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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

#131

Post by derf_ »

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…

> When these fail, it will become everyone's problem.

Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.

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

#132

Post by minimaltom »

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?

Even if theres a massive drawdown it will recover in the medium term (and in the short term is a great buying opportunity).

For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk.

Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.

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

#133

Post by fzeroracer »

palmotea wrote: post #48
chasd00 wrote: post #23

Are they really "trying to hide" this debt? I think it's pretty common knowledge that a lot of these companies are using debt/bonds for funding. The debt not showing up where the author wants is a reporting formality not an attempt to hide it.

> The debt not showing up where the author wants is a reporting formality not an attempt to hide it. Couldn't you characterize Enron that way? The liabilities are there, you "just" have to look at Raptor II or whatever!

You couldn't just characterize them that way, they are using literally the exact same setup that Enron did in order to hide the massive amount of debt and liabilities they had that eventually sunk the company. People jumping in to defend this as being totally legit or not-fraud seem quite insane to me: companies should not be trying to hide these things to pump up their stock prices or to entice investors that otherwise might not see it.

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

#134

Post by jgalt212 »

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…

> As long as this debt does not make it into life insurance and pension funds, we are fine.

I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.

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

#135

Post by senshan »

derf_ wrote: post #131
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…

> When these fail, it will become everyone's problem. Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.

Are you suggesting that holding private credit assets is relatively risk free?

Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.

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

#136

Post by kipchak »

anthonypasq wrote: post #119
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?

retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.

Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%.

https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)

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

#137

Post by Imustaskforhelp »

tyleo wrote: post #73
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?

It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years. I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most peop…

During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)

It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.

I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.

> I think most people just retire at a certain age instead with risk spread across decades.

The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.

(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

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

#138

Post by chairmansteve »

ch4s3 wrote: post #91
Noaidi wrote: post #80

Earlier quoted context omitted.

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.

Maybe GAAP should be changed? Professional investors have the time to comb through the small print. These off balance sheet activities seem designed to bamboozle the small investor.

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

#139

Post by toomuchtodo »

Imustaskforhelp wrote: post #137
tyleo wrote: post #73

Earlier quoted context omitted.

It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years. I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most peop…

During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era) It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic. I do understand what y…

> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)

What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.

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

#140

Post by npilk »

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…

It's cute they think 'retail investors' are reading balance sheets in the first place.
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