finance | Double Burrito Day

Doubling down on AI

Many years ago, at the Tropicana Hotel & Casino in Las Vegas, I once saw a guy in a Tom Brady jersey, double-down on successive (winning) hands of blackjack (at a $5 table). From my vantage point, after 15 minutes he was up at least $12,000 dollars. I told you that story to tell you this one.

I wrote some time ago that AI was too big to fail and that it wouldn’t matter if OpenAI or Anthropic went bankrupt. Both would be absorbed into MSFT, Google, or Amazon quickly for pennies on the dollar. The collateral damage however could be catastrophic because much of the AI buildout is debt-financed. And now, the institutional investors and market makers who manage your 401k or pension have decided to “Tom Brady” their way to the AI promised land. NVIDIA has announced that it now has partnered with Apollo, BlackRock, Blackstone, Brookfrield, Goldman Sachs, and KKR to establish “independent financing platforms designed to mobilize 3rd party capital to support the buildout of AI infrastructure over time.” The announcement signals two important things:

1. The AI bottleneck is no longer GPUs (called it) or Memory (called it) or Networking (called it) or Electricity (called it), no, the number one bottleneck now is financing (did not call it).

2. If indeed OpenAI goes bankrupt (I bet they will), the second-order effects would be so HUGE (see above) that the the world’s largest bank (and lender of last resort) would have to step in and bail everyone out. Sound familiar? Afterwards, life, for the most part will go back to normal, except for the crippling inflation and lack of funding for many home buyers and small businesses. But otherwise, back to normal.

The moral of the story is to choose your friends wisely. If I had a rack of “High Society” sitting in front of me at a casino table, one of my friends would take half the stack and hide it from me. Tom Brady chose his friends poorly.

RIP Trop in Vegas. Good times.

Too Big to Fail: The Sequel

Posted on November 15 by Leonard Pham

Let’s start with the fact that I did not major in finance or economics. BUT, I am a student of history, and well, let’s just say that I’ve seen this movie before.

I’ve been trying to make sense of all of the AI financing that’s been happening over the past several weeks. If I’m being honest, the way some of these deals are being financed are a bit over my head. Do I think another financial crisis is coming? Ehhhh, no not really. I feel uneasy about the massive piles of debt the hyperscalers are accumulating, but I’m not panicked either. If there’s any good news, companies like Google (aka Alphabet), Microsoft, Facebook (aka META), and Amazon all have solid businesses with lots of room for growth, and that’s without future demand for AI.

To be clear, it’s not the size of debt these companies are taking on. Their bonds are all investment grade (see above, they make huge profits). It’s everyone else who’s taking on debt to buy these bonds. It’s also where this debt is showing up. I.e., pension plans and 401ks. If you’re a fixed income fund manager, I imagine you’d probably get fired if you told your boss you bout US Treasuries or anything that yields less than the 10 year bond.

“Ay, there’s the rub” - Marvin J. Hamlet, former Prince of Denmark

Investment-grade debt markets are the deepest part of the credit system. Private Credit with complex and obscure cash flows are also issuing debt to fund datacenters. I will go out on a limb and suggest that a non-trivial amount of this cash is tied to people’s retirement funds.

That’s the bad news. Here’s the good news, sort of: I’ve seen this movie before and IF it all goes south, and I’m not saying it will, but if if if it all goes south, the US government will have to issue a bailout. And if you thought the last bailout was huge…