Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How AI Capex Is Creating a Hidden Debt Risk for Big Tech
Transcript
- Lucas: Moody's dropped a report this week that should make every equity investor pause. They're warning that the 'unprecedented' spending on artificial intelligence by Amazon, Meta, Alphabet, and others is starting to threaten their credit quality. Luna: And this is Moody's — not some tech blogger. When they say credit quality is at risk, you have to listen. Lucas: Exactly. They're looking at the scale of capex. Amazon alone is on track to spend roughly seventy-five to eighty billion dollars on capital expenditures this year, much of it on AI infrastructure. Meta's capex is up about sixty percent year-over-year. Alphabet isn't far behind. Luna: And that's just three names. You add Microsoft, Oracle, and the cloud players, and we're talking hundreds of billions. But the market isn't pricing in the risk yet. The VIX is at eighteen point five eight, the VVIX at one hundred point seven three — those aren't panic levels. Lucas: Right. The equity market is still riding high. S&P at seventy-four twelve, the Dow near fifty-two thousand. But the bond market is starting to show cracks. The ten-year yield is four point seven one percent, the two-year at four point three seven — spread is thirty-six basis points, still positive but not screaming confidence in corporate debt. Luna: Look, this connects directly to what we talk about on this show. If you're a long-term investor, you need to understand when the calm surface hides a credit storm underneath. And it's exactly that kind of research that keeps this show grounded. Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds making episodes like this. Lucas: Yeah, it's a small group that keeps us ad-free and independent. So if that matters to you, you know where to find it. Now, back to the AI spending. The question is: is this capex productive or is it a giant coordination game where nobody wants to be left behind? Luna: That's the billion-dollar question. Moody's seems to think it's a risk to credit profiles because a lot of this spending hasn't generated proportional revenue yet. Lucas: Exactly. Amazon's AWS is profitable, but its retail margins are thin. Meta is still largely ad-driven. Alphabet has search dominance, but Google Cloud is still fighting to break even. If the economy slows and these companies have to service debt taken on for AI data centers, you could see downgrades. Luna: And a downgrade from investment-grade to high-yield would force many institutional holders to sell. That's a cascade risk we saw with some energy companies back in twenty-fifteen. Lucas: Right. Now, we're not saying it's imminent. But the yield curve has been steepening — the ten-year minus two-year spread went from thirty-four basis points to thirty-six this week. That usually signals that longer-term borrowing costs are rising, which can squeeze companies that need to refinance. Luna: And oil prices ripping higher only adds to the inflation narrative. The odds of a Fed rate hike are surging, per the headlines. Higher rates mean higher cost of capital for these capex plans. Lucas: So the setup is: low equity volatility, but a potential credit event brewing in the bond market. The VVIX at one hundred point seven three is elevated — not extreme, but it's telling us that options on volatility are pricing in tail risk. That's often a precursor to a spike in the VIX itself. Luna: Which means if you're buying the dip right now, you should be selective. Not all dips are created equal. When the risk is in credit, the companies with the most debt — even big tech — could get hurt disproportionally. Lucas: Exactly. So what do we do? First, watch the credit default swap spreads for these companies. Second, look at their free cash flow coverage of interest. Amazon's free cash flow has improved, but it's still negative some quarters because of all the capex. Luna: And third, don't assume that because the S&P is at an all-time high, everything is fine. The market can stay irrational longer than you can stay solvent, but debt markets have a way of enforcing discipline eventually. Lucas: That's the long-term resilience angle. We're not calling a crash — we're saying the risk profile has shifted. If you're a buy and hold investor, you want to own companies that can self-fund their AI bets without tapping debt markets. Luna: Companies like Nvidia, which sells the chips, not the data centers. Or Apple — they're more measured on AI spending, and they have a fortress balance sheet. Lucas: Right. Apple hasn't gone all-in on AI capex the way Meta or Amazon have. Their capital allocation is more disciplined. That might be the playbook for a bear market: focus on free cash flow generation. Luna: So the Moody's report is a warning, not a prediction. It's telling us to look under the hood. And that's exactly the kind of analysis that helps you survive a downturn. Lucas: Exactly. Thanks to everyone who supports the show at buy me a coffee dot com slash fexingo — it keeps us digging into stories like this without any advertiser pressure. Luna: Alright, next episode we'll look at the oil spike and what it means for consumer spending. Until then, stay curious.