Robin Wigglesworth on Hyperscalers' 1.5 Trillion of Off-Balance Sheet Liabilities, Private Credit, and His Book "A Fabulous Debt"

I'm joined today by Robin Wigglesworth, editor of AlphaVill, the Financial Times Financial Blog and author of a fabulous debt, the epic story of how bonds built the modern world. Robin, we want to talk about bonds fixed income, of course, but we've got to start with what's going on right now. You've been doing some work on the off balance sheet, hidden leverage of the hyperscalers, met a Google Microsoft. So we're reading, oh, $100 billion of CapEx, Google's doing that, Microsoft's doing $150 billion. This is so much money. Oh, my God. But actually, it's looking like it's almost guaranteed to be way, way higher. You've been looking at the numbers. And just from the first to the second quarter, the guarantees, the least obligations and so forth, off balance sheet again, went from roughly $1 trillion to roughly $1.5 trillion. What are your thoughts on what we're looking at? No, I mean, it's fascinating. I mean, it is one of the biggest capital markets events of our lifetimes, really. It's just, I mean, we've seen massive of CapEx, booze before, like the railways in the 19th century is like the classic parallel that people draw, transformative technology, very expensive to build. Wasn't usual, of course, you know, railways back in the day, you used to be almost like venture capital ideas, right? They were very severe VCE-ish. Today, it's like major, large money machines that are doing it. Some Google alphabet makes lots of money, meta makes lots of money, Amazon makes lots of money. And for a long time, the money they were pouring into data centers, you know, they could just fund it from their free cash flow. You know, Google search, Amazon, Facebook itself, just, you know, Prince money, so it's easy. But the scale is just becoming so massive that they've increasingly turned to the debt markets. As we now see, there are actually some signs of indigestion, like the sheer scale of the bond sale, we're talking multiple hundreds of billions of dollars both last year and already this year, we've already smashed last year's record for the hyperscalers, bond sales. And they're getting more creative. And look, creativity and finance can be a good thing. I find a lot of this stuff fascinating, but it can also be quite dangerous, as you know, Jack. And, you know, first, it was structuring some of the bonds as leases. So essentially, let's say, take a great example. Meta is building a huge data center in Louisiana called Hyperion and rather than do some pay squillians to build it, they're essentially sort of, they're only investing 20% at the buying 20% of it, but they are guaranteeing that they will lease that data center for 20 years. So and the lease payments are essentially will cover the cost of that company itself, like a JV with Blue Owl and they'll sell those bonds rather than investors. But, you know, since off-balance sheet, it doesn't come up as a bond or a debt or a loan for Meta, but of course, it's on the hook for paying this lease for 20 years. And this, you know, has inspired a lot of the other hyperscalers. So we've seen massive amounts of these kind of lease structures happen. So that's what's gone to $1.5 trillion, I mean, up from, I mean, less than trillion last year and nothing diminimists a few years ago. And, you know, crucially, you know, 500 billion or so of that, you can see as sort of the leases have started. So you can see them in the financial accounts. They work a pair of debt, but you'll see the payment obligations on the balance sheets. But a trillion dollars of that is for leases that haven't even started yet. And that doesn't appear except there's a footnote. So Goldman Sachs, that's where I got the numbers from, they did their, you know, God's working, going through all the filings to find this stuff. What I did then was I started looking at the purchase commitments because these companies have also promised to buy obviously chips and equipment, cooling stuff like that, but obviously power as well. You know, these data centers need electricity and they need quite often guarantees that they will get that power. And that has gone from again, also roughly $1 trillion earlier, they say to $1.5 trillion. And these are quite often payment obligations they can't square all out of. So they kind of walk, talk and quack a bit like debt, but they don't actually pair as debt. And I think it's fascinating. And maybe this is, you know, they're betting the house on AI and I hope this all works out. But I'd feel maybe slightly more comfortable if the structure of some of this is more played vanilla debt and that the debt markets do the talking. If they structured it as playing vanilla debt, we, you're Goldman and you wouldn't have to do all of this work to figure out. It's, it is really interesting. So it's really a, a transformation from a pure, complete AAA, AA investment grade, counterparty like Microsoft. And it is using that, but through a much less investment grade data center developer or a neocloud to then they're the ones who are actually spending the money and they report to investors this giant backlog, which we just reported. And that giant backlog is basically these off balance sheet commitments that the Microsoft and the hybrid scalers have made. Yeah, I mean, you can say, you know, this is entirely disclosed. I mean, these companies aren't hiding the fact that they're pouring hundreds of billions of dollars into CapEx and that money has to come from somewhere. They're not hiding this. But I do think they could perhaps have chosen slightly more transparent approach to this, rather than wanting to preserve the optics of pristine balance sheets. They are kind of increasingly getting creative by like how they structure, how they paint, how they disclose it, just literally going through the ten cues to look at the purchase commitments. You know, some of these companies Google, for example, actually was admiralty like they don't break it up, but that you can search for it and find it fairly easily. On some of the other companies, I had to spend, you know, quite a lot of time digging it out. It's not easy. And I think that's unfortunately. Who's the most complicated? I guess all the others accept Google. Some of them disclose it, but they don't disclose it in a uniform way. They use different words in different places. So it's hard to compare one quarter to the next quarter. And some of them, you know, don't disclose it at all, really. They just say they have, you know, material upcoming payments or promises to make payments. But yeah. So it's a bit of a mixed bag, really. But Google, maybe because it's the biggest. I mean, Google has purchased commitments now of $800 billion. That's tips, memory, equipment, cooling, electricity, the whole job. Wow. But that's almost half the total. I think maybe their accountants may be going a little bit worried and thought, you know, we need to be quite transparent about this. And do you have a rough sense of over how many years the majority of that is scheduled for? Because like if that's scheduled for the next three years, then the Google CapEx number for expectations is too low. So Google, using them, again, they broke it up a little bit more transparently. Around $200 billion of that $800 billion is what they call short term. They don't define it there, but I'm pretty sure that'll be over the next 12 months or so. So their payments are coming due. On the leases, you know, if the leases haven't started yet, it's an accounting thing. Like once a lease is started, you actually can put a right of use asset on your vouche and then put the liability on the other side. So it's transparent. This isn't them necessary doing something bad or changing or doing anything differently from how people have done it forever. I just think that the scale of it is now such that it's a whole new world and maybe these off-balance sheet liabilities because they are financial liabilities that are in many cases extremely hard to swear all out of. Metas for a guarantee, for example, of the leases for the Hyperion data center are incredibly strong. I don't see how they can swear all out of them. Then they should be more transparently disclosed and then investors can make their minds up and broadly speaking, I think people are okay and understand that they are spending this money. These companies are hiding it. But I wish some of the gainsmanship could maybe be cut out and then breaking out a little bit more obviously. Robyn, what do you make of the deal that the member of understanding that NVIDIA made with a five or six giant alternative asset management firms, Blackstone, BlackRock, KKR, two finance chips and recognize that these are an investible asset class? I was looking at ISCLAB before this. What percentage of that 500 billion is going to be debt versus equity? They said roughly 80% debt, 20% equity. So you're the debt guy. So this is good for speaking to you. I don't know. This is a debt cycle. There's lots of hoopla around like the IPOs or SpaceX and Anthropic and OpenAID to come, but really this is a debt cycle. That actually makes me more worried. I mean, fundamentally like, incredible transformative technologies come around occasionally and sometimes they come true. The railways were genuinely transformative as were canals or telegraph balls or the internet. So when these big investment cycles are primarily equity finance, they can break bad, but it's generally fine. I mean, the end of the dot-com bubble, stock market dropped 50% peak to trough, economically it was a nothing burger. It's kind of hardly disentangle from the effects of 9/11. That fueled KAPEC cycles are very different. Even when the underlying premise comes true and AI kind of transforms the world, quite often they end in tears. On this specific deal, one thing I would say that it's very easy to push out press releases saying we're going to land. invest X or Y or Z into this or that, I will see what actually materializes. I mean, clearly there is a lot of heat in this area now and everybody wants to be seen to be leaning into it. But it's going to be really interesting to see what they actually do and how they structure it because I think a lot of these investment firms in particular are going to be very careful about how they protect their own balance sheets but also their balance sheets of their investors. So I urge people at this point in the cycle to take, you know, press releases with a pinch, maybe in the fistful of salt. Yes. What do you think that these AI securities are going to look like? I mean, Larry think literally said, I don't know if he's on vacation, these AI securities. What's an AI security? Well, I think it's just compute. And I think that's one interesting thing and I think this story is kind of throwing in a lot of different things. But it's the transformation of compute, like just kind of, you can buy a lease, a certain amount of GPUs, I guess, or how you'd structure it. That can be turned into an asset class. I think it is, you know, there is a journey there, just because you say something is an asset class doesn't make it so when it does become so, the SEC typically has something to say and we'll have a view about it. But I do think that is the directs on travel that in the segue that like water or commodity is a tradable asset class in this, the futures on these things, I can see us getting compute futures as well. And that becoming roughly investible. My wearing this is that, you know, just because something is investible, asset class doesn't mean people should be investing in it. We'll hear lots of stuff about, oh, you need to kind of be diversified and this is democratizing access to whatever everybody has. And, you know, to paraphrase, you know, who was it? Gobles, the Nazi propaganda, so you said, when I hear people talk about culture, I reach for my gun. He was not a nice man. But whenever I hear people talk about democratization of something, I tend to reach for my metaphorical gun because it's usually a code word for jamming something down the next retail investors that are not really quite ready to digest. So I actually have great hopes for compute futures and turning compute into some sort of tradable asset class that sounds cool and interesting to be. But I think there's a journey still to make on that and I'd worry about what happens along the way as well. And something like a commercial real estate building, yeah, it can be risky, but like, you know, a building is generally going to hold its value and generally appreciate it over time. So like a loan to value of 50%. So, so you know, you lend 50% of what the property is worth is like, you know, pretty, pretty appropriate. And you're lending to pipelines of oil infrastructure. Like these things, these are things we understand. And for something like compute, yes, the market right now is super hot. And you know, Google is buying compute from SpaceX for a super, super high amount of money. And on the depreciation argument, like the Michael Burry argument, basically every single data point of the past nine months has has not supported the Michael Burry depreciation point. Like depreciate, like, you know, Corey just reported and they had, you know, like 60-year-old chips that they're going to lease out to 2029 at favorable rates. But, but just because Michael Burry's been wrong, doesn't mean that like there's going to be a glut at some time and that lending a trillion dollars against this thing is a good idea. Well, fundamentally, it's a lending decision if you're lending to all of it. I mean, the compute on the chips, the duty generate, there is like, there is a half-life to how long you can keep them. And you know, for example, with SpaceX putting up in space, like how are you going to do maintenance, how are you going to replace chips of them out. But I would say that, look, you know, finance lending officers, like they mess this up all the time, but really speaking, that's what markets are really good at. That can be priced as long as they say no in risk. And then, you know, this is very much a known risk. People can price it in. People can adjust and sometimes they'll make a mistake and, you know, look at their faces ripped off and other people will make money. But that's the way of markets. It's kind of what makes this system so dynamic. So, you know, I'd be worried about the share amount of money going in there and some of the return expectations and this kind of sense of a fomo that seems to be everywhere these days. But that doesn't mean that sort of the end destination isn't the right one. It's just, you know, how much money we lose along the way and who loses it and when. Robin, in your book, you've been doing a lot of work on, I mean, close to a millennia of reading of financial history. I'm curious about the trends and patterns you've noticed about the following question, pricing power. Whenever a new industry emerges, there often is tremendous pricing power as there is in AI and seven doctors right now. Throughout your many, many centuries of reading of history, what tends to happen to that pricing power? It tends to erode. There are so many examples of this. I do worry, for example, right now, Nvidia is the the picks and the shovels distributed to the entire AI revolution. But it has obviously, it depends on its own supply chain. And I do wonder about the assumption that nobody else can create GPUs at scale and quality of an Nvidia ever. Because right now we're pricing that in and pricing power tends not to last forever. It's just again, in a catalyst system, people respond to incentives and kind of monopolist like pricing power tends to not last very long. Sometimes it can last for a few years. But it never lasts forever as far as I know. What's the most extreme debt cycle that you studied in the book? And how extreme is it compared to what we have right now and what what is almost guaranteed to happen over the next 18 months? The GFC, lead up to the GFC, because it was kind of the culmination of a debt bubble in every part of the world and in every sector. Sometimes it's governments, sometimes it's companies, sometimes it's households. In this case, actually governments weren't for the most part loving that much up. They were doing a little bit, but it wasn't too bad. But it was pretty much everywhere. Everybody thinks that our banks were uniquely terrible or our politicians or our government was uniquely factors. But in reality, it was a global phenomenon and the scale of it was just kind of wild. And also one of the reason when bonds and debt becomes particularly dangerous is when essentially it's been so long since a previous crisis that you treat it as money and money like. I mean, it's kind of one of the USPs, the ultimate selling points of bonds originally was that it was kind of a, you could use it as collateral, as money for certain things. It was kind of because it's yeah, government bonds, you quite often. And then over time, people started using high grade corporate bonds like IBM or Microsoft, very solid. You know, you can use that as collateral for loans. But then of course, you know, in the 2000s, people started using the As Back Securities and initially, those were super solid as well. And eventually, you know, we take things too far and you know, they were not the equivalent to money. In fact, you can trade them and some of them were close to worthless. And that I think is what really transforms almost like a a humdrum market downturn or an economic recession into something nasty, like really bad is not when you invest in something that's risky and it blows up in your face. That's fine. That's just risking reward there. They're part of me. If I invest in junk bonds, look, if they break bad, if they default, you know, I can't complain about that. Maybe I did something stupid, maybe they can't be did something stupid. That's fine. Is when you invest in something you think is super safe or you're based your entire kind of investment strategy or the business model of the bank around something that you thought was super safe proved not to be so. And that's what happened I think in 2008. It wasn't just the scale of the debt bubble. It was how people treated it. That's what transformed it into such a horrific financial disaster. But it probably isn't my favorite crisis because there are so many to choose from, like really demented ones. We'll get into some some demented ones. So a principle you're saying is basically financial crises are caused not by perceived risky assets, but by assets that are perceived to be safe, but that are risky. You mentioned junk bonds now, the more polite term, of course, is high yield. And it's funny. Obviously, like the real action of risky credit lending was junk bonds when it was invented in the 1980s. But now, like all of that risky lending has a lot of it has migrated from the high yield bond market to the private credit market. So the high yield bond market is, you know, so-called safe relative to the private credit market. I'm sure the private credit people would disagree. What do you make of the rise of the private credit asset class? And what have you made of the the jitters in the market? And I'm curious to what degree do you think they are real versus just just headlines and not much substance to them? Oh, they're real. I've been a borderline obsessed with private credit for a long time. And you know, I've had many arguments with people in industry and the nuance, I think it's a fantastic asset class. I think it's fantastic idea. I hope it brings grows and grows because I actually think it does the risk the financial system. That's not just marketing from the executives in the industry. I think it's great if we take basically these bundles of risks, which is what every loan constitutes. And That is in the investment ecosystem, like in the non-bank system. I think that's a great thing. But as we know, whenever people get overoptimistic, people do dumb shit. People invest, have invested way too much money in private credit based on very backward looking numbers and the illusion of safety. Or just frankly, the lack of volatility, which is just an artifice because of the lack of market accounting. So yeah, high yield, frankly, does, I mean, it's not safe. But it's far more solid, I'd say now, than it ever has been. I mean, the ratings is an obvious way to look at it. Like over half the market is double B now. But just generally the quality, even beyond ratings, I think is far more solid and it throws off cash. It's the technical's been great. And private credit has picked up all the dicey stuff. And I think that's great. That's what it should be. But that does mean there's been dicey stuff happening there. I mean, for me, the real wake up moment was when I was still in the United States. And I started getting cold calls and offers for private credit lines. Me, I'm as a journalist. I mean, that's just astonishing, right? I mean, nobody should lend any money to any journalist ever. You owe to the one. And you money, not for you to be an investor, really. People who offer me turn loans, you need 20, 30,000, million dollars working capital, 33, 4 percentage points above line, but I mean, incredible space. I mean, I didn't actually take them up on it. But I just thought when we're getting to that kind of spray and pray kind of approach to origination, there's so much money flooding into private credit. And it's a very kind of, how do you find the boroughs? How do you find high quality boroughs? Well, actually in the end, you don't need to find high quality boroughs. You just need to find boroughs to take the money so you can earn fees on it. It's very similar to what we saw in 2008, not in scale, of course, but the idea that you just wanted to make mortgages. Because that's how you got paid. You got paid by sourcing mortgages and making them. And then hopefully the risk is worn by the next guy. So I think in private credit, too much money flooded in too quickly, it has been deployed. A lot of it still drive, it hasn't been deployed. But it was in some cases deployed poorly. And there is a default cycle that is probably going to be far worse than what the backward looking numbers look like. Private credit looks great if you look at the historical data because frankly, you're not looking at the market day then. Now it's just a very different market. But that's again, it's part and parcel of finance. We want these things that you want cycles. You want ups and downs. You want people to learn their lessons and they will. And hopefully at some point, private credit will thus itself off learn from this. In the same way that the securitization has and come up with a better mass trap afterwards. And that is actually a good thing that will stick around for a long time. What is the issue with the mass trap? What and what could be better about the mass trap in private credit? It's the liquidity, I guess, and the leverage. So I mean, two or three things that will blow up anybody. I think I do think you can make a case that private credit could be sold to retail investors. But it has to be done exceptionally carefully. And I don't believe in semi-liquid offerings. If you're going to invest in an illiquid asset class that touts liquidity as one of its main selling points, do not do it even in a semi-liquid format. If you invest in loans with a five-year tenor, then you should be locked up for five years. Because retail investors, we know whatever they say, whatever retail investors can be like people like me or people are worth quite a few million or even billion. But people pull their money out when they're afraid. And these structures aren't built for that. So I hope more credit migrates from the banking system and into the non-bank financial system. But the non-bank financial system, private credit firms, bond funds, and so on, lock up investor money for a bit longer. I don't think-- I mean, we've built an entire financial system around the idea that one-day liquidity is some sort of God-given human right. And it isn't. And it shouldn't be. It's actually dangerous. I think even mutual funds should have-- my person who you should have longer or lock up, you should not be able to pull your money out daily. Because it actually leads to sub-optimal outcomes for both you, the investor, and the fund manager. Because they have to make decisions knowing that money can go in and out in one day, given day. And private credit, that's particularly acute. So a better master app. There are many small little fiddles. I would prefer investment vehicles that invest in highly-level companies not be levered themselves. So BDC-- Zero to zero leverage. Yeah, so zero leverage, ideally. I mean, again, term leverage. If a BDC bought a sales attendee a bond and invests in some similar maturity assets, that's not ideal, but it's fine. For the public BDCs that you have done a little bit of research, and a lot of it is term debt. But BDCs is just one more transparent slice of the private credit industry. But quite a lot of institutional investors that put money into private credit, as the returns started falling, because there was capital fiddling gushing in, and they had certain return expectations, they lever up their investments in these funds. And again, done judiciously, done carefully with no recourse. Maybe that's smart, but it makes me feel uncomfortable. When you basically kind of lever up an investment in a highly-levard vehicle anyway. So that's on the institutional side. I hope nobody's borrowing money from the brokerage and yellowing into BDCs, but teach the road. And also, there's a reflexive dynamic you referenced of that when money floods into an asset class, it makes returns look really good. So the private credit loans that were made in 2018, a ton of money flooded into 2022 to refinance those loans. So defaults were very close to zero. So even if on a fundamental basis, nothing changes, defaults will likely be higher as inflows go down, which they look like they are going to. I mean, that's very apparent in the equity market, right? That inflows will encourage-- will push the asset classes up. That in BDCs, I could say, in private credit, there's a different nuance. It's not like the loan value will suddenly go to the moon suddenly, because there's more money going in. But yes, it will give the private credit fund manager a far more flexibility in how they manage humps along the road, but only to a certain extent. There's one other reason why we've seen the increase in payment and kind is because some of these companies-- like payment and kind is a completely viable and acceptable and important tool. In many cases, it's the right one to use for companies growing very quickly, but don't want to send cash out that all right then. But I think it's unambiguous that lots of private credit funds have been using pick as a way of deferring the pain, essentially. The danger is, of course, a lot of these companies-- and this is where, for example, the default cycle comes in. It's not just the fact that the defaults have been kept probably artificially low because of the money coming in to the market, but also the recovery rates are somewhat, I'd say, the essential rates. So typically, let's say in a high yield bond, you might get 70, 80 cents on the dollar. Depends on where you're on the cap structure, of course. But people have penciled in, I suspect, unrealistic recovery rates when a lot of these companies are not going to have any recoveries whatsoever. Let's say if they're in the software industry, where there are no plants and factories and roads and trucks. If the company isn't good, it blows up. And there's nothing there for you as a creditor. So it's going to be fascinating to watch. So I tend to be on private credit stepping back. I tend to be on those guys that I think it's going to be a bad default cycle. It started already, but it's getting masked. But it's not going to be catastrophic. And the asset class deserves to survive and thrive once more, once it's been through a few of these. Definitely. And in a crisis, I think some of these public BDCs are probably going to go to 30 cents or 40 cents of net asset value. And for investors with the stomach, there could be opportunity. Yeah, completely. I mean, buying dollars for pennies is a classic way of making a killing. Problem is when you time it, of course, and when the BDCs go further. Because people always think something can fall and can't fall any further. It always can, unfortunately. But I'm not yoloing it to BDCs. Go that way. Robin, everything we've talked about, the off balance sheet, the hyper scalers, Nvidia, very murky, unclear what's going to look like private credit. What themes are present in there that are present throughout the history of the bond market and in debt that you wrote about in your book? Well, in a fabulous set, I talked a little about how, you know, we associate bonds with safety. And quite often that is true. But sometimes that safety can lel people into a false sense of safety, and they do stupid stuff. And also bonds are just as-- maybe not just as-- but are also susceptible to these kinds of bouts and mania that we see in these stock market most obviously. So whenever a transformative new technology comes, that typically manifests itself in both the stock and the bond market. And sometimes the most dangerous development happens in the bond market. A classic case were the canals and banks of the United States in the early 1819th century. So after independence, the US was rebuilding itself, building us canals, all these states were borrowing money for banks. New York famously started with the area canal, which was just a transformer. It was like the Apollo program or the era and it was a huge success and they sold lots of bonds and both the investors and the state made a killing after it. So that encouraged a double bond issues bubble that ended up half the United States being a default, like the individual states, all bankrupt. And that was quite a nasty crisis that took some time to do. So the state government, state governments that built the canals and they were the borrowers. Yeah, typically. So they looked at what New York had done with the area canal and then borrowed a lot of money on their own balance sheets because obviously it had very little debt because the United States as a federal government had assumed all the post-revolutioning debts. They sold lots of bonds to investors in Britain and the Netherlands and Italy and France and Germany and some of the United States and they started banks, they built canals, they started gingerly to industrialize. But they just borrowed too much money. There's actually a great scene in Christmas Carol by Charles Dickens where Ebene's a Scrooge is not unfortunately in the Muppets version, which was my favorite. I watch it with my kids every Christmas, but where Ebene's a Scrooge has a nightmare and he wakes up in a cold sweat because he's had a nightmare that all his securities have been transformed into United States securities, which was Dickens' joke about how US bonds had then by then all been become worthless. Half the states pretty much had all defaulted and some of them never pay back the bets ever. So at the time this is in the 1840s, the US was synonymous with Argentina today, like a country that just defaults all the time. But those canals were valuable. Most of the states duss of them sounds off and we're going to have quite that violent spate of state or municipal defaults in the United States since then. Same thing in the 19th century, late 19th century with the railway mania. That was just massive. If you talk about AI data centers today, that's a few trillion dollars. But the equivalent, if you scale it, the size of the US economy in the 1870s and the 1890s and 1890s and so on, to the present day, we're talking it's the equivalent railways issued the equivalent around ten trillion dollars of bonds. It was the biggest cap explosion in history. And a lot of those railways went bust and investors, quite often they get in England and in the Netherlands and France and Germany and Spain and Denmark, they lost their shirts. But the railways were still there. And that literally, physically knapped, knitted together in the United States and kind of transformed the economy. Which goes to show that these manias look the very painful after the 1871 financial crash when lots of railways went bankrupt. It caused a collapse of a bank called J. Cook, which was kind of, it was the equivalent of J.P. Morgan going bankrupt today. Overnight, it was catastrophic at the time. And it caused what was long called the Great Depression until the actual Great Depression happened. And we now call the downturn in the 1870s, the long depression. But it still transformed the United States because all those railways were still there. And I think it shows manias and financial crisis, although painful, sometimes they're a good thing. That like a weird thing is that the optimal number of financial crisis is arguably not zero. It's painful as they are to live through. That's an interesting argument. Probably. I mean, basically to guarantee that there would be no financial crisis, you'd have to have regulation, speculation basically be banned. And I can see, I can see the definitely the downsides of that. Robin, I understand how someone could get into a mania about a stock. They buy the stock at 100 and it goes to 900 and they get extremely emotionally very excited. But just in terms of, I can't wrap my head around a mania, a credit mania. I understand they exist. But like the idea of earning a sofa plus 4% on a risk of thinking, it just doesn't, you know, it doesn't really get my blood pumping, you know, maybe someone's calling me. No, I mean, sadly, there's never been, oh, they have been mean bombs. But there are any mean bonds around today. I guess maybe TLT is the closest or the levied version of TLT. No, so back in the day, most bonds were actually perpetual bonds. So they were quite, you know, they lasted until the government or sometimes the company paid them back. Governments, especially, should perpetuals. And they were quite often sold at a discount. So they were sold at, let's say, 90 cents on the dollar at an interest rate or four, but then, of course, 90 or 1/9. 90, 90, yeah. Oh, or 60 cents on the dollar or whatever, right? But they were sold at a discount, which is why you could have price appreciation for the bonds as well. And, you know, this is a different era. People didn't have Bloomberg terminals. It was, you know, quite difficult for even some smart bankers to calculate literally what was should be the right price for this bond. So you see bonds trade way above bar. We see that in modern day, but like it just shows that the bond could go up and down a lot. So people could get quite excited. And in an era where, you know, what else could you buy to make money? So let's say if you're in a change alley, it's kind of the Wall Street of Britain in the 17th and 18th century, and you're buying a bond for a newly independent Latin American country. Well, you might be buying, let's say, a Brazilian bond, this new, fantastical country. You've never heard of called Brazil, but the banks are saying it's fantastically full of potential. You're buying that at, let's say, 50 cents on the dollar. And then you're also getting the coupon. Maybe you're also getting the equivalent of 10 cents a dollar on interest all the time. So you're getting that plus the price keeps going up because everybody else is discovering this new country called Brazil. So that's why you can get wrapped into it. I mean, in the 19th century, there was a famous fraudster called Greg and McGregor that literally invented an entire country so he could sell a bond. And he just took the money in random France. But people didn't know better than that. Fraud is the business that has the highest profit margin. Yes, very much so. If you can get away with it, Greg and McGregor made that like a bandit. But to be fair, his efforts, there are frauds and then there are frauds. This guy invented an entire country. He invented a capital, a coat of arms, an entire system of government, geography, and maps made, he had songs made. He just basically invented an entire country out of cloth and managed to trick hundreds of people to literally move to this country and also invest in the country's bonds. But they ended up at something called actually the mosquito coast. Most of them died there, sadly. So quite tragic, but the joke is that the difference between tragedy and comedy is time. So hopefully after 200 years, we can laugh at the debacle of poire and Gregor McGregor. Yeah, I don't think I want to go to the mosquito coast. No, it's not nice. It's somewhere in Guatemala now. But that's where he invented this country of gold and honey everywhere, apparently. Robin, one thing you mentioned that how many of the canal bonds went bad, how many of the railroad bonds went bad. But ultimately, like, okay, the old man and the family made the loan. And eventually the grandson was able to like recover 70 cents on the dollar because he held it. And we think that just people holding the bonds like in their closet drawer and then eventually being paid back, that is much more stable than like a highly sophisticated financial institution, holding these securities on leverage, which is what BDCs are basically, even though it is a lot of it is term debt. Yeah. I mean, the reason why we always call like financial crisis back in the day used to be called panics because usually it was banks that held these loans, these bonds. And even though bond was, you know, it's technically designed, it's supposed to be tradable quite often when everybody wants to sell, and nobody wants to buy, well, good luck trading it. And there was no deposit insurance. They had to deposit a money. They borrowed money themselves. So that's why, you know, banking crisis and panics, you know, they went into twine for a long time. Now it is different, but yes, sometimes if you buy something unlevered, you know, you can lose money, but you can only lose what you put into it. And that's why leverage is so, so dangerous. And, you know, has shown that again and again and again in every major and minor market cycle. So early you talked about the great financial crisis 2008 GFC, but you said it wasn't one of your favorites. What is one of your favorites in the book? And why? God, it's like choosing my favorite child. I know. You know, it's very difficult. I mean, I do like Greg and my Greg and Poie, I mean, it's just incredible, right? I mean, 1873, they're the railway mania and crash. It's kind of epic because it was epic in size. It was epic in its casualty. J. Cook was, he was the John Paypoint Morgan before John Paypoint Morgan. He was titan. He was the guy that bankrolled the North's victory in the Civil War. And suddenly he just went bankrupt out of the blue because he'd gone over his skis on transcontinental railway bonds. He decided against his better judgment initially to back one of these big companies and it just soured on him. So because the mix of like the enormous ambational these transcontinental railways, because they weren't just like what they were like a series of Apollo. programs all happening at the same time. And they did genuinely transform the United States into what we know now, no today. You speak kind of a coastal country. It was like orphaned on the eastern coast and the west coast and it went up and down. But suddenly it became a country that changed its access. It was west the east. You could actually travel from California to Maine in a few days at these or at least a week rather than months it would take before. So I think the mix of both the economic impact, the political importance. You know, this really did transform it kind of united the United States physically, properly for the first time. And now how nasty it ended. It was a gigantic financial crisis that we don't remember that much these days. But you know, it was huge. Almost everywhere. Lots of companies went bankrupt in the United States. It's expressions like hobo came from that era because we're so many homeless people and soldiers unemployed soldiers also after the civil war that lost their employment in the railway lines. So I think that's probably my favorite. But you know, a whole change. A hobo on the railroad tracks. You can't have that if there's no railroads. No, exactly. It kind of seems to me like as speculative as data center build that is once the data center is rebuilt, they are producing revenue now. It seems to me that railroads back then were a little bit more speculative like to actually literally you have to have a guy putting the the wooden tack in and then you know, foot by foot across the entire country. And before the and then it has to be built. But then the train has to be built. You have to market it before the revenue built. Like that does seem to be a greater endeavor than building a data center, which is now very, very difficult and takes time and tons of capital of course. But it seems a little easier. Yeah, I mean, don't forget. I think the difference between railways in Europe and the United States is an interesting one because like in Europe railways connected existing towns like you built a railway from Liverpool to Manchester, for example, or from Berlin to Paris. In the United States, railways built towns. It created entire towns. It created entire states. Bismarck, the city is literally only main name Bismarck as a marketing gimmick for the company that built that railway line, the northern Pacific as a marketing gimmick to appeal to German investors because the chance of Germany at the time was called auto from Bismarck. And you know, these were middle of nowhere. I mean, is you know better than me. I mean, the United States is a vast country. And back there, very little of it was settled. So, you know, it's incredibly hard work. I mean, obviously this is manual. People had to literally hammer down the nail, let it dig out the grow, the rose. You have to keep it smooth as well, right? So it's just a back breaking work. Then there are all the ravines, the mountains, the forests, everything you have to go. And this in middle of nowhere, it was lethal. Like thousands of people died as much as the data center construction is pretty epic today. I'm not aware of some mass casualties in the construction of a data center in New York yet. And then, you know, this was the equivalent of building the pyramids, essentially, very epic, hugely dangerous and incredibly lethal, but transformative in the long run. Yes. And you're using the word epic in the British sense or the way the British people use the word great. Like it doesn't mean that it's a good thing. It just means it's big. Oh, yeah, yeah. No, I mean, I think the railways are good. Pyramids, you know, I'm a lot of slave labor there as well. I mean, in the railways, there was, you know, a lot of it was free workers, but, you know, not always. And they were treated incredibly shabby, especially like lots of workers were imported from China, for example, and basically killed in the thousands. Lots of Irish workers. And, you know, it was, you know, a positive thing in the long run, but, you know, not quite up to modern labor standards, put it that way. But yes, epic in the Titanic country transforming projects that unfortunately do sometimes always have a dark inside as well. So, if a few months ago, I interviewed the Iliacwat Aham had the author of a book of 1873, a few months later, I'm listening to the Microsoft earnings call and CEO Sachin Delas says, you know, we at Microsoft, the executive team, we're reading in 1873. So we're thinking about this. So let's say in a few months, the next Microsoft call, you know, the team, they say we're, we've been reading a fabulous debt epic story of how bonds built the modern world. What are some lessons that you think they should know? The people who are spending hundreds of billions of dollars, borrowing hundreds of billions of dollars, and probably according to the off your balance sheet, lease commitments, it's going to be over a trillion. So, you know, it happens, as you say, what are what are the lessons that they should know? Well, Liakit's book is phenomenal. It's really good. You know, I take, I tackle the railway, mainly, and the US. My book is a bit more US centric, is more global and focused maybe a bit more on Europe and the Grindercracken in Europe, which is spectacular. But I hope people realize that bonds are an incredibly powerful financial technology. It's kind of the, er, financial technology. It's kind of loads 2.0. I mean, there were both, both banks and bonds were born in Renaissance Italy a thousand years ago. But it's only now really that the bond market has, I'd argue, supplanted the banking system as the dominant, kind of credit engine of the global economy. And the reason why actually some of the basic building blocks haven't changed that much over the hundreds of years is because it's incredibly powerful. You know, it's fixing interest so you can calculate things easily and it's tradable. And that gives you, and it's decentralized. It's kind of the original to the OG decentralized finance, because you can sell not just the one or two banks, borough for a couple of a club of banks. You can sell bonds to thousands, even millions of investors indirectly. That's why you can pull individually tiny pieces of savings to one big gutting river. And that's kind of what the hyperscalers are doing. So I hope like a Microsoft, or any of these CEOs and CFOs reading it would realize that actually bonds, you can iterate on the fundamental technology and people are in due, but it still works. And that transparency, the sobriety that comes with doing something through public fixing and markets rather than leases, opaque financing arrangements, private credit loans negotiated off the side. That comes at a cost. That's flexibility. That's great. But if you have big projects, like the railways, the most valuable thing to do is to dis-sell bonds. The bond market is supremely able to handle that and has shown that again and again and again, ranging from you, Napoleonic walls, canals, railways and AI centers today. And I'd much rather that goes into public fixing and markets than stay in the shadows. Why is it in the shadows? And you talk about this flexibility, the private company people say, "Oh, our borrowers love flexibility." I don't even really know what that actually means. I agree. Flexibility, this sounds great. You want flexibility? Yes, definitely. You want freedom. Yeah, definitely. But in practice, it comes at a cost. Broadly speaking, if Microsoft wants to, let's say, sell 10 billion dollars to build a new data center, what is the cheapest way for a large mainstream public company to do so? Is it to sell to 10 private credit firms, maybe a handful of credit firms to do it without rating doing it quickly? We can do it opportunistically that way, yeah, sure. But you're definitely going to pay a lot less to borrow by just issuing a plain vanilla for general purposes corporate bond. And the reason why they aren't doing that is because they want to maybe obscure how these companies have become, kind of been going from being lean mean cash machines into being capex hungry utilities. And maybe that pays off. I mean, the returns to some of these data centers are pretty phenomenal right now. But they're not doing it for purely financial reasons. And I think flexibility is probably a convenient excuse to hide, you know, but this is more about making them seem healthier than they really are. Yeah, I think one thing that like Coruiva, you know, Neoclid is doing is delayed draw term loan. So, oh, you don't have to actually borrow the money until you need it. So it's like a credit line. Yeah, I mean, the real king of debt, I would say, is Coruiva that there's just reported. I've never seen a bigger gap between EBITDA and net income loss. It is quite extreme and it's a little real way, real way like what do you make of just, I mean, Coruiva is massive, massive borrowings. Yes, it's heavily indebted. There is in every cycle one or two, or maybe a handful of ad lies. Look, I'm not worried about like Facebook and an alphabet or Amazon going bust. Yeah. You know, they, if they take all these liabilities on balance sheet, like it's not great for investors. I worry about the financial hangover, but like it is fundamentally different in that this is not the dot com error. These companies do have solid real products and they're just shoveling all that [BLANK_AUDIO] money and a bit extra into AI. And even if AI somehow goes to zero, nothing happens, I think it's manageable, it's okay. But there will be of course in any cycle a few extreme outliers that just like borrowed way too much money, did too many dumb things. We're kind of too invested in this or didn't have any other products or fullbacks, essentially. People are still gonna be going on YouTube, even if Google wastes a few hundred billion dollars on AI data centers. And that's gonna save them with a core weave or some of these other companies. Do they have that backup? I mean, maybe crypto mining, I don't know, but I'd worry about those, essentially. More than I do, the big hyperscale is. The refue of the hyperscale is that look a little bit dice here, but broadly speaking, they're probably, probably okay. - Yeah, you perhaps referring to Oracle, definitely the most indebted relative to its revenue. - Yeah, Oracle, in the hyperscale in terms of the rest and then Oracle, Oracle is not like a tiny bad company or anything like that, but it's just, it's not, doesn't have nearly the financial and corporate heft of the others. And it's clearly the weakest of the litter. - How long do you think this CapEx bubble burst? I think we all know that this is not gonna be infinite, she's gonna go to the scribe, there will be a bust, a correction like, do you think it's gonna be soon or in a few years? - I mean, obviously I have no clue. - You were signing the checks or no? - Yeah, it's like you say, trees don't grow to the sky. CapEx bubbles can continue for a long time until it becomes very obviously unmanageable. Right now, there are a lot of people in that industry and this is maybe both what worries me, but also can keep the show going for a lot longer. There are a lot of people now with a vested interest in keeping this going. Like that AI industry has become remarkably incestuous with just an incredible tangle of financing agreements, co-investments, supplier and customer relationships that kind of bind it all together, but also can kind of keep things going for a long time. They all have an interest in kind of managing this. And that makes me worried about what the Daniel Moore funny looks like, but it also means it can continue for a while longer. And then it, I guess, the chicken art story just comes down to the technology that to what extent AI genuinely is transformative, is it glorified chat bots or is it gonna cure cancer? Is it put people in Mars? And where we fall on that spectrum is probably what's going to the side, just how much those investments pay off. But the scale is pretty astonishing now. - Okay, so as someone who is a journalist and is talking to people all the time and is very well informed, what are you hearing about how the revenue is at OpenAI and Anthropic? I think that literally over half of what matters is that topic. Are you hearing good things or bad things or medium things? So I haven't spoken to anybody directly about the revenues at OpenAI and Anthropic. So I only know what my colleagues have reported in the paper. I think it's broadly understood that Anthropic looks financially a lot healthier than OpenAI. And that's one of the reasons why they're probably going a little bit more aggressively for an IPO now. But I'd question with private companies how real sometimes revenue is and not like fending numbers. But just like, I mean, if you just look at the net income of some of the high-period, the public companies now, look at how much is actually classified as other income, which is essentially evaluations of other investments. - Yes. - A lot of the money that Microsoft and Google and Amazon have made are basically marking up the value of their stakes in Anthropic, OpenAI and SpaceX and other companies. If you take that away, then some of those earnings look ellipse a little bit not bad, but definitely not as good. - Yes. - And with like OpenAI and revenue, how much of that is actually cash? Like free cash by rules, everything. And you know, until I've seen the accounts, I don't know, even when we've seen the accounts, sometimes it's hard to know. But I can tell you, I'm really looking forward to the S1s for OpenAI and Anthropic. That's gonna be a popcorn moment for me. - Definitely Robin, how durable do you think the credit-raising agencies are? So Moody's S&P Fitch, the former two which are publicly traded companies? And up until recently, we're viewed by, you know, the compound bros, the hedge funds as these extremely durable businesses, the evaluations have fallen a lot because OAI could displace them. I just wonder you having spent so much time researching and writing this book, just your insight on the value of lack thereof, like is just a sticker that really isn't that valuable over time? Like do you think in 2070, when there's a giant credit cycle, are people gonna be like, oh my God, I need my Moody's rating before I buy it? - So that's a great question actually. And because I spent a lot of time depressing, I'm writing a book thinking about this. There's an entire chapter just on the history of the rating agencies. And it is kind of weird, like how many cow pies have stepped in over the years and how they endure. And I think that's the secret to answering your questions. That yes, I don't know about 2070, that's a long way off. But I think people will be shocked at the resiliency of their business model. Because people don't actually pay S&P and Moody's and fit for their credit work. It's not like if you're the CIO of PIMCO and you sit there, well, I'm gonna look at what Moody says about this bond. I mean, you care about the rating ratings, the rating, but for investment mandate reasons. But the credit work you do yourself, and that's clearly like with AI, like a lot of that is happening. A lot of that happen before the current excitement about large language models. Like I've been covering AI for, I mean, before it was cool, you know, it's a natural language processing and machine learning. I used to cover quants all the time. And it was fascinating to see how people were learning to automate the ripping apart of a credit perspective and putting their end-year-on models and then automating all that. And this was 10 years ago. But the rating matters not as because of like you want Moody's to tell you what to think of this investment because they're famous, they don't try to give investment advice. So they just give a probability of default. The Moody's rating, I mean, the credit rating agency ratings are a lot better than people think. Like there are outliers when people say, "Well, this company was rated a half a year ago and went bust." But they are highlighted because they're actually pretty rare. Broadly speaking, the letter-based model as a signifier of, the chart of default is actually pretty accurate. Like even the financial crisis, all those shoddy, securities, monstrosities that were given AAA ratings, well actually, even quite a lot of the AAA trances ended up being money good. They traded down maybe to $20 on the dollar. But also those actually were pretty okay. And AAA companies, AAA governments, there aren't that many of them around these days, but it tends to work. And I think the reason why the rating agency's actually in jail will continue to in jail is because this phrase that wants to come across somebody in the industry use, but you've talked about the need for a language of credit. Like we need shorthand, we're humans. We're in both very smart and very stupid at the same time. And we like these shorthands. We like rules of thumb. We like simplistic models. And it's just nice to have something at this is a single B. That's a AA, that's a triple C. And the reason why the rating agency, despite having very different, they talk up all their difference, they still have basically the same letters as well. And that's because it gives us a cohesive language to talk about credit. And sometimes it's wrong, like all language can be. All models don't work. You know, it's like, there's a famous British satirist who said that all models are wrong, but some are useful. The rating agency models are not as wrong as people think, and it's still pretty useful. And as much as you can automate all sorts of cool shit with AI, I think that will injure. And the craving for just a brand, a name, like Amoudis, or an S&P, is going to stay there. And in fact, in places like the United States is enshrined in law. Despite all the controversy around the financial crisis, the nationally recognized rating agency designation is still there. It's still in the books. And that's why it's one of the most stubborn oligopolis in the history of business, probably. And if you're an insurance company buying something, you have to buy something. A certain percentage of your assets have to be investment grade. Even if the rating is totally wrong. And also, I think of the Charlie Munger anecdot about how he was in World War II, and I think he was tracking the weather. And he also was saying, so he was superior. You're like, hey, my forecasts are really bad. I shouldn't, you shouldn't be asking me for these forecasts. And the military people said, we need these forecasts for our military planning. So even though the forecasts are wrong, we still need them. We still need them. We still need something like that. Yeah, I mean, it's like so many things have fined that said, look, wait, I mean, in the world, really, they look weird or dumb or dangerous. It's quite often like you still come to this kind of, well, if it didn't exist, we'd have to invent it. Ratings is weird and dumb as they sometimes can seem. And if they didn't exist, we'd have to reinvent them all over again. The insurance issue is quite interesting, drawing back to private credit. There, of course, there is always a danger of shopping around for the greatest rating. And broadly speaking, the big three have done a pretty good job over time, not always, but over time, to as much as, you know, they could be a little bit more commercial, let's say, certainly before the financial crisis. Broadly speaking, not letting the kind of standards arose too comically far. But clearly there, I do worry about so-called private label credits that insurance companies are getting on private credit loans and saying their investment grade when really the reality is, I suspect a lot, if you. What does an investment grade private loan really, really mean? What it means you can literally have something you can put internally in your model saying, oh, this, this, uh, by that, this direct loan to widget maker XYZ or Acne software is a single-a credit. And therefore, the amount of capital, oh, how much you have to plug in your models of risk of default on that is lower. And, ergo, you know, your return to your investment returns look better. I think most of the big serious insurance companies are very aware of this issue and are aware of it. And if they do use private label, a label credit ratings, they take it with a pinch of salt and they know the issues, they'll be dragons maybe. But there are also a lot of private, insurance companies are owned by private equity. Yes. And those private equity insurers, companies sometimes own also some of these private label companies. And I do worry about that. They, the, the tangled private capital ecosystem of private credit, private equity, private ratings and private equity insurance companies. I think that is something that could at some point bear watching as well. Have you looked into these things called funding agreement backed notes? No, but it sounds amazing. Tell me more. It is basically when an insurance company, probably a like a life insurance company, issues debt, but the debt that they're issuing, they can call it a policy, a life insurance policy. Yeah. Yes. No, actually, I do remember reading about this and I was delighted to learn about it. It shows that there is nothing more creative on this planet as a financial engineer who wants to optimize risk reward and game the system to do so. Is it, you know, one of the dangers of my job, journalism and your job. And I guess everybody's job is that we look very much backwards. It's always cooler to see them pessimistic and call this is the next big thing and this is the next CDO or whatever. And, you know, luckily those kind of crashes like 2008, they don't happen very often. I actually have like literally on in front of my desk, I have a little cartoon that shows, it's from 2008 that shows like somebody going on the airline and the captain comes across the town I was saying, oh, you know, there's a bit of turbulence buckle up and there's a passenger scream, oh my god, we're all going to die. And the passenger next to him says, look, it's a financial journalist don't worry, he's just panicking. And I just have it there in front of my desk to remind myself and not always thinking everything is in the next 2008, not everything is a big crisis. So these these notes, look, I think it's the optics are bad, the fundamentals are probably not great. Is it going to be a disaster? Probably not because you know, yeah, it might be bad, but you know, we can't have reward without risk, you can't make money without losing money, that's kind of what keeps the train on the roads and you know, people sometimes create stupid things, invent new things, game the rules and they get their faces ripped off, it blows up in the next downturn. But the good inventions they survive and they evolve and they thrive, I'm a securitization is one of them. Securitization was a dirty word, not that long ago, like I'm just a few years ago, and now we're looking even the Europeans are talking about it like, oh my god, we wish we had America's mortgage back security market on my god, that would be amazing. And I remember when even American politicians were bad mouthing it, stupid things happening to 2008, but we learn from it. And you know, at some point we'll realize what was really stupid that we're doing right now, what was actually just fine, and what was just moderately stupid. And then I get to write a book about it a few years after that. So you know, it's all it's all gravy for me as a financial journalist. People should buy the book, a fabulous debt, the epic story of how bonds built the modern world, buy it for yourself, buy it for your kid, buy it for your parents, grandparents. Thanks so much. Thanks for having me on Jagged.