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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

#241

Post by jimnotgym »

cj wrote: post #219
jimnotgym wrote: post #218

If I were nearing retirement and had a decent pension pot where I could control it in fine detail...I would be diversifying away from tech stocks and holding some cash for immediate needs. There probably won't be much time when it unravels...I wouldn't be over exposed to the Nasdaq 100, for instance. Although you could probably pick some AI safe companies out of it. The real problem will be figuring out where all thi…

The problem is 1) the Nasdaq 100 is where the majority of gains are coming from, and 2) it very well might be another 3+ years before anything unravels, if it unravels at all. If you're truly at retirement, absolutely cycle out. But if you're still young and trying to maximize portfolio growth, it's not obvious that a non-tech strategy would yield better returns.

It's a really good point, and you will have time for the recovery.

But counterpoint, the S&P 100 gained over 24% this year. FTSE gained nearly 18%. Still good gains vs inflation!

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

#242

Post by godwinson__4-8 »

cj wrote: post #219
jimnotgym wrote: post #218

If I were nearing retirement and had a decent pension pot where I could control it in fine detail...I would be diversifying away from tech stocks and holding some cash for immediate needs. There probably won't be much time when it unravels...I wouldn't be over exposed to the Nasdaq 100, for instance. Although you could probably pick some AI safe companies out of it. The real problem will be figuring out where all thi…

The problem is 1) the Nasdaq 100 is where the majority of gains are coming from, and 2) it very well might be another 3+ years before anything unravels, if it unravels at all. If you're truly at retirement, absolutely cycle out. But if you're still young and trying to maximize portfolio growth, it's not obvious that a non-tech strategy would yield better returns.

Another thing to remember - rebounds are highly compressed. If you try to get out ahead of a downturn, you will not only likely mistime your exit but also miss the rebound. It can keep going down or stay flat for sometime. But when it rebounds, it does so quickly [1].

Don't try to be too smart. Especially if this is not your full time job. The market is not rational. Dollar cost averaging and proper risk allocation is the way.

[1]https://www.hartfordfunds.com/practice-management/client-con... & https://www.fidelity.com/learning-center/wealth-management-i... (if you prefer an additional source)

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

#243

Post by LargeWu »

duzer65657 wrote: post #179
rwmj wrote: post #171

Earlier quoted context omitted.

Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).

most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.

Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".

Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.

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

#244

Post by Aurornis »

lumost wrote: post #64
wongarsu wrote: post #53

Do they? Is a company with $200 billion annual revenue and earnings (EBITDA) of $100 billion having $420 billion of off-balance-sheet debt really staggering? In many other industries that would be a perfectly normal amount of debt to have. It's only unusual because we are used to tech companies having so much cash on hand they don't know where to put it

These companies have valuations reflecting a debt light business. At a minimum, 420 billion in debt is enough to change the stock price by 10-20%. If the company plans to add another 400 billion in debt you need to give it the side eye. If 50 billion in revenue is from other companies debt spending… then You have a problem.

> These companies have valuations

By the time we're reading headlines about this debt, it has been known to institutional investors for a long time.

The debt is priced into the valuation.

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

#245

Post by jandrewrogers »

anthonypasq wrote: post #235
jandrewrogers wrote: post #224

Earlier quoted context omitted.

That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days. Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, wh…

i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.

It literally doesn't matter if drops 50% in a year. That is a paper loss and you have years worth of cash you can spend while waiting for it to recover. If you panic-sell at the bottom of that market then that's on you. It isn't necessary in order to pay the bills.

What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.

Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.

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

#246

Post by rightbyte »

HDThoreaun wrote: post #234
jszymborski wrote: post #232

Earlier quoted context omitted.

Datacenters that have not and might not be built to accommodate for future AI demand that may or may not grow to the extent or as fast as the companies anticipate.

Whether the datacenters will end up profitable is a different question than whether they are a real risk for the business. This whole thing could be a massive mistake and all the big tech companies will come out the other end just fine. I think the executives at these companies realize that, this whole build out is a massive case of FOMO. No one wants to be microsoft missing the boat on mobile and theyre willing to f…

Windows Mobile predated the iPhone by like 4 years or something. MS didn't miss the boat they steered a crappy boat.

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

#247

Post by muellero »

AnimalMuppet wrote: post #222
muellero wrote: post #215

Earlier quoted context omitted.

If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.

Yes, they should, if they can. But on the other side, life insurance companies and pension funds should not be buying it.

Agree with you on that. I just wanted to point out that Big Tech debt being a bad purchase for things like pension funds means its a good deal for big tech. Everyone else in the thread seems very negative on big tech debt for some reason. You can't have it both ways.

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

#248

Post by burningChrome »

rockskon wrote: post #141
riffraff wrote: post #90

Earlier quoted context omitted.

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…

It is unlikely that a 50% drop in NVidia wouldn't be paired with a significant drop in the valuation of every other company heavily invested in AI.

Unless they too were somehow tied into Nvidia.

This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.

I can easily see the same happening with AI.

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

#250

Post by Retric »

smallmancontrov wrote: post #227
light_hue_1 wrote: post #216

Earlier quoted context omitted.

And lose the tax advantages? That's crazy

The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?

401k reduces your taxable income when depositing money, this is more tax efficient than paying normal income taxes and then also paying capital gains.

401k lets you rebalance a portfolio with zero tax implications.

The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.

Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.

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