The Week: The Hidden Debt Behind the AI Boom

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1:32Welcome to the week from Prop G Media, where we break down what mattered and what it all means. I'm George Han, and it's Friday, July 31st. Today, the hidden debt, financing the AI boom, and why the market turned this week. Then, China's push to spread cheap, open-source AI around the world. And finally, the reality behind the creator economy and the rise of the solo founder. Let's get into it. This week, the debt underneath the AI boom came into view, and the market didn't like what it saw. An investigation from Nikkei Asia found that the five biggest companies in AI, Alphabet, Microsoft, Amazon, Meta, and Oracle are now carrying more debt off their balance sheets than on them.

2:28On Monday's Prof G Markets episode, Scott walked through what that means. There is a sweet spot of leverage in the economy, both in the banking system and corporate debt, and even personally, a certain amount of leverage. but what big tech's 1.7 trillion and off balance sheet debt versus 1.4 trillion reported that gap is sort of the story because when you're hiding a bigger number than what you're reporting that's not accounting it's concealment and meta's off balance debt is 420 billion dollars which is 3x what they report that's not a rounding error that's the second company hiding hiding liabilities inside of the first company.

3:15And the mechanism is that shell companies will fund the data centers, private credit funds, the shell companies and pension funds and insurance annuities fund the private credit. If you reach far enough into the barrel where you reverse engineer far enough, what you find is that a teacher's retirement account is underwriting Zuckerberg's GPU bill. And, you know, Bernanke always said this, we're obsessed. 90 % of the airtime on this show or on CNBC is about equities because they're more interesting and they have a daily scorecard and the movements are more dramatic. We're just in stock. Stocks are just more fun.

3:51They have more personality. They're more interesting to track. But whether it's the depression, whether it's a great financial recession, whether it's a dot-com implosion, nothing rings the bell of a beginning of a crisis like leverage. The hidden debt wasn't the only warning. NVIDIA had lined up more than$750 billion in new AI commitments, including a quarter trillion dollar guarantee for open AI. And the cost of insuring its debt posted its biggest one-day jump on record. Just another iteration of the circular financing Prof G markets has flagged for months. On Wednesday, the market stopped ignoring it.

4:35The Nasdaq fell into correction territory. Chip stocks got crushed. Torsten Slock, chief economist at Apollo, explained what the market was suddenly pricing in. The challenge at the moment is that the hyperscalers and those who are building the infrastructure, they are changing their financing, which used to be mainly from the equity side of the balance sheet to now being on the debt side of the balance sheet. And the amount of debt that has come to the market from the hyperscalers, meaning the companies that are building out the infrastructure, has just been enormous. So as a result, we've seen a very, very significant increase in supply of investment-grade credit that is in the hyperscaler space.

5:17And the consequence of that is that we have started to see spreads in credit widened out on that hyperscaler debt. And this has resulted, of course, in a number of questions being asked, namely, are spreads widening out on hyperscaler debt because of worries about the underlying credit of these companies, meaning their ability to pay back their debt? Or is it simply just because of demand and supply that there's just more supply at the moment? Here's what makes that debt harder to carry. The American bet, hundreds of billions borrowed against a build-out, assumes the company's doing the building can eventually charge enough to pay it back.

5:54And China is attacking exactly that. Not by building better models, but by making cheap ones the whole world can download for free. This week, Xi Jinping stood up at an AI conference in Shanghai and made it official. On China Decode, James King laid out the scale of the plan. And so China doesn't want to miss the boat. It doesn't want the US to win AI as well. And in fact, it wants to win AI so that in 20 years' time, whoever is doing this version of this podcast will be talking about the fact that China won AI. And that's what this whole plan is all about. And I think the political nature of the plan comes over really clearly when you see how the training that you mentioned is organized.

6:47So China's going to be training thousands of people. And the focus is going to be on the global south. The training is going to be on how to use Chinese open weight models. and there are going to be six major regional AI centers that are set up within regional groupings so that the training will be delivered through the auspices of these regional groupings. And so that we can see that China is getting behind this strategy in a very major way.

7:21We'll be right back after the break.

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9:35Welcome back. There's risk at the top of the economy, but this week also brought a story about risk at the bottom of it, the record number of Americans calling themselves founders. Last year, Americans filed nearly 6 million applications to start a business, the most on record. But only about a third intend to hire a single employee. And on LinkedIn, the number of people calling themselves a founder jumped 69%. On Monday's Prof G Markets, Scott made the case that most of them aren't founders at all. Okay, I have a real bee in my bonnet around the whole founder thing. If you typed in the name on LinkedIn of every company I've started, you're going to find there are 30 or 40 co-founders of all these companies.

10:28Everyone has decided they're a co-founder of Red Envelope, of Profit. And people would call themselves co-founders, and I'd be like, fine, have at it. Titles are cheap. Have at it. But here's what a founder is. A founder signs the front of checks, not the back of checks. And the reality is the vast majority of people are not willing to put their own money. Here's what it means. You know, I l2 amazing great company smart people we sold for 160 million. I got very lucky extraordinary all the moons lined up The first two years of l2 Was me going home and telling my girlfriend who had just giving birth to our second son in about 36 months Oh business is good And I apologize.

11:16I can't be home for bath time I am working 14 fucking hours a day and I've got to work all day Sunday and just go in on Sunday to be emotionally supportive of the people who showed up on Sunday. And in exchange for that, on the first or the 31st of every month, we've got to take$100 ,000 out of our savings and put it into the company. And my girlfriend would literally look at me with this look of fear, like, what the fuck are you doing to our family? and I would have to sit there for an hour and explain to her why hopefully it was gonna pay off. And not once, but twice, I came within a hair of losing it all, couldn't pay my lease on my office, was gonna have to shut the whole thing down and go home and not only lay off a bunch of people, but go home and tell my girlfriend and the mother of my children, oh, the$1.2 million or basically the majority of our savings is gone.

12:15That's what entrepreneurship is, folks. And by the way, that's a good story. It worked out. Ed also gave us his take on the side hustle economy. So that leads me to one conclusion that makes a lot of sense, which is that these are all kind of bullshit side gigs. this is i'm bored at work i'm still employed at work but i work remotely and i kind of want to start like a lifestyle brand and i'm going to make an instagram account and maybe i'm going to make a sub stack and maybe if i'm feeling really excited about it i'll also create an llc because i'm interested in doing that but to be clear that's not a business that is actually contributing to the economy, it's basically like a hobby.

13:06It's basically like a more legit vehicle to express yourself based out of the boredom that you feel in your real job. But economic anxiety isn't the whole story. A lot of people, especially younger people, aren't turning to solo work only because traditional employment feels less secure. They're also betting that the Internet has made it possible to build something meaningful without millions in capital or hundreds of employees. Jack Rains, author of the newsletter Young Money, joined Scott this week to discuss the business model behind that bet. On the media industry, I think this might be a hot take.

13:52I actually think it's a very good time to start a media brand because you can just do stuff a lot leaner now. like if you look at the radio industry it's like there was so much infrastructure you had so many people working the studio versus now you can launch a podcast and hit publish and effectively get distributed to the entire world immediately like i know you have a whole team that works with you that team is still probably way leaner than it would have been 40 years ago to try to have the same level of distribution right so there's a lot of like what i would say is like bloated media companies that didn't really adapt to social media and now kind of influence or creator first stuff that their revenue model and their cost structure just doesn't really make sense.

14:32But for individuals or lean teams, whether they're building a subscription model, ad model, whatever, I think there's a lot of value building in niches with a pretty low cost basis and low headcount. On the creator front specifically, the fund I'm at, Slow Ventures, we actually have our fund that invests in startups, like tech, AI for whatever, yada, yada, yada, like Silicon Valley, New York, we do everything um we have a separate fund that invests in creators and creator-led businesses where the bet that we're making there is that the internet is getting more and more siloed where like i have my internet you have your internet like algorithms and interest drive everything people that are kind of like cult leaders in different pockets have interesting opportunities to build businesses around like their niche or their audience where if you're kind of seen as the like like market or industry leader on your thing and you have hundreds of thousands or millions of followers.

15:26Can you build businesses on top of that platform? We think so. And that trust still takes time. This week, No Mercy, No Malice turned 10. 10 years of Scott writing the same newsletter every Friday and four years of me narrating his words for the audio edition. While the cost of publishing has fallen towards zero, the cost of building a voice people care about hasn't. It takes consistency, vulnerability, and a willingness to keep showing up. In this week's anniversary essay, Scott explained the reason he keeps writing. Here's what he wrote. I write a lot about the end, death, believing that I'll go first and that someday I'll look into my son's eyes and know our relationship is coming to an end.

16:21this has been an unlock all the fear of shaming worrying what other people think and reticence to tell people i love them melts as the light at the end of the tunnel draws nearer my boys have little interest in my work i doubt they've ever read a post but they will It will transport them back to this era, the good and bad, and cement what they feel but may not know. How much I think about and love them.

16:59Platforms change, markets turn, business models come and go, but a voice worth remembering can outlast all of them. that's the week I'm George Hahn we'll see you next Friday