Nvidia’s Latest Round of Deals Spur New Circular AI Fears

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2:20finance, and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. On the call this morning, Carol, you drew our attention to this story. Jim Chanos criticizing the company for effectively bankrolling, quote, roughly two-thirds of the cost of its own hardware sales in a reported AI deal. This is Jim Chanos' criticism. Correct. You should know. But to be fair, we see it play out in the trade often of investors getting a little bit more nervous about these very closely connected companies that are basically doing investments and some of that investment is going to be buying something that they make, like the chips.

2:58So let's see what Robert Shiffman has to say. He's been in the hot seat. He's been following all of this. He's Bloomberg Intelligence Senior Technology Credit Analyst. He joins us here in the Bloomberg Businessweek studio. The longer this goes on, do you get more nervous or do you feel like, okay, this is all making sense though, because we do see the demand. That's real. Yeah, I don't get nervous. I'm pretty confident in my bullish views. I'd love to be the voice of reason at least for 30 seconds. If you take a step back, so NVIDIA is in the news today, most read article, the sky is falling. But what has NVIDIA done over the last five years?

3:32Its stock, I'm a credit guy, its stock is up 1 ,000%. Its stock is still up 5 % year to date. S &P's up 6%, 7%. NASDAQ's up 6 % or 7%. We don't go up every single day in equity markets. We don't go tighter every single day in credit markets. So we're going to be a little bit bouncy. But that being said, what gives me my bullish viewpoint is, quite frankly, the fundamentals, the evidence that growth is here, and it's only getting bigger and better, and it's going to stay hasn't gone away. And the evidence is it's only getting bigger and better. Now, from the credit markets, it scares people a little bit because you have to finance it.

4:11You know, you got to put in the work, the time, the effort, and the money up front, and you don't see it for a few years. Yeah. Hello, Alphabet last week, cashflow negative. Yeah. You know, I would argue, listen, I said this with you guys just three months ago when NVIDIA reported, I thought it was the best print potentially in the history of the stock market and the stock was down. Alphabet's numbers were enormous, right? You've heard so many people say the story again today, cloud AI growth was 82 % in the quarter, but they boosted CapEx again by another 10 or$15 billion. So the world starts to freak out that they can't afford it, that there's not going to be enough money to lend to these guys.

4:48The cost of capital is getting way too high and the sky is falling. And quite frankly, it just isn't. but as some of these companies we've always talked about their balance sheet and how much cash is on their balance sheet and it feels like things are shifting is that a worrisome should we be concerned about that well we should be worried that means less buybacks and things that investors have enjoyed but i would push that aside the technicals in the market have clearly gotten weaker so if if we just also take a step back and think about how trading desks corporate bond trading desks work today versus how they worked five or seven years ago is that um desks used to take risk.

5:24So when you had sellers, you actually had the banks buying back their deals, sitting on maybe tens, hundreds of billions of dollars of bonds, and helping reduce volatility in spreads. Nowadays, no bank takes risk anymore. So when you have sellers come out, you see exaggerated spread movements. On top of that, when you see deal after deal after deal, and we've heard it, there's fatigue when there's long-dated bond deal after long-dated bond deal, and we think that's going to happen again next year. Just the cost of having to do business is going to go up. If you're selling something today and you're going to sell another hundred of those tomorrow, the cost is going to change.

6:03So the costs are going up. But if you think about cash, there's a lot of cash that's sitting around still. Look at Alphabet's balance sheet. They have$240 billion of cash on the books and they still have another 30 or 40 odd of equity to issue that they haven't issued yet. So they've effectively pre-funded themselves, I think, for a couple of years. They're just taking advantage of there's still a bid for corporate bonds these days, albeit at a higher cost. And the other cash is just NVIDIA. Why is NVIDIA? They're the rich uncle that comes to the house and is doling out$20 and$100 bills. Is that necessarily a bad thing?

6:42Take a look at the FA screen on the terminal. The market believes NVIDIA is going to generate$200 billion of free cash next year. So it's a little bit, I don't want to say Robin Hood, but it's the rich giving money to the wealthy right now. So it's just sort of a temporary shift in assets. I know we're talking credit here, but I want to broach something that we broached with Ed Vodlo a little earlier. And that's sort of like the end game here when it comes to these companies and this world that they're trying to create. From where you're sitting on the credit side, just what does the world look like if these investments work out?

7:18Like, what are we doing differently? How are we getting to work differently? Are we working four days a week because we're so productive? Like, what are the promises that have to play out in order for these investments to be successful? Well, BI Credit works seven days a week. I don't see that changing. Just wait until we have 24-7 trading. Financially, what does it look like? I think it looks like where we were three years ago. when the hyperscalers, which were previously, you know, Mag7, had a lot of other different names, were just generating so much cash, they just were buying back tons and tons of stock.

7:56I actually think we're going to get to that point again, where they're going to be in video like where there's going to be so much excess cash flow, they're going to have nothing to do with it, but buy back stock. Now, I don't think that inflection point starts probably until late 2028 or 2029. When you think about the world that we live in, clearly, listen, that's going to change. All of our jobs are going to change. And some for the better, some for the worse. Like everything that we do at Bloomberg is changing now. We're utilizing Ask B, we're utilizing automated research. And it's not to replace analysts, it's to make us better and more efficient.

8:29And I think that's what's going to happen with the rest of the world is everyone's going to get better and more efficient. But some of the moves we're seeing today are exaggerated. There's other names like IBM, for instance. They fell 25 % after earnings. And when they actually guided preliminarily, we didn't know what they were going to come out with full guidance. The guidance prior was revenue growth of over 5%. Then they guided to 4 % to 5 % revenue growth without a change in free cash flow. Is that company worth 25 % less? I'm not an equity analyst. I'll tell you from the credit standpoint, spread shouldn't be very much wider and they're not.

9:04You know, it's interesting, kind of related, I guess, if you will. But there's a story on the Bloomberg today about Morgan Stanley saying AI adopters set for solid profit margins. So they say he has companies that are integrating AI capabilities are poised for stronger profit margins. Because we're becoming more productive or because they're replacing people? That's the question. Mike Wilson and his team said margin expectations are improving most clearly for companies where AI is central to their investment thesis and pricing power is neutral to strong. you know um so you know i guess this is where when we go through the earning season to find out exactly what folks are doing think about everybody we bring on and we ask them like ceos or even like investment folks like are you using it everybody seems to be using it there is a point though where people are starting to say do we need all the models do we need all the expensive models does everybody need access too much for the right reasons like are we spending too much in tokens yeah like right i don't think we are i think the real question is are we spending too much money on something today that we can spend half as much on tomorrow.

10:02That's the real fear, is that China comes in and just creates a better, cheaper mousetrap. And everyone's sitting now on trillions of dollars of spending. And if they just would have waited a couple of years, they could have spent half the amount. We've already talked about this. Is it the Chinese model where some companies are playing around with it? Yeah. I mean, this is the deep seek scare from last year that we spoke about. Yeah, and I think the answer is no. If we look back at what happened with DeepSeek, right? It was this sort of moment where everyone was panicky, and then what happened?

10:32We hit all-time highs again. So I think that's eventually going to end up happening. I do think, listen, the credit markets are deep enough to finance all this. There's a variety of different things that are happening. There's a host of SPVs that are being priced. Now they're off balance sheet, and that's an interesting sort of trade. But there's tens of billions of dollars of private capital that's around. There's tremendous amounts of non-US dollar currency that's still likely to be raised. That helps with technicals. And then I think the other step, and this is bad for the equity markets, I guess, is that I think you're going to see more equity issuance.

11:04We saw massive issuance out of Alphabet. bit. We've actually seen that out of Oracle. Obviously, SpaceX did a big deal. And I think others are going to follow. And by the way, with things like SpaceX, which are wider, nothing's changed. Zero reporting. They're 100 basis points wider. Robert Schiffman, this is Bloomberg. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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13:38You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. There is a lot to talk to Kat Doherty about. Traders are getting a new tool to wager on the biggest U.S. stocks. Also, Fanatics and BGC are inking a prediction markets deal with the sale of an exchange. Kat Doherty is here. She's Bloomberg News Finance reporter. She joins us in the Bloomberg Businessweek studio. I want to talk about this new tool that you and Bernard wrote about over the weekend, Single Stock Futures.

14:13It allows investors to hedge or speculate on more than 50 of the largest U.S. companies. For people who are hearing this or watching, they're saying, wait a second, this sounds familiar. haven't they done this before? Apparently this time is different. Well, it's different for a number of reasons. I would say first and foremost, retail participation. When this was tried years ago, there wasn't as much of the retail or individual investor. We didn't have phones that we could just place trade on for free. And think about the SpaceX IPO that just happened and the emphasis on retail trader participation.

14:47This new tool is going to be another way that retail can participate, even if they weren't able to buy a stock of the SpaceX IPO because it was oversubscribed, they couldn't get in, they couldn't get an allocation. They can now place a wager through the single stock futures, and it will give them exposure to the price of SpaceX, but not owning the underlying shares. it's just another way to place your bet on where you're seeing this name or other names move in terms of their price movement. I'm really glad you brought up SpaceX. Rick Worcester was on last week. What did he tell us? He told us, nobody, none of our clients got what they wanted in terms of the amount of SpaceX stock that they wanted.

15:35Yep. Or the allocation that they wanted, but everybody got something. But none of them got as much as they wanted. Right. There was incredible interest. So is that what this is all about? essentially is giving people access to something that, you know, new issuance, IPOs, is that really what it's targeting? I think that's one piece of the puzzle. CME is touting this as a hedging tool. So it's not just for the retail participant that couldn't get into SpaceX's IPO or future IPOs. It's meant to be another avenue, think for the institutional investor that has exposure. And if you want to hedge your bets and you want to, just like you would use options, But they are touting this also as a tool similar to options.

16:15It gives you exposure. What is different from options is that this is somewhat of an easier tool because you don't have to take into account the gamma or any of the Greek considerations that are an advanced form of investing. Which I learned about for the first time by reading your story. It was pretty funny. Yeah. I mean, yeah, I have no idea how any of that stuff works. The question, though, that I think Carol brought this up on our call this morning when we were talking about this is what's potential downside here for people who are, you know, have easier ways to do this stuff, but does it mean easier ways to part with their money?

16:49Well, and on that, you've got this is to give it access to retail investors, but you have institutional investors playing with it, too. So retail investors beware. Yes. So I think in terms of the potential downsides or the risks that have been identified, people have brought up volatility. if there is major price swings in these names the futures are going to be again it's a tool to help offset some some price swings but if there's more movement and there's more volatility overall the products are going to be harder to price or to to at least hedge your bets in a way that has more certainty so I think that that's one thing that has been brought up this is a new tool for So for any tool that is being released into the market, there's a question of liquidity, how much activities are going to be, who's going to support it, who are the market makers that are going to support it.

17:44But presumably there is a lot of demand for this. And again, the tool is not so dissimilar to options. So it's not as if you are putting out an entirely new asset class that is being tested. There's a lot of use case for putting out tools like this. Increases activity on the CME too? Always. Whenever there's a new product, that's going to mean more dollar signs for a venue like CME that offers these products. So does everybody think it's going to work this time, even though it didn't work 25 years ago? I think that there's a lot of evidence to support it, again, from the just growth of the retail investor.

18:20We have seen a lot of their micro or mini products, as they call them, outside of just these single stock futures. those have got a lot of demand and when I say mini micro it just means that they're in smaller sizes so that they're more accessible to folks that have less money to trade with so we've seen interest from other again of the smaller products so that gives evidence to point to the the fact that this could be more successful on its second launch there's a lot of also competition right increasingly among exchanges. There is new products. You have prediction markets that are launching, um, perps.

19:02It's just becoming, um, which tool is going to be, I think a lot of times these venues like to point to the ease at which some of these tools, um, and ease can mean a number of things, but first and foremost, if you're talking about a retail investor, it's, do you understand the, the underlying product, what, what your exposures and the risks are and, and how do you use it? I think that education for products that are more advanced is something that the venues like to tout. They like to say, we educate our investors and they know what they're buying into. That's why we've seen the rise in options.

19:39You've got more sophisticated retail participation. But when you have new products that are touted because of how easy they are to understand and to use, that becomes their new tagline. You know, I described you as a finance reporter who covers markets, and I didn't mean to say you cover the ins and outs of the daily moves on markets. What I mean is you actually literally cover the market structure and market structure, the pipes, the plumbing, as everybody likes to say. And there's, you know, it doesn't get a lot of attention until there's an issue and they need to call the plumber. That's right.

20:08But these days it is getting a lot of attention because you have the rise of prediction markets. And we're going to talk about some prediction markets in just a second and some sort of like very strange bedfellows, I think some people would say. But I'm curious how your beat has changed just over the last few months now that everybody is kind of getting in on CME's turf. Like CME and SIBO, for years, they were the only ones that were doing this sort of thing and intercontinental exchange. But now there's like all these upstarts. Well, it's innovation, right? We're in a new regulatory regime. And what it has meant is in the last year or so, you've seen upstarts that have really gained traction because they're able to actually launch products.

20:48They're not just asking permission or asking for forgiveness. They're given the green light to just go ahead. And because of that, when you see these new products and some of these upstarts, their benefit is that they can come at this with new products, but they also have new technology. Some of the interface is a little bit more, it is exactly tailored to the retail investor. Whereas if you think about CME especially and somewhat SIBO, they have come from the place of serving institutions. Those institutions are used to certain products and also certain interfaces that might seem outdated to a retail customer that is coming to the market fresh and is looking for an app that, again, easy to use, easy to understand.

21:36They want to have, it's both ease and accessibility. So they want to be able to see certain buttons are going to work in certain ways and it's not complicated and you know exactly which interface you need to go to. so I think that if you are an incumbent like CME you're coming at it with the benefit of you have the foundation you have the years of trust and partnerships and and clients that you have been serving that's a huge they've they've rested on those laurels for for many many years and now you have these these new players coming and they are fresh and they're building their brand and they are using the retail customer as an entryway and they want to bring the institutions in too I will say that both players are coming at this that it's not as if cme is saying oh we serve institutions we're only going to serve institutions they're building their retail uh clients and in the same capacity you have a cal she that is serving the retail investor they're primarily in sports but they want the institutions to come in and start trading things outside of sports well then there's fanatics tell us about this back to sports yeah yes it all goes back there yes tell us about this deal.

22:45So Fanatics has been in prediction markets. They've been working with crypto.com. And again, you think of Fanatics as this customer client first, they're selling sports jerseys, and they have all of these partnerships with the major sports leagues. And then they got into prediction markets. It's a natural extension for them. They're keeping it in the sports arena, serving clients that want to bet on sports games. And now today's announcement, they're partnering with one of the brokerage firms that many of our Bloomberg readers, BGC, is selling. They sold their licenses to operate an exchange that Fanatics will now use to list and eventually trade their own prediction market contracts.

23:35So they can still work with Crypto.com in offering prediction market contracts through them. But now they have their own exchange where they can list trade prediction markets. They're going to start with sports. Eventually they could expand beyond that. But these two unlikely partners, they actually see this as a very likely pair. To them, they see this as a natural extension for both firms. The reason being for Fanatics, they want the support. And when I say support, the liquidity, the trading, the pricing that a Wall Street firm can bring like BGC. BGC wants exposure to retail. They also want to give some of their big clients exposure to prediction markets, which they don't currently offer.

24:21So now they can say, hey, look, we have this partnership with Fanatics. They're operating this exchange that we just sold to them, the licensing that is. And here's another asset class that you can trade with us. How many prediction markets do we need? There's just going to keep being a slew, but it's really the question of who will dominate the space. Yeah. Ultimately, right? Kat Doherty, unbelievable. Great stuff. Finance reporter, as we said, really kind of the infrastructure, the nuts and bolts of how all of the activity happens here at Bloomberg News. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

25:04Support for the show comes from public.com. If you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English. Like, if the VIX hits 25, buy a put option on the S &P 500. Or, if my cash balance goes above$20 ,000, move the excess into my direct index. You approve the workflow and your agent handles the rest. Monitoring the market, watching for your conditions, and executing your strategies exactly as defined.

25:42An investing platform driven by your intent, not just your clicks. You can also get full read and write access to your account via the public API. Go to public.com slash market and fund your account in five minutes or less. That's public.com slash market. Paid for by Public Investing. Rokered services by Open to the Public Investing, Inc., Member FINRA and SIPC. Advisory services by Public Advisors, LLC, SEC Registered Advisor. Complete disclosures available at public.com slash disclosures. Make it a summer of life at Credit Union 1 Amphitheater. Get four lawn tickets for just$99 and see NEO and ACON on July 28th.

26:24Avenged Sevenfold and Good Charlotte on July 30th. Train on August 7th Five Finger Death Punch on August 19th Motley Crue on August 22nd and many more. Get your friends and grab tickets now at CreditUnionOneAmp.com If your best finance people are doing expense reports chasing receipts or spending time on month-end close it's time to get Brex AF a Gentic finance that eliminates that work before it starts. Learn more at brecks.com slash AF. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App.