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0:02:37 Today’s number, 25.
0:02:43 That is the percentage of ants that never do any work for the colony.
0:02:47 Scientists have yet to figure out why these ants don’t work,
0:02:50 but they have identified one trade that they all have in common.
0:02:52 They’re all in consulting.
0:03:08 Welcome to Prof. G. Markets. I’m Ed Elson. It is November 19th.
0:03:11 Let’s check in on yesterday’s market vitals.
0:03:15 The major indices all declined as the tech sell-off continued.
0:03:20 The S&P 500 fell for the fourth day in a row to its lowest close in a month.
0:03:26 Meanwhile, the yield on 10-year treasuries slid, and finally, Bitcoin dipped below $90,000
0:03:28 before recovering marginally.
0:03:31 Okay, what else is happening?
0:03:35 Home Depot shares dropped after reporting third-quarter earnings yesterday.
0:03:40 Revenue slightly beat expectations, but the company missed on earnings per share.
0:03:43 The retailer also cut its full-year guidance.
0:03:49 Earnings for 2025 are now expected to fall 5% instead of previous projections of 2%.
0:03:52 The stock closed down 6% yesterday.
0:03:55 So, why do we care?
0:04:00 Well, Home Depot can tell us kind of a lot about how the American consumer is doing.
0:04:03 Its results are also closely tied to the housing market.
0:04:07 And on top of that, the company is relatively exposed to the tariffs.
0:04:12 So, to help us break down what these earnings tell us about the broader economy,
0:04:17 we are speaking with Joe Feldman, Senior Managing Director at Telsey Group.
0:04:18 Joe, thanks for joining us.
0:04:19 Yeah, thanks for having me.
0:04:20 I’m excited to chat with you.
0:04:23 So, we want to get your reactions to these earnings.
0:04:29 Beat on revenue, missed on EPS, stock fell 6%.
0:04:32 Take us through what happened with these Home Depot earnings.
0:04:38 So, I think what happened was expectations were a lot higher heading into the print.
0:04:42 Really self-induced by Home Depot.
0:04:46 If you go back a quarter, they saw some momentum in the business.
0:04:49 They had a better spring, early spring-summer period.
0:04:53 And they thought the second half of the year was going to be even better.
0:04:55 They thought there would be continued momentum.
0:05:01 So, we in the street all expected higher sales trends coming into this quarter.
0:05:05 And then when the quarter materialized, it didn’t happen.
0:05:08 You know, basically, the consumer stayed kind of stable.
0:05:13 So, their underlying business stayed stable at around a 1% growth in terms of comp.
0:05:17 But there was some pressure because of the lack of storm activity.
0:05:20 Usually, hurricanes are a good thing for Home Depot, for Lowe’s.
0:05:24 And when that didn’t happen, it caused further pressure on sales.
0:05:27 Then the margins start to deteriorate a little bit.
0:05:28 And you saw some deleverage.
0:05:30 And so, the earnings came in a little bit worse.
0:05:34 And the investor community was a little frustrated with what happened.
0:05:39 Can you tell us more about how hurricanes relate to profits at Home Depot?
0:05:43 It’s a strange thing in the business, but it is important.
0:05:44 Yeah.
0:05:48 No, it’s very important, actually, in the third quarter and sometimes in the fourth quarter,
0:05:51 where big storms can have a big impact.
0:05:57 Because when a hurricane comes and there is some destruction related to it, or tornadoes
0:06:00 and other storms, you know, houses need repair.
0:06:02 Roofs might get damaged.
0:06:03 Gutters might get damaged.
0:06:09 And so, when that happens, the consumer usually comes back in force in that region soon after
0:06:12 the event to try to repair their homes.
0:06:17 This time around, in the third quarter of 2025, we didn’t really have any major storms like
0:06:20 that compared to two last year, late in the quarter, around October.
0:06:27 And those storms had a big positive boost to Home Depot, Lowe’s, tractor supply, late
0:06:29 in the quarter, a year ago, and their fourth quarter.
0:06:35 So, now when you look ahead and you don’t have any storm activity or recovery activity to
0:06:38 happen, that’s going to put some extra pressure on the sales.
0:06:39 Yeah.
0:06:40 So interesting.
0:06:46 Aside from the hurricanes or the lack thereof, which was interestingly a bad thing for the
0:06:49 company, was there anything else?
0:06:52 Was there anything that we learned about the consumer, perhaps?
0:06:58 I mean, I feel like Home Depot’s generally considered to be like a bellwether for how
0:07:00 the consumer is doing.
0:07:03 Did that play a role in these earnings here?
0:07:06 You know, I think the consumer was definitely front and center.
0:07:10 And there was a, it’s always a much talked about topic, as you said, with Home Depot as a bellwether.
0:07:13 And their consumer is actually pretty healthy.
0:07:15 It was interesting.
0:07:17 Now, you may not think that when you look at the sales trend.
0:07:21 However, big ticket sales were actually up a couple of percent.
0:07:27 That would imply that people, when they do go to shop, they’re opting for, you know, new
0:07:32 innovations, newer products, things that may have advanced technologies within them.
0:07:37 I’m thinking of appliances and power tools and things like that, where they are stepping
0:07:37 up.
0:07:41 So that would imply that the consumer has the money to spend.
0:07:45 The homeowner, by definition, tends to be a bit more affluent, just because to own a home,
0:07:46 you need to be.
0:07:50 And so I think they’re seeing resilience among their consumer.
0:07:55 It’s just they’re not seeing people, you know, digging in deeper to go after bigger projects,
0:07:58 like a bathroom remodel or a kitchen remodel.
0:08:00 And that’s really what’s causing the pressure.
0:08:03 The day-to-day repair and maintenance is happening.
0:08:08 And that’s why I said earlier that the business is relatively stable, because that underlying
0:08:10 core business is fine.
0:08:12 And we’re seeing consumers spend and shop.
0:08:19 It’s just that incremental spend is not happening because that otherwise considered discretionary
0:08:23 within the home improvement space is not happening because people are just a little bit more
0:08:23 cautious.
0:08:27 Maybe they’re waiting for rates, interest rates to come down a little more to finance some of
0:08:32 these projects and, you know, home values are still up.
0:08:36 But with lack of housing turnover, there’s also some pressure there.
0:08:41 Usually people will do some extra work to clean up the house before they sell it or soon after
0:08:42 they buy it.
0:08:45 And with the lack of turnover, that hurts as well.
0:08:48 So broadly speaking, the consumer is somewhat resilient.
0:08:49 They’re spending.
0:08:54 It’s just that they’re not spending beyond what they need to spend on the day-to-day maintenance.
0:08:59 Have tariffs played a role in the story here?
0:09:04 I mean, Home Depot, I believe it imports quite a lot of its inventory.
0:09:07 Have tariffs had any effect on the business?
0:09:13 You know, so far, tariffs have not had a significant effect at Home Depot, nor at Lowe’s.
0:09:14 I mean, we’ll hear from Lowe’s tomorrow.
0:09:21 But I think what we’ve seen is that the tariffs, you know, over half of what Home Depot buys is
0:09:21 domestic.
0:09:26 So, you know, a little less than 50% is imported.
0:09:28 Those goods, there are tariffs on.
0:09:33 They’ve been able to mitigate a lot of the tariffs through negotiations with suppliers, through,
0:09:38 you know, cost controls on their own end, maybe, you know, operating it more efficiently.
0:09:40 And there has been selective pass-through.
0:09:45 They’ve not really seen much pushback on the pricing pass-through that they’ve had to do.
0:09:46 It’s not been too dramatic.
0:09:53 You do see it in appliances, power tools, things like that, that come out of China or other parts
0:09:53 of the world.
0:09:58 But, you know, broadly speaking, tariffs were not a major impact in this quarter.
0:10:04 But they are increasing prices, and they are saying that it’s because of the tariffs.
0:10:08 In other words, it’s impacting the consumer at least a little bit.
0:10:09 Yes.
0:10:10 I think broadly, yes.
0:10:13 To expand beyond the Home Depot story, you’re absolutely right.
0:10:17 The consumer is very much feeling the impact of tariff-related price increases.
0:10:19 There’s no question about that.
0:10:24 And I think the Trump administration response on food the other day really reflects that.
0:10:30 You know, I assume when we hear from Target and Walmart later this week, we’re going to hear
0:10:33 that tariff pressure is there.
0:10:33 It’s real.
0:10:36 It’s causing consumers to have less discretionary dollars.
0:10:39 It’s causing consumers to be a little sharper and tighter with how they spend.
0:10:41 They’re seeking out more value.
0:10:48 So, yes, broadly, the consumer is definitely being impacted by the higher prices that are
0:10:49 starting to flow through.
0:10:54 And it’s really just starting because if you consider when the tariffs really did jump up a
0:10:58 little bit, inventory that’s now hitting the stores for this holiday season and into next
0:11:03 year, that’s the tariff inventory at the higher tariffs that are in place today.
0:11:03 Right.
0:11:04 Yeah.
0:11:09 Just before we let you go here, what did we learn about the guidance?
0:11:16 I mean, is there anything that the guidance for Home Depot could tell us about the economy
0:11:17 at large?
0:11:23 I mean, can we learn anything from these earnings about what will happen either on tariffs or on
0:11:24 anything else going forward?
0:11:25 Yeah.
0:11:31 I think the guidance from Home Depot reflects the fact that the macro, more specifically,
0:11:33 the housing market is still rather sluggish.
0:11:38 And we’re just not seeing that pickup that we would have expected to see at this point.
0:11:41 Now, we are seeing a more stable housing market.
0:11:45 And the turnover is running at around 4 million at an annual run rate.
0:11:47 4 million units are turning over.
0:11:49 But we need to see it higher.
0:11:51 We want to see it higher.
0:11:52 And I think Home Depot wants to see that.
0:11:56 They also want to see lower interest rates that would help people to finance projects.
0:12:02 So I think their guidance shows that caution that we’re just not getting that incremental
0:12:05 lift from the industry that we would like to see at this point.
0:12:10 I do believe Home Depot is taking market share reflected in their current business.
0:12:12 I mean, it was positive sales.
0:12:15 They generated $40 billion, $41 billion of revenue in the quarter.
0:12:21 But to go forward, I think there’s going to be some caution in 2026 as well.
0:12:26 Tariff-related pricing pressure on the first half of the year on the consumer is going to
0:12:27 continue to weigh on things.
0:12:31 And so you may not see this sharp rebound in the first or second quarter.
0:12:35 We’re hoping spring, so maybe second quarter, you’ll start to see a little bit of a lift.
0:12:41 But it still looks like we’re going to see more of the same for the next couple of quarters.
0:12:45 All right. Joe Feldman, Senior Managing Director at Telsey Group.
0:12:46 Thank you for joining us.
0:12:46 Really appreciate your time.
0:12:47 My pleasure.
0:12:48 Thanks for having me.
0:12:51 After the break, big tech embraces debt.
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0:16:19 We’re back with Prof.G Markets.
0:16:21 What’s the hot new trend in AI right now?
0:16:24 Raising a lot of debt.
0:16:29 This week, Amazon raised $15 billion in its first US dollar bond offering.
0:16:31 In three years, it’s not alone.
0:16:35 Google sold $25 billion worth of debt in the US and Europe earlier this month.
0:16:39 Meta issued $30 billion of corporate bonds in October.
0:16:43 Meanwhile, Oracle is already carrying $104 billion in debt.
0:16:46 And it is lining up another $38 billion.
0:16:49 All of this spending adds up.
0:16:55 These deals have contributed to a record $6 trillion in global debt issuance this year.
0:17:01 In sum, big tech is now financing the AI boom with borrowed money just as investors are starting
0:17:05 to question how and when this AI build-out will actually pay off.
0:17:10 So, here to explain the role that debt is playing in the AI boom, we are speaking with Robert
0:17:15 Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence.
0:17:18 Robert, thanks for joining us on Prof.G Markets.
0:17:19 How are you doing, Ed?
0:17:20 I’m doing very well.
0:17:21 Thank you for being here.
0:17:22 Awesome.
0:17:27 So, a lot of big tech debt headlines in the news recently.
0:17:30 Amazon raising $15 billion.
0:17:33 We saw Google raise $25 billion.
0:17:35 Meta raised $30 billion.
0:17:42 These seem like very big numbers, but for those of us who are, you know, less familiar with
0:17:46 the debt markets, how big are these numbers really?
0:17:48 Why are we seeing them?
0:17:54 And why do they all seem to be happening kind of at the same time or at least in the same month?
0:18:00 Yeah, it’s even bigger than what you said because Oracle did $18 billion of public debt and they’re
0:18:01 looking to do $38 billion of private debt.
0:18:06 Meta did another $27 billion of off-balance sheet debt.
0:18:11 So, we’re actually in a record year for debt issuance, public and private.
0:18:18 And it’s a little bit of a question of if we build it, will they come when it comes to AI?
0:18:19 I actually think it’s the other way.
0:18:21 I think the demand has come.
0:18:24 So, these companies are building it.
0:18:28 And the reality is this is just the early stages.
0:18:31 There is a lot more spending to go.
0:18:35 I think we’re going to see hundreds of billions of dollars of debt.
0:18:41 over the next few years because we’re likely to see $3 trillion of AI cap spending
0:18:45 cumulatively from probably a handful of the largest hyperscalers through 2030.
0:18:51 So, those names you mentioned there, these are all companies that, generally speaking,
0:18:54 already have quite a lot of cash on the balance sheet.
0:19:01 You’d kind of think that if you’re Google or you’re Meta or you’re Amazon, that you don’t
0:19:02 need to borrow money.
0:19:04 Do they need to borrow?
0:19:09 I mean, do they not have enough cash already to just finance this themselves?
0:19:09 Yeah.
0:19:14 Listen, the old adage in the bond markets are you borrow money when you can, not when
0:19:15 you have to.
0:19:18 And right now, the market is still ripe for lending.
0:19:25 If you can take down 10-year money with a four-handle on it, so a 4% coupon, you’re going to do that
0:19:26 all day long.
0:19:30 You can borrow 30, 40, 50-year money with a five-handle on it.
0:19:31 You’re also going to do that.
0:19:37 The reality is they have enough money today that if they didn’t want to borrow another dime,
0:19:39 they could probably get away with it.
0:19:44 But what it would do is it really pulls resources away, pulls financial flexibility away.
0:19:51 Because most of these companies, other than Amazon, are also spending 30, 50, 70, in the
0:19:54 case of Apple, $100 billion a year on shareholder returns.
0:19:57 So, how do you do everything is really the question.
0:20:04 And this enables borrowing money, enables them to both invest organically, continue to do M&A
0:20:08 and pay significant dividends and share buybacks.
0:20:13 Over the next couple of years, some of the companies like Ameta are going to be spending
0:20:18 more money than they’re pulling in, if they continue on a shareholder return path they’ve
0:20:19 been on.
0:20:20 So, they actually do need money.
0:20:25 Others, like an Oracle, which are triple B rated, are just flat out free cash flow negative.
0:20:27 They’re spending a lot more than they’re bringing in.
0:20:28 So, it’s a little bit idiosyncratic.
0:20:35 But remember, for years, most of these companies, whether it’s Meta, Google, Amazon, Microsoft,
0:20:38 they’ve been very conservative in terms of their balance sheets.
0:20:43 Double A balance sheets, triple A balance sheets, 50, 75, $100 billion in cash.
0:20:46 They’ve been setting themselves up for an opportunity like this.
0:20:49 So, they position themselves very well.
0:20:53 That being said, borrowing money today makes a pretty good argument that they’re going to
0:20:55 spend a lot more money tomorrow.
0:21:00 You mentioned there that, you know, there’s this question of, if we build it, will they
0:21:01 come?
0:21:04 You said that you think the demand already is there.
0:21:12 I think the AI bears would say, well, yes, there’s demand, but it’s all kind of circular.
0:21:13 It’s all coming from the same people.
0:21:20 I mean, OpenAI wants to buy compute, but, you know, NVIDIA, they’re the ones who have been
0:21:24 investing in OpenAI, and then OpenAI takes their money and spends it over at Oracle.
0:21:27 In other words, the demand is artificial.
0:21:31 To the people who are worried about that prospect, what would you say to those people?
0:21:36 Yeah, there’s been a lot of incestuous type of investing here.
0:21:39 That doesn’t mean that true third-party demand doesn’t exist.
0:21:41 I actually think it does.
0:21:46 I think every single business is looking towards these large hyperscalers to create an AI backdrop
0:21:47 for them.
0:21:49 They cannot do that on themselves.
0:21:54 Every one of these companies constantly are talking on their earnings calls about they
0:21:59 have much more demand than there is supply, and that’s why they’re spending so much.
0:22:03 I understand the naysayers, because if you’re spending hundreds of billions of dollars, if
0:22:09 not trillions of dollars right now, and you’re not seeing returns for the next two, four, six
0:22:10 years, you get skeptical.
0:22:14 In particular, the skepticism, though, is coming from the equity markets.
0:22:20 We saw stocks skyrocket, all-time high valuations, expectations that every single one of these
0:22:22 companies were going to the moon and beyond.
0:22:27 The credit markets, though, have been, I think, a lot more based in reality.
0:22:33 Spreads have gotten a little bit wider as all this debt has come.
0:22:36 That being said, there hasn’t been the same sort of panic or sell-off.
0:22:40 We’re not 35% or 40% off from our highs.
0:22:41 We’re just a little bit wider.
0:22:46 And I think that’s really the market that you need to look at to see, is there really
0:22:47 pessimism?
0:22:50 Is there really some sort of systematic problem?
0:22:55 And the reality is, I think the market is much more fighting headlines on return on investment
0:22:59 than they are whether or not these are going to ultimately pay off.
0:23:01 They are going to pay off.
0:23:02 The question just is how much.
0:23:05 From a credit side, pretty much everything’s trading at par.
0:23:09 Things are trading near historic tights.
0:23:13 That says, or the market is pretty comfortable that those cash flows are going to be there
0:23:13 in the future.
0:23:15 Equities are just a different story.
0:23:18 Perhaps they got ahead of themselves, and that’s why they’re coming back.
0:23:21 And that’s where we’re seeing a little bit of the panic in the market.
0:23:25 But we’ve been asked whether or not this is a systematic potential risk.
0:23:27 And I don’t see it at all.
0:23:32 And the difference between now and, say, the dot-com era is the dot-com era had companies
0:23:40 that weren’t generating any revenues, raising money via IPOs at ridiculous valuations that
0:23:41 could never be justified.
0:23:44 Here, you actually have companies collecting money.
0:23:50 The reason why Amazon stock took off after the end of the quarter was because AWS, its AI
0:23:55 and cloud business, had its best quarter in three years off of really large numbers.
0:23:57 And you’re seeing that across the space.
0:24:03 So we’ve got really big companies generating real revenues and real cash flows today, and
0:24:06 they’re spending money to make money in the future.
0:24:11 I just don’t think that the type of worries that people have out there really are justified.
0:24:16 Yeah, it sounds like you think that, you know, yes, they’re taking on a lot of debt.
0:24:18 But for the most part, it’s justified and responsible.
0:24:22 Are there certain companies that aren’t doing it right, though?
0:24:24 I mean, I think of Oracle as an example.
0:24:27 You mentioned that they’ve taken on more than $100 billion.
0:24:30 Investors seem to be getting a lot more anxious.
0:24:32 You mentioned their credit rating.
0:24:36 I think you said double B or somewhere closer to junk.
0:24:40 Are you concerned about a company like that or maybe a company like CoreWeave, again, which
0:24:41 is borrowing quite a lot?
0:24:44 All that companies doing it right and companies doing it wrong?
0:24:46 Yeah, it’s not necessarily right or wrong.
0:24:47 It’s just the starting point.
0:24:55 So some of the largest companies, like Microsoft or Amazon or Alphabet, have AA or AAA ratings.
0:24:58 So their balance sheets are already prepped for more borrowing.
0:25:00 They have little or no leverage.
0:25:01 Absolute debt might be high.
0:25:03 They might have $50 or $100 billion of debt.
0:25:07 But they also have $100 or $150 or $200 billion of EBITDA.
0:25:11 So in the world of credit, it’s all relative.
0:25:13 Leverage is still very low.
0:25:18 As you move down the credit scale, somebody like Oracle, who’s triple B rated, this is sort
0:25:18 of important.
0:25:20 They are investment grade.
0:25:21 They’re mid-triple B.
0:25:23 They’ve got negative outlooks at S&P and Moody’s.
0:25:28 People are worried that a name like that could fall to junk because the free cash flow is
0:25:30 going to be so negative over the next couple of years.
0:25:32 It doesn’t mean they’re doing anything wrong.
0:25:39 And in fact, it appears as if they’ve got about $300 billion of contracts coming from what we
0:25:40 believe is open AI.
0:25:49 If that’s the case, if they’re spending money now, they’re more than willing to go into
0:25:53 a cash flow deficit in order to meet that demand over the next few years.
0:25:54 So it’s not a matter of right or wrong.
0:25:57 It’s just their balance sheet is starting in a different place.
0:26:02 And what that means is that credit risk is going to be higher because they’re triple B with
0:26:07 $100 billion plus of debt and adding more debt versus a Microsoft’s that’s triple A that
0:26:09 has less debt that’s adding debt.
0:26:12 So it’s still a little bit relative.
0:26:13 I don’t think it’s right or wrong.
0:26:15 I think it’s all sort of right.
0:26:17 They’re actually all going after very similar dollars.
0:26:23 This is a huge pie of potential revenues, but there’s only a handful of players here that
0:26:26 are actually building super deep moats around them.
0:26:32 They’re going to make it so that there’s going to be such large barriers to entry that no one
0:26:33 else is going to be able to provide these services.
0:26:39 So if that demand does end up playing out, I think we’re going to be looking back at now
0:26:41 and saying, why didn’t actually, why didn’t they spend more money?
0:26:45 I think that’s a fair argument is we just wrote a note on Amazon saying that they’re going
0:26:48 to spend a trillion dollars over the next five years.
0:26:49 Is that too much or too little?
0:26:51 I actually think it’s going to end up proving to be too little.
0:26:54 Yeah, I think those are all fair arguments.
0:26:58 I think someone, my position at least, is that the very important word there is if.
0:27:04 If it is the case that the demand is coming, if it is the case that OpenAI will spend those
0:27:11 $300 billion, there are a lot of ifs, which I think make people like me and I think other
0:27:13 investors kind of nervous.
0:27:19 But just at sort of a general level, how much debt is too much debt?
0:27:25 Like, at what point do we look at what’s happening and say, yeah, we’re going too far?
0:27:27 Like, what is that line, do you think?
0:27:30 Yeah, I don’t think we’re, you know, I don’t think we’re anywhere near it.
0:27:36 And the reason why is credit markets, again, it’s about relative numbers.
0:27:43 If you have growing cash flow, if your EBITDA is going from $100 billion to $200 billion, growing
0:27:48 your debt levels from $50 billion to $150 billion might not mean that much.
0:27:51 Your leverage still might be very, very low.
0:27:54 So your absolute debt levels might be really high.
0:27:59 I think this market is ripe for dramatic or borrowing.
0:28:05 If you look at some of these transactions, the amount that the books were oversubscribed.
0:28:09 So the book talk on Amazon, they raised $15 billion in debt.
0:28:14 The buzz on the book was it was $80 billion of demand for that $15 billion of debt.
0:28:17 What if Amazon wanted to raise $100 billion?
0:28:20 How much would the book of demand have been?
0:28:25 You know, it’s sort of hard to say, but these deals are being way oversubscribed.
0:28:31 There’s a lot more money chasing this debt, particularly for the high quality names than not.
0:28:33 Yields are hard to come by.
0:28:40 In a spread compressed environment, generating alpha and excess returns is very difficult.
0:28:45 These are all very high, highly rated, high quality companies.
0:28:48 People are not used to this levels of debt.
0:28:53 I’m telling people, get used to it because we’re going to see more because they want to build more.
0:28:56 And if you say to me, how much more can they borrow?
0:28:58 I don’t know what that number is.
0:29:01 I just know it’s more, and it’s more by a lot.
0:29:03 And by the way, let’s say I’m wrong.
0:29:05 I sort of sound bullish, right?
0:29:10 Say I’m dead wrong and that you’re only going to get half the revenues that these companies are expecting.
0:29:18 The reality is the vast majority of them, certainly these double A’s and triple A’s, it’s going to primarily be an equity impact.
0:29:24 The credit profiles, you know, if you go from triple A to double A, you’re going to get your money back.
0:29:27 If you go from double A to single A, ultimately you’re going to get your money back.
0:29:37 But if your equity is valued at 30 times earnings and your revenues are growing at a much slower rate, 50% less than what the market anticipates,
0:29:42 your multiple could be cut in half, your stock price could be cut in half, and you can get crushed.
0:29:43 And I think that’s a little bit of what’s going on now.
0:29:47 Just like you said, everyone’s asking, though, what if this doesn’t happen?
0:29:49 What if those revenues don’t come?
0:29:50 What if they’re not there?
0:29:56 It’s really much more of an equity risk, even though this is being funded on the back of bondholders.
0:29:56 Yes.
0:30:01 The equity holders are actually taking much more risk than the debt holders from my perspective.
0:30:03 And that’s where you’re going to see even more debt.
0:30:03 Yes.
0:30:07 Which is itself concerning for some people as well.
0:30:08 Yeah.
0:30:09 It’s very, very interesting stuff.
0:30:12 Well, listen, these are the Mount Rushmore of credits.
0:30:17 If you think about names that are positioned to borrow more money, these are the names.
0:30:22 They’ve run historically very conservative financial policies.
0:30:23 They’ve got tons of cash.
0:30:25 They generate a lot of cash.
0:30:26 They can add a lot of debt.
0:30:30 The rating agencies are providing support and letting them grow into the balance sheet.
0:30:36 So what I would say for the everyday person who’s not even investing, this is a great thing.
0:30:41 This means the benefits of AI are going to come to you sooner than later.
0:30:44 And I think that’s what all these enterprises are looking for.
0:30:48 They are desperate to enhance efficiency.
0:30:50 Sometimes it means firing people.
0:30:54 Other times it just means the ability to sell more products and services.
0:30:58 And they need these hyperscalers and they need these products and services quicker.
0:31:00 So the faster they can be built, the better.
0:31:02 And I think that’s actually good for everybody.
0:31:02 All right.
0:31:03 You are bullish.
0:31:05 I’ll tell you that much.
0:31:07 We appreciate it.
0:31:12 Robert Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence.
0:31:13 Robert, this was great.
0:31:14 Thanks for joining us.
0:31:15 Thanks so much, Ed.
0:31:23 Well, as Robert told us, record year for debt, both public and private.
0:31:26 More than $6 trillion issued this year.
0:31:31 And as Robert also told us, it is only going to continue.
0:31:34 In his words, expect, quote, more.
0:31:38 Now, clearly, Robert isn’t so worried about that.
0:31:42 Part of that is probably because he’s more focused on the credit markets than the equity markets.
0:31:46 As he said, the equity investors are actually quite exposed here.
0:31:50 And part of it is also that he is fundamentally bullish on AI.
0:31:52 And that is a fair position.
0:31:54 And many people take that position.
0:31:58 But regardless of what you think of all of this, the point does stand.
0:32:03 And that is that we are borrowing more money than ever before to build AI.
0:32:13 And it’s also highly relevant to a conversation that we had a few weeks ago with Andrew Ross Sorkin.
0:32:25 You might remember we had Andrew on to discuss his new book, 1929, which tells the story of 1929 and how the U.S. stock market collapsed that year and how it ultimately led to this Great Depression.
0:32:28 And we covered a lot of ground in that conversation.
0:32:33 But there was one piece of the story that we perhaps should have dug into a little bit more.
0:32:36 And that was the debt piece of the story.
0:32:44 The enormous amounts of debt that investors on Wall Street and on Main Street were taking back in 1929 to finance their investments.
0:32:46 Now, I won’t explain exactly how that all played out.
0:32:50 If you want the full explanation, then I encourage you to just read the book.
0:33:00 But I would highlight just one paragraph that I think really summarizes things and which I think is probably the most important paragraph in the whole book.
0:33:03 So here it is, Andrew Ross Sorkin writes, quote,
0:33:10 The almost singular through line behind every major financial crisis is one thing, debt.
0:33:13 It is a powerfully optimistic force.
0:33:19 If we envision the future as a land of ever-expanding opportunity and affluence,
0:33:23 why shouldn’t we marshal some of those resources for use today?
0:33:25 That’s what debt does.
0:33:29 It draws the wealth of tomorrow into the present.
0:33:33 Problems arise when we get greedy and take too much.
0:33:40 Nobody knows for sure where the line is or what to do when we discover we’ve gone past it.
0:33:44 At that point, panic is the natural reaction.
0:33:53 The future suddenly grows so small and so dark that there isn’t enough optimism left to draw from.
0:33:57 Okay, that’s it for today.
0:34:03 This episode was produced by Claire Miller, edited by Joel Patterson, and engineered by Benjamin Spencer.
0:34:04 Our associate producer is Alison Weiss.
0:34:08 Our research team is Dan Shalon, Isabella Kinsel, Chris O’Donoghue, and Mia Silverio.
0:34:11 Our technical director is Drew Burrows.
0:34:13 Thank you for listening to Profit G Markets from Profit G Media.
0:34:15 If you liked what you heard, give us a follow.
0:34:17 I’m Ed Elson.
0:34:18 I’ll see you tomorrow.
0:34:20 I’ll see you tomorrow.
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0:02:37 Today’s number, 25.
0:02:43 That is the percentage of ants that never do any work for the colony.
0:02:47 Scientists have yet to figure out why these ants don’t work,
0:02:50 but they have identified one trade that they all have in common.
0:02:52 They’re all in consulting.
0:03:08 Welcome to Prof. G. Markets. I’m Ed Elson. It is November 19th.
0:03:11 Let’s check in on yesterday’s market vitals.
0:03:15 The major indices all declined as the tech sell-off continued.
0:03:20 The S&P 500 fell for the fourth day in a row to its lowest close in a month.
0:03:26 Meanwhile, the yield on 10-year treasuries slid, and finally, Bitcoin dipped below $90,000
0:03:28 before recovering marginally.
0:03:31 Okay, what else is happening?
0:03:35 Home Depot shares dropped after reporting third-quarter earnings yesterday.
0:03:40 Revenue slightly beat expectations, but the company missed on earnings per share.
0:03:43 The retailer also cut its full-year guidance.
0:03:49 Earnings for 2025 are now expected to fall 5% instead of previous projections of 2%.
0:03:52 The stock closed down 6% yesterday.
0:03:55 So, why do we care?
0:04:00 Well, Home Depot can tell us kind of a lot about how the American consumer is doing.
0:04:03 Its results are also closely tied to the housing market.
0:04:07 And on top of that, the company is relatively exposed to the tariffs.
0:04:12 So, to help us break down what these earnings tell us about the broader economy,
0:04:17 we are speaking with Joe Feldman, Senior Managing Director at Telsey Group.
0:04:18 Joe, thanks for joining us.
0:04:19 Yeah, thanks for having me.
0:04:20 I’m excited to chat with you.
0:04:23 So, we want to get your reactions to these earnings.
0:04:29 Beat on revenue, missed on EPS, stock fell 6%.
0:04:32 Take us through what happened with these Home Depot earnings.
0:04:38 So, I think what happened was expectations were a lot higher heading into the print.
0:04:42 Really self-induced by Home Depot.
0:04:46 If you go back a quarter, they saw some momentum in the business.
0:04:49 They had a better spring, early spring-summer period.
0:04:53 And they thought the second half of the year was going to be even better.
0:04:55 They thought there would be continued momentum.
0:05:01 So, we in the street all expected higher sales trends coming into this quarter.
0:05:05 And then when the quarter materialized, it didn’t happen.
0:05:08 You know, basically, the consumer stayed kind of stable.
0:05:13 So, their underlying business stayed stable at around a 1% growth in terms of comp.
0:05:17 But there was some pressure because of the lack of storm activity.
0:05:20 Usually, hurricanes are a good thing for Home Depot, for Lowe’s.
0:05:24 And when that didn’t happen, it caused further pressure on sales.
0:05:27 Then the margins start to deteriorate a little bit.
0:05:28 And you saw some deleverage.
0:05:30 And so, the earnings came in a little bit worse.
0:05:34 And the investor community was a little frustrated with what happened.
0:05:39 Can you tell us more about how hurricanes relate to profits at Home Depot?
0:05:43 It’s a strange thing in the business, but it is important.
0:05:44 Yeah.
0:05:48 No, it’s very important, actually, in the third quarter and sometimes in the fourth quarter,
0:05:51 where big storms can have a big impact.
0:05:57 Because when a hurricane comes and there is some destruction related to it, or tornadoes
0:06:00 and other storms, you know, houses need repair.
0:06:02 Roofs might get damaged.
0:06:03 Gutters might get damaged.
0:06:09 And so, when that happens, the consumer usually comes back in force in that region soon after
0:06:12 the event to try to repair their homes.
0:06:17 This time around, in the third quarter of 2025, we didn’t really have any major storms like
0:06:20 that compared to two last year, late in the quarter, around October.
0:06:27 And those storms had a big positive boost to Home Depot, Lowe’s, tractor supply, late
0:06:29 in the quarter, a year ago, and their fourth quarter.
0:06:35 So, now when you look ahead and you don’t have any storm activity or recovery activity to
0:06:38 happen, that’s going to put some extra pressure on the sales.
0:06:39 Yeah.
0:06:40 So interesting.
0:06:46 Aside from the hurricanes or the lack thereof, which was interestingly a bad thing for the
0:06:49 company, was there anything else?
0:06:52 Was there anything that we learned about the consumer, perhaps?
0:06:58 I mean, I feel like Home Depot’s generally considered to be like a bellwether for how
0:07:00 the consumer is doing.
0:07:03 Did that play a role in these earnings here?
0:07:06 You know, I think the consumer was definitely front and center.
0:07:10 And there was a, it’s always a much talked about topic, as you said, with Home Depot as a bellwether.
0:07:13 And their consumer is actually pretty healthy.
0:07:15 It was interesting.
0:07:17 Now, you may not think that when you look at the sales trend.
0:07:21 However, big ticket sales were actually up a couple of percent.
0:07:27 That would imply that people, when they do go to shop, they’re opting for, you know, new
0:07:32 innovations, newer products, things that may have advanced technologies within them.
0:07:37 I’m thinking of appliances and power tools and things like that, where they are stepping
0:07:37 up.
0:07:41 So that would imply that the consumer has the money to spend.
0:07:45 The homeowner, by definition, tends to be a bit more affluent, just because to own a home,
0:07:46 you need to be.
0:07:50 And so I think they’re seeing resilience among their consumer.
0:07:55 It’s just they’re not seeing people, you know, digging in deeper to go after bigger projects,
0:07:58 like a bathroom remodel or a kitchen remodel.
0:08:00 And that’s really what’s causing the pressure.
0:08:03 The day-to-day repair and maintenance is happening.
0:08:08 And that’s why I said earlier that the business is relatively stable, because that underlying
0:08:10 core business is fine.
0:08:12 And we’re seeing consumers spend and shop.
0:08:19 It’s just that incremental spend is not happening because that otherwise considered discretionary
0:08:23 within the home improvement space is not happening because people are just a little bit more
0:08:23 cautious.
0:08:27 Maybe they’re waiting for rates, interest rates to come down a little more to finance some of
0:08:32 these projects and, you know, home values are still up.
0:08:36 But with lack of housing turnover, there’s also some pressure there.
0:08:41 Usually people will do some extra work to clean up the house before they sell it or soon after
0:08:42 they buy it.
0:08:45 And with the lack of turnover, that hurts as well.
0:08:48 So broadly speaking, the consumer is somewhat resilient.
0:08:49 They’re spending.
0:08:54 It’s just that they’re not spending beyond what they need to spend on the day-to-day maintenance.
0:08:59 Have tariffs played a role in the story here?
0:09:04 I mean, Home Depot, I believe it imports quite a lot of its inventory.
0:09:07 Have tariffs had any effect on the business?
0:09:13 You know, so far, tariffs have not had a significant effect at Home Depot, nor at Lowe’s.
0:09:14 I mean, we’ll hear from Lowe’s tomorrow.
0:09:21 But I think what we’ve seen is that the tariffs, you know, over half of what Home Depot buys is
0:09:21 domestic.
0:09:26 So, you know, a little less than 50% is imported.
0:09:28 Those goods, there are tariffs on.
0:09:33 They’ve been able to mitigate a lot of the tariffs through negotiations with suppliers, through,
0:09:38 you know, cost controls on their own end, maybe, you know, operating it more efficiently.
0:09:40 And there has been selective pass-through.
0:09:45 They’ve not really seen much pushback on the pricing pass-through that they’ve had to do.
0:09:46 It’s not been too dramatic.
0:09:53 You do see it in appliances, power tools, things like that, that come out of China or other parts
0:09:53 of the world.
0:09:58 But, you know, broadly speaking, tariffs were not a major impact in this quarter.
0:10:04 But they are increasing prices, and they are saying that it’s because of the tariffs.
0:10:08 In other words, it’s impacting the consumer at least a little bit.
0:10:09 Yes.
0:10:10 I think broadly, yes.
0:10:13 To expand beyond the Home Depot story, you’re absolutely right.
0:10:17 The consumer is very much feeling the impact of tariff-related price increases.
0:10:19 There’s no question about that.
0:10:24 And I think the Trump administration response on food the other day really reflects that.
0:10:30 You know, I assume when we hear from Target and Walmart later this week, we’re going to hear
0:10:33 that tariff pressure is there.
0:10:33 It’s real.
0:10:36 It’s causing consumers to have less discretionary dollars.
0:10:39 It’s causing consumers to be a little sharper and tighter with how they spend.
0:10:41 They’re seeking out more value.
0:10:48 So, yes, broadly, the consumer is definitely being impacted by the higher prices that are
0:10:49 starting to flow through.
0:10:54 And it’s really just starting because if you consider when the tariffs really did jump up a
0:10:58 little bit, inventory that’s now hitting the stores for this holiday season and into next
0:11:03 year, that’s the tariff inventory at the higher tariffs that are in place today.
0:11:03 Right.
0:11:04 Yeah.
0:11:09 Just before we let you go here, what did we learn about the guidance?
0:11:16 I mean, is there anything that the guidance for Home Depot could tell us about the economy
0:11:17 at large?
0:11:23 I mean, can we learn anything from these earnings about what will happen either on tariffs or on
0:11:24 anything else going forward?
0:11:25 Yeah.
0:11:31 I think the guidance from Home Depot reflects the fact that the macro, more specifically,
0:11:33 the housing market is still rather sluggish.
0:11:38 And we’re just not seeing that pickup that we would have expected to see at this point.
0:11:41 Now, we are seeing a more stable housing market.
0:11:45 And the turnover is running at around 4 million at an annual run rate.
0:11:47 4 million units are turning over.
0:11:49 But we need to see it higher.
0:11:51 We want to see it higher.
0:11:52 And I think Home Depot wants to see that.
0:11:56 They also want to see lower interest rates that would help people to finance projects.
0:12:02 So I think their guidance shows that caution that we’re just not getting that incremental
0:12:05 lift from the industry that we would like to see at this point.
0:12:10 I do believe Home Depot is taking market share reflected in their current business.
0:12:12 I mean, it was positive sales.
0:12:15 They generated $40 billion, $41 billion of revenue in the quarter.
0:12:21 But to go forward, I think there’s going to be some caution in 2026 as well.
0:12:26 Tariff-related pricing pressure on the first half of the year on the consumer is going to
0:12:27 continue to weigh on things.
0:12:31 And so you may not see this sharp rebound in the first or second quarter.
0:12:35 We’re hoping spring, so maybe second quarter, you’ll start to see a little bit of a lift.
0:12:41 But it still looks like we’re going to see more of the same for the next couple of quarters.
0:12:45 All right. Joe Feldman, Senior Managing Director at Telsey Group.
0:12:46 Thank you for joining us.
0:12:46 Really appreciate your time.
0:12:47 My pleasure.
0:12:48 Thanks for having me.
0:12:51 After the break, big tech embraces debt.
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0:16:21 What’s the hot new trend in AI right now?
0:16:24 Raising a lot of debt.
0:16:29 This week, Amazon raised $15 billion in its first US dollar bond offering.
0:16:31 In three years, it’s not alone.
0:16:35 Google sold $25 billion worth of debt in the US and Europe earlier this month.
0:16:39 Meta issued $30 billion of corporate bonds in October.
0:16:43 Meanwhile, Oracle is already carrying $104 billion in debt.
0:16:46 And it is lining up another $38 billion.
0:16:49 All of this spending adds up.
0:16:55 These deals have contributed to a record $6 trillion in global debt issuance this year.
0:17:01 In sum, big tech is now financing the AI boom with borrowed money just as investors are starting
0:17:05 to question how and when this AI build-out will actually pay off.
0:17:10 So, here to explain the role that debt is playing in the AI boom, we are speaking with Robert
0:17:15 Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence.
0:17:18 Robert, thanks for joining us on Prof.G Markets.
0:17:19 How are you doing, Ed?
0:17:20 I’m doing very well.
0:17:21 Thank you for being here.
0:17:22 Awesome.
0:17:27 So, a lot of big tech debt headlines in the news recently.
0:17:30 Amazon raising $15 billion.
0:17:33 We saw Google raise $25 billion.
0:17:35 Meta raised $30 billion.
0:17:42 These seem like very big numbers, but for those of us who are, you know, less familiar with
0:17:46 the debt markets, how big are these numbers really?
0:17:48 Why are we seeing them?
0:17:54 And why do they all seem to be happening kind of at the same time or at least in the same month?
0:18:00 Yeah, it’s even bigger than what you said because Oracle did $18 billion of public debt and they’re
0:18:01 looking to do $38 billion of private debt.
0:18:06 Meta did another $27 billion of off-balance sheet debt.
0:18:11 So, we’re actually in a record year for debt issuance, public and private.
0:18:18 And it’s a little bit of a question of if we build it, will they come when it comes to AI?
0:18:19 I actually think it’s the other way.
0:18:21 I think the demand has come.
0:18:24 So, these companies are building it.
0:18:28 And the reality is this is just the early stages.
0:18:31 There is a lot more spending to go.
0:18:35 I think we’re going to see hundreds of billions of dollars of debt.
0:18:41 over the next few years because we’re likely to see $3 trillion of AI cap spending
0:18:45 cumulatively from probably a handful of the largest hyperscalers through 2030.
0:18:51 So, those names you mentioned there, these are all companies that, generally speaking,
0:18:54 already have quite a lot of cash on the balance sheet.
0:19:01 You’d kind of think that if you’re Google or you’re Meta or you’re Amazon, that you don’t
0:19:02 need to borrow money.
0:19:04 Do they need to borrow?
0:19:09 I mean, do they not have enough cash already to just finance this themselves?
0:19:09 Yeah.
0:19:14 Listen, the old adage in the bond markets are you borrow money when you can, not when
0:19:15 you have to.
0:19:18 And right now, the market is still ripe for lending.
0:19:25 If you can take down 10-year money with a four-handle on it, so a 4% coupon, you’re going to do that
0:19:26 all day long.
0:19:30 You can borrow 30, 40, 50-year money with a five-handle on it.
0:19:31 You’re also going to do that.
0:19:37 The reality is they have enough money today that if they didn’t want to borrow another dime,
0:19:39 they could probably get away with it.
0:19:44 But what it would do is it really pulls resources away, pulls financial flexibility away.
0:19:51 Because most of these companies, other than Amazon, are also spending 30, 50, 70, in the
0:19:54 case of Apple, $100 billion a year on shareholder returns.
0:19:57 So, how do you do everything is really the question.
0:20:04 And this enables borrowing money, enables them to both invest organically, continue to do M&A
0:20:08 and pay significant dividends and share buybacks.
0:20:13 Over the next couple of years, some of the companies like Ameta are going to be spending
0:20:18 more money than they’re pulling in, if they continue on a shareholder return path they’ve
0:20:19 been on.
0:20:20 So, they actually do need money.
0:20:25 Others, like an Oracle, which are triple B rated, are just flat out free cash flow negative.
0:20:27 They’re spending a lot more than they’re bringing in.
0:20:28 So, it’s a little bit idiosyncratic.
0:20:35 But remember, for years, most of these companies, whether it’s Meta, Google, Amazon, Microsoft,
0:20:38 they’ve been very conservative in terms of their balance sheets.
0:20:43 Double A balance sheets, triple A balance sheets, 50, 75, $100 billion in cash.
0:20:46 They’ve been setting themselves up for an opportunity like this.
0:20:49 So, they position themselves very well.
0:20:53 That being said, borrowing money today makes a pretty good argument that they’re going to
0:20:55 spend a lot more money tomorrow.
0:21:00 You mentioned there that, you know, there’s this question of, if we build it, will they
0:21:01 come?
0:21:04 You said that you think the demand already is there.
0:21:12 I think the AI bears would say, well, yes, there’s demand, but it’s all kind of circular.
0:21:13 It’s all coming from the same people.
0:21:20 I mean, OpenAI wants to buy compute, but, you know, NVIDIA, they’re the ones who have been
0:21:24 investing in OpenAI, and then OpenAI takes their money and spends it over at Oracle.
0:21:27 In other words, the demand is artificial.
0:21:31 To the people who are worried about that prospect, what would you say to those people?
0:21:36 Yeah, there’s been a lot of incestuous type of investing here.
0:21:39 That doesn’t mean that true third-party demand doesn’t exist.
0:21:41 I actually think it does.
0:21:46 I think every single business is looking towards these large hyperscalers to create an AI backdrop
0:21:47 for them.
0:21:49 They cannot do that on themselves.
0:21:54 Every one of these companies constantly are talking on their earnings calls about they
0:21:59 have much more demand than there is supply, and that’s why they’re spending so much.
0:22:03 I understand the naysayers, because if you’re spending hundreds of billions of dollars, if
0:22:09 not trillions of dollars right now, and you’re not seeing returns for the next two, four, six
0:22:10 years, you get skeptical.
0:22:14 In particular, the skepticism, though, is coming from the equity markets.
0:22:20 We saw stocks skyrocket, all-time high valuations, expectations that every single one of these
0:22:22 companies were going to the moon and beyond.
0:22:27 The credit markets, though, have been, I think, a lot more based in reality.
0:22:33 Spreads have gotten a little bit wider as all this debt has come.
0:22:36 That being said, there hasn’t been the same sort of panic or sell-off.
0:22:40 We’re not 35% or 40% off from our highs.
0:22:41 We’re just a little bit wider.
0:22:46 And I think that’s really the market that you need to look at to see, is there really
0:22:47 pessimism?
0:22:50 Is there really some sort of systematic problem?
0:22:55 And the reality is, I think the market is much more fighting headlines on return on investment
0:22:59 than they are whether or not these are going to ultimately pay off.
0:23:01 They are going to pay off.
0:23:02 The question just is how much.
0:23:05 From a credit side, pretty much everything’s trading at par.
0:23:09 Things are trading near historic tights.
0:23:13 That says, or the market is pretty comfortable that those cash flows are going to be there
0:23:13 in the future.
0:23:15 Equities are just a different story.
0:23:18 Perhaps they got ahead of themselves, and that’s why they’re coming back.
0:23:21 And that’s where we’re seeing a little bit of the panic in the market.
0:23:25 But we’ve been asked whether or not this is a systematic potential risk.
0:23:27 And I don’t see it at all.
0:23:32 And the difference between now and, say, the dot-com era is the dot-com era had companies
0:23:40 that weren’t generating any revenues, raising money via IPOs at ridiculous valuations that
0:23:41 could never be justified.
0:23:44 Here, you actually have companies collecting money.
0:23:50 The reason why Amazon stock took off after the end of the quarter was because AWS, its AI
0:23:55 and cloud business, had its best quarter in three years off of really large numbers.
0:23:57 And you’re seeing that across the space.
0:24:03 So we’ve got really big companies generating real revenues and real cash flows today, and
0:24:06 they’re spending money to make money in the future.
0:24:11 I just don’t think that the type of worries that people have out there really are justified.
0:24:16 Yeah, it sounds like you think that, you know, yes, they’re taking on a lot of debt.
0:24:18 But for the most part, it’s justified and responsible.
0:24:22 Are there certain companies that aren’t doing it right, though?
0:24:24 I mean, I think of Oracle as an example.
0:24:27 You mentioned that they’ve taken on more than $100 billion.
0:24:30 Investors seem to be getting a lot more anxious.
0:24:32 You mentioned their credit rating.
0:24:36 I think you said double B or somewhere closer to junk.
0:24:40 Are you concerned about a company like that or maybe a company like CoreWeave, again, which
0:24:41 is borrowing quite a lot?
0:24:44 All that companies doing it right and companies doing it wrong?
0:24:46 Yeah, it’s not necessarily right or wrong.
0:24:47 It’s just the starting point.
0:24:55 So some of the largest companies, like Microsoft or Amazon or Alphabet, have AA or AAA ratings.
0:24:58 So their balance sheets are already prepped for more borrowing.
0:25:00 They have little or no leverage.
0:25:01 Absolute debt might be high.
0:25:03 They might have $50 or $100 billion of debt.
0:25:07 But they also have $100 or $150 or $200 billion of EBITDA.
0:25:11 So in the world of credit, it’s all relative.
0:25:13 Leverage is still very low.
0:25:18 As you move down the credit scale, somebody like Oracle, who’s triple B rated, this is sort
0:25:18 of important.
0:25:20 They are investment grade.
0:25:21 They’re mid-triple B.
0:25:23 They’ve got negative outlooks at S&P and Moody’s.
0:25:28 People are worried that a name like that could fall to junk because the free cash flow is
0:25:30 going to be so negative over the next couple of years.
0:25:32 It doesn’t mean they’re doing anything wrong.
0:25:39 And in fact, it appears as if they’ve got about $300 billion of contracts coming from what we
0:25:40 believe is open AI.
0:25:49 If that’s the case, if they’re spending money now, they’re more than willing to go into
0:25:53 a cash flow deficit in order to meet that demand over the next few years.
0:25:54 So it’s not a matter of right or wrong.
0:25:57 It’s just their balance sheet is starting in a different place.
0:26:02 And what that means is that credit risk is going to be higher because they’re triple B with
0:26:07 $100 billion plus of debt and adding more debt versus a Microsoft’s that’s triple A that
0:26:09 has less debt that’s adding debt.
0:26:12 So it’s still a little bit relative.
0:26:13 I don’t think it’s right or wrong.
0:26:15 I think it’s all sort of right.
0:26:17 They’re actually all going after very similar dollars.
0:26:23 This is a huge pie of potential revenues, but there’s only a handful of players here that
0:26:26 are actually building super deep moats around them.
0:26:32 They’re going to make it so that there’s going to be such large barriers to entry that no one
0:26:33 else is going to be able to provide these services.
0:26:39 So if that demand does end up playing out, I think we’re going to be looking back at now
0:26:41 and saying, why didn’t actually, why didn’t they spend more money?
0:26:45 I think that’s a fair argument is we just wrote a note on Amazon saying that they’re going
0:26:48 to spend a trillion dollars over the next five years.
0:26:49 Is that too much or too little?
0:26:51 I actually think it’s going to end up proving to be too little.
0:26:54 Yeah, I think those are all fair arguments.
0:26:58 I think someone, my position at least, is that the very important word there is if.
0:27:04 If it is the case that the demand is coming, if it is the case that OpenAI will spend those
0:27:11 $300 billion, there are a lot of ifs, which I think make people like me and I think other
0:27:13 investors kind of nervous.
0:27:19 But just at sort of a general level, how much debt is too much debt?
0:27:25 Like, at what point do we look at what’s happening and say, yeah, we’re going too far?
0:27:27 Like, what is that line, do you think?
0:27:30 Yeah, I don’t think we’re, you know, I don’t think we’re anywhere near it.
0:27:36 And the reason why is credit markets, again, it’s about relative numbers.
0:27:43 If you have growing cash flow, if your EBITDA is going from $100 billion to $200 billion, growing
0:27:48 your debt levels from $50 billion to $150 billion might not mean that much.
0:27:51 Your leverage still might be very, very low.
0:27:54 So your absolute debt levels might be really high.
0:27:59 I think this market is ripe for dramatic or borrowing.
0:28:05 If you look at some of these transactions, the amount that the books were oversubscribed.
0:28:09 So the book talk on Amazon, they raised $15 billion in debt.
0:28:14 The buzz on the book was it was $80 billion of demand for that $15 billion of debt.
0:28:17 What if Amazon wanted to raise $100 billion?
0:28:20 How much would the book of demand have been?
0:28:25 You know, it’s sort of hard to say, but these deals are being way oversubscribed.
0:28:31 There’s a lot more money chasing this debt, particularly for the high quality names than not.
0:28:33 Yields are hard to come by.
0:28:40 In a spread compressed environment, generating alpha and excess returns is very difficult.
0:28:45 These are all very high, highly rated, high quality companies.
0:28:48 People are not used to this levels of debt.
0:28:53 I’m telling people, get used to it because we’re going to see more because they want to build more.
0:28:56 And if you say to me, how much more can they borrow?
0:28:58 I don’t know what that number is.
0:29:01 I just know it’s more, and it’s more by a lot.
0:29:03 And by the way, let’s say I’m wrong.
0:29:05 I sort of sound bullish, right?
0:29:10 Say I’m dead wrong and that you’re only going to get half the revenues that these companies are expecting.
0:29:18 The reality is the vast majority of them, certainly these double A’s and triple A’s, it’s going to primarily be an equity impact.
0:29:24 The credit profiles, you know, if you go from triple A to double A, you’re going to get your money back.
0:29:27 If you go from double A to single A, ultimately you’re going to get your money back.
0:29:37 But if your equity is valued at 30 times earnings and your revenues are growing at a much slower rate, 50% less than what the market anticipates,
0:29:42 your multiple could be cut in half, your stock price could be cut in half, and you can get crushed.
0:29:43 And I think that’s a little bit of what’s going on now.
0:29:47 Just like you said, everyone’s asking, though, what if this doesn’t happen?
0:29:49 What if those revenues don’t come?
0:29:50 What if they’re not there?
0:29:56 It’s really much more of an equity risk, even though this is being funded on the back of bondholders.
0:29:56 Yes.
0:30:01 The equity holders are actually taking much more risk than the debt holders from my perspective.
0:30:03 And that’s where you’re going to see even more debt.
0:30:03 Yes.
0:30:07 Which is itself concerning for some people as well.
0:30:08 Yeah.
0:30:09 It’s very, very interesting stuff.
0:30:12 Well, listen, these are the Mount Rushmore of credits.
0:30:17 If you think about names that are positioned to borrow more money, these are the names.
0:30:22 They’ve run historically very conservative financial policies.
0:30:23 They’ve got tons of cash.
0:30:25 They generate a lot of cash.
0:30:26 They can add a lot of debt.
0:30:30 The rating agencies are providing support and letting them grow into the balance sheet.
0:30:36 So what I would say for the everyday person who’s not even investing, this is a great thing.
0:30:41 This means the benefits of AI are going to come to you sooner than later.
0:30:44 And I think that’s what all these enterprises are looking for.
0:30:48 They are desperate to enhance efficiency.
0:30:50 Sometimes it means firing people.
0:30:54 Other times it just means the ability to sell more products and services.
0:30:58 And they need these hyperscalers and they need these products and services quicker.
0:31:00 So the faster they can be built, the better.
0:31:02 And I think that’s actually good for everybody.
0:31:02 All right.
0:31:03 You are bullish.
0:31:05 I’ll tell you that much.
0:31:07 We appreciate it.
0:31:12 Robert Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence.
0:31:13 Robert, this was great.
0:31:14 Thanks for joining us.
0:31:15 Thanks so much, Ed.
0:31:23 Well, as Robert told us, record year for debt, both public and private.
0:31:26 More than $6 trillion issued this year.
0:31:31 And as Robert also told us, it is only going to continue.
0:31:34 In his words, expect, quote, more.
0:31:38 Now, clearly, Robert isn’t so worried about that.
0:31:42 Part of that is probably because he’s more focused on the credit markets than the equity markets.
0:31:46 As he said, the equity investors are actually quite exposed here.
0:31:50 And part of it is also that he is fundamentally bullish on AI.
0:31:52 And that is a fair position.
0:31:54 And many people take that position.
0:31:58 But regardless of what you think of all of this, the point does stand.
0:32:03 And that is that we are borrowing more money than ever before to build AI.
0:32:13 And it’s also highly relevant to a conversation that we had a few weeks ago with Andrew Ross Sorkin.
0:32:25 You might remember we had Andrew on to discuss his new book, 1929, which tells the story of 1929 and how the U.S. stock market collapsed that year and how it ultimately led to this Great Depression.
0:32:28 And we covered a lot of ground in that conversation.
0:32:33 But there was one piece of the story that we perhaps should have dug into a little bit more.
0:32:36 And that was the debt piece of the story.
0:32:44 The enormous amounts of debt that investors on Wall Street and on Main Street were taking back in 1929 to finance their investments.
0:32:46 Now, I won’t explain exactly how that all played out.
0:32:50 If you want the full explanation, then I encourage you to just read the book.
0:33:00 But I would highlight just one paragraph that I think really summarizes things and which I think is probably the most important paragraph in the whole book.
0:33:03 So here it is, Andrew Ross Sorkin writes, quote,
0:33:10 The almost singular through line behind every major financial crisis is one thing, debt.
0:33:13 It is a powerfully optimistic force.
0:33:19 If we envision the future as a land of ever-expanding opportunity and affluence,
0:33:23 why shouldn’t we marshal some of those resources for use today?
0:33:25 That’s what debt does.
0:33:29 It draws the wealth of tomorrow into the present.
0:33:33 Problems arise when we get greedy and take too much.
0:33:40 Nobody knows for sure where the line is or what to do when we discover we’ve gone past it.
0:33:44 At that point, panic is the natural reaction.
0:33:53 The future suddenly grows so small and so dark that there isn’t enough optimism left to draw from.
0:33:57 Okay, that’s it for today.
0:34:03 This episode was produced by Claire Miller, edited by Joel Patterson, and engineered by Benjamin Spencer.
0:34:04 Our associate producer is Alison Weiss.
0:34:08 Our research team is Dan Shalon, Isabella Kinsel, Chris O’Donoghue, and Mia Silverio.
0:34:11 Our technical director is Drew Burrows.
0:34:13 Thank you for listening to Profit G Markets from Profit G Media.
0:34:15 If you liked what you heard, give us a follow.
0:34:17 I’m Ed Elson.
0:34:18 I’ll see you tomorrow.
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Ed Elson is joined by Joe Feldman, Senior Managing Director at the Telsey Group, to unpack Home Depot’s earnings and what they reveal about the state of the American economy. Then Robert Schiffman, Senior Technology and Internet Credit Analyst at Bloomberg Intelligence, joins the show to break down why Amazon raised $15 billion in debt this week and explain how that strategy is shaping the AI boom.
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