Prof G Markets
00:06:38 · Ed Elson
Due to the $800,000,000,000 they spent on AI this year, every hyperscaler aside from Microsoft is now cash flow negative. This is remarkable considering these companies are known as the most profitable businesses in history. That's where you come in. Over the past several years, very few companies have asked you for money. IPO issuance has been historically low, and existing companies have been happy to finance operations on their own. But that is all about to change. All of a sudden, many of the world's most valuable companies need hundreds of billions of your dollars all at once. This is very unlike big tech whose profits have historically been so strong that the very notion of asking for anything would have been seen as an admission of defeat. The AI era, however, is very different. We are all in this together now. Financial independence is a relic of the past. The trouble with needing money is it makes you extremely vulnerable when people are no longer willing to be generous. It's like being a kid. Your fate is in someone else's hands. The good news for kids is that most parents are willing to help them no matter what. Companies, however, do not have that luxury. Investors will let them die. A couple weeks ago, we got our first taste of what that might look like. After big tech reported solid earnings, investors got the AI jitters largely in reaction to how much money these companies continue to spend. Google plummeted more than 10% overnight, erasing roughly $500,000,000,000 in market value. Intel fell more than 25%, its worst week ever. It was a bloodbath. But that's what happens when investors get anxious. They become harder to please and easier to frighten. On Wall Street, this emotional state is known as the music. It became especially famous in July 2007 when Citigroup CEO Chuck Prince told investors that when the music is playing, you've gotta, quote, get up and dance. In other words, don't shy away from an exuberant market. Four months later, however, the housing bubble popped. Citigroup had to write down billions of dollars in losses, and Chuck Prince was removed as CEO. He was right about what to do when the music was playing, but he was wrong about when it would stop. The obvious question for investors is how the music sounds right now. As always, it is hard to tell. One thing that's for certain though is that it is playing.
00:09:16 · Ed Elson
Meta's recent $25,000,000,000 stock sale was five times oversubscribed. Amazon's $25,000,000,000 bond deal drew $62,000,000,000 in orders, and Microsoft just pulled off one of the most sought after debt offerings on record. That is not the sound of silence. At the same time, some of the music is starting to go out of tune. In the past month, CoreWeave's bond yields have exploded to 15%, and many neo clouds have seen their valuations get cut in half. Meanwhile, the Financial Times reported that Anthropic will not receive the investment grade credit rating that it wanted. Hello, drug status. And OpenAI just slashed its funding target by $10,000,000,000. In both cases, exuberance was lower than previously anticipated. These aren't signs that the party's over, but they do suggest that the lights are coming on. Our greatest musical signal, however, will be the Anthropic IPO set to take place within the next two weeks. The expectation is that demand will be through the roof, which means the stock should rocket upward as soon as it lists. That is exciting for Anthropic, but also terrifying as anything less will be seen as evidence that something has gone wrong. The trouble with capital markets is that they're temperamental and moody. They will fall for you just as quickly as they will turn you away. That is why you should never depend on them. Yes. They have been very generous over the past few years, But that's because the MDMA has been hitting and the music has been blaring. Everyone is nice in that environment. I get the sense though that the drugs are beginning to wear off and the sun is starting to rise. As for the music, I hear it, but it's getting fainter. This edition of Simply Put was produced by Claire Miller and Alison Weiss, edited by Natalia Cabrera, and engineered by Benjamin Spencer. Our research associate is Dan Shalon. Our design editor is Olivia Rudy Hall. Special thanks to Vivian Zhang, Audrey Hettelman, and Rohit Bohler. Thanks for listening to Simply Put by Ed Elson. You can find this piece and more on Substack. Just go to edwardelson.substack.com.
00:11:35 · S4, S5, S6, S7
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