Artificial Intelligence, Very Real Debt

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1:58That's reassuring for any investor worried that the AI boom is going to stop booming. But if you go back not even that far, like a week ago, the picture wasn't so rosy. South Korea's stock market tanked, which pushed the Nasdaq way down toward corrections territory. This pattern has been on repeat all summer, up, down, up and down. What's going on? This feels to me like the most volatile market of all time. Ed Elson co-hosts the Prof G Markets podcast. I think what's happening here is that because the prize of AI is so gigantic, but also because the possibility of the destruction if the AI thing doesn't work out, because that possibility is so gigantic as well, you have huge amounts of volatility.

2:44These are massively money losing businesses. OpenAI is one of the most unprofitable companies in the history of companies. This is a company that lost more than$20 billion last year. That is based on their leaked financials. This is a company that is spending more than the US government spends on the FBI and NASA combined. So you have to start asking the question, what happens if the money runs out? Today on the show, did somebody say AI bubble? Don't tell the markets. I'm Rob Gunther, filling in for Lizzie O 'Leary. and you're listening to What Next CBD, a show about technology, power, and how the future will be determined.

3:25Stick around.

3:31So Ed, we're talking on Wednesday morning. This week, we've seen the S &P reach new highs. What's driving this growth? It's hard to fully understand at this point because we're kind of reacting in real time here. I think this is a lot of optimism coming off of a lot of pessimism that investors were feeling. in the last couple of weeks, basically the past month, a lot of concerns related to AI, related to the amount of leverage that was being poured into the AI trade. And we saw the ramifications of that in what was a pretty brutal market for the NASDAQ and also for the South Korean stock market, which is heavily leveraged on the AI trade.

4:13So we can maybe get to that in a moment. But I think what we're seeing now is investors are looking for any reason that they can to feel optimistic again and to believe that this AI thing is going to work out. Because yeah, there are a lot of warning signs and there's a lot of instability right now. But the other thing that investors know is that if it does work out, if things happen the way they'd like, well, this is a multi-trillion dollar opportunity. So I think investors are looking for reasons to feel optimistic again. They're looking for reasons to believe that this will work out over the long run.

4:48And I think that's what we're seeing this week. You're talking about the NASDAQ going down recently. To me, that screams volatility. Do you see this market as somewhat volatile? And if so, do you think like investors are starting to price volatility into their business? This feels to me like the most volatile market of all time. But I have to be cautious when I say that because most markets feel like the most volatile market of all time. But this market especially feels that way. I mean, if we just look at big tech earnings, which we saw just last week and the week before, and we look at the way that some of the largest names, some of the largest, most valuable companies in the world, the way they whipsawed up and down.

5:30We looked at Amazon, for example, which literally rose 15 % in a single day. It's kind of unheard of for a company that's worth literally trillions of dollars. We saw similar things with Meta. We saw similar things with Google and Microsoft. I think what's happening here is that because the prize of AI is so gigantic, but also because the possibility of the destruction if the AI thing doesn't work out, because that possibility is so gigantic as well, you have huge amounts of volatility. You do not have a real sense of consensus in the markets right now. investors say, I think AI is going to be worth X trillions of dollars.

6:12I think it's going to be worth nothing. And no one really knows right now because we're all just making bets on the future. We're all speculating at this point. We haven't seen a genuine ROI on AI investment so far, and people will debate me on that. But if we just look at some of the end products, if we look at OpenAI, if we look at Anthropic, if those are sort of ground zero for what the AI future might look like. Well, these are massively money losing businesses. OpenAI is one of the most unprofitable companies in the history of companies. This is a company that lost more than $20 billion last year.

6:52That is based on their leaked financials. This is a company that is spending more than the US government spends on the FBI and NASA combined. They spent$34 billion dollars last year. And even that isn't enough. And we're seeing this now. We saw just this week that Anthropic is looking to receive a$36 billion loan from Blackstone because the nearly$170 billion that they already raised in the private markets, that's not enough money. That's not enough money to cover the cost of simply selling their product. So what we're starting to see here is, yeah, on the front end of AI, this business has not been proven whatsoever.

7:37Sure, you can build data centers and you can sell the compute to those companies, but that business only works so long as an open AI and an anthropic still exist. And a lot of these big tech companies are becoming increasingly reliant on those two AI startups for their growth. So you have to start asking the question, what happens if the money runs out for open AI? What happens if they're no longer able to go to the debt markets and raise tens of billions of dollars at a time. That's a real concern. Well, I guess my question based on what you said is, what is the timeline there? Because from my perspective right now, these companies are chugging along on the faith that something good will happen in the future.

8:18Do we have a sense of how long that runway is? How long can these companies maintain the status quo just by promising something shiny in the future? That is the multi-trillion dollar question that literally no one knows the answer to. But what I can tell you is that there is a timeline and there's going to be a deadline on this. The optimism cannot exist forever. We've seen this with asset bubbles throughout the history of markets. There are a lot of people, what I can tell you, there are a lot of people who say, don't worry about it. They'll get there eventually. Just give them some time. It's going to happen.

8:52Don't worry about the timeline. That's not a problem. Those people are for sure, certainly 100 % wrong. There is a deadline on this. They cannot continue to raise hundreds of billions of dollars ad infinitum. And by the way, their next place to go in order to get the money to continue building this dream of an AI future is the public markets. But what we are starting to see now is that they're actually getting anxious about that themselves. OpenAI had plans to go to the public markets, to go public, to issue an IPO and raise money there. But then they tabled those plans because I think they probably realized, actually, we're not sure that we're going to be able to convince enough investors in the public markets that this is worth investing in.

9:41I think they probably saw some of the reaction to their leaked financials. They probably saw the way people were talking about OpenAI and the anxiety about it. And they said, you know what, let's hold off for now. Let's continue searching for money in the private market. Let's maybe go and figure out some debt financing as Anthropic is doing with Blackstone and Apollo. And they said, let's table this for now. And I think the real sort of canary in the coal mine here when it comes to AI existing in a fully disclosed world of public markets, if you want to get a sense of how an AI company like an open AI might trade on the public markets, how the public markets would receive that company, just look at SpaceX, which was cut in half in less than two months.

10:26And we're recording this on Wednesday, August 5th. SpaceX has lockup periods that expire tomorrow, which means that a lot of the insiders are going to be allowed to sell legally for the first time ever since the company went public, which means we're about to see even more selling pressure on this stock. billions of dollars of SpaceX shares that will likely be sold by investors who invested a long time ago and want to cash in because they want their paycheck. Yeah, I want to drill down on that because you had a guest on recently who said that even if everything goes right for SpaceX, which includes, you know, building these AI compute centers in space, which seems like an unrealistic proposition so far, even if that comes to light, you say your guest told you that the valuation, it should be like a quarter of what it is right now.

11:15It's just so overvalued. I mean, this is the guest you're referring to is Nicholas Owens. He's an equity research analyst at Morningstar. And his fair value estimate, and this is not an ideological and biased person. This is someone who has simply run the numbers, who actually has a pretty middle of the road view on what AI could do. I mean, I'm someone who thinks that open AI and Anthropic are running into trouble. His belief is that they're going to be okay. And yet he believes that the fair value estimate for SpaceX is$62 per share. And it was up as high as$250. It went to$225 was its high.

11:58And when that stock went out and when I saw the IPO prospectus, The original IPO price was$135 per share. It went out immediately at around$150. It went up on the first day, hitting$225. My prediction before the company went public was that the stock was going to rise 25%. That happened. My second prediction before the company went public was that then it would get cut in half. That did happen. It went down to around 107. We've risen back up a little bit more because they reported earnings recently, which were decent-ish. I mean, behind some of those decent-ish numbers are some scary numbers related to the amount of money that they are spending to build the data centers, to build the AI.

12:45But that stock has gotten hammered. And a lot of retail investors have lost a lot of money on that thing. And it's largely because they were sold a dream, a dream that didn't really have any basis in reality.

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14:55This episode is brought to you by Capital One. Capital One's tech team isn't just talking about multi-agentic AI. They already deployed one. It's called Chat Concierge and it's simplifying car shopping. Using self-reflection and layered reasoning with live API checks, it doesn't just help buyers find a car they love. It helps schedule a test drive, get pre-approved for financing, and estimate trade-in value. Advanced, intuitive, and deployed. That's how they stack. That's technology at Capital One. You had mentioned asset bubbles before. I didn't want to say the bubble word. It sounds a little, maybe a little cliche, only because I feel like we've been hearing about an AI bubble for over a year now, right?

15:37And I'm just thinking of Paul Krugman recently talked about the end of this optimism that you're kind of describing right now. He said that this is like not the beginning of the end. It's the end of the beginning because these are such slow moving phenomenon. What are your thoughts on that? I think that's probably right. I mean, I can understand why someone would feel frustrated by the idea that we keep on hearing this word bubble. And you're right. We have been hearing it for, I would say it started to be thrown around in September of last year. We're in August of 2026. So it's been almost a year of people saying, is there a bubble?

16:18Is there not a bubble? Are we starting to see signs of a bubble? And so I'm sure that people look at the markets and they see the markets going up and they go, you guys are wrong. There is no bubble because the markets are up today and the markets are up from where they were a year ago. That doesn't negate the possibility of there being a bubble. Bubbles can inflate over long periods of time. They can also deflate over long periods of time. Just because the markets have increased since we started hearing murmurs of there being a bubble doesn't mean that there isn't a bubble. It doesn't mean that asset prices have become inflated to a level that is not based on the reality on the ground.

17:04So if we try to define like this bubble, right? The idea, I think we've already said it, but the idea is that we just have billions and billions of dollars going into this idea that AI is going to become this product that just generates way more money than it's showing the potential to right now. Let's say I'm not a retail investor. Let's say I feel like I don't have any skin in this game. Should I be freaked out anyway? It's tough because I think the bubbles are located in different pockets of the market. And the market is grappling with this question in real time. I mean, the nice thing about this bubble, and I believe that it is a bubble, the nice thing about this one is the markets aren't totally clueless here.

17:47Like if you go to 2008, and you look at the housing bubble that developed, there was such an amount, such a large amount of misinformation and obscurity that led the entire market in one fell swoop to believe something that was totally wrong. I don't think that's exactly what's happening here. I think that people are, I think investors in some corners of the market are somewhat aware of what is happening here. And then there are other corners of the market where they just have their blinders totally on and they don't really care about the fundamentals. They don't really care about what might be going wrong over at the frontier labs.

18:23And I think that you start to see that in some of the more obscure AI names that have become more popular over the past year or so. Some of the neocloud names like CoreWeave and Nebius, some of the chip names like SanDisk. There are a lot of these stocks which have just become synonymous with AI is going to the moon. And you have a lot of investors who are just covering their eyes and just saying, buy, buy, buy, I don't really care. And we did see the ramifications of that, by the way, last week in South Korea, because of course, the top two stocks there. Yeah, let's dig into that. What happened in South Korea?

18:58I know that so much of the value of their stock market was wiped out. It sent the Nasdaq briefly toward correction territory. First off, the South Korean stock market got eviscerated. It fell about 44 % in 40 days. It wiped out$2 trillion in market value. There were two main reasons for that. And the reasons are named Samsung and SK Hynix. And these are these two chip stocks, which became extremely valuable in a very short amount of time. And because of their role in AI, because everyone's trying to build a data center, because there is a shortage of chips to go into those data centers, Samsung and SK Hynix make those chips.

19:43So they are able to ratchet up their prices while selling a lot of chips. So their businesses are flat out crushing right now. The trouble is that a lot of investors are now extrapolating that into the future and going, oh, my God, these businesses are going to crush for the next two, three, four, five, 10 years. They believe that this is perpetual. This is never going to end, which is a bold prediction, to say the least. So those two stocks absolutely skyrocketed. And eventually, they breached roughly half of the value of the entire South Korean stock market. They're worth around 55 % of the entire stock market.

20:22So this is the most over-concentrated stock market in the world. Suddenly, we started to see some murmurs of how the AI trade might not be working out. We saw some sketchy stuff with some circular financing over NVIDIA. We saw some kind of shady levels of debt that were being raised. Investors got a little bit of the jitters, and that sent the AI stocks back down again. The thing that was really the problem was leverage. and that is that the South Korean retail investor community had gotten so excited by this idea of leverage, which is where you basically just borrow money to amplify your returns.

21:00You can do 2X leverage, you can do 3X leverage, you can do 5X leverage. They employed this strategy of leverage. What they forgot about is that it also amplifies your losses. Yes, it can 2X your return, but also 2X your debt. I would love to translate this for a non-business audience. My understanding is that in May, South Korea was given the ability to do what you're talking about, these leveraged ETFs. They're allowed to borrow a lot of money to make a bet. And then if they win, which, you know, the whole market had been winning on AI, they'll get a bigger piece of the pie, right? And what you're describing here is when you have too much leverage, though, like when things turn on a dime, you could just like get wiped out, which is what happened.

21:43360 ,000 accounts. in South Korea went to zero because they became so hooked on the leverage, they became so obsessed with it, that as soon as the stock started to enter a downturn, suddenly they were getting margin calls from the bank and they had to give up all the money back that they borrowed because they had levered up so high. There were 1.2 million South Korean investors that received margin calls. It's more than 3 % of the entire adult population. This is a nation that became addicted to a financial instrument that is really akin to gambling. So South Korea, everybody's pissed off. They've halted trading.

22:21My understanding from watching your content is that the government has banned these leveraged ETFs, right? But you've called this crash a warning for US investors. And I want you to articulate how that is so. Well, if we look at what brought down the stock market in South Korea, it was an over concentration into a handful of AI stocks. It was a proliferation of leverage because they got obsessed with the gambling. And there is one other aspect to this, which I think is relevant, but it's more of a cultural sociological point, which is that South Korea has a population of young adults who are aimless and lonely.

23:05And we're seeing this in the fertility rates in South Korea which are, I believe they're 0.7 right now. It's the lowest fertility rate of any OECD nation. Their population is entering into a state of structural decline. Their marriage rates have fallen 40 % over the past year. There is a very serious loneliness crisis that is developing in South Korea. And it's also related to the fact that housing prices in South Korea have risen. Inflation is also rising. Young people are generally struggling economically. And so there is a large swath of the population, the young population specifically, that is sitting at home, especially if you're a young man, because young men are more interested in these and have more of a penchant towards these gambling tendencies.

23:52They're sitting at home and they're gambling on these 2x and 3x and 5x leveraged ETFs. And when you look at the demographic makeup of the accounts that were wiped out, a significant portion of those accounts were young people. It's people under the age of 30. So I believe that that is a big contributor to the problem, which is that you have a lot of young people. They don't feel that they have economic prospects. They don't feel that they have much of a purpose, much of a mission in life. And so they see these opportunities for 200 % returns, 2000 % returns. This is how I'm going to do it. This is my lottery ticket out to make my life better.

24:31And they get hooked on these strategies. And it's not entirely their fault, by the way, because also they're being sold these strategies. It's predatory. Billions of dollars that are going in to putting these leveraged ETFs out there and getting people to believe that this is your ticket out. This is how you're going to make money. Now, why is that a warning to the US. Well, I look at the US and I see all of the same trends. I see a population of young people that is unprecedentedly lonely. One in five of us, young people, I'm Gen Z, one in five of us say we have zero close friends whatsoever.

25:10I look at a market that is unprecedentedly over-concentrated into a handful of names. The top 10 stocks in America now make up 40 % of the entire stock market. 30 years ago, that number was 20%, given less concentrated than South Korea, but still very, very concentrated. And then we're also seeing a rise in leverage, specifically leveraged ETFs, which have jumped from$120 billion in AUM in April to more than$200 billion today. It's up nearly 70 % in just a few months.

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26:39All this behavior that you're identifying, all this predatory behavior and our sort of being habituated to participate in it. Is this the type of activity that's sort of providing the scaffolding for the AI boom here in the US? That's the scarier implication. And that is the scarier implication of South Korea, because that is what created those phenomenal returns in South Korea. Yes, there was AI optimism, but at the same time, there was huge amounts of leverage that was juicing the trade upward when things were going well. And if people are making 2 ,000 % on Dogecoin or CumRocket and then losing all of their money, it's not a good thing, but at least it's not really systemic to the wider stock market.

27:28At least that's just happening out in crypto land and people are kind of messing around with those nonsense coins. But in the case of the AI trade, which is not just juicing the stock market, but it's juicing the economy itself. I mean, this is not Samsung, SK Inix. These are not meme stocks per se. Yes, they have meme like qualities, but they also make up literally half of the entire Korean stock market. And they're also inking deals with some of the most important systemic companies in the world. They're inking deals with NVIDIA. They're inking deals with the big tech companies. So these companies and these stocks actually matter.

28:07And so when we use financial products and we use leverage and we use all of these different derivatives and instruments and vehicles to make the line go up higher, we're starting to play a very dangerous game, which could result in the evisceration of a lot of portfolios and retirement accounts and pension funds, all of the things that actually do matter in the real economy. So you've identified leverage, you've identified this gambling. On your programming, you've also identified a couple of other phenomena that seem to be playing a big role. One is through these SPV, special purpose vehicles, and then the other one is called circular financing.

28:43Maybe let's start with circular financing. What is that? So circular financing is a phenomenon that arose actually more than a year ago. And it was the reason that a lot of people started to get worried about there being a bubble in AI, and rightly so. Essentially what you do, say I'm Google. We'll use a recent example. I'm Google and I want to increase my revenues this year. What I'll do is I will invest $10 billion into an AI startup called Anthropic. And then a few months later, Anthropic will turn around and they'll buy$10 billion worth of my AI chips. So what happened there is, one, Google looks good because they're investing in frontier technologies and they're participating in the upside of Anthropic.

29:32And they also look good because their revenue went up by$10 billion. They sold$10 billion more worth of chips. So on the surface, it looks really good. The trouble is the money is just moving in a circle. There was no actual new value that was created. I'm just sending you the money and then you're wiring the money back to me, which creates a false sense of growth. a false sense of business. Because the numbers do go up and people do get returns. Is that the idea? They don't look enough into the numbers. They don't register the fact that actually the money is moving in a circle. And so how sustainable is that revenue growth?

30:05Yeah, I can just send you money and then you can send it back to me and I'll say, look, my revenue went up. But if you're going to keep on doing that, then eventually the revenue is going to run out. And eventually people are going to realize that actually we're not creating new economic value here. So this was the concern. And it was a strategy that was employed by many big tech companies. And it's one thing when we know what's happening, right? We can see these trades taking place. But there was another piece of news recently, and it touches on the SPVs, which is the second thing that I learned from watching your show.

30:37But it turns out that a lot of these companies had even more debt than we imagined. So it was debt that was hidden. It was a massive amount of debt, and they're all being done through these vehicles called SPVs. What's going on there? Yeah. So one of the reasonable bull cases in the markets right now is that you could say, okay, yeah, they're spending all of this money on AI and who knows if the AI is going to generate a return, but at least they're not taking on too much debt. And that was a fair argument that I subscribed to for a long time because the reality is these big tech companies, they are cash cows, They have huge amounts of profits.

31:17And yeah, they have money that they can spend and it's up to them to spend whatever they want to spend that money on. They had about$1.4 trillion worth of debt on their balance sheets, which sounds like a huge number, but compared to the profits that they're making, it's sustainable. Then we learned that actually there's$1.7 trillion worth of debt that is off of the balance sheet that is not being reflected in the reporting and the earnings reports from these companies. The$1.7 trillion worth of debt is being accumulated in these financial instruments called special purpose vehicles, which are now the main way by which data centers are built.

31:59You essentially create a shell company, an SPV, a special purpose vehicle, and then you find debt from somewhere else. It's usually provided by a thing called a private credit fund, which is what it sounds like. It's a fund that goes and loans out money in the private markets. And this has become the principal way by which data centers are built. And I should be clear here, that's not debt that is being accumulated by the big tech companies. For the most part, they are off the hook. So we shouldn't pull our hair out and say, oh my God, the world's going to end. But what we should recognize is that big tech is making an intentional decision to offload the risk of the data centers, throw it off their balance sheets, and pass it on to someone else.

32:45And that someone else is in most cases private credit funds, which has exploded into a huge industry. The point being, this AI buildout is accumulating vastly more amounts of debt than people are willing to acknowledge. It's not just the debt that's on the balance sheets of the companies. It's the debt that's buried away in these no-name SPVs that no one has much clear insight into. They don't really know what it actually is. They don't really know who's actually financing it, that's where the AI boom is happening. And the less clarity you have, the less transparency you have, the more likelihood there is that people aren't going to get their numbers right.

33:23They're not going to do their underwriting properly. They're not going to do their homework. And that's how bubbles rise. This is what we saw in 2008. It's what we saw in 1999 going into 2000. It's very likely that this could happen again. Well, help me understand if we use maybe one data center as an example. I'm thinking of last year, Oracle made this$300 billion data center deal with OpenAI. And I think you alluded to this earlier, but deliveries and commitments on that deal, they're supposed to kick off next year. What happens when that deadline happens? So in Oracle's case, Oracle is actually the odd one out here because Oracle is one of the few, one of the only, it is the only big tech company that is accumulating the debt on its own balance sheet.

34:09So that's an example of a company where you can actually see all of the risk. They're inking these deals with OpenAI and all of these other AI companies. They're spending more on AI data centers currently than they actually generate in revenue. So they are, talk about leverage, they are levered to the hilt. They are like South Korea's retail investor times a billion. It's reflected in the price because Oracle stock has been absolutely pummeled. So it's baked in already. It's baked in. The price of their credit default swaps, which is basically insurance on the possibility that Oracle just defaults on its debt and therefore just goes bust.

34:50Those have been soaring recently as investors price in the increasing likelihood that Oracle could literally just go bust. So it's not that Wall Street's ignoring the debt. It's sort of that they're aware of it and they're trying to like bake it into their projections. They're aware of it because Oracle is reporting it. They're not taking the SPV route. And that's why I get anxious. Oh, because for the SPV route, there's lots of vehicles that you have no idea what's going on. Yes. Okay. That's why I get worried with Oracle, because I look at what's happening to Oracle right now. I look at how investors are reacting to what they're doing with their debt.

35:23And then I think, well, where else? Why isn't that being priced in elsewhere? I mean, there's huge amounts of debt being accumulated everywhere else. Why aren't we seeing it? And the answer is it's being stuffed into the SPVs and the private credit funds, which are not publicly traded. And so we don't get a proper markup and we don't get transparency into what's actually happening there. So this is the problem with bubbles that I should emphasize. It's not necessarily that people are doing something illegal or they're trying to pull a fast one on us. What happens in financial markets is people come up with these complicated financial derivatives of derivatives of derivatives, which makes the entire market increasingly more complicated, which means that fewer investors are actually doing their proper homework as to what's happening.

36:09That's how markets become disjointed from reality. And we're increasingly starting to see that in these financial markets. Ed Elson, thank you so much for joining us. Thank you very much for having me. Ed Elson is a co-host of the Prof G Markets podcast. And that's our show. What Next is produced by Evan Campbell, Madeline Temsu-Sharme, and Patrick Fort. Paige Osborne is the senior supervising producer of What Next and What Next TVD. Mia Lobel is the executive producer of podcasts here at Slate. Ben Richmond is the Senior Director of Podcast Operations. And I'm Rob Gunther, filling in for Lizzie O 'Leary.

36:44You can find me on Blue Sky. I'm at 1RobGunther. Thanks for listening. I'll talk to you soon.

36:53This episode is brought to you by Capital One. Capital One's tech team isn't just talking about multi-agentic AI. They already deployed one. It's called Chat Concierge, and it's simplifying car shopping. Using self-reflection and layered reasoning with live API checks, it doesn't just help buyers find a car they love. It helps schedule a test drive, get pre-approved for financing, and estimate trade-in value. Advanced, intuitive, and deployed. That's how they stack. That's technology at Capital One. Still waiting in line? Again? That's time you'll never get back. Save time and money with Stamps.com.

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