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Better Offline - Monologue: Anthropic's $413bn Burden · KDAV Radio

• 0:02
  Speaker 1: Hello and welcome to this week's Better Offline monologue, I'm
• 0:07
  Speaker 1: your host Ed Zitron. So Reuters has continued to drip
• 0:18
  Speaker 1: drip drip Anthropix IPO prospectus in a way that is
• 0:20
  Speaker 1: very frustrating for anyone trying to follow this story, but
• 0:24
  Speaker 1: in doing so have revealed a deeply worrying truth. that
• 0:26
  Speaker 1: Anthropic has $ 413 billion worth of non-cancelable compute contracts and
• 0:32
  Speaker 1: chip leases across Google, Amazon, Microsoft, and Broadcom. $ 252 billion
• 0:38
  Speaker 1: of that is dedicated to the hyperscalers, and $ 161. 2 billion
• 0:43
  Speaker 1: to Broadcom. Broadcom is, in case you didn't know, the
• 0:46
  Speaker 1: company that makes Google's TPU AI chips, of which Anthropic's
• 0:50
  Speaker 1: the largest customer by country mile as far as rentals go,
• 0:53
  Speaker 1: And now, as a result of this deal, is the
• 0:55
  Speaker 1: largest customer purchasing them. And by the way, yeah, Anthropic
• 0:59
  Speaker 1: buys them, puts them in the Google data center, then
• 1:04
  Speaker 1: they pay Google to rent them back. It's not circular financing, though.
• 1:08
  Speaker 1: Stop calling it that. Anyway, in a story that came
• 1:12
  Speaker 1: out the morning of October 1st, Reuters also revealed that
• 1:15
  Speaker 1: Broadcom had agreed to lend Anthropic $ 42 billion to finance
• 1:19
  Speaker 1: purchases of these TPU chips, though they called them leases.
• 1:23
  Speaker 1: their purchases, which is the first example we've seen in
• 1:25
  Speaker 1: the AI bubble of dot-com-style vendor financing, where a company
• 1:29
  Speaker 1: lends another company the money to pay them. The contract,
• 1:33
  Speaker 1: per Reuters, allows Broadcom to also convert the debt into
• 1:36
  Speaker 1: anthropic shares, an interesting escape hatch for the inevitable point
• 1:39
  Speaker 1: at which the AI lab can't actually afford its bills. Also,
• 1:43
  Speaker 1: Broadcom really can't afford this debt. They were apparently raising
• 1:46
  Speaker 1: $ 60 to $ 100 billion of debt. Is this part of this?
• 1:49
  Speaker 1: Because if it's not, I don't know, it doesn't really
• 1:52
  Speaker 1: make sense. In any case, that $ 42 billion would only
• 1:56
  Speaker 1: scratch about a third of what Anthropic needs with Broadcom,
• 1:58
  Speaker 1: which means it'll have to find the cash elsewhere. As
• 2:01
  Speaker 1: a reminder from earlier in the week, Anthropic lost $ 8
• 2:04
  Speaker 1: billion on $ 4. 6 billion of revenue in 2025, which means
• 2:08
  Speaker 1: that this company is light years away from funding any
• 2:11
  Speaker 1: of these ridiculous costs out of cash flow. And really
• 2:14
  Speaker 1: that begs the question, how will Anthropic pay for all
• 2:18
  Speaker 1: these bills? Let's assume that this horrible oaf of a
• 2:22
  Speaker 1: company is allowed to go public and that the ratings
• 2:24
  Speaker 1: agencies allow it to become investment-grade, which I believe should
• 2:27
  Speaker 1: have people put in prison, which I know sounds dramatic,
• 2:30
  Speaker 1: but it actively harms investors and it will be historically
• 2:33
  Speaker 1: awful for them. Even if that were the case, the
• 2:36
  Speaker 1: company would have to pull in somewhere between $ 50 billion
• 2:38
  Speaker 1: and $ 100 billion a year. And even at investment grade,
• 2:42
  Speaker 1: they'd still be borrowing at 7% to 10% because their
• 2:45
  Speaker 1: negative cash flows and opaque path to profitability mean that
• 2:48
  Speaker 1: investors would want to be compensated for that risk. And
• 2:51
  Speaker 1: let's be clear that Anthropic would need to raise debt
• 2:54
  Speaker 1: every single year without fail to keep its business afloat.
• 2:57
  Speaker 1: And every time it did so, investors would likely demand
• 3:00
  Speaker 1: more for their money. And that would be if the
• 3:02
  Speaker 1: bonds didn't sell off, which they absolutely would because of
• 3:05
  Speaker 1: any negative story about this company. Now, this all assumes
• 3:09
  Speaker 1: that Anthropic would get an investment-grade rating, because if it
• 3:12
  Speaker 1: got a junk rating, it would have to borrow at
• 3:15
  Speaker 1: rates somewhere between 10% and 13%, which would be effectively lethal,
• 3:18
  Speaker 1: basically a personal loan at this point. While it could
• 3:21
  Speaker 1: do convertible debt, meaning that the loan would convert into
• 3:24
  Speaker 1: shares if they hit a certain price and would otherwise
• 3:26
  Speaker 1: be a low interest rate, there are limits to how
• 3:28
  Speaker 1: much one can borrow, and Anthropic needs tens of billions
• 3:31
  Speaker 1: of dollars multiple times a year without fail to pay
• 3:34
  Speaker 1: the bloody cloud bills. I should also add, yes, NVIDIA
• 3:37
  Speaker 1: would likely give it a couple billion dollars. There would
• 3:39
  Speaker 1: be some venture investment, but we are talking tens of billions.
• 3:44
  Speaker 1: I haven't even discussed Anthropic's putrid cousin OpenAI, who also
• 3:48
  Speaker 1: wants to go public sometime in the next year and
• 3:51
  Speaker 1: will also need all this debt, and projects to spend
• 3:53
  Speaker 1: $ 750 billion on cloud compute through 2030. All those Oracle
• 3:58
  Speaker 1: data centers, including the one in New Mexico where Oracle
• 4:01
  Speaker 1: just declared a force majeure, depend on OpenAI's ability to pay,
• 4:05
  Speaker 1: which will depend on its ability to raise money, which
• 4:07
  Speaker 1: all comes down to whether venture capitalists or debt markets
• 4:09
  Speaker 1: can keep it alive. And the more money that everyone borrows,
• 4:13
  Speaker 1: by which I mean AI data center companies, AI labs,
• 4:16
  Speaker 1: and hyperscalers, the more expensive it becomes for everyone to borrow,
• 4:20
  Speaker 1: as I discussed a few weeks ago with Paul Kudrowski.
• 4:24
  Speaker 1: All that AI debt is creating meaningful competition for US treasuries.
• 4:28
  Speaker 1: At a time when the war in Iran and Ukraine
• 4:30
  Speaker 1: is causing a sell-off in the bond market, and when
• 4:33
  Speaker 1: bonds on the market sell off, their effective interest rate
• 4:35
  Speaker 1: goes up, which means that any future government debt, and
• 4:38
  Speaker 1: indeed any future debt from anyone, will have to price higher.
• 4:41
  Speaker 1: To explain this really simply, imagine a bond, a treasury bond,
• 4:45
  Speaker 1: is paying 5% and it costs $ 100 to buy. It's
• 4:49
  Speaker 1: technically a little different, but just for the example. Now,
• 4:51
  Speaker 1: if that bond sells off and someone can buy it
• 4:54
  Speaker 1: for $ 90 instead of $ 100, the effective interest rate is
• 4:58
  Speaker 1: actually higher because you're getting more bang for your buck.
• 5:00
  Speaker 1: If that doesn't make sense, email me. I'll happily explain. Nevertheless,
• 5:05
  Speaker 1: this is going to make everything more expensive. And I
• 5:09
  Speaker 1: hear no compelling counter-argument to any of this outside of
• 5:12
  Speaker 1: people saying it'll all work out, and that these are
• 5:15
  Speaker 1: the fastest-growing companies in the world. Ed, check out Anthropic's
• 5:19
  Speaker 1: annualized run rate, which, according to insane analysis, was calculated
• 5:22
  Speaker 1: by an investor by multiplying July 31st, so approximately $ 178 million,
• 5:30
  Speaker 1: by $ 365. If that's what's happening, I question every single
• 5:34
  Speaker 1: run rate number we've ever heard. I think they were
• 5:37
  Speaker 1: bollocks before, and they're horseshit now. And this childlike thought
• 5:41
  Speaker 1: process will mean that the media and the markets are
• 5:43
  Speaker 1: utterly unprepared for when things begin to collapse. The information
• 5:47
  Speaker 1: just reported that SMBC and MUFJ, the two largest Japanese
• 5:51
  Speaker 1: banks and major backers of effectively every AI data center,
• 5:54
  Speaker 1: including Stargate's, I mean, actually all of them, I think
• 5:57
  Speaker 1: one or both of them were in every single one,
• 5:59
  Speaker 1: they're becoming more selective with their investments in AI. which
• 6:03
  Speaker 1: means that the music is slowing down, the lights are
• 6:06
  Speaker 1: being turned on and off, and pretty soon we're going
• 6:08
  Speaker 1: to know who's pissed themselves, puked all over themselves, or
• 6:11
  Speaker 1: simply cannot pay their tab. Now that you've heard that
• 6:15
  Speaker 1: beautiful metaphor, I've told you a story in words, I
• 6:19
  Speaker 1: bid you adieu for the week. I'll be back next
• 6:21
  Speaker 1: week as ever. I should have an interview of some kind.
• 6:23
  Speaker 1: I've got two really fun ones queued up. Really looking
• 6:26
  Speaker 1: forward to you hearing them. Thanks as ever, and I
• 6:29
  Speaker 1: love you all.