with a new
launch expected on November twenty fifth. Freed from the obligations
of reporting and client management, Burry returned to X with
a message that cuts straight through the current AI euphoria
you see. To him, the boom and GPUs data centers
(24:54):
and trillion dollar AI bets is an evidence of an
unstoppable growth. It's evidence of a financial cycle that looks
increasingly distorted, increasingly crowded, and increasingly fragile. Berry put the
numbers to it in a post on X. The investor
estimated that big tech will understate depreciation by one hundred
(25:16):
and seventy six billion dollars between twenty twenty six and
twenty twenty eight, inflating their reported profits by twenty six
point nine percent at Oracle, inflating route profits by twenty
point eight percent at Meta. Just to name two of
his specific targets. I'm gonna stop right there. I should
(25:40):
tell you Wall Street's trying to figure out we think
that he has shorted these names, you know, I meaning
he wants them to go down. So I always got
to keep that in mind. With these heads. Fund managers
make these predictions. Nine times out of ten, it's what
we call talking up their book. They're talking negative, they're
probably short. If they're talking positive, they're probably long. So
everyone's trying to decipher. But now that he he registered
(26:00):
as of I think yesterday it was you can't get
access to his SEC filings, okay, so keep that in mind.
Meta did not respond to your request for comment. Oracle
decline to comment. He spot on Morotel's fortune. Moro has
been making the argument for months, warning that a tsunami
of depreciation could quietly flatten big Texai profits behind the
(26:22):
trillion dollar boom and chips. Data centers and model training,
he argues, lies a simple but powerful illusion. Companies have
quietly changed the length of time they account for their
machines and their semiconductor chips wearing out and depreciating. Now,
I'm going to stop there. During the break, I went
into the IRS regulations, and just as I said earlier,
(26:43):
I just wanted to verify because it's been a while
since I've taken accounting course. IRS allows companies to depreciate
computers and peripheral equipment over a five year depreciation cycle
or five year time period. Right. General manufacturing equipment falls
between five to seven years, So that's how long they
allow you to depreciate it out. Okay, and then it
(27:03):
gets a little more complicated you get into the Chips
Act Investment Credit blah blah blah. But anyways, just let
you know on that, all right. This is a quote
from mister Morrow. Companies are very aware of it. Morrow
claims they've gone to great lengths to change their accounting
and appreciation schedules to get ahead of it, to effectively
avoid all the cap ex or capital expenditure hitting their
(27:24):
income statements. So let's stop there. So again, when the
company goes out spends a billion dollars on chips, that's
a hit to their income statement. But again, instead of
spending showing that billion dollars they spend, now they get
to depreciate it out longer they depreciate it out, the
less hit to the financial statement. Like I told you
in the first segment, Burry's post drew viral attention. Marrol's
(27:46):
been making the case longer, but he thinks the sudden
resonance means investors are finally waking up to something fundamental.
Quote these aren't small numbers, They're huge, and the fact
that someone like Burry is calling it out tells you
people are starting to notice what's happening between the lines
of the balance sheet. Here's how deppreciation works or doesn't.
When tech giants like Microsoft, Meta Oracle build AI data
(28:09):
centers that by tens of billions of dollars in GPUs
servers and cooling systems. Now, normally those assets lose value fast,
which cuts into profits. But recently Bury claims many companies
are quietly extending how long they claim those machines last,
from not fully three years to as many as six.
That simple change lets than spread out their cost and
(28:30):
report fatter earnings. Now quote have they not made those changes?
Moro says their earnings would be dramatically lower, and of
course we all know farnings are stock prices generally go lower.
Meta's filings, for one, seem to at least corroborate the
directionality of Burrow and Moros claim until the year twenty
(28:51):
twenty four, servers and network gear were depreciated over four
to five years. Effect of January twenty twenty five, Meta
said they would quote extend the US useful lives of
certain servers and network assets to five point five years.
They may think, okay, big dealer are going to go
from five years to five point five top folks, And
we're talking billions of dollars hit to the bottom line
(29:11):
or not. That's significant. Quote Depreciation expense on property and equipment,
Meta rote in its annual filing for twenty twenty two
was eight This is so good to listen to. This
depreciation expense on property and equipment. Meta rote in its
annual filing for twenty twenty two was eight point five billion.
(29:31):
In twenty yeah, eight point five billion, in twenty twenty
one it was seven point five six billion, and in
twenty twenty it was six point three nine billion, respectively.
In other words, depreciation was a major cost already, and
management clearly chose to stretch the timeline over which the
cost will recognize. The policy change doesn't prove Buri's dollar
(29:53):
total cross firms, but it's marketingly moves reported earnings in
the direction he describes by lowering near ti termed appreciation
expense and pushing more of it into later years. Marrow
argues that the time he makes little sense as the
pace of technological change accelerates. Navidian and listen closely. This
is one of the most important things I'm going to
share with you. Navidia now releases new chips every twelve
(30:17):
to eighteen months instead of every two years, which means
the hardware becomes absolute faster, not slower. It's like any
old technology take laptops. Imagine trying to run the newest
version of Adobe Premiere Pro on a twenty eighteen MacBook.
Sure it might boot up, but it's going to overheat,
lag or crash because it simply wasn't built for today's
computer demands. Old chips are the same way. They don't
(30:37):
stop working, but they quickly lose their economic value as newer,
faster models render them functionality obsolete. Morrow argues, to be sure,
Marrow's expertise is in the value investing in high dividend
companies as opposed to the trendier high growth tech stocks.
In fact, he says he has no long positions in
technology broadly, so he benefits if big tech multiplies multiples
(30:58):
can press, or if the markets begin to price the
cost of that's very buried in AI spending. Still, his
critique aligns with growing and knees from other analysts. Richard
Jarik and analyst that uncovered Alpha, has raised similar alarms
about the mismatch between AI chip life cycle and corporate accounting.
And I want to stop there before I go to break,
and I want to just go back to something very important.
I said. So I'm covering a lot here, and I
(31:19):
apologize for being a Friday doing this to you. So
once again, Navidia now is producing these chips every twelve
to eighteen months, right before it used to be two years. Now,
why are they doing that? Whole nother show. But the
bottom line is, if I bought a chip from Navidia
a year ago and we're fast forward to you know
where we are today, that chip's just about obsolete. Does
(31:41):
it were run yes, but it is worth the same
value as it was when I bought it. Absolutely not,
because technology changes and it improves. So therefore they should
not be able to meta a Microsoft. They shouldn't be
able to appreciate it at over six years. If that
chip's no good and I've got to move on to
the next new chip coming out of the video, I
should take that full depreciation that first year because the
(32:03):
chip's now almost basically worthless to me. But again that
would be a major hit to my bottom line. So
therefore I depreciate that over six years, and their finances
look stronger than what they really they should be because
there should be much more depreciation schedule, all right or
expense all right, continue on, Let's wrap it up a
Christmas Snell right now traffic center. Hello Christen, Welcome back
(32:25):
to the John Sanchez Show on Newstalk seven eighty koh.
All right, we're talking once again about cheating the depreciation schedule. Again,
very very wonderful article and fortune written about kind of
the strategy of Michael Burry again, the guy who created
the movie was about him, the big short and then
some other gentlemen in the industry that are all coming
(32:47):
up with the same concern that some of our big
tech companies that we all love may not be doing
accounting properly when it comes to depreciating their chips. Once again,
we kind of left off with the videos coming out
with nuts every twelve to eighteen months. But how can
these companies appreciate the chips over six years those new
chips come out, they got to get rid of the
(33:11):
ones they just had twelve twenty four months cycle. So
is this right accounting? So let's go back to the
article I left off with the Richard Jarkin, analyst that
Undercover Alpha, has raised similar alarms about the mismatch between
AI chip life cycles and corporate accounting. He has said
that the latest generation of GPUs where's out faster than
companies amortization schedules suggest well. Some point to the continued
(33:35):
use in the video's eighth one hundred chips released three
years ago as evidence of longer utility. Jerk says that's misleading.
Demand remains largely high because a handful of companies are
subsidizing compute costs for end users. A dynamic and this
is reference to what I keep saying the circular accounting
A dynamic that depends upon investor cash flow rather than fundamentals.
(33:57):
Dark argues more important than the video has now shifted
for releasing new chips every eight to twelve every eighteen
to twenty four months to now an annual cadence, and
that context, Jark says, treating GPUs as though remain valuable
for five or six years is unrealistic. Their true economic life,
he estimates, is closer to one or two years. The
(34:17):
recent sell off of megacap ai names, the team led
by vivik Ariya wrote, was driven by correctable macro factors,
shut down, genderous week job data, tariff confusions over misinterpreted
open AI comments, rather than any real deterioration in AI demand.
In fact, I, for one, pointed to surging segments like
memory and optical of fourteen percent last week, as well
as Nvidia's disclosure of a five hundred billion dollars plus
(34:40):
twenty twenty five twenty twenty six data center order assigns
the underlying spinning cycle remains robust. Let's see every month
thirty five billion dollars stack of GPUs sits without power.
That's a billion dollars a depreciation, just burning a hole
in the balance sheet, this analyst said, So of course
they're panicking and they're ordering their own on turbin. So
(35:00):
the article goes on to talk about that. You get
the gist of it, right, There's always something going on.
But I think this article makes us all begin to
sit back and think about always do your research, Always
do your homework before you get involved in different types
of technology and things. Is it here to stay as
it wonderful? Absolutely? We just don't want to get caught
like we did in two thousand, two thousand, two thousand
(35:21):
and one, ninety nine, that whole era where all of
a sudden, some accounting the regularity shows up and are like,
uh oh, and that's what happened in two thousand and eight,
which is a whole other topic. All right, folks, thanks
so much for sticking with me this Friday afternoon. I
wish eaching one of you a great week, and we'll
see you on Monday. Gobbas. John Sanchez is a registered
(35:42):
investment advisor, and the opinions expressed by Sanchez Gone Capital Management,
LLC on the show or their own and do not
reflect the opinions of News Talks seven eighty or its
pairing company, Cumulus media. All statements and opinions expressed or
based upon information considered reliable, although it should not be
relied upon, as any statements or opinions are subject to
(36:02):
change without notice. Information presented is for educational purposes only
and does not intend to make an offer or solicitation
for the sale or purchase of any specific securities, investments,
or investment strategies. Investments involve risk, and, unless otherwise stated
or are not guaranteed. Information expressed does not take into
account your specific situation or objectives, and is not intended
(36:25):
as recommendations appropriate for any individual. Listeners are encouraged to
seek advice from a qualified tax, legal, or investment advisor
to determine whether any information presented may be suitable for
their specific situation. Past performance is not indicative of future performance.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Ruthie's Table 4
For more than 30 years The River Cafe in London, has been the home-from-home of artists, architects, designers, actors, collectors, writers, activists, and politicians. Michael Caine, Glenn Close, JJ Abrams, Steve McQueen, Victoria and David Beckham, and Lily Allen, are just some of the people who love to call The River Cafe home. On River Cafe Table 4, Rogers sits down with her customers—who have become friends—to talk about food memories. Table 4 explores how food impacts every aspect of our lives. “Foods is politics, food is cultural, food is how you express love, food is about your heritage, it defines who you and who you want to be,” says Rogers. Each week, Rogers invites her guest to reminisce about family suppers and first dates, what they cook, how they eat when performing, the restaurants they choose, and what food they seek when they need comfort. And to punctuate each episode of Table 4, guests such as Ralph Fiennes, Emily Blunt, and Alfonso Cuarón, read their favourite recipe from one of the best-selling River Cafe cookbooks. Table 4 itself, is situated near The River Cafe’s open kitchen, close to the bright pink wood-fired oven and next to the glossy yellow pass, where Ruthie oversees the restaurant. You are invited to take a seat at this intimate table and join the conversation. For more information, recipes, and ingredients, go to https://shoptherivercafe.co.uk/ Web: https://rivercafe.co.uk/ Instagram: www.instagram.com/therivercafelondon/ Facebook: https://en-gb.facebook.com/therivercafelondon/ For more podcasts from iHeartRadio, visit the iheartradio app, apple podcasts, or wherever you listen to your favorite shows. Learn more about your ad-choices at https://www.iheartpodcastnetwork.com
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com