"No you guys it isn't actually an issue because it isn't." Why? "Because it isn't; okay?!" oh ok.
Keep this kind of comment to reddit please.
Wouldn’t want to have any fun over here.
AI Companies Are Trying to Hide a Staggering Amount of Debt
311–320 of 407 posts
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#312Earlier quoted context omitted.
Growth of what exactly? AI doesn't have the normal leverage factor that software usually does where a simple codebase can drive a billion dollars of subscription revenue with 90%+ gross margin. There's no eventual state where the capex is in place and the margins flip. They're in the datacenter business, which is real estate, with tenant improvements consisting of rapidly depreciating/obsoleting equipment. These marg…
I think your analysis assumes current closed SOTA models have no moat, which isn't a given considered the protectionism the Trump administration is already considering for US AI firms.
It is a given. Unless the Trump admin figures out how to ban 1s and 0s, you can't stop Chinese labs from open sourcing their models. They can certainly ban new providers from using the Chinese models, but they can't ban Canadian ones, European ones, other Asian countries etc. from setting up provider proxies and bypassing those rules. Then what, great firewall of USA? Block off all internet traffic to other countries? Bye bye economy.
I think the burden of proof is on the closed SOTA model providers to prove they have a moat, because common sense indicates they don't.
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#313Earlier quoted context omitted.
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.
This is a common objection, "It's already priced in". I've believed it for a long time, but also been really interested in the claim, since it feels recursive in the kind of suspicious way. Recently I read / watched a lot of material about it, just out of personal interest. In short, this claim (the efficient market hypothesis, "It's already priced in") is very optimistic. It's not possible to prove definitively if it is or isn't true, and people will argue both ways. However, it seems very unlikely that _all_ effects are _always_ already priced in. Some evidence by way of contradiction:
1. It's widely known that Spacex is overvalued. How is it possible for it to be widely known, and yet still overvalued? Either it is fairly valued, or these issues are _not_ already priced in.
2. If people read Enron's filings, they could have been aware of the shady reporting, and should have seen the reduction in price coming. But clearly most did not! Enron persisted for a long time despite shady tactics, that essentially were happening "in the open" if you dug into the paperwork.
3. The same argument can be made about housing loans during 2008, the dot com boom in 2000, and the response to covid in 2020
If you're interested I have much more to say on the topic! It's fascinating and I've only recently been convinced that the efficient market hypothesis is untrue (or at least it is suspect). I also highly recommend any of patrick boyle's videos, he makes great content often touching on this topic.
disclaimer: I'm not an expert in this industry, or really in this industry at all. I just like learning about it.
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#314Earlier quoted context omitted.
In many historical societies, religious prohibitions on usury meant the charging of interest of any kind . Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful. And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract"…
I love when religions have rule lawyers like this. It readily discredits the religion. As if their all powerful god can be fooled by fancy paperwork or legal loopholes.
Do you love it when people use religion to create rules like this as though people can be fooled into thinking they /know/ the mind of god?
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#315Earlier quoted context omitted.
Because bonds involve interest. Per Summa Theologica: > To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice. https://www.newadvent.org/summa/3078.htm …Aquinas expands the analysis but it is relatively straightforward: all interest is usury. Personally, I find it helpful to imagine two hypothetical persons re…
>in effect asking for more units of money than actually exist in the whole system. Depends on how you define the 'whole system'. If I borrow $100 and make $110, the latter didn't appear out of nowhere. The lender, too, could have turned that $100 into $110. Why shouldn't they be compensated for that opportunity cost?
The opportunity cost point is fair enough if one is thinking in terms of two concrete individuals. The illustration I offered was meant at a more abstract level, the two persons standing in for the creditor side and the debtor side of a closed economy taken as wholes. In that framing the issue is not whether a particular borrower can put the money to productive use (clearly he can), but that the system as a whole is being asked to generate more units of the circulating medium than currently exist within it. Even when real value is created, the monetary claim still exceeds the monetary stock. Settlement then requires continuous expansion of the money supply, continuous transfer of existing assets toward creditors, or periodic default. That structural pressure is what I was trying to get at.
I suspect the deeper difficulty is the “bond” in bonds themselves, the ongoing compulsion that interest introduces. Once interest is attached the debtor is under continuous obligation to produce additional claims simply to keep the accounts from breaking. Traditional writers on the Christian and Islamic sides generally preferred arrangements that avoided this continuous pressure. A pure discount (as with discounted Treasury bills and similar instruments) prices the time element once, up front: the creditor advances a smaller sum and later receives the larger face amount. The cost is paid at the beginning rather than levied as a recurring claim that must be met out of future circulation. In that sense the time value is acknowledged without the mechanism that forces the system to keep generating more monetary units than presently exist.
[edit:] Clarified the discount language.
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#316Earlier quoted context omitted.
The pertinent comparison in valuations is debt vs equity, not debt vs cash as you noted.
My point was more of an exercise to point out that finance is about mutating resources. A lot of cash can be a good thing or a bad thing. Same for debt. There’s nothing inherently bad about levels.
Debt always raises risks, it can be rational but an asset rich and debt free business is vastly less likely to suddenly fail which has a real impact on rational evaluation of the value of their stock.
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#317[dead]
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#318Earlier 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 suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies. Personally, I drop the financial sector entirely (Thomistic proh…
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Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#319Earlier quoted context omitted.
Because bonds involve interest. Per Summa Theologica: > To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice. https://www.newadvent.org/summa/3078.htm …Aquinas expands the analysis but it is relatively straightforward: all interest is usury. Personally, I find it helpful to imagine two hypothetical persons re…
>in effect asking for more units of money than actually exist in the whole system. Depends on how you define the 'whole system'. If I borrow $100 and make $110, the latter didn't appear out of nowhere. The lender, too, could have turned that $100 into $110. Why shouldn't they be compensated for that opportunity cost?
If I understand right, it is allowed to invest like a partnership, where you make $110 together out of your $100 and your partner's effort. But you must be exposed to the downside of failure just like your partner.
Re: AI Companies Are Trying to Hide a Staggering Amount of Debt
#320Earlier quoted context omitted.
brother read those numbers out loud If I make $200k I do not have $400k off-balance gambling debt
This "debt" is almost solely rental style deals with datacenter constructors. If you make 200k and have a 400k mortgage youre doing just fine.
Data centers are depreciating assets. I'd class it more like a fancy car than a house.