Investors fret over AI debt

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0:32Good morning from the Financial Times. Today is Friday, October 16th, and this is your FT News Briefing. The UK might implement a new bank tax, and chip stocks had a week that investors probably want to forget. Plus, the FT's chief economics commentator, Martin Wolf, shares his thoughts on America, the midterms, and democracy. I'm Mark Filippino, and here's the news you need to start your day.

1:07We're getting more and more hints that UK banks could get hit with higher taxes. Chancellor John Healy said at the IMF meetings on Thursday that he had some decisions to make in regards to the UK's financial services sector. This comes after a report in The Guardian said, Healy is poised to implement higher taxes on banks. The Treasury, though, declined to comment on that. Healy is trying to find a way to keep the budget deficit under control, and he wants to do that without breaking an important promise Labor made during the last election. The party said it wouldn't raise income tax, value-added tax, or employee national insurance contributions.

1:44Increasing levies on banks is one way around that, but we'll find out for sure if Healy will do it when he releases the budget in about two weeks.

1:57Anthropic seems pretty darn close to graduating from a junk credit rating to investment grade. The AI Labs received a double B grade from Kroll Bond Rating Agency in June. That's according to documents that FT reporters have seen. Now, obviously, that score is from a while ago, but it was never publicly reported. And the FT's U.S. credit correspondent, Michelle Chan, says that's a big deal. Because we previously reported that bankers acting on behalf of Anthropic have been lobbying to obtain an investment grade credit rating after it goes public. Having an investment grade rating or having a high rating in general would help them lower the borrowing costs and help them to get the lenders comfortable with their credit worthiness.

2:40So having an IG stamp of approval from credit rating agencies is essential for them to tap a large pool of capital and for them to do massive fundraising after the IPO. But Michelle says KBRA, the rating agency, didn't have full access to Anthropics Financials when it gave the company this grade. We should say that KBRA and Anthropics declined to comment. In a traditional credit rating report, you will see a full forecast, including earnings, net profit, financial modeling, all the figures being laid out in a report. But in this one, they use an in-house credit risk score, which is pretty rare in a credit rating.

3:17And they only got a very limited set of financials from Anthropic. So the fact that Anthropic was able to get such a strong rating of very limited financial disclosure was very impressive. Now, reminder, Anthropic got this rating a few months ago. Since then, there have been quite a few bumps in the road for artificial intelligence. Some CEOs have recently called for a slowdown in developing the tech because they're worried humans could lose control of it. But Michelle says Anthropic is still on track for an investment-grade rating. It looks like after the IPO, once they have a lot of cash cushion, they are pretty close to an investment grade according to the framework developed here by KBRA.

3:55But we have to note that KBRA is not one of the big three credit rating agencies. It also depends on how other credit agencies look at Anthropic and whether other credit rating agencies would give the company as much leeway as KBRA does. That's the FT's U.S. credit correspondent, Michelle Chan.

4:19Now, Anthropic might be making moves towards its IPO, but this week overall was not a happy for AI tech stocks. Investors are worried about debt. And we saw that worry come across in a rough sell-off in shares of chip companies. Here to talk to me about that is the FT's Markets columnist, Katie Martin. Katie, things look a little queasy, don't they? Look, queasy is the word. We're not a death's door here, but it's not pretty in markets today. So we're speaking on Thursday. And OK, let's start from the beginning of the global trading day in Asia. The Korean stock market, which I'm sure a lot of your listeners know, is absolutely rammed full of semiconductor stocks that had a really bad session.

5:04That closed down 8%. And that kind of bled through to later trading hours in Europe and somewhat into the US as well. There is just a real sense of nerves now, a kind of uh-oh moment that says, hang on, there's a lot of companies out there that have borrowed an awful lot of money. to build an awful lot of data centers and we still don't really have a good understanding of how they're going to make money out of this and has it all gone a little bit too far too fast. But Katie, hasn't this always been the case? How are these things going to make money? This is the thing. So, you know, people are pointing at all sorts of things.

5:44Like, for example, there's a company called CoreWeave and it basically rents out chips. And a senior executive there said to the FT earlier this week that one of the things that he wants to do is to get an investment grade rating from rating agencies. So a stamp of approval that his bonds are nice and safe because he thinks that this will enable him to tap into money from insurance companies, which he said that's where all the money in the world is. And again, it just it all sort of sounds like that corner of the tech industry is getting eyes bigger than its tummy. And it's thinking, what can we do next?

6:23How much more can we borrow? How much more aggressive can we be? And a large part of the AI trade over the past sort of 12 to 18 months, you know, it's been about vibes. It's been about hype and vibes. And you live by the vibes, you die by the vibes. All right. So part of the diagnosis is vibes. The other part of it, though, is probably some of this economic data that we got out of the US this week? Well, that's an interesting one, right? So we had data out of the US that said that inflation is, surprise, surprise, still running ahead of target in the US. And government bonds hate high inflation.

7:02All bonds hate high inflation. It generally makes them weaker. But what we've actually seen after this quite toppy inflation data that came out of the US is that U.S. government bonds have picked up in price significantly. Now, that is a really important signal because that is saying that investors are so spooked by what's going on in the tech sector that they finally want to buy U.S. government bonds that everyone's been dumping all year. Do you think this is going to change how companies operate or are they just going to keep marching along and building and borrowing? Look, I think this trade has been one-way traffic for a really long time.

7:42The tech trade, the AI trade, the semiconductors trade, okay, that's quite a lot of volatility in it too. But it has just been win after win for that trade for months and months at a time. And it's perfectly normal and natural for those things to take a step back. But you look at the amount of money that is parked in the AI trade and the degree of consensus there is around it and the huge amount of enthusiasm that it's drawn from retail investors, professional investors absolutely everywhere all across the world, it does make you think, hmm, if this one thing that the entire global stock market is predicated on doesn't actually turn out that well, then we've got a serious problem.

8:22And that's the thing we don't know is whether it is a short-term wobble or whether this is the beginning of something really horrible. Katie, thank you so much for that. Katie Martin is a columnist and a host of the Unhedged podcast. Pleasure.

8:39The U.S. midterms are coming up next month. Their outcome could define the next two years of Donald Trump's presidency, as well as his legacy. Ahead of these crucial elections, the FT's chief economics commentator, Martin Wolf, is speaking to a number of political analysts and historians. Their conversations will cover the state of American democracy and what the midterms might mean for the world. Martin, thanks for joining me. A great pleasure. Martin, you're about to launch a series on the midterms, one that we'll be hosting on the briefing's feed. Why and why now? Well, these midterms seem a sort of perfect moment to assess what Trump's second term means for the United States and the world.

9:20And possibly they might be a turning point. Yeah. Tell me about the stakes here. Well, I tend to the view that there are sort of two outcomes. One outcome is that the Republicans do really well, possibly even holding both houses, but certainly comfortably holding the Senate, in which case I think they don't change much. And the trajectory is, to my mind, pretty obvious. If, however, the Democrats do really well, win both houses, that might not change anything dramatically in the short term. It's clear Trump is going to go on ruling with executive orders freely. His power as president is enormous.

10:07as he can veto any legislation. So he remains immensely powerful. But it would make the position of the Republicans and the MAGA movement more difficult and possibly could, in the longer term, prove to be a turning point. Right. So, Martin, what worries you the most about these upcoming elections? Well, I think that what Trump and his administration is trying to do is run a dictatorship. Now, this is a massive shift in the U.S., which was the oldest existing, most important republic in the world. So what's at stake is whether this can be stopped before the United States ends up as the sort of dictatorship we've seen emerge in many erstwhile democracies when authoritarians and their supporters come into power.

11:02It's not hard to connect the dots as to why these midterms matter outside the U.S., but break that down for us, Martin. Why should people outside of America care? Well, the United States, it's the most powerful democracy there's ever existed. And so if the United States turns around and says, we don't believe in any of those principles, we don't believe in any of these rules, we don't believe in the liberal order, we don't really believe in the republic, then it is of potentially decisive significance. for the rest of the world, and most notably Europe, which is very much the creation of that post-war effort by the United States to ensure that what happened in Europe between the First and Second World Wars never happens again.

11:47Martin Wolf is the FT's chief economics commentator. You can find his series on American democracy in the FT News Briefing feed starting tomorrow, Saturday. Thank you so much, Martin. Pleasure.

12:04Before we go, just a heads up that our Bethlehem episode on that voter roundtable we mentioned earlier this week is going to be a little late. So stay tuned. You can read more on all these stories for free when you click the links on our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news. The FT News Briefing is produced by Misha Frankel Duvall, Safiya Ahmed, Sonia Hudson and Josh Gabbert Doyle. I'm your editor, Mark Filippino. Our video producer is Zachary Alfred. Our show is mixed by Alex Higgins and Sam Giovinco. We get help from Peter Barber, Vanessa Brown, Michael Lello, David Da Silva, and Gavin Coleman.

12:38Our executive producer is Topher Forges. Flo Phillips is the FT's global head of audio. And our theme song is by Metaphor Music.

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