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AI Companies Are Trying to Hide a Staggering Amount of Debt

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

#161

Post by hnfong »

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…

> EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".

They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...

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

#163

Post by intrasight »

Marsymars wrote: post #156
toomuchtodo wrote: post #139

Earlier quoted context omitted.

> (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 prote…

> 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. I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for. I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.

My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.

That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.

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

#164

Post by TacticalCoder »

toomuchtodo wrote: post #139
Imustaskforhelp wrote: post #137

Earlier quoted context omitted.

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 prote…

Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.

SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.

A solid 20% yearly, unless my math is way off.

Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.

In any case it's well known that the costs to hedge are extremely high.

In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.

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

#165

Post by delecti »

softwaredoug wrote: post #92
delecti wrote: post #68

Earlier quoted context omitted.

> 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

Well that's a big of a separate issue. You aren't violating copyright law to use the output of one LLM to train your own, but that doesn't mean they need to let you do it. You likewise aren't violating Apple's copyright if you use iTunes to make a missile, but Apple doesn't have to let you do it. (Example chosen because that carveout is/was in their EULA)

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

#166

Post by MattGrommes »

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…

One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.

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

#167

Post by matwood »

toomuchtodo wrote: post #139
Imustaskforhelp wrote: post #137

Earlier quoted context omitted.

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 prote…

Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.

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

#168

Post by drob518 »

aftbit wrote: post #86
Anon1096 wrote: post #74

Earlier quoted context omitted.

It's not hidden at all. Financial blogs very accessible to laymen like Matt Levine's Money Stuff have talked about this structure months ago. If you are an investor and surprised by this news you weren't sufficiently prepared and shouldn't have been investing in the first place.

What's the purpose of keeping it off the balance sheet if not to hide it?

A legitimate reason to do this is so that you can sell it all off or restructure it later without it being intertwined with your main books. So, for instance, it you’re an AI company, your main business is developing models and selling inference, but you need data centers to do that. You could buy those data centers yourself, or you could create a data center subsidiary that would take on debt and build your data centers and then rent them back to you. In the future, if you decide you don’t need that capability any longer, you just sell the subsidiary and you don’t have to tease apart the P&L and personnel to do it. It’s clean and separate because it was structured that way up front.

Now, that’s not to say that there aren’t other benefits of having a separate balance sheet related to moving numbers around. But it doesn’t have to be nefarious.

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

#169

Post by drob518 »

dmitriy_ko wrote: post #59
drob518 wrote: post #45

Earlier quoted context omitted.

I think the point is that it’s not showing up on the standard financial filings. If you were to pull the annual reports for these companies, you wouldn’t see it. That doesn’t mean it’s impossible to find it. Obviously, it is otherwise the article wouldn’t have been written. But you’re going to have to go the extra mile. To be clear, none of this is illegal. It’s just covered in the advanced CFO accounting class.

Take-or-pay contracts appear as "contractual commitments" in 10-K. They are not hidden. That's the way they are reported in all industries where take-or-pay contracts exist. There's nothing nefarious about it.

Yes, the contractual obligation shows up, but not the debt the subsidiaries took on. You have to follow the entity structure and look at their books for that piece. And it’ll show up as a different accounting category, “services rendered,” for instance, not as debt repayments.

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

#170

Post by matwood »

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…

An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.
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