Coreweave for instance, now has its CDS trade around 600bp, which is a 1/3 rise in 2 months, which implies that the probability of a default in 5 years is 40% at a 40 cent recovery rate.
That makes Coreweave's credit rating the equivalent of CCC-, which aint good.
Yeah, and then the Canadian government handed hundreds of millions to the kids at Cohere who have now gone spent it on Coreweave. When it was all announced I was very very vocal that using an inexperienced startup for the sovereign compute capabilities seemed a very poor choice. I'm so curious to see how this all plays out.
I think we know how it plays out. In a couple of years, someone is going to have to swoop in and save CoreWeave’s customers and consultants will be lined up for that “transformation”.
> When it was all announced I was very very vocal that using an inexperienced startup for the sovereign compute capabilities seemed a very poor choice.
Cohere raised from Nvidia. Cohere spends on Coreweave. Coreweave raised from Nvidia and buys Nvidia chips.
Cohere is doing a lot of enterprise AI business, and a lot of business directly with the federal government. They are also not juiced up in these financial games that OpenAI or Oracle are playing.
Additionally, Cohere is no less “kids” than Anthropic or OpenAI. Aidan was literally one of the co-authors of “Attention is all you need”.
Yes, the price of Coreweave default swaps has jumped 53% since October. In the eyes of the bond markets they’re basically toast… a ticking debt bomb waiting to implode.
Sorry if this is basic, but do you mind explaining the logic here for those who aren’t familiar? Also where are you getting this data? Thanks in advance.
You can buy insurance on a bond defaulting, it’s called a credit default swap. One party sells a credit default swap and another party buys the credit default swap.
The price of a credit default swap is essentially the probability that the borrower defaults on its bonds (misses an interest payment) which would mean the person who sold the credit default swap would owe money to the holder of the credit default swap.
The price of a credit default swap increasing means the market is pricing in a higher probability of Coreweave defaulting on a bond. Oracle credit default swaps have also increased in price lately.
Coreweave has taken on a ton of debt to pay for everything they’re building. Investors can make money by lending Coreweave money and charging interest (aka a bond).
Separately, investors can buy a derivative product that is a bet that Coreweave won’t be able to pay this money back. This is a called a “credit default swap.” If Coreweave starts missing payments or can’t pay back the loan this instrument pays out.
The price of the instrument is linked to the likelihood that Coreweave won’t be able to repay the money. Given growing questions around their financial business model the price of these derivatives has been rocketing up over the last few months. In plain speak this means the market increasingly thinks Coreweave won’t be able to repay these loans.
Thats mirroring broader Wall Street sentiment these last few months that the math isn’t adding up on AI and all the spend committed isn’t mapping out against money likely to be available to pay for all that. Investors are increasingly making plays for the AI bubble popping and the price of these credit default swaps shooting up is one metric indicative of that downturn positioning.
The data on this is available in various financial data platforms and has been written about by financial news outlets.
It’s not good, and is a sign the market is getting increasingly bearish on the future of AI from a business standpoint. That doesn’t mean the tech is bad, but these are signs Wall Street is saying the math doesn’t add up here and thus there’s storms building on the horizon.
Are they building something useful or did Larry just snag a bunch of GPUs, flip the gpu time for good money, and extrapolate mega exponential growth in his guidance?
TL;DR NVIDIA didn't want to have customers be overly concentrated in the 3 already established cloud providers (GCP/Azure/AWS), so reserved kit for others. Oracle won out for essentially being a distant fourth (if even that? Their accountants make Oracle cloud look much larger than it is).
This is every hopium "Stock in Thing You Don't Like Plummeting" article where it's the tiniest little dip at the top of a peak that makes Everest jealous once you zoom out.
Companies with high morality, do those even exist? Which one of the big tech companies do you expect to work towards benefiting humanity instead of focusing on turning a profit by any means?
I know plenty of small tech companies that really do care about their customers top to bottom.
There's no magic way for anyone to validate that claim because if I named them, nobody would know, there's no way to really know these things anyway. But they exist.
That's the point of having a government for the people by the people.
But when you let billionaires take over that too then the people have zero protections from exploitation.
If they cared they would invest in America paying more taxes, ensuring citizens are educated and capable of leading their companies versus offshoring and even competing with them.
They don't want that and prefer their monopolies instead.
I've never been a fan of Oracle to begin with given my love for open source but after Larry Ellison is out there preaching about a surveillance state America he became a "person I can ignore" to a "person a despise".
It just seems so obvious that all of these companies are going to unwind and yet I don't know how to avoid being damaged by this in my retirement funds in the S&P 500.
Hopefully all of this happens before Open AI can be flogged to the public in an IPO large enough to get into the S&P 500 -- in which OpenAI then goes to zero
if it's a corporate 401k you can move it to something very conservative and probably protect yourself from the worst of it. I've built up a decent college fund for my boys in a standard issue vanguard brokerage account and one of their SP500 index fund. I'm going to go mostly to cash on Jan1 and wait a year and see what happens. I need that money in 2 years (my oldest will be starting college then) so I don't have a lot of time to recover from a full on crash.
If you aren’t close to retirement you don’t worry about damage, and if you are close to retirement your funds are hopefully already stuffed into munch more conservative funds.
Long term investment strategy assumes and welcomes volatility to maximize returns.
Continuous investment in a 401k means that every bubble burst lowers your cost basis (buying stocks at a “discount” post-burst, lowering your average price paid).
So debt financing (Oracle) vs fund-it-more-on-your-own (other big tech?) vs fund-it-with-equity (startups?)... I guess that makes some kind of sense? Oracle raises 4x the debt of e.g. Google?
Many of the ‘AI data centers’ are being financed with debt; some are being done as joint ventures with companies like Blue Owl Capital (whose stock is also taking a beating).
> I guess that makes some kind of sense? Oracle raises 4x the debt of e.g. Google?
The problem is why is Oracle raising this debt? It's to do the buildout for OpenAI. So Oracle buys GPUs from Nvidia. Nvidia invests in OpenAI. OpenAI then pays Oracle for the GPUs.
The statement here that Nvidia invests in OpenAI is a bit misleading. Nvidia would pay out nothing to OpenAI if OpenAI turns out to be too poor to pay for capacity. So they are not that exposed to the death of OpenAI specifically. They would be more at risk of making too many GPUs to prepare for the deals.
Oracle takes a lot more risk, but in case OpenAI fails to grow quickly, it can still probably find buyers for its capacity in the next 5 years. There are many rich firms that will continue to invest in AI whether or not AI makes money.
They’re saying that Oracle has issued a lot of debt (like $60Bn) to fund their AI/datacenter commitments. Where as other companies, like MSFT, are using the cash in their balance sheet, and startups are using the cash they’ve gotten from investors
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Coreweave for instance, now has its CDS trade around 600bp, which is a 1/3 rise in 2 months, which implies that the probability of a default in 5 years is 40% at a 40 cent recovery rate.
That makes Coreweave's credit rating the equivalent of CCC-, which aint good.
Cohere raised from Nvidia. Cohere spends on Coreweave. Coreweave raised from Nvidia and buys Nvidia chips.
This is why they buy from Coreweave.
I have a lot of opinions on this but curious about yours :)
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Additionally, Cohere is no less “kids” than Anthropic or OpenAI. Aidan was literally one of the co-authors of “Attention is all you need”.
THe annual premium is approx the premium paid to cover the expected loss, so:
spread = (prob_of_default_annual * (1-recovery_rate)
We have a spread of 0.06 and a recovery_rate of 0.4
so the annual probability of default is about 0.10
Now converting that to 5 year we have
prob_of_default5y = 1 - (1-pd_annual)^5
Which gives about 40%.
And if you look at the cds spreads across various bond ratings you'll see they look like
Rating || 5y CDS Spread || 5 yr default prob
BBB 60-120bps 1-3%
BB 150-250bps 5-15%
B 400-700bps 25-34%
CCC 700-1200bps 35-60%
The price of a credit default swap is essentially the probability that the borrower defaults on its bonds (misses an interest payment) which would mean the person who sold the credit default swap would owe money to the holder of the credit default swap.
The price of a credit default swap increasing means the market is pricing in a higher probability of Coreweave defaulting on a bond. Oracle credit default swaps have also increased in price lately.
Separately, investors can buy a derivative product that is a bet that Coreweave won’t be able to pay this money back. This is a called a “credit default swap.” If Coreweave starts missing payments or can’t pay back the loan this instrument pays out.
The price of the instrument is linked to the likelihood that Coreweave won’t be able to repay the money. Given growing questions around their financial business model the price of these derivatives has been rocketing up over the last few months. In plain speak this means the market increasingly thinks Coreweave won’t be able to repay these loans.
Thats mirroring broader Wall Street sentiment these last few months that the math isn’t adding up on AI and all the spend committed isn’t mapping out against money likely to be available to pay for all that. Investors are increasingly making plays for the AI bubble popping and the price of these credit default swaps shooting up is one metric indicative of that downturn positioning.
The data on this is available in various financial data platforms and has been written about by financial news outlets.
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That said, I hope Oracle doesn't survive this transition. We need higher moral companies to usher in the AI era.
I know plenty of small tech companies that really do care about their customers top to bottom.
There's no magic way for anyone to validate that claim because if I named them, nobody would know, there's no way to really know these things anyway. But they exist.
But when you let billionaires take over that too then the people have zero protections from exploitation.
If they cared they would invest in America paying more taxes, ensuring citizens are educated and capable of leading their companies versus offshoring and even competing with them.
They don't want that and prefer their monopolies instead.
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That said, they are the only example I can think of.
I agree that Oracle scrapes the bottom of the moral barrel.
But OpenAI, post-Altman-coup, is right there at the bottom with them.
Not sure that Google, Amazon and Microsoft are that much higher.
Like Google? Microsoft? Meta? Amazon? Those staples of morality?
Or like companies such as OpenAI that just stole industrial amounts of copyright to train their models?
Morality has left this building a long time ago.
Core Scientific (CoreWeave): -19% in one month
Hopefully all of this happens before Open AI can be flogged to the public in an IPO large enough to get into the S&P 500 -- in which OpenAI then goes to zero
Long term investment strategy assumes and welcomes volatility to maximize returns.
Continuous investment in a 401k means that every bubble burst lowers your cost basis (buying stocks at a “discount” post-burst, lowering your average price paid).
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The problem is why is Oracle raising this debt? It's to do the buildout for OpenAI. So Oracle buys GPUs from Nvidia. Nvidia invests in OpenAI. OpenAI then pays Oracle for the GPUs.
i.e. we're going around in circles.
Oracle takes a lot more risk, but in case OpenAI fails to grow quickly, it can still probably find buyers for its capacity in the next 5 years. There are many rich firms that will continue to invest in AI whether or not AI makes money.
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