# AI Infrastructure Mismatch and Market Volatility

**Podcast:** Prof G Markets
**Published:** 2026-10-21

## Transcript

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Money market matters.
If money is evil, then that building is hell.
Welcome to Prof G Markets.
I'm Ed Elson.
It is October 21st.
Let's check in on yesterday's Market Vitals.
The S&P 500 and the Dow climbed.
The Nasdaq was flat as chipmakers fell again.
Brent crude dipped just below $109 per barrel.
The yield on 10-year treasuries decreased.
And Netflix shares fell in after-hours trading following earnings that showed the slowest revenue growth in three years.
Okay, what else is happening?
Amazon is spending $220 billion this year to build AI.
However, some of what it bought may be sitting unused.
According to new reporting from Business Insider, despite the fact that Amazon is spending billions of dollars a month on NVIDIA server racks and GPUs, it can't actually immediately install them in their data centers.
Because these chips are so scarce, Amazon and other companies are forced to buy more than they currently have the capacity to use, meaning that some of these racks are currently sitting inside of a warehouse.
An Amazon spokesperson said that this is routine and, quote, best business practice, but others fear that this is proof that the hyperscalers have overestimated AI demand.
Our next guest is one of those people.
Last month, he wrote an investigative piece estimating that roughly half of AI chips in America are, quote, sitting in warehouses.
He believes that hyperscalers significantly overbought GPUs relative to data center construction.
And while this news doesn't necessarily prove fully that he's right, it certainly suggests that he might be.
So here to discuss what is happening in AI, what is the meaning of these chips in warehouses, we're speaking with Ed Zittron.
CEO of Easy Primary Research and author of the Where's Your Ed At newsletter.
Ed, thank you for joining us on the show.
I want to start with a report that you wrote last month that you titled, Where Are All the AI Chips?
And you asked this question.
You say, where is all the money that these hyperscalers are spending?
Where is it actually going?
And you said it's going into, quote, a warehouse or, quote, into a data center without power.
That is the implication of the news that we just got from Business Insider.
Before we get to that, what was the impetus for this original investigation?
Why is this warehouse problem relevant to the AI story?
So a few months ago, I did the story with Isha Down over at The Guardian, where I got a source who had given me a fairly precise list of all the AI chips that Microsoft has in operation.
And I didn't publish it, but it was about 1.993 gigawatts worth.
The reason they didn't publish it is we couldn't ascertain whether it was inclusive or exclusive of OpenAI.
Bloomberg then reported about a month later that...
that Microsoft only had two gigawatts worth of actual AI data center capacity, despite saying it brought on every single quarter a single gigawatt for three quarters straight.
So I think they said they had 12 gigawatts total, but only two gigawatts of that is AI.
This made me think, okay, I've got to start looking around.
And when you look across the various hyperscaler earnings, Amazon only reports it on an annual basis, but there's a thing called construction in progress, which is basically where chips go if you have this...
segment of your balance sheet.
It's where chips go before you use them.
And it's where data centers in progress is exactly what it sounds like.
And I found that there was hundreds and hundreds of billions, I think it was $374 billion of construction in progress across CoreWeave, SpaceX, Amazon, Google as well.
Google has over $100 billion themselves.
And the thing is, people will say, oh, it could involve data centers as well.
But this is the thing.
The big...
reason I looked into this is everyone's so cloak and dagger about this, despite this being the biggest, most hugest thing ever, blah, blah, blah, blah, blah.
They're so proud of buying the chips, but they're not proud of where they're going.
They don't really want to communicate even how much capacity they have, which means in my opinion, and I think it's kind of being proven true that they don't have that much actually going on.
They don't actually have that much installed.
They will say power.
They'll say power is the problem.
I think it's also construction delays.
I think it's a lack of electrical grade steel.
Things connected to power, perhaps.
But I don't know.
I think there's a lot more going on here than just, oh, we don't have the space to plug them in.
And the Amazon story kind of elaborates on that, too.
Yeah, it sounds like what's happening is it's not that they're not buying the chips.
They are buying the chips.
The question is, where do the chips go once they've bought them?
uh, the implication of this news.
And to be clear, we actually don't know how many chips are in the warehouse.
We don't know for how long they're gonna stay in the warehouse.
But it does align.
quite closely with something that you have been putting forward, which is that it seems like the data centers are running into problems, and it means that they have all of these chips that they can't actually plug in and then use.
Clearly, there seems to be some sort of mismatch between the rate at which data centers are being constructed and the rate at which hyperscalers are buying chips.
My question, why is that bad?
Why is it a problem, in your view?
if there is this mismatch, which could, you know, some would argue this is what happens in construction.
You buy things, timelines don't match up.
Why is this a problem in your view?
So the Business Insider story is written by Eugene Kim, who's been an Amazon reporter for donkey's years.
He's a really great reporter.
And there were some curious details in there that suggest that NVIDIA is channel stuffing.
Channel stuffing is when you force sales through the channel without needing to.
And the reason I believe that is part of the story says that there was a period when Amazon didn't have to pay for the racks before they were put in the data center.
Very standard.
You would pay closer to when they're going in there.
You'd pay, say, when they're about to be installed.
Except something called the Early Rack Receipt Program started.
It wasn't clear when.
And suddenly, Amazon has to start receiving racks early.
So early that there was a quote in there that they had no foreseeable path to installing some indeterminate amount.
I believe, because there's this also thing you said earlier, that they say, oh, because of the scarcity of NVIDIA GPUs.
There's no scarcity.
If there was scarcity, why would there be scarcity?
People can't install them unless, of course, the scarcity is created by NVIDIA saying, you have to buy these and you have to receive them immediately, even if you don't need them, which is obviously what's happening.
This isn't a theory.
This isn't a grievance.
This is what was said in the story.
It's obvious that NVIDIA is saying you have to take these early, unless Amazon just happens to want them early, which I don't think is the case.
And the fact of the matter is, this is bad for a number of reasons.
One, Nvidia is artificially inflating its revenues.
Now people will say, like, the CEO in Margin Call, I'm selling to willing buyers.
Oh, this is fine.
And perhaps it is.
It's fully legal, I guess.
Though I don't think channel stuffing is well looked upon by the SEC.
But nevertheless, it means that Nvidia is strong-arming their customers and saying, you have to take these now or you won't get an allocation in the future.
And the pay pigs over at Amazon and Google and Microsoft are saying, of course, sir, here's my credit card right away, even though they have nothing to do with them.
This is bad because it's created a global consumer electronics price inflation.
The cost of RAM is up everywhere.
The cost of basically every imaginable consumer electronic is up so that these people can put GPUs in warehouses.
It's actually morally reprehensible.
And they will say, oh, it's about planning.
It's clearly not about planning because if it was about planning, you'd have planned for this.
It wouldn't be, there wouldn't be emails going about being like, yeah, I've got no idea where to put these, mate.
If you were planning, you would say, okay, we're planning to get in an allocation three, six months late, early, we're going to put them here and here.
No, this sounds like, because again, the original statement was, NVIDIA didn't, they used to have to not pay for the racks until they put them in the data center.
Now, early rack receipt, we've got to do it.
I think NVIDIA is channel stuffing to pump its earnings.
That's a bad sign for NVIDIA, but also has created material harm throughout the world.
It's made the price of, and people say, oh, you don't need consumer electronics.
Yeah, as long as you don't want to live in society.
You want to buy a phone, you want to buy a laptop, even the cheap ones.
They're more expensive now.
Every single one, even the cheapest Apple MacBook Neo is more expensive as a result of this.
And it's all because Jensen Huang is greedy and his hyperscale pay pigs will do whatever they can to make sure that they can keep this up.
Because if they stop buying GPUs, the markets will immediately reward them.
And then they'll say, why'd you do that?
As long as they keep buying them, they can keep kicking the can and they can keep saying, oh, AI will pay off in the future, will pay off at some point in the future.
I am 100% in agreement with you that there is a pricing or a production mismatch.
There is some misalignment in the market here, which is clearly causing...
memory prices to soar, and it is why iPhones and consumer electronics are soaring 100%.
I'm not sure I agree with you on what exactly is causing it, because in my view, I mean, on the one hand, there's this idea that maybe NVIDIA and Jensen Huang are trying to force the hyperscaler's hand and say, okay, you need to buy our chips early, and you basically need to over-order.
you know, ahead of schedule.
But at the same time, I'm looking at this other thing, which is that it does appear that data center construction is being massively delayed.
It does appear that investors and the builders of these data center companies just didn't really know how difficult and expensive it would be to build, possibly because a lot of, we're seeing a lot of this political backlash, which might be a real problem in terms of the AI build-out.
And to me, that is a...
a plausible explanation as to why there is a mismatch right now.
Maybe Amazon goes and they buy the chips.
They think that the data centers are going to come online within the next few months or so.
And then they learn, actually, no, because the local community said, we don't want you to do this or for whatever reason.
To be clear, I'm not sure what the reasons are, but it seems to me more like a supply problem of the data centers.
That to me seems more plausible than an artificially intentional.
decision by Jensen Huang.
What would you say to that?
I would agree with you if it wasn't for the explicit use of a term of early rack receipt program.
If it wasn't for the fact that within that story, they say they are taking $3 billion worth of deliveries every single month for the foreseeable future.
If they know that there's tons of delays and they've known a while, the delays have been obvious for six to 12 months, then they could say, hey, NVIDIA, we won't need these until here.
Could it not be that they thought that there was going to be huge demand and Amazon decided themselves, we want to try to get ahead of the curve here.
We're going to sign up for some program where we get early chips.
And now they learn that was a stupid idea because we have all of these chips in a warehouse.
I think early rack receipt is an Amazon program versus an NVIDIA one.
And again, I would agree if it wasn't for the fact that the story also said that they previously did not have.
to pay for racks until they went in.
That's where the disconnect is.
If it was consistently that Jensen Huang was saying, you pay for these things, you take them when they're ready.
That would be, it would be bad.
It would suck, but it would make, it would fit in.
It would be a standard business thing.
However, it's obvious that something has changed.
It's in the story.
And remember, NVIDIA has ballooning accounts receivable as well.
So who knows what is going on there?
Their accounts receivable, well, I think for the first half of the year was five companies with 70% of it.
How much of that is Amazon?
We don't know.
And I agree, there are absolutely delays, but the artificial increase in the cost of RAM is directly a result of NVIDIA taking up so much of the fabs.
It's a direct result of the high bandwidth memory going into NVIDIA GPUs that are sitting in warehouses.
I think hundreds of millions, at least $200 billion worth of them are sitting in warehouses.
And here's the thing.
Again, I would agree with you if it wasn't for the fact there's so much.
If it was, okay, we've hit a wall and NVIDIA goes, all right, yeah, you don't, like, we'll stop shipping them to you.
No, I think Jensen has these morons over a barrel.
Because outside of Anthropic and OpenAI, really no large customers of AI compute.
You can listen to whatever insane guy on Twitter you want, but the analysts across the financial markets all are in agreement that 70% plus is Anthropoc and OpenAI.
So it's not like they have insane demand outside of that they need to capture.
I think that they are just kind of just doing what they can to keep up.
I think that they're doing this so that they can make sure they don't piss off Jensen.
There was a story in the Wall Street Journal a few months ago saying that if you, as a NeoCloud, were to buy AMD GPUs, you would get put in something called Jensen jail, which is when Jensen Huang will no longer sell to you.
It's a general story.
I think it was Robbie Whelan, Catherine Blunt, I believe who wrote it, is about Google's TPUs.
So Jensen Huang is very, he's done this before.
He's done it.
I think that this is a case where he is channel stuffing, where he's saying to his partners, no, you will take delivery or you won't get Vera Rubin.
And I know for a fact, I have a source who told me that there are Vera Rubins making their way to Amazon.
So it's obvious that they're buying so many things.
They have Blackwells that they haven't installed, but they're buying and taking receipt of Vera Rubins.
This is very strange.
And it strikes me is that NVIDIA is just channeling.
I can see no other way.
And people really want, I'm not saying you here, but people really want to take a charitable view of Jensen goddamn Huang, who misstated that gaming revenue was growing about a decade ago when it was actually crypto sales.
I want to know what the real truth is.
And I mean, I think that I can see a world in which there was a gold rush.
I mean, this story to me is...
quite indicative of what we saw with like the railroads as an example and we just had liakit ahmed on to explain the similarities where to me i'm i'm i'm less jumping to jensen manufactured this but we know he had a lot of power there was a there was a there was a chip rush that was akin to a gold rush everyone wanted to buy chips suddenly everyone's trying to buy them and to me This is an example of, oh yeah, we overspent.
This is sort of the physical example of, we put too many railroad tracks on the ground and now we're not using them.
Now they're sitting in a warehouse because we didn't fully figure out how to match our timelines.
And let me just be explicit about what I'm saying.
I think you were right for the most part.
I think, yeah, he got a ton of orders that backed up.
Like that's one, like there was a gold rush, it happened.
I now think with this early rack receipt program, he's taking advantage of that because this whole thing about scarcity just does not make sense to me.
What scarcity?
When you've got Microsoft, Google, Amazon, Meta, all of these companies with hundreds of billions of dollars of GPUs they can't install.
How is there scarcity?
Scarcity, there's clearly enough of them.
There's clearly so many of them you can't install them.
What's making the scarcity happen?
Or indeed, maybe the question is, what would make these scarce?
And it seems what would make them scarce was, not taking delivery.
We may never know unless someone gets actual reporting around that.
And Eugene Kim did a magnificent job with this.
Eugene has been around forever.
He should get his rose over this one.
He really kicked ass in this report.
But I think even if you don't agree with me on the channel stuffing, this is a sign that hyperscalers are overburdened with these assets.
And we are so close to this thing bursting.
And at some point, investors are going to turn on them and start demanding they pull back on CapEx.
I mean, justifiably, because if you're an investor in a hyperscaler right now, and you're saying, okay, I invest and I want the value of my equity to go up because you're buying these GPUs, and you hear these things aren't even being installed, the natural question is, why?
Why are you still doing this?
Oh, you claim there's demand.
Why not stop buying them until you've taken your fill?
is there a reason you can't?
Well, at least until the data centers are able to be operational.
Exactly.
And that to me is, it's less of a, they pulled a fast one and more of a, they just haven't figured this problem out.
And so, I mean, as we start to wrap up here, thinking about the next chapter in this story, I mean, it seems to me that if we have physical examples of hyperscalers overbuying chips, the next chapter in the story is they're going to buy fewer chips.
Because for whatever reason it is, whether it's because of channel stuffing, I'm not sure about it, but I mean, what is certainly clear is the data centers aren't coming online as quickly as they had hoped.
That is a good enough reason, I think, to say, okay, let's reduce our order next month.
Let's buy fewer chips than we did last month.
And we're starting to see some signs, some bad signs in the markets.
We've seen CDS spreads on some of the big data center names and widening.
Oracle's five-year credit default swaps hit a record high last week.
We have ramp data showing that token spending is not growing.
In fact, it's been flat for two straight months.
One of these AI data center companies just went public.
Elise fell more than 30%.
There are bad signs brewing, I guess, as we start to wrap here.
What are you focused on?
What data or what signs do you think are most important in terms of understanding what's next in this story?
I think CapEx.
I think what they do with CapEx.
If CapEx is flat, that's a problem.
If CapEx is higher, that's a bigger problem.
Because the question is, why?
But I think it ultimately comes down to, does Anthropic go public?
Does Anthropic go public at 1.5?
Does it go public at 2?
Because if it goes public at 1.5, that screws open AI's 1.4 trillion private round.
And also, Anthropics numbers came out just before we went through it.
These companies are clearly not economically viable unless you really squim.
And so I think it's going to come down to...
is the CapEx going to keep up?
Because you can remove Anthropic and OpenAI fully from the picture.
Hyperscalers don't disclose their AI revenues.
So it really comes down to, will hyperscalers keep spending?
Because if they stop, I don't think that there are any parties big enough to fill the gap with NVIDIA other than SpaceX and Oracle.
And we're at a point when even still, the 10-year treasury's at a 5.1 still.
So I mean...
Things are so expensive and they're only seeming to get more expensive.
And the more of the chips they buy and these chips that are waiting in warehouses, the more expensive the RAM gets, the more expensive the servers get.
At some point, something has to break.
So I'm looking at the numbers that are kind of the enumeration of spend on tokens, token spend as you brought up, but also on CapEx.
And if anyone pulls CapEx, that's a bad scene for everyone.
So on that note, the Wall Street Journal just reported more details from Anthropics S1.
This happened just before we started recording.
And I want to get your reaction to some of these numbers that we learned.
So H1 2026, net loss of $81 billion.
That's crazy.
$72 billion of it from fair value accounting charges on convertible notes.
So we'll give him a big asterisk there.
Compute spend of $9 billion in the first half.
And two customers account for about one fifth of H1 revenue.
Okay, so we have some more color on Anthropics Financials.
Your initial reactions, Ed?
Well, so that's an 8 billion net loss-ish.
Journal, I love them to death.
Love Anissa over there.
The numbers in that piece are put in the world's worst chart.
malpractice.
I don't know why you'd do that.
$8 billion net loss.
Also within the second quarter, Elon Musk was discounting SpaceX's compute.
But nevertheless, this company lost $8 billion in the first half of the year.
This company had a net loss of $80 billion, but the cash loss is about $8 billion.
This is not a company that's improving its economics.
It's got about $413 billion of non-cancelable commitments.
I'm going to be honest.
I don't think any amount of growth can make up for the fact that Anthropix business just isn't particularly good.
And also we have now, despite this, this is about the first half of the year.
We now have tangible proof revenue growth slowing.
The run rate is bollocks as that number is, is plateauing.
And I did the reason that they are pushing Anthropic is pushing so hard in this drug discovery stuff is they know.
that they are running out of coding revenue.
There's only so far they can go on it.
And also, Ramp has data that says 80% of their revenue comes from the 1% of their customers, most of which are unprofitable, unsustainable AI startups funded by venture capital.
And this company, as big as their revenues may be, and they are big because everyone's focused on them.
Everyone's sending them money.
This company is a load-bearing part of the AI trade and also of the AI economy.
70% of...
compute spend is anthropic and open ai i don't know what this company's going to do i think that they should get rated ccc by moody's and s p they are junk junk junk and this is a test of financial regulators and also honestly the market's overall intelligence it's a dog of a company uh predictions for when it goes public do you think it goes out at two trillion i think one five I think I just, I get the sense one five.
No, everyone I've talked to in finance is just like two trillion.
No, thank you.
The nerves are bad right now.
The vibes are sour.
Bad vibes in AI.
That's the headline.
Ed Citrin is host of the Better Offline podcast and author of the Where's Your Ed At newsletter.
Ed, appreciate your time.
Thank you.
Thanks for having me.
After the break, SpaceX earnings.
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We're back with Prof G Markets.
SpaceX just delivered a blowout quarter in its second earnings report as a public company.
Revenue rose 161% year-over-year, largely driven by strong performance in its connectivity and AI businesses.
Profit came in above expectations, and capital expenditures came in slightly below what investors anticipated.
The stock rose more than 4% in after-hours trading.
So...
to help us unpack these results and what they mean for SpaceX.
We are joined by Nicholas Owens, Equity Analyst at Morningstar.
Nicholas, thank you for joining us.
We just got these numbers, so we're reacting pretty much in real time here.
But from what I can see, pretty much good across every business line.
I mean, there are certainly some underlying concerns about customer concentration, potentially about...
CapEx, which maybe we can get into.
But first, just your initial reactions to this quarter.
Yeah, good.
And, you know, to be honest, probably about a billion and a half of more profit than I expected in the quarter.
But that said, I'm not really pacing this company at that quarter to quarter basis.
You know, we are in the hockey stick in a way.
And so it's hard to be precise, you could say.
Yeah.
These things like big, chunky CapEx and so forth, they can space those out throughout the year.
So it certainly was a good quarter and they have a very strong trajectory.
Perhaps the highlight was Starlink.
They had a lot more subscriber growth than I had anticipated at this point.
So you mentioned this idea that it's sort of chunky, that they can space out their CapEx.
Why is that relevant?
Why does that make you feel not as excited as perhaps others might?
The point I think I'm trying to make is you can't take a linear plot from two quarters and say this is the path, right?
So in either direction.
So they might have pushed out one project and, you know, I think they're building out this Louisiana facility, which is going to just, you know, soak up quite a bit of capex.
And that's really putting them on pace to spend quite a bit of money there this year.
Those types of things are simply lumpy.
I mean, that's the bottom line.
Just looking at the AI revenue, $7.6 billion up more than 800% year over year.
My initial reaction is like, wow, that's big.
But then I kind of remember that they have this customer concentration problem.
where we know that two customers make up around 40% of the revenue.
So I assume this is just that Anthropic's paying a lot of money and Google's paying a lot of money.
And there is a question, an open question, as to how long is this compute boom going to actually last?
Is Anthropic going to continue to pay billions of dollars for this compute when...
I mean, from a business perspective, they're actually not profitable and they're basically taking venture capital dollars to fund this thing.
So I guess when you look at that, just from an underlying fundamental perspective, what is the trajectory of SpaceX and is that kind of revenue and that kind of trajectory, is it sustainable?
Great question.
And I think there's three.
points I'd want to make there.
The first, it's a perfect illustration of what I was talking about with lumpiness.
So 800% year-on-year growth is almost an arbitrary phenomenon because this business didn't, this renting out servers didn't happen a year ago, right?
So there you have it.
But I think you've asked the nub of the question, which is, let's say, beyond a quarterly type time horizon, you know, 2027, 2030, how These deals, I think, are dated for three-ish years, cancelable, et cetera.
Sure, they're going to make a chunk of money renting out servers.
Just a few minutes ago on the call, the comment was, well, we probably will use most of our capacity for Grok because Grok is going to be great.
And in a way, you can't have both.
in terms of who's using all this capacity.
In the short term, call it even three to five years, their best play right now is to rent out the capacity that they've built.
They've done an amazing job, let's say, quickly scaling out the data centers that they have, and I think they're going to do more.
And these other operators, Anthropic and so forth, have the money and are willing to pay the money to rent out this capacity as they grow their user base.
They're trying to do an operating leverage type.
scale where the incremental users using their already trained bots add a lot of incremental profit eventually as they amortize, let's say, the training costs.
SpaceX is really still in that middle layer of the infrastructure play.
And I would say, ironically, I can get to $144 fair value if all they do is rent out.
Colossus for the next five years and never launch another satellite.
I don't think they're going to do that.
But, you know, it's a good business for them.
It's great.
It's just that at the end of the day, what's the run rate and the profitability of sort of what rental you can get for the capacity over the longer term?
Sure, it's under capacity now or, you know, demand outstrips supply.
And what we see is a bunch of...
picks and shovels going out and building more supply.
The sort of normal laws of the market would say that eventually, and economics would drive supply catching up.
And so then these billions of dollars of rental agreements, does that flatten out?
You know, that's the question I have.
And I think you have to get it just right, let's say.
I mean, I'm just looking at the CapEx, $20 billion in the quarter, nearly $50 billion.
year to date.
And mind you, they're also going out and raising tens of billions of dollars of debt.
I mean, that was just a couple of weeks ago when they announced their $40 billion debt raise.
They're spending enormous amounts of money.
And on an operating basis, the company looks like it's pretty good because it's achieving operating profitability.
But those numbers are enormous.
And it does see, I mean, it's not clear to me that those numbers are going to come down anytime soon.
So I guess, what do you make of those numbers?
How important are they relative to, say, the fact that revenues are increasing at a very high clip?
Sort of simplifying the picture.
I'm trying to run this 20-year forecast model, and so 50 billion is nothing.
There's hundreds and hundreds of billions, if not trillions, of spending in the cards if you believe they're going to put a million satellites in orbit, et cetera, et cetera, et cetera.
The thing to watch is...
If we spent $50 billion in CapEx this year, that's not hitting our income statement, but it will as we start depreciating those things that we bought.
To the extent that their GPUs, those last, call it five years, that's actually a pretty steep depreciation cliff.
So your operating expenses pile up, let's say, cumulatively as you run through this CapEx.
SpaceX also, I think, has a...
pension here for uh renting gpus as a way of um uh maybe mitigating some some of that so and i think that was part of the debt raise or a previous deal where they have a third party buy the gpus and then uh spacex rents them so it's just another way to to move fast the stock was actually down uh from its ipo price before the earnings uh it's risen in after hours trading so we'll see what happens over the course of the day.
But, you know, the stock has had a comeback from, I mean, we talked before when it had gotten cut in half, and it has certainly come back in kind of a big way.
Do you have any predictions or thoughts on how this stock might fare over the next several months?
What do you think is going to happen here?
My general prediction would be, it's more of an observation and sharing notes with my colleague, Seth, who covers Tesla.
What you have is a, loyal installed base, if you will, of share owners, which I would argue lowers the liquidity even more than otherwise in a thinly floated stock.
You know, folks who are going to hodl forever.
And then he's going to give it to them for free.
He's going to put them in their accounts as well.
I mean, that to me seems like even going a step further, right?
A share certificate in every pot, right?
Yeah.
Putting that aside.
So there's, I would say, sort of some structural demand for the shares.
And so it's still relatively thinly floated.
And you're talking about an exciting list of scientific projects and a team that arguably is the best equipped to go after some of these things.
In terms of reusable rockets and cheap satellite internet, they're the...
best show in town.
So there's some legitimate reasons to be excited about the stock.
My job is to try to put a reasonable valuation on it using, you know, let's say defensible economic assumptions.
And that's where we keep coming back to these numbers that are half of the market prices.
All right.
Nicholas Owens is equity analyst at Morningstar.
Nicholas, always appreciate your time.
My pleasure.
France is on the brink of a fiscal crisis as investors weigh the possibility that the EU's second largest economy could default.
A bond market sell-off in recent weeks has sent borrowing costs skyrocketing.
France's 10-year yield soared to 4.93% on Monday, one of the market's worst days this year.
The gap between French and German borrowing costs is now the widest it's been since the eurozone debt crisis of 2012, and the country's debt pile is growing.
France's debt-to-GDP ratio is expected to climb to 122% next year.
Meanwhile, political pressures are mounting, with nationwide protests escalating over the weekend.
Over 2,000 people were arrested, as people demonstrated against surging energy and living costs.
And with a presidential election six months away, it's unclear whether lawmakers will pass the spending cuts the country needs.
The crisis is raising a big question.
Is France reaching its borrowing limit?
Joining us to discuss this, we're speaking with Terry Wiseman, global FX and rate strategist at Macquarie Group.
Terry, thank you for joining us.
I guess we should start with the protests.
For those who don't know what is going on in France right now, could you give us a little bit of clarity?
Yes.
Keep in mind, I have not been there and I have not seen anything firsthand.
What I see, I see by virtue of what I get.
on the television, on the news wires.
What has been happening have been a series of riots over the course of the last few days.
They seem to have culminated over the weekend.
That's when they got most intense.
They have not been just in Paris.
They have been in many cities in France.
Although in some cities, they don't really take the form of rioting.
They take the form of more peaceful protests, maybe standing outside of schools and in town centers without any running amok, effectively.
But in Paris, where we've seen most of the pictures, obviously, it has been quite intense and has been accompanied by breaking into stores, bringing into government facilities, et cetera, wreaking havoc here and there.
There is quite a debate in France, obviously, about...
uh, what the ideology, what the origin of these riots are.
I think everyone can agree that they began as student riots.
The question is what has evolved into and who has been taking advantage of the fact that these riots have been taking place?
Uh, is it, is it the left in France?
which has maybe potentially been driven to exploit what is happening for the purpose of building their own political capital within France.
Is it really just the students?
Are they just, is it students joined by the syndicates, the unions, the teachers' unions, for example, the so-called yellow vest protesters of several years ago?
The scope of these protests, who's involved and who's benefiting from this?
Who might be directing them behind the scenes?
I guess, are the essential questions that the French are trying to answer these days.
The fact that it's coming at the same time as this bond market sell-off, it seems to indicate that something has gone wrong in terms of France's political governance and its fiscal policy.
What are the big red flags for France right now?
Well, one red flag, and I think you just alluded to it, is that there is potentially a connection between what is happening in the bond market and what is happening on the streets.
And that makes a modicum of sense.
If you think about it, the fact that bond yields have been rising is an indication that the market is less trustful of France's ability to rein in its deficits and get to a situation where their debt is sustainable.
But, of course, when the market puts these kind of pressures on a country, what the market is effectively saying is they would like that country to reduce spending or raise taxes, certainly to reduce spending.
Because France, in the case of France at least, the amount of spending that comes from the government relative to GDP is among the highest in the euro zone, certainly in the EU and within the broader developed market countries.
If that is the pressure that the market is applying to the French state, to the French government, the people effectively know about this pressure.
It may not be because they watch the market, but they certainly know because politicians have been talking about reducing spending.
And that calls them out into the street.
The problem is that when they're called out into the street, what they're effectively demanding to some extent is more spending.
And of course, when they...
go out into the streets, it hurts GDP.
There are quite a few French businesses that are saying that they're going to suffer this month in terms of their revenues and their sales because of this.
But of course, when GDP goes down and suffers, tax revenue comes down as well.
So it puts even more pressure up on the bond market effectively because it detracts.
It detracts from France's and the French state's ability to honor its debt obligations.
You need growth to be able to pay down your debt.
So there's some people that have discussed this in the context of a doom loop, effectively a loop between what the bond market is doing and what the protesters are doing in the street, and one that can only be resolved if the state takes a strong position one way or the other, i.e.
with respect to finding its way to austerity.
or finding its way to some sort of political dissolution of France's ties to the European Union and the Eurozone.
Because effectively, those are the constraints that France has right now.
It's the constraints on its spending that are imposed by the rules of the Growth and Stability Pact and the Maastricht Treaty and its obligations to the EU.
Just looking at the 10-year yield on French bonds, we're at...
above 4.9%.
The U.S.
10-year yield, the 10-year Treasury yield, is above 5%.
Does that mean that the U.S.
is in worse shape than France?
Why or why not?
Not at all.
First of all, the French are paying that 4.9% on a much larger debt load.
Their debt to GDP ratio is approximately 120%.
The U.S.'s is barely above 100%.
So the debt load is larger in France.
But that's not the most important difference.
The most important difference is that the U.S.
is growing more rapidly in nominal terms and in real terms.
The French are not.
So through a perspective of what is going to happen in the future, of course, you would like a country's GDP to be growing faster because one way of diminishing that debt-to-GDP ratio over time is to simply have GDP grow faster than the debt, the numerator in that ratio.
The U.S.
has much faster growth than France.
France has been in a state of low growth for quite a while.
while at the same time that it has been running high deficits in excess of 4% for quite a few years.
So the U.S.
is not France in that regard.
The U.S.
still has growth.
And that is something that is making the market actually quite comfortable with U.S.
debt right now.
I know that yields have been going up in the U.S., but that hardly seems to be linked to a lack of comfort with the U.S.'s ability to pay its own debt.
If it were that lack of comfort, you'd be seeing spreads on credit default swaps for the U.S.
go up.
They have not.
Certainly in France, they have gone up quite a bit.
What is your view on what is driving high yields in America right now?
My view on what's driving high yields is that there's a lot of bond issuance.
The government is issuing bonds.
Corporations are issuing a lot of bonds because they have to finance the AI infrastructure build-out.
So the result of this is that there are just too many bonds in the marketplace being issued, especially bonds that the government competes with.
In other words, high-grade, long-term issuers are issuing those bonds.
The other problem is that the savings rate in the U.S.
is quite low right now.
People are fancying consumption.
They're not fancying saving.
So there is effectively a dearth of capital from within the country to buy those bonds.
And as a result, the U.S.
has to depend, as it has for a long time, on savings from abroad to finance the issuance of these projects, effectively.
The deficit being a project, but the build-out of the AI infrastructure.
being another project.
At the same time, though, we have seen pretty significant increases in our interest payments as a result of our debt load.
The cost to finance our debt just crossed a trillion dollars this year, so 14% of the federal budget.
One, is that not a problem?
Two, is France sort of a cautionary tale?
for where the US might be headed if we continue down this path, where it does seem that debts will continue to rise and also that financing costs will continue to rise as well.
Right.
Now, I did not mean to infer that the U.S.
does not have a problem.
What I was trying to say is that the market does not see it as a problem yet.
Certainly, it could become a problem because of the debt financing costs that the U.S.
is being required to bear in view of its high debt-to-GDP ratio and its ongoing high deficits.
Which, by the way, the deficit in the U.S., we don't have much visibility on it coming down.
And to the extent we do not, it does look like it's going to continue to run at about six to six and a half percent of GDP, which, mind you, is larger than France's.
But again, I would highlight the fact that the U.S.
is growing.
That's the saving grace.
Now, with regard to whether ultimately this will become a problem for the U.S., yes, it certainly can be.
But there's still another important difference between the U.S.
and France in this regard, and that is that the U.S.
issues debt.
that is denominated in U.S.
dollars and ultimately, effectively an agency of the federal government, which is the Federal Reserve, our central bank, has ultimate control over the supply of dollars.
And if need be, it could always step in to help support public finance in the U.S., public finance at the federal level.
The French don't have that luxury, right?
They created a common currency back in the late 1990s, and they effectively assigned.
control of the supply of that currency to a central bank that's federated.
In other words, that is supposed to look after the well-being of the eurozone as a whole and not just France.
Now, this has been a problem since the creation of the ECB, of the central bank.
in Europe, because there will always be countries that are weak in Europe and might need lower interest rates and countries that are strong.
It might need higher interest rates.
But of course, the European Central Bank is a one-stop shop.
It can only have one interest rate.
that prevails upon the whole continent to the detriment, if it's too high, of countries that are weak.
And France, of course, has been having weak growth for quite a while.
So having devolved the powers of monetary policy to a federated central bank, let's say, is not working in France's interest these days.
Do you see a future where France leaves?
the EU or where they take some sort of action in order to have control over their own monetary policy, to have their own central bank issue their own currency?
Is that kind of where they're headed?
It's not inconceivable, but there really isn't a protocol for a country effectively exiting a currency and, you know.
reverting back to its original currency called the French franc.
It's not as simple as that.
It's a lot simpler actually to combine national currencies into one common currency than to go the other way.
Having said that, I do see referendums potentially coming in France that will point towards, you know, let's call it a staged disassociation from the strictures of Brussels and the EU.
That is possible.
Of course, it's going to be much more likely if the national rally wins the presidency and then wins a controlling interest within the National Assembly.
Okay.
Terry Wiseman is Global FX and rate strategist at Macquarie Group.
Terry, we appreciate your time.
Thank you, F.
The results of the Signal Awards are in, and I am happy to report that we won, not just in one category, but in three categories.
Thanks to your support and your votes, Profit G Markets was able to win Best Daily Podcast and Best Money in Finance Podcast.
And my newsletter, simply put, won Best Newsletter, which is super exciting because I just started writing that thing in January, and I did not expect that we would be winning an award.
So I would like to take this moment as we end this episode.
just to say thank you.
These awards are dumb in a lot of ways, but they're also quite important, especially for a show like this, where we started out not fully knowing what we were doing or where we were going with this, but we believed that there was just something missing in traditional...
markets coverage.
We found that a lot of it was either too apathetic or out of touch, or on the flip side, that it was too crude or too lacking in nuance.
And we wanted to find some sort of middle ground where you could learn something about the financial markets, but at the same time, learn about people and the world and the way these things all interact with each other.
Now, we're really proud of where we have gotten, but we really couldn't have done it without your help, because your comments, your feedback, and your interest in all of this, that has all shaped the direction of this podcast.
And now that you have helped us to win these awards, it really feels like we have a real show.
And I know that might sound surprising, but...
That's the way it feels.
We are a very small team.
We are young.
We are very scrappy.
And so to get this kind of recognition, it really does mean a lot to us.
So thank you.
To be clear, there are other awards out there that we also want to win.
we can't help ourselves.
So please don't be surprised if we ask for your vote again for something else in the future.
But for now, we're going to enjoy this moment.
We're very proud.
We're very grateful.
And we will take this energy to improve the show and hopefully make your mornings more interesting, more informative, and ultimately more rewarding.
Okay, that's it for today.
This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer.
Our video editor is Brad Williams.
Our research team is Dan Chalon, Kristen O'Donoghue, and Mia Silverio.
And our social producer is Jake McPherson.
Thank you for listening to Prof G Markets from Prof G Media.
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I'm Ed Elson.
I will see you tomorrow.
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