All In on AI

Bond investors are starting to see the actual cost of building the AI infrastructure in the U.S. in the chart below, you can see the 5 year Credit Default Swaps (CDS) for the Banking sector and the Tech sector. Despite the fact that banks are going through a tough period, with low liquidity levels in the short term market, the perception of risk by bond investors is mostly muted. For the tech sector, however, the fact that organic cash flow can only satisfy half (if at all) of the needs to build and power data centers, combined with aggressive accounting practices when it comes to amortizing and depreciating the technology involved, are pushing CDS higher, which is concerning because you would not think that credit worries could come from hyper scalers at this point. And yet, here we are. The good news is that AI comes within the purview of National Security as the U.S. is competing with China, and the government has already invested in US companies to make sure they remain competitive and well funded. But if that’s the end game, more money printing will be involved. We are all in on AI.

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