Leopold Aschenbrenner

This is a 4-minute transcript from the July 30th broadcast of Fox Business, comparing the situation surrounding Leopold Aschenbrenner to the excessive leverage (investing through debt) of Korean investors. Just take a look ^^

** Hello everyone, good afternoon. I’m Charles Payne, and this is 'Making Money.' Let's talk about a truly wild day. Let me tell you what happened today.

Today, the market enjoyed a sigh-of-relief rally. That's because the Personal Consumption Expenditures (PCE) price index released this morning came in quite decent. Maybe Kevin Warsh was right not to push for an interest rate hike yesterday. We'll cover a lot of that on today's show, but the much bigger real issue in the stock market right now is the situation surrounding Leopold Aschenbrenner.

Some of you might not be familiar with him, but anyone who invests in the stock market, especially tech stocks, knows who he is. All eyes in the market were on him all year long, and he rose to superstar status, dubbed a sort of 'AI boy genius.' Just last month, the Wall Street Journal praised him as well. Think about it. This guy, Leopold, graduated as valedictorian from Columbia University at age 19, worked on FTX's philanthropic team, and then moved to OpenAI. There, after standing up to the board and facing various controversies, he was fired in 2024. Then he stepped out and wrote a 165-page essay titled Situational Awareness.

Wall Street big wigs were mesmerized by this essay and said, "Since you've mastered everything at 24, run some money yourself," helping him launch a fund named after the essay. And that fund ballooned from 1 billion to45 billion. For a while, this guy looked like a genuine genius. In fact, it was almost like a self-fulfilling prophecy. Every stock he touched, everyone rushed in saying, "Leopold bought it, so I have to buy it too," and the stocks he picked soared without exception. But last night, rumors started circulating that this 'Situational Awareness' fund was trying to raise additional capital. The word was that things were spiraling out of control and collapsing due to massive losses. As it turns out, after accumulating heavy losses, most of its public equity portfolio had been sold off to Citadel. What on earth happened?

The key point here is that this isn't a critique of the AI industry itself. Though some are misreporting it that way, Leopold made the exact same mistake that Korean investors made.

It was excessive leverage (investing through debt). Excessive leverage.

From a logical standpoint, you might think, "Wait a minute, look at the KOSPI. Sure, a 39% drop is big, but if it's still up 28 to 30%, why is that such a big deal?" The problem is that as stocks rise and reach their peaks, leverage piles up to extreme levels. People gain confidence and borrow even more money. So even if the market overall looks safe, in reality, it isn't at all. The moment these stocks start pulling back slightly from their highs, a truly horrific domino effect is triggered. Margin calls trigger more margin calls, leading to even bigger margin calls. Take the KOSPI as an example: it hit an all-time high on June 22nd, but by July 13th, a staggering 1.2 million margin calls were triggered. That's why the market collapsed. Leverage added fuel to the fire during the bull run.

The secret behind Leopold's returns was so-called 'pair trading.' The stocks he went long on using massive leverage were companies like CoreWeave, Iron, Sandis, Common, and Bloom Energy. (By the way, if you look at today's top gainers, they include names like Ryan Clean Smart.) The stocks he favored and went long on were related to data centers, computing power, electricity, and bottlenecks.

On the flip side, his short positions were in certain semiconductor hardware, infrastructure shorts, and a whole host of software stocks. That was his trading strategy.

Overnight and this morning when this news broke, I was reminded of music's 'one-hit wonders.' Having lived through the 80s myself, bands like Kajagoogoo came to mind. (Maybe they're the same person, just kidding.) Anyway, you might remember they had a hit song called Too Shy.

The moral of the story is that Leopold was certainly never 'too shy' when it came to making massive bets with other people's money. In the end, Kajagoogoo left us with a catchy song, but Leopold left us with much more. He gave 'buy the dip' investors a great entry point today, while reminding the rest of us that no matter how brilliant a genius you are, excessive hubris and reckless leverage ultimately lead to catastrophic results.