A Great New Era is Upon Us
Back in 1970, Ginnie Mae was created to securitize the mortgage industry. Previous to it, mortgages were originated at a local bank and said bank held onto it for decades. Once securitized, it was pooled into an SPV and then sold to an institutional investor. This freed up capital at the banks to make even more loans; therefore creating a vibrant housing market. This of course didn’t mean prices would go up indefinitely, much of that is dependent on the underlying economic realities and as we all know leverage can play a serious role in de-risking investors to the point or insolvency. But the MBS model certainly helped banks and the overall economy, turning illiquid assets liquid and eventually helped intertwine global capital markets.
Now this is about to happen to AI related debt.
Why is this important?
Presently AI related debt or capex is financed by either the hyperscalers themselves, private credit, or NVDA. The problem with this model, similar to the pre Ginnie Mae model, is the debt sits on Blue Owl’s or Apollo’s balance sheets for 5 years, locking in investors who have to read Zerohedge all day long talking about hyperscaler CDS. This is very inconvenient and as we saw last year — it led to redemptions because humans are always scared to lose their fiat. Under the new Jensen plan, kicking off the party with a crisp $500b, Blue Owl can simply sell the paper to a pension fund or perhaps a life insurance company and then recycle those same dollars to finance new AI projects.
At first this is going to expressly benefit NVDA via GPU financing. But like all things on Wall Street, it’ll spread to many different facets of this trade, eventually moving from standardized SPVs to investment grade Compute debt to pooled/tranche ABS to large secondary markets and standardized benchmarks with debt counted in the trillions!
Now I know what some of you are thinking — because you’ve seen The Big Short too many times and you were also beaten like a dog in 2008 and 2009. But you should relax now, for it is the beginning of the GREASINGS OF THE WHEELS not the end. Without a doubt, some of this will backfire spectacularly and cast losses across many a balance sheet in the future. But before that happens, many will get rich and the speed of the AI capex rollout will increase to levels not thought possible.
Back to the serious topic at hand — winning the AI race.
I hope you understand we are not building the matrix so that some morons can create videos of Abraham Lincoln rapping in Korean or help incompetent programmers do their jobs better. This race is about building 1 billion mosquito drones armed with explosives that can be sent to a country to kill everyone in it. So whenever you read or hear about a Chinese model being able to operate on a few D batteries and without datacenters, know that what they’re really trying to do is use the useful idiot bears in America to cast doubt here and derail our projects so that they can win and eventually send those mosquitoes to your house.
The race is about global hegemony and it is a national security priority, so important I would not be surprised to learn one day that said AI debt would enjoy tacit backing by the US govt.
What this means for us investors is pretty clear to me, the clearest I’ve seen to date. Once enacted, this eliminates the private credit concerns and minimizes the capex fud. All of the fears will not abate entirely until the hyperscalers prove massive ROI success, a feat that is probably a year or two away.
Firms like APO, BX, KKR, MS, GS and others stand to make a mint off the fees they generate in the coming years and the chief obstacle, once again, lies in material procurement, power, and logistics.
How this is translated in the stock market is contingent upon us not heading into a full blown ground invasion of Iran, which would spike oil and rates to the point it would demand a severe market correction. Barring that, it seems to me, and many others of my ilk, that we are quite possibly on the cusp of significant market melt up — underwritten by Jensen’s brilliant idea to scale up the borrowing and materially pull ahead of China, placing a datacenter in every American hamlet — eventually arming humanoids with the skills to become construction workers used to build them in space — all the while we sit back at home watching our portfolios hit fresh recourd highs.
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