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AI Companies Are Trying to Hide a Staggering Amount of Debt

futurism.com

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Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#91

Post by ch4s3 »

Noaidi wrote: post #80
ch4s3 wrote: post #63

Earlier quoted context omitted.

> is they are trying to hide the debt. They aren't hiding it though. The contracts are recorded in regular filings.

Rope a doped with cope. Maybe you should buy some $ORCL? https://asia.nikkei.com/business/technology/five-us-tech-gia... "Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks." "Today's AI industry is partly supported by demand…

Retail investors shouldn’t be investing in individual stocks outside of industries they understand well. Following GAAP is the definition of not hiding the obligations.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#92

Post by softwaredoug »

delecti wrote: post #68
softwaredoug wrote: post #47

Really feels like the govt + industry, through protectionism and fear-mongering, are propping up a "Too big to fail" situation. Long term, I think the best thing the economy could do is to make training on model outputs fair-use, as suggested by Ben Thompson[1]. Short of that, the companies should enter into distillation agreements with other US labs to let them make near-Fable models. As it stands now, the companies…

> Long term, I think the best thing the economy could do is to make training on model outputs fair-use AI outputs have been ruled as not even copyrightable, isn't that even better than fair use?

Probably - The issue is more about terms-of-service and whether any company wants to go to bat on a years-long legal battle over this issue

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#93

Post by senshan »

skohan wrote: post #62
senshan wrote: post #56

As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem. > Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private e…

Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#94

Post by loudmax »

swarnie wrote: post #77
skohan wrote: post #62

Earlier quoted context omitted.

Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

I'm not familiar with 401k rules but presumably they get a choice of markets and products? If one is over concentrated its easily avoided.

The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account).

Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.

So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.

Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.

There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#95

Post by skohan »

swarnie wrote: post #77
skohan wrote: post #62

Earlier quoted context omitted.

Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

I'm not familiar with 401k rules but presumably they get a choice of markets and products? If one is over concentrated its easily avoided.

The problem some have pointed out is that these companies are such a huge portion of the market right now.

The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.

So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.

Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.

And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#96

Post by xhkkffbf »

simonw wrote: post #75

Something doesn't quite smell right about this story. Here's a key paragraph from the Nikkei story that this Futurism story re-tells: > Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks. Does that justify a "tries to hide" he…

Gosh it would be ironic if they were hiding the nuances behind the firewall in a way that makes it difficult for retail investors to read.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#97

Post by skohan »

rmah wrote: post #89
skohan wrote: post #50

Earlier quoted context omitted.

If it didn't matter, why would they bother jumping through hoops to keep the debt off their balance sheet? In the run-up to 2008 a big factor in the bubble forming was that poor quality loans were packaged in a way to hide the risk in those investments. I'm not expert enough in finance to know if it's the case now, but we do know that clever accounting to hide debt can lead to the incorrect valuation of assets, poten…

They're not jumping through any hoops, I think they're simply complying with reporting requirements. It's not on their balance sheet because being recorded as strait debt would itself be misleading. My understanding is that these sort of off-balance sheet "debt" is mostly in the form of deal terms that may or may not be expressed at some point in the future. An analogy that comes to mind is when companies used to boo…

[dead]

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#98

Post by senshan »

aftbit wrote: post #83
senshan wrote: post #56

As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem. > Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private e…

I disagree - high leverage inherently makes systems less stable.

You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#99

Post by nater5000 »

Noaidi wrote: post #80
ch4s3 wrote: post #63

Earlier quoted context omitted.

> is they are trying to hide the debt. They aren't hiding it though. The contracts are recorded in regular filings.

Rope a doped with cope. Maybe you should buy some $ORCL? https://asia.nikkei.com/business/technology/five-us-tech-gia... "Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks." "Today's AI industry is partly supported by demand…

>but may make it difficult for retail investors to recognize risks

Ok, so just to be clear: institutional investors are (a) the ones investing the large proportion of capital in these companies and (b) are well equipped to decipher financial statements. The idea that any significant amount of retail investors have even seen a financial statement, let alone is making decisions based on their analysis of a financial statement, is laughable. And, even then, if someone is putting in that effort, then presumably they're not going to get tripped up by a legitimate practice that they ought to specifically be looking for given the context.

And all of that doesn't even take into account that every article discussing the financials of AI firms over the last half a decade have been pointing out these dynamics. We're literally in a thread discussing this exact dynamic. Retail investors are certainly far more likely to make investing decisions based on these kinds of articles and threads than they are based solely on independent financial statement analysis that they're conducting. At a minimum, I think anybody taking any of this seriously has gotten the hint by now.

If it comes out that these firms are committing straight-up fraud, then there will be a lot more to discuss. But, as of now, the sentiment is that these firms are behaving perfectly legitimately, just abnormally and maybe irresponsibly compared to their historical context. If an investor isn't equipped to handle this kind of analysis under these circumstances, then I'm not going to feel too bad if they lose their money "investing" when they're really just gambling.

Re: AI Companies Are Trying to Hide a Staggering Amount of Debt

#100

Post by bdangubic »

riffraff wrote: post #90
skohan wrote: post #62

Earlier quoted context omitted.

Couldn't it be a problem given the concentration of the S&P in these companies? At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?

NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less. Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market. EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration b…

how are they not “mostly AI”?
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