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- [00:01]
Sponsor Announcer
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- [00:37]
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- [01:36]
George Hahn
Jobs welcome to the week from Propg Media where we break down what mattered and what it all means. I'm George Hahn and it's Friday, July 31st. Today, the hidden debt financing the AI boom and why the market turned this week. Then China's push to spread cheap open source AI around the world. And finally the reality behind the creator economy and the rise of the solo founder. Let's get into it this week, the debt underneath the AI boom came into view and the market didn't like what it saw. An investigation from Nikkei Asia foundation found that the five biggest companies in AI Alphabet, Microsoft, Amazon, Meta and Oracle are now carrying more debt off their balance sheets than on them. On Monday's Prof. G Markets episode, Scott walked through what that means.
- [02:38]
Ed
There is a sweet spot of leverage in the economy, both in the banking system and corporate debt, and even personally a certain amount of leverage. But wait. Big tax 1.7 trillion and off balance sheet debt versus 1.4 trillion reported. That gap is sort of the story because when you're hiding a bigger number than what you're reporting, that's not accounting it's concealment. And Meta's off balance debt is $420 billion, which is 3x what they report. That's not a rounding error, that's a second company hiding, hiding liabilities inside of the first company. And the mechanism is that shell companies will fund the data centers, private credit funds the shell companies and pension funds and insurance annuities fund the private credit. If you reach far enough into the barrel, where you reverse engineer far enough, what you find is that a teacher's retirement account is underwriting Zuckerberg's GPU bill. And you know, Bernanke always said this. We're obsessed. 90% of the airtime on this show or on CNBC is about equities because they're more interesting and they have a daily scorecard and the movements are more dramatic. We're just in stock. Stocks are just more fun, they have more personality, they're more interesting to track. But whether it's, whether it's the depression, whether it's a great financial recession, whether it's a dot com implosion, nothing rings the bell of a beginning of a crisis like leverage.
- [04:11]
George Hahn
The hidden debt wasn't the only warning. Nvidia had lined up more than $750 billion in new AI commitments including a quarter trillion dollar guarantee for OpenAI and the cost of insuring its debt posted its biggest one day jump on record. Just another iteration of the circular financing propg markets has flagged for for months. On Wednesday, the market stopped ignoring it. The NASDAQ fell into correction territory. Chip stocks got crushed. Torsten Slok, chief economist at Apollo, explained what the market was suddenly pricing in.
- [04:53]
Torsten Slok
The challenge at the moment is that the hyperscalers and those who are building the infrastructure, they are changing their financing, which used to be mainly from the equity side of the balance sheet to to now being on the debt side of the balance sheet. And the amount of debt that has come to the market from the hyperscalers, meaning the companies that are building out the infrastructure, has just been enormous. So as a result we've seen very, very significant increase in supply of investment grade credit that is in the hyperscaler space. And the consequence of that is that we have started to see spreads in credit widened out on that hyperscaler debt. And this has resulted of course in a number of questions being asked. Namely, are spreads widening out on hyperscaler debt because of worries about the underlying credit of these companies, meaning their ability to pay back their debt, or is it simply just because of demand and supply that there's just more supply at the moment.
- [05:45]
George Hahn
Here's what makes that debt harder to carry. The American bet hundreds of billions borrowed against a build out assumes the companies doing the building can eventually charge enough to pay it back. And China is attacking exactly that, not by building better models, but by making cheap ones the whole world can download for free. This week, Xi Jinping stood up at an AI conference in Shanghai and made it official on China Decode. James King laid out the scale of
- [06:20]
James King
the plan and so China doesn't want to miss the boat. It doesn't want the US to win AI as well. And in fact it wants to win AI so that in 20 years time, whoever is doing this version of this podcast will be talking about the fact that China won AI. And that's what this whole plan is all about. And I think the political nature of the plan comes over really clearly when you see how the training that you mentioned is organized. So China's gonna be training thousands of people and the focus is gonna be on the Global South. The training's gonna be on how to use Chinese open weight models. And there are GONN regional AI centers that are set up within regional groupings so that the training will be delivered through the auspices of these regional groupings and so that we can see that China is getting behind this strategy in a very major way.
- [07:26]
George Hahn
We'll be right back after the break.
- [07:32]
Sponsor Announcer
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- [08:37]
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- [09:03]
Ed
hear that?
- [09:04]
George Hahn
That's now crispy and McCrispy strips meeting creamy Caesar sauce sounds extra crispy. Caesar sauce at McDonald's for a limited time. Welcome back. There's risk at the top of the economy, but this week also brought a story about risk at the bottom of it. The record number of Americans calling themselves founders. Last year, Americans filed nearly 6 million applications to start a business, the most on record, but only about a third intend to hire a single employee. And on LinkedIn, the number of people calling themselves a founder jumped 69%. On Monday's Prof. G Markets, Scott made the case that most of them aren't founders at all.
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Ed
Okay, I have a real BMI bonnet around the whole founder thing. And let me if you typed in the name on LinkedIn of every company I've started, you're going to find there are 30 or 40 co founders of all these companies. Everyone has decided they're a co founder of Red envelope of profit. And people would call themselves co founders and I'd be like, fine, have at it. Titles are cheap. Have at it. But here's what a founder is. A founder signs the front of checks, not the back of checks. And the reality is the vast majority of people are not willing to put their own money. Here's what it means, you know, L2, amazing, great company, smart people. We sold for 160 million. I got very lucky. Extraordinary. All the moons lined up. The first two years of L2 was me going home and telling my girlfriend, who had just given birth to our second son in about 36 months, oh, business is good. And I apologize, I can't be home for bath time. I am working 14 hours a day and I've got to work all day Sunday and just go in on Sunday to be emotionally supportive of the people
- [11:10]
Sponsor Announcer
who showed up on Sunday.
- [11:11]
Ed
And in exchange for that, on the 1st or the 31st of every month, we've got to take $100,000 out of our savings and put it into the company. And my girlfriend would literally look at me with this look of fear like, what the fuck are you doing to our family? And I would have to sit there for an hour and explain to her why hopefully it was going to pay off. And not once, but twice. I came within a hair of losing it all, couldn't pay my lease on my office, was going to have to shut the whole thing down and go home and not only lay off a bunch of people, but go home and tell my girlfriend and the mother of my children, oh, the $1.2 million or basically the majority of our savings is gone. That's what entrepreneurship is, folks. And by the way, that's a good story. It worked out.
- [12:08]
George Hahn
Ed also gave us his take on the side hustle economy.
- [12:12]
Ed
So that leads me to one conclusion that makes a lot of sense, which is that these are all kind of bullshit side gigs. This is I'm bored at work. I'm still employed at work, but I work remotely and I kind of want to start like a lifestyle brand and I'm going to make an Instagram account and maybe I'm going to make a substack and maybe if I'm feeling really excited about it, I' also create an LLC because I'm interested in doing that. But to be clear, that's not a business that is actually contributing to the economy. It's basically like a, it's basically a hobby. It's basically like a, a, a more legit vehicle to express yourself based out of the boredom that you feel in your real job.
- [13:04]
George Hahn
But economic anxiety isn't the whole story. A lot of people, especially younger people, aren't turning to solo work only because traditional employment feels less secure. They're also betting that the Internet has made it possible to build something meaningful without millions in capital or hundreds of employees. Jack Raines, author of the newsletter Young Money, joined Scott this week to discuss the business model behind that beta on the.
- [13:34]
Jack Raines
On the media industry. I think it's a. This might be a hot take. I actually think it's a very good time to start a media brand because you can just do stuff a lot leaner now. Like if you look at the radio industry, it's like there was so much infrastructure, you had so many people working in the studio versus now you can launch a podcast and hit publish and effectively get distributed to the entire world immediately. Like, I know you have a whole team that works with you. That team is still probably way leaner than it would have been 40 years ago to try to have the same level of distribution, right? So there's a lot of like, what I would say is like bloated media companies that didn't really adapt to social media and now kind of influencer creator first stuff that like their revenue model and their cost structure just doesn't really make sense. But for like individuals or lean teams, whether they're building subscription model, ad model, whatever, I think there's like a lot of value building in niches with like a pretty low cost basis and low headcount on the creator front. Specifically like the fund I'm at, Slow Ventures, we actually have a, like we have our fund that invests in startups like tech AI for whatever, yada yada yada, like Silicon Valley, New York. We do everything. We have a separate fund that invests in creators and creator led businesses where the bet that we're making there is that the Internet is getting more and more siloed. Where like I have my Internet, you have your Internet. Like algorithms and interest drive everything. People that are kind of like cult leaders in different pockets have interesting opportunities to build businesses around like their niche or their audience. Where if you're kind of seen as the like like market or industry leader on your thing and you have hundreds of thousands or millions of followers, like can you build businesses on top of that platform? We think so.
- [15:16]
George Hahn
And that trust still takes time. This week, no mercy, no malice turned 10. 10 years of Scott writing the same newsletter every Friday and four years of me narrating his words for the audio edition. While the cost of publishing has fallen towards zero, the cost of building a voice people care about hasn't. It takes consistency, vulnerability and a willingness to keep showing up. In this week's anniversary essay, Scott explained the reason he keeps writing. Here's what he wrote. I write a lot about the end death, believing that I'll go first and that someday I'll look into my son's eyes and know our relationship is coming to an end. This has been an unlock all the fear of shaming, worrying what other people think, and reticence to tell people I love them melts as the light at the end of the tunnel draws nearer. My boys have little interest in my work. I doubt they've ever read a post. But they will. It will transport them back to this era, the good and bad, and cement what they feel but may not know how much I think about and love them. Platforms change, markets turn, business models come and go. But a voice worth remembering can outlast all of them. That's the week. I'm George Hahn. We'll see you next Friday.
- [17:11]
Sponsor Announcer
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