OpenAI’s circular deals

0:03Good morning from the Financial Times. Today is Tuesday, October 7th, and this is your FT News briefing. Europe applies pressure to Russia over suspected spy attacks. And another open AI deal has analysts worried. Plus, U.S.-focused companies are losing out on the benefits of a weaker dollar. I'm Sonia Hudson, and here's the news you need to start your day.

0:36The European Union is expected to limit the travel of Russian diplomats within the bloc. The move is a response to a surge in suspected spy attacks. Those include arson and infrastructure sabotage. The proposed rules will force Russian diplomats based in EU capitals to inform other governments of their travel plans outside their host country. The restrictions are part of a new set of sanctions that need unanimous support to get approved. Hungary was the last country opposed to the initiative, but two people familiar with the matter say Budapest has dropped its veto.

1:21There's been a flurry of artificial intelligence-related deals lately. And they're starting to look pretty circular. OpenAI agreed to buy tens of billions of dollars worth of chips from AMD yesterday. This comes just a couple of weeks after AMD's rival, NVIDIA, announced a$100 billion investment into OpenAI. Here to talk more about why analysts are worried is the FT's venture capital correspondent, George Hammond. Hi, George. Hey. So first off, give me some of the details of this OpenAI AMD deal that we learned about yesterday. So OpenAI has agreed to buy a huge number of chips from AMD. And AMD are one of the preeminent chip makers in the US.

2:08And this is a deal to buy six gigawatts of computing capacity. And that's roughly the amount of power that Singapore consumes. Wow. So Opening Eye will take up to a 10 % stake in AMD over time as this deal plays out. This is a deal that will help Opening Eye to pursue its ambition of being the US centerpiece for the technology. They want to be the infrastructure developer, the builder of the leading models and the provider of the top tools. And as a result, they're striking deals across the space to lock in computing power. And the AMD deal, as well as the NVIDIA deal recently, kind of fall under that ambition.

2:49George, what other deals have we seen lately? So OpenAI has also signed agreements with Oracle,$300 billion contract over five years to take off some of the computing power that Oracle is building across the country. And it signed a deal with CoreWeave, another cloud computing provider. And again, an interesting deal,$12 billion over five years, which would see OpeningEye build a stake in CoreWeave. So there's this flurry of deal making all pointed for OpeningEye at becoming the preeminent player in the AI build out, but all contingent on money that OpeningEye today does not have. And when we say these deals are circular, what exactly does that mean?

3:36So in each of these deals, the money is flowing from Opening Eye to its partner companies and then back to Opening Eye or the same in reverse. And let's take the NVIDIA deal as an example. So NVIDIA plans to invest up to$100 billion into Opening Eye over the period that Opening Eye is building out its data centers. Opening Eye is going to spend most of that money, from what we understand, on buying chips from NVIDIA. So it will take NVIDIA's investment, leverage that investment, and then go back and buy chips directly from the company. So it's hugely advantageous for both companies. But money is essentially changing hands between the two of them and no one else.

4:16And so what's the concern that analysts have? What do they think is going to happen? One of the concerns is that these kind of deals drive up the share prices of the companies involved. But with little new value being created. They are very positive demand signals for the company, but they're demand signals funded by the balance sheets of the original company. And I think the central concern is that this is stoking an AI bubble and this is all being paid for by revenue, which is not yet in existence and may not be in the near future. Well, George, what can AI companies do, if anything, to avoid a bubble bursting?

5:02They need to keep growing. I think this is the logic on which this whole circular economy is being built. If AI demand continues to grow in the way that open AI certainly think it will, then a lot of these bets pay off and everything is fine. The concern is if that demand cracks or if a Chinese competitor emerges, any of these risks that could either slow usage or derail the lead of the AI companies in America, these could be real issues at that point. George Hammond is the FT's venture capital correspondent. Thanks, George. Thanks.

5:44France's Prime Minister, Sébastien Lecornu, resigned yesterday, less than a month after he was appointed. The departure plunged France even further into a major political crisis. Lecornu was the country's third prime minister since last summer's snap elections. All this turmoil is because Parliament can't agree on a budget to tackle the deficit. That's made French debt more expensive, and investors are increasingly nervous after yesterday's resignation. The pressure is back on President Emmanuel Macron to find a new prime minister or call an election.

6:27The weak dollar is drawing a new dividing line in corporate America. Multinationals and exporters are outshining companies that are more geared towards America's domestic economy. Here to explain is the FT's U.S. Markets Editor, Kate Duguid. Hi, Kate. Hi. So just how big is this gap between exporters and companies that are more focused on the U.S.? So the gap is basically the widest it's been since 2009. What we're looking at are two indices that Goldman Sachs runs, and one of them tracks the 50 companies in the S &P 500 that have the most exposure to foreign revenue. The other tracks the 50 companies in the S &P with the least amount of foreign revenue.

7:19So that gives you two baskets, you know, the basket of exporters, multinationals, those kinds of companies, right? So it's the Metas, the Philip Morris's. And then on the other side, we have companies that are far more domestically focused, and they may be big importers. So think about a Target, big retail stores that are importing a lot of their goods. The index of multinationals and exporters has risen 21 percent this year. That is far outpacing the growth of the other basket, which is up only 5 percent this year. Wow, that is a really big difference. Can you unpack for us just how a weaker dollar is creating this divide, you know, hurting domestically focused companies and helping multinationals?

8:09So one thing is I wouldn't say that it's necessarily hurting domestically focused companies, but they are not benefiting from it in the same way. Those companies, if they are big importers, are being hurt by it. So a weaker dollar increases the value of a U.S. company's earnings abroad. U.S. companies that have significant earnings overseas benefit because their earnings in that foreign currency convert into more dollars. The other way that it helps is that the price of American goods overseas is lower. You know, so American products sold abroad are more competitive with local rivals. These products become cheaper because they are initially priced in dollars, so they cost less when they're abroad with a weaker dollar.

8:56Do you think this trend is going to continue and widen the gap on Wall Street even further, or is there a sense that this could maybe plateau? It does seem like the dollar will continue to decline. The dollar moves with interest rates, and we are expecting one to two more interest rate cuts this year and then another couple next year. If those come as expected, the dollar will sink more. Certainly, that could have the effect of widening this gap between domestic-focused companies and multinationals. But it is also the case that as interest rates fall, that has a stimulative effect on the economy.

9:35So, you know, we may see these sort of domestically-focused companies starting to do better because they're able to borrow at much cheaper rates. Hmm. Ultimately, what kind of impact do you think this trend could have on the landscape of American business investment more broadly? I mean, at the moment, the companies that are benefiting, so big tech, AI companies, are in this sort of multinational category. And they get this additional boost from the dollar. And they're already doing really, really well right now. They're already doing really, really well. So it's kind of exacerbating the concentration problem that we have in the S &P.

10:15I think that that may continue. But again, I guess if we see interest rates come down and we don't see a recession in the U.S., we might see companies across the board really stimulated by that looser monetary policy. Kate Dugood is the FT's U.S. Markets Editor. Thanks, Kate. Thank you. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.