The Compound and Friends
00:47:10 · Michael Batnick, Josh Brown, Alex Altmann
[00:47:10] S2: it. Right? [00:47:10] S0: Let's put some of his charts up, and let's do chart 11, Daniel. So so so tell us what's going on here. [00:47:19] S1: Okay. So this is just simply looking at the it's just an equal weighted index of the spread of a bunch of data center bonds against, the equivalent, benchmark, which I I think the average average duration is about seventeen years. So we just took the twenty year twenty year, treasury. And, you know, you can see that that's sort of steadily widened, and now it's sort of not steadily widening. And, like... So, yes, you're right. It is being absorbed, but at a price. Right? And so the prevailing market narrative, right, at the moment, we talk about narratives, is that there is no price that this AI trade doesn't make sense. NVIDIA will tell you that. Meta, to a degree, will tell you that. Microsoft will probably tell you that based upon their revenue growth numbers. Right? But the reality is a little bit different. There is a price. Right? And I think what the market is doing right now is trying to get to the point where that where that price is. It's trying to work out, is there a price where you guys won't wanna pay? [00:48:25] S0: Put up chart 12. So you are saying [00:48:29] S1: This is my favorite chart. [00:48:30] S0: The first time there has been real competition for capital in a higher interest rate environment. What are we looking at?
00:48:30 · Josh Brown, Alex Altmann, Michael Batnick
[00:48:30] S0: The first time there has been real competition for capital in a higher interest rate environment. What are we looking at? [00:48:36] S1: Right. So this goes back to the point that you're not you're not just issuing in a vacuum in equities. You're issuing at a time when the government's trying to get money, and they're running a significant deficit. The debt market, whether it's hyperscaler issuance or otherwise, just other corporate financing needs, are issuing, as I said, $1,200,000,000,000 in net issuance. [00:48:57] S0: The competition. [00:48:58] S1: Yes. Right. And then equities is now... You've completely offset or mitigated the buyback effect. Right? And so you take each market in any given year, and you work out how much issuance was as a percentage of that market size, and then you get a percent, obviously. You add up those three percentage numbers, and then you basically put it on that as a dot, and you compare it where two year yields were in that year. [00:49:20] S0: So why is this such an anomaly this particular year? [00:49:23] S1: Good question. So, effectively, this chart is to tell you that, you know, corporate finance and econ one zero one holds true over a very long period of time, and this goes back to, I think, 1995, if I'm not mistaken. [00:49:35] S2: Meaning higher cost of capital, less issuance. Correct. [00:49:37] S1: Yeah. Kinda makes sense. Yeah. But apparently [00:49:39] S0: Not today.
00:49:39 · Josh Brown, Alex Altmann
[00:49:39] S0: Not today. [00:49:40] S1: We've just... We've decided, and this is like the AI narrative. AI does... AI can ignore that. Right? And the the chart before, the the, you know, the IG, chart of of data centers debt is telling you you can't ignore it because spreads are widening. And they're gonna continue widening to the point where it's effectively going to either test or break the market. And we're we're we're we're seeing, like, cracks already. That's what CoreWeave is about. Yeah. Right? That's what Neo Cloud's more holistically about. It's about the fact that, actually, AI financing does have limitations. It may not apply today to hyperscalers who still are cash volcanoes, but it is certainly applying to, you know, levered, sort of plays on forward compute. [00:50:23] S0: Well, so the market efficiently is, I guess, like, the way to think... The way I would think about this is it's rationality in the market. Yes. It got to CoreWeave before it got to Alphabet, which is the way it should work. [00:50:38] S1: Yes. Mean... [00:50:39] S0: Okay. Give me 13, guys. What... You're saying equities are also finally catching up to the moves in credit by way of a bid to quality, and this is your balance sheet efficiency. What... Like, ex ex... I guess, explain to the viewers what they're looking at and why this is meaningful to you.
00:50:39 · Josh Brown, Alex Altmann, Michael Batnick
[00:50:39] S0: Okay. Give me 13, guys. What... You're saying equities are also finally catching up to the moves in credit by way of a bid to quality, and this is your balance sheet efficiency. What... Like, ex ex... I guess, explain to the viewers what they're looking at and why this is meaningful to you. [00:50:59] S1: Yeah. Sure. So, look, obviously, what what we try to do as a team is try to take relatively complex concepts in the market that may all be produced by other parts of the bank or by us and present them in ways that kind of make sense. Right? [00:51:17] S0: Right. [00:51:17] S1: And so equity markets are amazingly efficient below the surface. Right? A lot of people just look at the S and P and go, it just goes up or, you know, whatever. And, yeah, and as we know recently, there's these tons of rotations, and those rotations, some of them make sense, some of them may not. But this is a classic example of, like, one of the visualizations of that rotation. Right? And it's hard because this is a slightly longer time series. But, essentially, what it's telling you, the orange line is the behavior of Those are stocks. Those are... This is a basket of stocks on the long side versus a basket of stocks on the short side. So it's an RV trade just like the triple c versus double p spread is also [00:51:55] S2: So this is intuitive. If you need to borrow money, money's expensive. You're in much bigger trouble than the companies that have a stronger balance sheet.
00:51:55 · Michael Batnick, Alex Altmann, Josh Brown
[00:51:55] S2: So this is intuitive. If you need to borrow money, money's expensive. You're in much bigger trouble than the companies that have a stronger balance sheet. [00:52:01] S1: Exactly. It's it's it's actually a very straightforward concept, which is the market is is efficiently starting to basically tell you that if you're a lower quality balance sheet business, yeah, the equity is gonna start getting hurt because the chances are you might need to tap that equity channel to start raising money because the debt channel's not available [00:52:19] S0: to you. Is there a world where the neo clouds that seem to be challenged to continue raising money at the weight that they have? Is there a world where they flame out and this never ends up touching the the traditional hyperscaler stocks and they sort of just sail past it. Is there a world in which this is actually a new, comparative advantage for the traditional hyperscalers and it actually helps their stocks for there to be chaos amongst the neviuses of the world? Like, what... How do you [00:52:48] S1: think about that? You you... So you know what I call that? I call that the trade after the trade. Yeah. [00:52:54] S0: So I call it that too, but let's explain to Michael what what what we mean. [00:52:58] S1: The... In in the in the sense that [00:53:01] S0: Trade after the trade. Like, just... Like, I I mean, I could explain it, but I wanna hear [00:53:05] S2: CoreWeave's only $33,000,000,000 market cap. When is it... Like, could Nvidia... If it goes low enough, would Nvidia just buy it and just put this to bed?
00:53:05 · Michael Batnick, Alex Altmann, Josh Brown
[00:53:05] S2: CoreWeave's only $33,000,000,000 market cap. When is it... Like, could Nvidia... If it goes low enough, would Nvidia just buy it and just put this to bed? [00:53:12] S1: So if I... Listen. I don't know exactly what Jensen's thinking. He said other... Obviously, last week, he told basically in in corporate parlance, you know, told CoreWeave to kinda go pound sand. Right? He basically said, I have no interest in helping you guys out at all. Why would he? It's trading above the IPO price. So so that that move lower needs to be a lot lower before I think he'd even consider, from an equity perspective. But why would you even do that? [00:53:36] S0: Mean, he He doesn't want the equity. He wants the assets. [00:53:37] S2: But isn't there a [00:53:38] S1: So so buys the bonds. [00:53:39] S2: But is there a Jensen put? Like, if things get bad enough, he could just say one thing and and chill everybody out? Maybe it's much lower. [00:53:45] S1: But My my suspicion is given how central in... NVIDIA have become to the entire ecosystem, and we've all seen some version of that chart with the [00:53:55] S0: codependency. The sun. Yeah. Yeah. It's like a Greek