00:07:16 · Tracy Alloway, Alex Altmann, Joe Weisenthal
[00:07:16] S0: Right. [00:07:16] S1: And then it spilled over, but like, quite frankly, if you look at the data center bonds in isolation, whether like the beignets of this. [00:07:22] S2: World, you know, the meta one, exactly. [00:07:25] S0: Yeah. [00:07:25] S1: These had already been widening. For months prior to that. [00:07:29] S0: Right. [00:07:29] S1: And we'd seen a creep in IG hyperscale is one of. [00:07:32] S2: These ones that pivoted from Bitcoin mining to getting into AI. [00:07:36] S0: Yeah. Yeah. All right. [00:07:37] S1: So I guess the point I'm trying to make is, is that there's ripple effects in financing that start in. in the periphery, and we're seeing that. So what I find amazing, back to the original point in terms of you asked what's going on, are people bullish or bearish, and we literally just conducted a survey with a group of investors. [00:07:55] S0: Fantastic. [00:07:56] S1: Yeah. And the only, I mean, you could make this argument, this is a high number, but from the responses that we've got so far, around about 60% of investors, we asked them a question, do you think financing is going to be a problem? AI financing is going to be a problem for the foreseeable future. [00:08:10] S2: Only 60% said yes. [00:08:12] S1: By definition, what's happened over the past couple of weeks means the answer should be 100%, right? And yet, let's just call it just over half think or just under half think there is no financing issue, but there is. So what's happening in AI to me is evidence of like almost a denial of a reality that's already here.
00:08:12 · Alex Altmann, Tracy Alloway, Joe Weisenthal
[00:08:12] S1: By definition, what's happened over the past couple of weeks means the answer should be 100%, right? And yet, let's just call it just over half think or just under half think there is no financing issue, but there is. So what's happening in AI to me is evidence of like almost a denial of a reality that's already here. [00:08:33] S0: To be fair, one of the reasons CoreWeave started selling off was because Brannin McBee gave an interview to the FT where he was talking literally about unlimited amounts of borrowing, which I think ties into what you're discussing when it comes to capital concerns. So on the financing side, I mean, we've seen some differentiation in terms of lending money to different AI entities out there. Is the overarching point that we've been in a period where it seemed like there was in fact unlimited money and people could tap the IG markets or the loan markets for as much as they needed. And now we're moving to a period where things are more selective and not everyone is going to be able to get the type of funding that they were tapping before. [00:09:21] S2: That is exactly it.
00:09:21 · Joe Weisenthal, Alex Altmann
[00:09:21] S2: That is exactly it. [00:09:22] S1: Right. Because, you know, part of the job that my team does is we travel the world. We talk to a lot of different investors and, We ask questions, we collate the kind of feedback that informs our decisions. And there was this almost universal view that, and you guys would have heard it as well, AI was immune to high interest rates. Evidently is not true, right? And so there is a spectrum. And even, I think that's where I think the meta results were pretty instructive in the 14C, in the sense that they highlighted the fact that financing does constrain, financing does have limitations. And we wrote a load of, we did a load of work on this in the summer where we were looking, not specifically at AI, we were just looking at the holistic net issuance profile of the market. And maybe you guys saw this. And we looked at just the entire corporate market, so IG high yield. We looked at treasuries and we looked at, equity. And we went back to about 1995, collated all the data, and looked at each market, the amount of net issuance in any given year as a percentage of each market's market cap in that given year. And then we plotted it over time. And what we found was there was, unsurprisingly, a very strong relationship. When interest rates went down, overall issuance went up, and vice versa, as you'd expect. [00:10:40] S2: The laws of the economy still exist. [00:10:42] S1: Well, apparently not so much in 2025 and 2026. [00:10:45] S2: Yeah, here's the punchline.
00:10:45 · Joe Weisenthal, Alex Altmann, Tracy Alloway
[00:10:45] S2: Yeah, here's the punchline. [00:10:47] S1: Yeah, this is the... Yeah, exactly. This is the punchline. 2026 has completely shattered what you'd seen in the norms. I think Tracy used You looked at that chart. Yeah. [00:10:57] S0: So you had, you had this great chart plotting the relationship between the two year yield and net issuance. And you can see the relationship really breaks down in 2026. So we are issuing a lot more. We're selling a lot more bonds, a lot more debt related to benchmark rates than pretty much like ever in history. It's, it's kind of biblical. [00:11:20] S1: It's certainly, we have data back to the nineties. So, you know, if you compare it to say.com, And the interesting thing about dot-com is, of course, there was a lot of equity issuance and interest rates were high, but the US government was basically running a surplus and all this kind of stuff. So today is very unique. And the reason why I bring it back to the sort of AI financing is because there is this competition for capital. It is real. AI is not issuing debt in a vacuum. There are other verticals that need to tap financing too. And there is a finite amount, right? So IG issuance and a high-yield market this year on a net basis, we forecast to be $ 1. 1 trillion, right? And we just throw around trillions as though it's just this casual number that everyone's got, but there is limitations, right?
00:12:21 · Joe Weisenthal, Tracy Alloway, Alex Altmann
[00:12:21] S2: Reconcile this. If there is this perception that people are still bullish, there is a, the train is still moving at full speed. Why should capital be hesitant? Like, okay. So it's like, you can, you can see on the numbers, like the core weaves and the irons and the cipher and like a bunch of other ones that I had never heard of. Like, yes, clearly there's the capital markets are telling something, telling them something. But why? If the view is that AI is still generally going straight up, what is the fear about these companies that are at the tip of the sphere? Wouldn't the bull say, look, someone is going to pay for these GPUs. The demand is going up. If they buy or rent or whatever, if they have electricity, if they have GPUs, if they bought them, whatever, they're not going to zero. They're going to be worth a lot of money somewhere or nothing. [00:13:17] S0: Yeah. [00:13:17] S1: So that, that is the bull argument is there's nothing wrong with it in terms of build it and they will come. I would say that, that the challenge will be to the early two things to the earlier point, tip of the spear. So when you start to see cracks or canaries in coal mines or however you want to characterize it, you should probably pay attention. Right. [00:13:36] S2: Um, and, and.
00:13:36 · Joe Weisenthal, Alex Altmann, Tracy Alloway
[00:13:36] S2: Um, and, and. [00:13:38] S1: The second point is, is that, thank you. Uh, the second point is we, we need to think about revenues at the end of the day. And this is something which we addressed at the end of August in a note called placing your AI chips more carefully. And the idea was, is that we basically decomposed. It was around the time of the SpaceX TAM. If you remember, that was around about $ 30 trillion. [00:14:02] S0: It was a total addressable market of like the entire universe, not just earth, something like that. [00:14:08] S1: Yeah. $ 30 trillion, which is obviously around about the GDP of the United States. And so we went, again, to the point about people throwing around trillions. Fun fact for you. Since 1990, I can't actually take credit for this stat, by the way. This actually belongs to Cameron Crease at, who also works here? [00:14:25] S2: Our colleague, yeah. [00:14:26] S1: And so give him the necessary plug on this. Looking at the cumulative revenue of the two most successful tech companies in modern history, it was Microsoft and Apple, and it was the cumulative TAM of those two was, I think, inflation-adjusted, not even $ 10 trillion since 1990. But SpaceX's addressable is talking three times that number. So that kind of prompts us, where's all this money going to come from? So punchline again, $ 17 trillion of S & P top line revenue. And they've got around about $ 11 or $ 12 trillion of expenses. And so that means that the net profit approximately of the S & P is somewhere between five and five and a half trillion.