# Anthropic's $800 Billion Problem Is Hiding In The Fine Print

Markdown copy of https://realalpha.app/v/ilkjZXwb8dU/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy.

Paul Kedrosky says Anthropic’s compute commitments could reshape its economics, while Robert Armstrong sees AI-market cracks but not a 2008-style crash.

- Show: Prof G Markets
- Hosts: [Ed Elson](https://realalpha.app/people/ed-elson/)
- Guest: [Paul Kedrosky](https://realalpha.app/people/paul-kedrosky/) · Managing Partner, SK Ventures
- Guest: [Robert Armstrong](https://realalpha.app/people/robert-armstrong/) · US Financial Commentator, Financial Times
- Published: Oct 27, 2026
- Length: 34 min

## The best minutes

- [8:16](https://realalpha.app/v/ilkjZXwb8dU/?t=496) [Anthropic’s future compute costs dwarf its current losses](https://realalpha.app/s/anthropics-future-compute-costs-dwarf-its-current-losses/) (9 min)
- [30:11](https://realalpha.app/v/ilkjZXwb8dU/?t=1811) [A correction could hit chipmakers harder than hyperscalers](https://realalpha.app/s/a-correction-could-hit-chipmakers-harder-than-hyperscalers/) (3 min)

## Also worth watching

- [2:48](https://realalpha.app/v/ilkjZXwb8dU/?t=168) [Anthropic’s lower operating loss may be an IPO snapshot](https://realalpha.app/s/anthropics-lower-operating-loss-may-be-an-ipo-snapshot/) (5 min)
- [20:37](https://realalpha.app/v/ilkjZXwb8dU/?t=1237) [Bond buying and weaker market breadth point to a turn](https://realalpha.app/s/bond-buying-and-weaker-market-breadth-point-to-a-turn/) (4 min)
- [27:03](https://realalpha.app/v/ilkjZXwb8dU/?t=1623) [AI infrastructure financing is headed for consolidation](https://realalpha.app/s/ai-infrastructure-financing-is-headed-for-consolidation/) (3 min)

Skip the opening podcast promos, the market-vitals recap, the SoFi ad and cross-show promotions.

## Full analysis: Paul Kedrosky says $800 billion-plus commitments reshape Anthropic

- Anthropic reported a $693 million first-half operating loss, while disclosed agreements point to more than $800 billion in compute commitments.
- Paul Kedrosky says the loss is backward-looking, as most commitments are non-cancellable and infrastructure spending shifts toward direct builds.
- Track compute efficiency, renewed revenue growth and funding access before treating that loss as a margin signal.

Its 6 sections, what it means for you and what to watch are on [the page](https://realalpha.app/v/ilkjZXwb8dU/#analysis), free with an account:

- [5:50](https://realalpha.app/v/ilkjZXwb8dU/?t=350) The operating loss captures a favorable snapshot
- [8:55](https://realalpha.app/v/ilkjZXwb8dU/?t=535) The $800 billion lacks a disclosed payment schedule
- [14:26](https://realalpha.app/v/ilkjZXwb8dU/?t=866) Going direct trades distribution risk for capital spending
- [16:41](https://realalpha.app/v/ilkjZXwb8dU/?t=1001) Efficiency and renewed growth must arrive together
- [32:29](https://realalpha.app/v/ilkjZXwb8dU/?t=1949) A pullback could punish suppliers more than platforms
- [18:01](https://realalpha.app/v/ilkjZXwb8dU/?t=1081) The IPO price cannot settle the business model

## Summary

Paul Kedrosky is a managing partner at SK Ventures. Robert Armstrong is the US financial commentator for the Financial Times and author of the Unhedged newsletter.

Paul Kedrosky says Anthropic’s $693 million first-half operating loss is a backward-looking snapshot: disclosed agreements imply more than $800 billion in future compute spending as the company shifts toward direct infrastructure. He argues that most commitments are non-cancellable and that reliance on cloud rivals creates strategic and distribution risks; falling compute intensity and renewed revenue growth will matter to the business. Robert Armstrong says the market’s move into Treasuries and weakness beyond mega-cap tech signal greater caution around AI investment, but he does not expect a 2008-style correction. In his view, hyperscalers may remain resilient even as semiconductor companies and smaller AI infrastructure players face losses.

### Minute by minute

- [1:33](https://realalpha.app/v/ilkjZXwb8dU/?t=93) **The filing leaves key costs undisclosed.** Ed Elson reports that Anthropic generated $16.3 billion in first-half revenue, up from $1.2 billion a year earlier, and recorded a loss above $80 billion, including a $72 billion non-cash charge. Operating loss was about $700 million. The filing omitted total compute commitments, customer identities, training costs and its listing date.
- [2:48](https://realalpha.app/v/ilkjZXwb8dU/?t=168) **Kedrosky sees few filing surprises.** Paul Kedrosky says many of the filing’s notable details had already appeared in reports, so he found few surprises. He expected more customer-concentration data: the filing identifies only customers above 10%, with the largest shown at 11% or 12%, leaving other shares unclear.
- [5:25](https://realalpha.app/v/ilkjZXwb8dU/?t=325) **Narrower losses do not settle profitability.** Kedrosky says the $693 million first-half operating loss was below his expectation of about $1.1 billion, though IPO preparations can affect how costs are presented and he expects losses could worsen. He flags material stock-based compensation as a source of dilution that could require buybacks after listing.
- [8:11](https://realalpha.app/v/ilkjZXwb8dU/?t=491) **Kedrosky flags more than $800 billion in compute.** Kedrosky says the disclosed Broadcom and Google agreements, at $161 billion and $115 billion, imply more than $800 billion in compute spending over an undisclosed timeline. He says most commitments are non-cancellable and that excluding SpaceX still leaves close to $700 billion. The roughly $3 billion a year for SpaceX can be canceled on 90 days’ notice.
- [10:52](https://realalpha.app/v/ilkjZXwb8dU/?t=652) **Distribution through rivals creates exposure.** Kedrosky says Anthropic distributes its models through Microsoft, Google and Amazon, which also compete with it and take a share of marketplace sales. He compares the arrangement to Spotify paying a fixed share while rival music-streaming services could cut off access. He sees this as a structural vulnerability, not just a sales expense.
- [12:00](https://realalpha.app/v/ilkjZXwb8dU/?t=720) **Direct infrastructure will raise capital needs.** The S-1 says compute bought through cloud-provider agreements is paid for as it becomes available, while a growing portion of infrastructure investment will require upfront spending and lease obligations. Kedrosky says Anthropic is moving toward building its own capacity to reduce reliance on rivals, bringing both initial build costs and ongoing maintenance capex.
- [14:00](https://realalpha.app/v/ilkjZXwb8dU/?t=840) **Kedrosky says the filing is backward-looking.** Kedrosky says the filing reflects an earlier, distributor-heavy model, while direct infrastructure will bring upfront and maintenance capex. He agrees with Elson’s suggestion that Anthropic may be going public while its current operating numbers look relatively good, before the capital-intensive model appears in its statements.
- [16:23](https://realalpha.app/v/ilkjZXwb8dU/?t=983) **Growth and efficiency must improve.** Kedrosky says the business needs continued declines in compute per token and a reacceleration in revenue growth. He cites leaked Q3 growth around 50% and Q4 growth implied at about 64%. He expects a valuation of about $1.5 trillion if Anthropic lists, rather than the discussed $2 trillion.
- [20:37](https://realalpha.app/v/ilkjZXwb8dU/?t=1237) **Treasury demand signals a mood shift.** Robert Armstrong says demand for bonds became striking when stocks weakened, despite recent concerns about US fiscal sustainability and inflation. He notes the 10-year yield fell 19 basis points in one day and argues that inflation-adjusted bond yields of 2% to 3% looked attractive.
- [22:07](https://realalpha.app/v/ilkjZXwb8dU/?t=1327) **Equity cracks predated the sell-off.** Armstrong says weakness in the market had preceded the recent sell-off: the Nasdaq and S&P 500 had moved sideways since May while small caps, utilities, real estate and industrial names linked to data-center construction struggled. He says the shift has broken the market’s euphoria, but he is not calling for a crash.
- [27:03](https://realalpha.app/v/ilkjZXwb8dU/?t=1623) **Armstrong expects AI infrastructure consolidation.** Elon Musk says debt markets have largely closed funding to companies without revenue independent of AI data centers, predicting failures and consolidation among 200-plus neoclouds. Armstrong says a broadly financed AI infrastructure boom is likely to undergo restructuring, and that Musk’s fundraising ability could put him among the consolidators.
- [30:11](https://realalpha.app/v/ilkjZXwb8dU/?t=1811) **Hyperscalers could cushion an AI downturn.** Armstrong argues that cash-rich Alphabet, Amazon, Meta and Microsoft could hold up if spending on data centers slows, while semiconductor companies such as Nvidia and Broadcom could lose substantial value. He does not expect a 2008-style correction, but says some companies may fail. He views a 5% 10-year Treasury yield as a cushion against inflation and rate moves.

## Transcript

Prof G Markets, hosted by Ed Elson, with Paul Kedrosky and Robert Armstrong.

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there. Where the podcast’s audio and the video part ways, some times are a minute or so off.

[0:06](https://realalpha.app/v/ilkjZXwb8dU/?t=6) If money is evil, then that building is hell. The show goes on! The folks are never watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. It is October 27th. Let's check in on yesterday's market vitals. The major indices climbed as tech stocks got a boost from Anthropics S1. More on that in a second. The yield on 10-year treasuries was flat ahead of the Federal Reserve's interest rate meeting. On Calci, the odds they'll hold rates steady are at 92%. Brent crude was volatile, peaking above $117 per barrel. As President Trump said, he was deciding whether to make a deal with Iran or, quote, finish it off.

[1:27](https://realalpha.app/v/ilkjZXwb8dU/?t=87) And finally, Brazilian markets sold off after... incumbent President Lula won re-election. Brazil's benchmark index, the Ibovespa, crashed as much as 17%, and its currency saw its sharpest drop in more than two decades. Okay, what else is happening? One of the most anticipated S1s of all time has officially arrived. Anthropic has filed to go public, and we finally got to see the books. In the first six months of the year, Anthropic brought in $16.3 billion in revenue. That is up from $1.2 billion in the same period last year. It reported a loss of more than $80 billion over those six months. However, $72 billion of that loss is a non-cash charge tied to its convertible notes and other fundraising instruments. Its operating loss, which is more important here, came to around $700 million, that is down from $2.1 billion a year ago. While the filing answered many questions about Anthropic's business, it also left out some crucial details. For example, the company did not disclose the total sum of its contractual compute obligations. It also didn't reveal who its biggest customers are. It didn't break out training costs either. And it didn't say when Anthropic will actually be listed. So, lots to get into here. We are breaking this down with Paul Kedrosky,

[2:54](https://realalpha.app/v/ilkjZXwb8dU/?t=174) managing partner at SK Ventures. Paul, great to have you on the show. Lots to get into here. I'm going to start with an open-ended question, which is, what did you make of this S1? It's finally here. I felt like it was like an MCU, like a Marvel movie, and I'd seen the trailer too many times. And so I'm like, oh God, there's nothing left. It's all been spoiled. So an awful lot of what was in this was in this was pre-leaked, right? So some of it was obviously in a series of Reuters reports, Business Insider. It's been all over the place. And so I guess the surprising thing for me, for the most part, was how few surprises there were.

[3:31](https://realalpha.app/v/ilkjZXwb8dU/?t=211) That for the most part, the major nuggets in terms of, you know, customer concentration, the deceleration in revenue this quarter, which was a little bit masked actually in the filing itself. But nevertheless, you can kind of back it out. um those kinds of things had all been sort of pre-leaked as they say it was like i'd seen the trailer and it was too long so that sort of stuff was there um the other things like customer concentration i had expected a little bit more data on that so like last year i think their two largest customers were something like from the disclosure table i think was 25 percent And this year, they kind of masked out a lot of the names and showed that their largest customer is sitting at around, I think it was 11% or 12%, and then everyone else is kind of masked out, so you don't really know where it stands.

[4:14](https://realalpha.app/v/ilkjZXwb8dU/?t=254) So all we can assume is that customer concentration, it may be that there's 10 companies that are 25%. We just don't know anymore because they're only showing people over 10% share. I think the big question that we were sort of speculating about is how unprofitable will they be? And will they pursue some sort of accounting gymnastics to mask their lack of profitability? And I think that that is an open question, and we will get into that. But from the outset, when we look at the operating losses, and just to clarify for people, that net loss of $72 billion that is related to the conversion, that is genuinely not relevant because basically what that is accounting for is the fact that they now need to pay back investors because their enterprise value has gotten so large.

[5:08](https://realalpha.app/v/ilkjZXwb8dU/?t=308) So actually, the fact that net loss is so big reflects the fact that the valuation has gotten so high. So that's not the thing to focus on. The thing to focus on is the operating loss of nearly $700 million, which I thought was low, or at least narrow, compared to the six months compared to last year, where it was more than $2 billion. That, to me, was a pretty good sign. I have some pushback to why that might be a good thing that we can get into. But But your reactions just to that number, $693 million in operating losses in the first half of this year? It was narrower than I expected as well.

[5:48](https://realalpha.app/v/ilkjZXwb8dU/?t=348) So, again, it's hard to know.

[5:50](https://realalpha.app/v/ilkjZXwb8dU/?t=350) **Paul Kedrosky:** I mean, having been on the other side of this, and not to be completely cynical, there's a lot of work goes on in terms of preparing a company's cost for an IPO.

[5:58](https://realalpha.app/v/ilkjZXwb8dU/?t=358) So the thing that they wanted to show, probably show their best face on, was what that operating number looked like. And so that's not particularly surprising that I guess that it was a little better than expected. But nevertheless, like full credit to them that I think this is nowhere near profitable and it's probably going to get worse in future because for a bunch of reasons we can talk about. But the number they presented there was I think I was thinking we'd probably see a number around 1.1 billion on that order of things. And so we're about 400 million shy in a good way of that number for all kinds of.

[6:32](https://realalpha.app/v/ilkjZXwb8dU/?t=392) Reasons they can control. So it's not necessarily something that isn't written as the laws of physics that it has to stay at these levels. But nevertheless, it's slightly narrower than expected. There were other things that I thought were interesting that they did that are, they're not nefarious. They're just things you need to keep an eye on. Like non-cash things like adding back stock-based compensation. That was a material item in there. Anthropic is very, how shall I say, generous in terms of stock-based compensation. And that will probably continue post-IPO. So it's something that investors will have to keep an eye on.

[7:02](https://realalpha.app/v/ilkjZXwb8dU/?t=422) because that's dilutive, obviously. And as a public company, one of the things that the consequences of having such high stock-based compensation is that you have to buy back a lot of stock to avoid dilution of your institutional, well, all investors, but institutional investors in particular. So that item actually is consequential going forward because in terms of your sources and uses of cash, it's not all going to be going out the door again for funding compute commitments. You obviously have this very large number that they're going to be having to deal with in future in terms of trying to continue to protect investors, if you will, from future dilution, given how aggressive they are in terms of stock-based compensation.

[7:43](https://realalpha.app/v/ilkjZXwb8dU/?t=463) Credit to them for not giving us a completely bullshit, you know, non-gap adjustment. I remember you and I were speculating, are they going to strip out the training costs? Are they going to say, oh, don't worry about what we have to do in terms of training these things? They didn't do that. They didn't break it out cleanly, but they didn't try to do something non-gap in terms of hiding it. That's exactly right. Yes. They didn't try to say, don't worry, it doesn't exist. It doesn't matter. Yeah, totally true. But, so I was looking for, okay, well, maybe this is going to work. Maybe compute costs are actually like, they're on a path to profitability, which seems, you know, plausible and, to be honest, imminent, given what we saw.

[8:23](https://realalpha.app/v/ilkjZXwb8dU/?t=503) but then i go through the document i want to get your reactions to to what i make of this and i get to the the liquidity and capital resources section this is like page 161 it's it's way further down and they go through some of their future compute agreements and they they tell they show us that they have an agreement with broadcom with 161 billion dollars and google 115 $15 billion. And you add it all up and you realize that they are about to spend on a timeline that they don't tell you, but they're about to spend more than $800 billion on compute. And none of that is included in the income statement.

[9:05](https://realalpha.app/v/ilkjZXwb8dU/?t=545) And so I'm looking at the income statement now and I'm thinking, does this actually tell me anything? Because it seems as though they've left all of their compute costs at the bottom as a footnote, not because they're trying to pull a fast one, I don't think, but because those costs haven't actually been reflected in their income statement yet because they're about to happen. So what do you make of that part? I think that's exactly right. And this is a deep structural problem that I think Moody's pointed to a few weeks ago in terms of the way that all of these compute commitments trickle back to and are consolidated in the financial statements because, well, they're non-cash obviously now because they're future commitments, but they don't even show up necessarily in the form of orthodox debt because these are future commitments that aren't actually debt instruments.

[9:51](https://realalpha.app/v/ilkjZXwb8dU/?t=591) They're more like a lease that's being discounted back to their present value today. And they're all obviously highly consequential and investors would need to think about it as you consider what the actual cash flow nature of the business looks like going forward. Because in particular, it's not just the size of the commitments, they're all non-cancellable, right? This is really important. This is not something where I say, you know what, it's not working out the way we wanted. We're not gonna have that commitment. No, these are all non-cancellable capital commitments with the only exception being that there's a growing capital commitment in terms of doing compute at SpaceX, which I think works out to about $3 billion a year.

[10:27](https://realalpha.app/v/ilkjZXwb8dU/?t=627) So much smaller in the great scheme of things than these other non-cancellable compute commitments. And that, I think, is cancelable on a 90-day basis, 90-day notice, which speaks more to what SpaceX is trying to do, I think, than anything else, that they're desperate to have this cash flow coming back in because they, in turn, consolidate it as growing AI revenues when it's really not, obviously. This is just compute you're providing to someone else on a rental basis. So it's important, I think, to remember

[10:52](https://realalpha.app/v/ilkjZXwb8dU/?t=652) **Paul Kedrosky:** that the preponderance of the commitments are in future, they're massive, and they're all non-cancellable.

[10:58](https://realalpha.app/v/ilkjZXwb8dU/?t=658) And even if you were to get rid of SpaceX, you're close to $700 billion in compute spending. That's exactly right. It's immaterial in terms of the great scheme of things. And I think that's by far the most important factor here that they're looking at. And in turn, those compute commitments are even more important because in a sense, you're working through distributors. And they say this in the S1 itself. And so they're distributing their large language models through competitors, right? Microsoft is one of the prime examples, Google, and so Amazon. And this is a really unusual relationship because you're distributing through companies who also sell on your behalf, but also take a rake off the top as they do it.

[11:36](https://realalpha.app/v/ilkjZXwb8dU/?t=696) So my analogy is, this is a little like as if Spotify, which has a rake from the music companies of about 30% of their revenues, but instead of it being 30% of revenues, it was a fixed percentage. It doesn't matter how much you sell. Not only that, all of your competitors also have music streaming services, and they're perfectly happy to kick you out. So this is the deep fragility in the nature of the distribution business. And I used the Spotify example because it shows you how a company that's been penalized for this kind of relationship is actually in a much more favorable position than Anthropic is.

[12:07](https://realalpha.app/v/ilkjZXwb8dU/?t=727) So this brings us to what I think is the most illuminating part of the filing, which is that we learned, and a lot of people said, oh my gosh, this is so great, that Anthropic is not spending on CapEx, which has obviously been a huge expenditure for the hyperscalers, i.e. building their own compute building their own data centers and everyone said look this works because they don't have this capex issue but they admit to the problem that you're describing which is that they are leasing compute from their competitors primarily which is probably going to be an issue later down the line and so i'd like to just quote read you this quote from the s1 our increasing efforts to build out our compute and infrastructure require substantial capital expenditures and are changing the cash flow profile of our business whereas the compute purchased through our csp agreements is generally paid as the compute becomes available to us we expect an increasing portion of our compute and infrastructure investment to take the form of capital expenditures and other commitments including lease obligations that require significant upfront payments well in advance of the related compute becoming operational.

[13:21](https://realalpha.app/v/ilkjZXwb8dU/?t=801) That tells me they're about to build data centers, and they're about to spend a shit ton on them. Is that right? Right. That's exactly right. Shit ton being the technical term here. So this is also a fancy way of saying, or maybe a relatively opaque way of saying, that what you see in the past in terms of the structure of the business won't be representative of what it looks like in the future. That we can't maintain these leasehold, these lease relationships with our competitors in terms of passing product through. So we're going to be forced to make duplicate capital investments so that we're not beholden to them, both in terms of strategically, but also in terms of this rake off the top in terms of what we have to give up from what's called marketplace sales, where we're actually selling products through the marketplaces on these other services.

[14:02](https://realalpha.app/v/ilkjZXwb8dU/?t=842) And so that's what you're saying. The nature of what we spend in future not only is going to continue, but it's going to accelerate in terms of the CapEx because we're in this strategic quandary of being reliant on our largest competitors. Which tells me that the income statement is actually irrelevant, right? I mean, if that's not even close to a reflection of what this business is about to look like, why does it matter? Yeah. And I think that's the thing that people are missing is that, in a sense, we all know that income statements and financial statements in general are backwards looking documents. But this is backwards looking at a particularly sharp inflection. And the sharp inflection is from a business that was largely relying on distributors to a business that's increasingly going to be trying to go direct. This is the transition that's underway. And in going direct, it has two consequences. One is massive current capex for doing that.

[14:53](https://realalpha.app/v/ilkjZXwb8dU/?t=893) And second, and this is the thing people miss all the time, and kudos to Michael Burry and others who are pointing this out, is that it creates maintenance capex. You don't have to spend it just once. You have to maintain these things. And so you have a future capital obligation that's not just the amount you spend to build, but also the amount you have to spend to maintain these very expensive facilities. But they're in this Hobbesian choice. They have no choice but to do that because otherwise it's to be reliant on their largest competitors who could, you know, like Microsoft did back in its heyday, you know, cut off their air supply at any moment.

[15:22](https://realalpha.app/v/ilkjZXwb8dU/?t=922) So here's a little conspiracy theory that I'd like to see if you think is perhaps correct. Is it possible that this is why they wanted to go public now? Is it possible that they wanted to take this one moment in time where the operating profitability looks pretty good right before it's about to look quite bad? Because that seems like that is what is about to happen. They're at this inflection point. No, no, no, no, no. Listen, I was arguing that earlier today multiple times with people. So I think that's exactly what's going on. This is as good as it looks from the standpoint of the business as currently structured.

[16:02](https://realalpha.app/v/ilkjZXwb8dU/?t=962) And now you go through this inflection that makes it much more CapEx intensive. So you're essentially changing jockeys and changing the underlying structure of what's happening. And so I think this was probably their, and they know this, this is the best time to do it because the future business is going to be very different. They're essentially reduplicating AWS, Amazon Web Services, in both directions, building up and building down in terms of both the client-customer facing as well as the cloud-facing stuff. It doesn't mean it's impossible. It could work. But it does mean that the build… the way the business is characterized in this current statement is not representative of the future. So what would it working look like in your view? Well, I think it would have to look like, you'd see, for example, one of the statistics they want to tout in the document is the declining compute intensity of token production, that it's been coming down something like, it's fallen like 50% or something like that. And so you want, the business would have to look like collapsing cost in terms of compute intensity of the underlying business. And that's the only way that the margins are supported and could work because otherwise you just simply are

[17:04](https://realalpha.app/v/ilkjZXwb8dU/?t=1024) going to eat the business on the basis of the compute costs associated with it. So that has to continue to decline. The more troubling piece is that there's a revenue deceleration underway if you look at the leaked Q3 numbers in the context of everything else. They're now looking at something like 50% revenue growth, but arguing that in Q4 they'll see a spike. It's implied, but back to about 64 percent or so. So you that has to you have to see that reversal in the fortunes of the business. So one is declining compute intensity. One is a reacceleration of growth. And that I'm saying a company coming like this to market needs already to reaccelerate growth just blows the top of my head off. Final question. This is set to go public. The report evaluation is going to be two trillion dollars. There has been some debate as to whether that will actually materialize.

[17:51](https://realalpha.app/v/ilkjZXwb8dU/?t=1071) Yeah. One five or so. I keep hearing him. Yeah. What do you think will happen here? Do you think this goes out at $2 trillion, $1.5 trillion? Does it go out at all? What do you think? I think if it goes, it goes at $1.5 or so. But I reserve the right, and this is my longstanding claim, is the U.S. won't have a functioning government for the balance of the year. So who knows what will actually be able to come public and what won't. It's not very helpful, Paul. It's not my fault that we don't have a functioning government. Blame politicians. But nevertheless, $1.5, assuming we have a functioning government, zero if it doesn't.

[18:24](https://realalpha.app/v/ilkjZXwb8dU/?t=1104) Paul Kudrowski is Managing Partner at SK Ventures. Paul, always appreciate your time. Thank you. Yeah, thank you. After the break, a chill in the markets. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com. Support for the show comes from so far. Here's the thing. Most traditional banks pay almost nothing in interest, so your money ends up just sitting there, twiddling its sums, doing nothing. And if your money's doing nothing, it's not doing its job. You work hard for every dollar, so why not put those dollars to work for you?

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[18:58](https://realalpha.app/v/ilkjZXwb8dU/?t=1138) SoFi checking and savings is offered through SoFi Bank N.A. member FDIC. Hi, everyone. I'm Kara Swisher. And I'm Sky Galloway. Twice a week, we get together on Pivot to sort through the biggest stories in tech, business, and politics. And we're taking the show back on the road for a live tour in November. So we'll bring hot takes, I'll bring the insight, and the dick jokes, and Kara will try, keyword is try, to keep me in check. You'll get to see her hit me in person, live. I'll do it. If someone has to do it. We'll cover AI, whatever chaos Washington has cooked up that week, and every billionaire misbehaving.

[19:14](https://realalpha.app/v/ilkjZXwb8dU/?t=1154) That's all of them. And you'll also get to participate in audience Q&A, so bring your best questions. Scott will probably answer ones you didn't ask. We also have secret special guests, which you'll enjoy for every city. Get tickets at PivotTour.com. That's PivotTour.com. We are selling out, so don't wait. And we look forward to seeing you. Are you tired of hearing about business, tech, and finance from the bros? We are the Tiger Sisters, a top business podcast with the Vox Media Podcast Network. Tiger Sisters releases every Monday and we decode money, power and love. And who doesn't love all those things?

[19:28](https://realalpha.app/v/ilkjZXwb8dU/?t=1168) We are the Internet's Wall Street and Silicon Valley Big Sisters. Tune in every Monday for late night sister talk meets boardroom strategy. Check out Tiger Sisters on YouTube, Spotify or wherever you get your podcasts. Welcome to the Tiger Fam. We're back with Prof G Markets. Markets are beginning to feel a chill in the air. The Nasdaq 100 fell nearly 3% on Thursday, its worst day since... June, as worries about how big tech will pay for the AI build-out hit tech stocks. The same fear showed up in the corporate bond market. Corporate bond yield premiums surged to their widest levels since May 2025.

[19:59](https://realalpha.app/v/ilkjZXwb8dU/?t=1199) Meanwhile, investors moved back into treasuries, pushing the 10-year yield below 5% for the first time in a month. Now, stocks did rise yesterday, but the S&P and the Nasdaq are coming off of two weeks of losses, with big tech earnings and a Fed meeting still ahead this week. So the question for investors, is winter coming for the markets? Joining us to discuss this, we're speaking with Robert Armstrong, US financial commentator for the Financial Times and author of the Unhedged newsletter. Rob, good to see you. You wrote that last week's, quote, epic treasury rally and the accompanying rout in tech stocks had the feeling of a turning point.

[20:41](https://realalpha.app/v/ilkjZXwb8dU/?t=1241) The sudden arrival of winter after a long summer. Very general question that you posed in your piece. Is winter coming for stocks? I think it's really important that the 10-year and the 30-year yield went up last week when stock markets were faltering. Because if you remember, it was hardly a week ago when all bad things were being done by treasuries and treasuries were trash uh the u.s fiscal system is unsustainable inflation is out of control these things are monstrous they only go down and with that as the context things got spooky enough in equities that people started buying the crap out of treasuries anyway like you know we had like a 19 basis point day on the 10-year last week i can't remember the last 19 basis point day when the yields went down that much. People were really buying the stuff. And by the way, the bad feelings about the bond market may have been overdone, right? When you can get in real terms, in inflation adjusted terms, you're talking about two to 3% from the bond market.

[22:01](https://realalpha.app/v/ilkjZXwb8dU/?t=1321) I'd say that's pretty good. And so it's not like there was an irrational rush into bonds, But this fast change of mood, I think really told you something. And that was, you know, and that's extremely striking. That's point number. Number one, and I'm rattling on here, but I'll get it all out and then you can respond. Point number two is that cracks had really been appearing in the equity markets for quite a while before this happened. So as we've discussed on this show before, I believe, the NASDAQ and the S&P 500 have been heading in a herky-jerky way sideways for six months and since May. But below that, we have seen the market behaving in a way that is consistent with the end of a cycle and is consistent with higher bond yields putting pressure on them.

[22:54](https://realalpha.app/v/ilkjZXwb8dU/?t=1374) So we've seen things like one of the examples I pointed out last week was there was this group of industrial stocks like GE Verona and Caterpillar was one of them and Comfort Systems. These were all the industrial stocks that sort of benefit from the AI boom. They like put the cooling and electronic systems into and the construction part of the data centers. Great. Those had an unbelievable run. A lot of them doubled. well they've been doing like crap since may right uh and you know the small cap stocks uh have been doing terrible uh a lot of the interest sensitive parts of the s&p utilities real estate those have been doing badly so it was like you know more and more work was being done by the big tech stocks. And last week, those started to crack. And we saw the response in bond yields. And it's like, okay, something is different as now. It's not all unicorns and

[23:57](https://realalpha.app/v/ilkjZXwb8dU/?t=1437) **Robert Armstrong:** rainbows and hard candy at this point. You know, it's like something feels different. So I'm not calling for a crash, but the euphoria is broken. There's a much more realistic, much more

[24:15](https://realalpha.app/v/ilkjZXwb8dU/?t=1455) wary set of fundamental action, price action going on in the stock market now. And that remains true today, even though we had a pretty decent day today in markets, I would argue. It seems that the 10-year is really the crucial thing to look at. And just to be clear for everyone, you know, beginning of the month, we were at 5.3%. And I'm going to take my little victory lap here, which is that on October 5th, I said that this was the end of the sell-off, and my prediction was we're going to see the yield come back down and we'll see bonds rally. That is what's happened. We're now down below 5%.

[24:57](https://realalpha.app/v/ilkjZXwb8dU/?t=1497) Yeah, that is a huge move. Just for readers who don't follow the stock market, that's like a 15% move in the stock market would be an equivalent size. This is a shift. Yes, huge shift. And I guess the question is, why is that happening? And it's probably a combination of both things. It's probably that the bond sell-off was overdone. And then at the same time, there is a legitimate concern around the equity markets, specifically around its reliance on AI. It seems that investors are beginning to get jittery. And so in that environment, why would you not lock in decent yields, move into the safer bond markets, which is kind of everything that you would expect from a market that is reacting to a boom and bust cycle.

[25:44](https://realalpha.app/v/ilkjZXwb8dU/?t=1544) And so in a lot of ways, it almost seems like, yeah, this is what's supposed to happen. The boom happened, and now investors do this. Yeah, no, it makes sense. And it's supposed to be that when equities get jumpy, bonds do a little bit better. And they have, and that's really nice. And there's more evidence for your claim that this is a flight. There's part of this is a flight to equity trade, which is the staple stocks would have been, which have been like the worst performing stocks in global markets in general, in the U.S. markets. So I'm talking about the people who make paper towels and deodorant and tomato sauce, right?

[26:28](https://realalpha.app/v/ilkjZXwb8dU/?t=1588) The real consumer basics, tobacco, whatever. These, you know, this industry, especially in the United States, has been having its struggles just to grow. And so that's one reason it's been doing it. But nobody wants anything to do with these very safe, boring companies. Look at how those performed in the last week or two. Over the whole world, it's like the line just like leaps off the chart all of a sudden. Right? So that's fear at work. When you're starting, like, maybe I'll sell that tech stock and buy Kimberly-Clark. That's fear talking right there, you know? Until Kimberly-Clark pivots to data centers in some way, which I don't think is off the table.

[27:12](https://realalpha.app/v/ilkjZXwb8dU/?t=1632) I think perhaps the most... jittery signal that we got last week, I think came from Elon Musk. He posted this tweet on X, which I'd like to read to you and get your reactions. He said, quote, as of the past few weeks, debt markets have almost entirely shut off access to the money for any company that doesn't have revenue independent of AI data centers. He continued, he said that means 200 plus neoclouds are going to see guppy level death and consolidation. Some will make it through, but not many. He seems to be saying something which I think I agree with, which is that the bond markets are deciding, OK, we're anxious about this data center build out now. And without us, a lot of you guys are screwed. A lot of you guys need us in order to build these things, which would suggest, as he puts forward, that some of these smaller, newer AI names, the neoclouds that have just become very hot and popular, that they actually risk genuinely going out of business. And perhaps that's how the trade unravels. What do you make of his comments? He fancies himself one of the consolidators. So, you know, clearly, good, bad, or indifferent results from the AI industry.

[28:28](https://realalpha.app/v/ilkjZXwb8dU/?t=1708) This first round of like a railroad boom, like everyone in his dog financing a railroad,

[28:38](https://realalpha.app/v/ilkjZXwb8dU/?t=1718) **Robert Armstrong:** This is going to go through a round of restructuring and reconstruction and consolidation. That's just going to happen one way or the other.

[28:46](https://realalpha.app/v/ilkjZXwb8dU/?t=1726) And Elon Musk is talking from the position of, I fancy myself one of the big boys who's going to come out the other side, right? And I'm going to be buying, I'm going to be buying these little guys out of bankruptcy and it's going to be great. I'm going to buy them at 60 cents on the dollar and it's going to be fantastic. Whether that's true or not, I mean, you know, we've probably discussed the relative precariousness of the financing of his two companies, too, but I'll say this for him. He is a master fundraiser, and someone who is a master fundraiser is going to have a chance at being one of those consolidators out on the other end, right?

[29:23](https://realalpha.app/v/ilkjZXwb8dU/?t=1763) So I think that's definitely true. If anyone's not going to be affected by capital drying up, it's the richest man in the world. And the man who for, you know, you may, we may like him, dislike him, uh, be impressed, not be impressed. The guy has proven he knows how to scare up money. Right. That, you know, and he's done some incredible things in my view on it. an industrial level but on a financial level is talent seems to be equally great say this is what transpires say we do see that continually that the bond markets are demanding more from these ai data center companies a lot of them can't make good on those payments some of them start to go out of business is that how the stock market enters the correction that everyone has been waiting for for so long? Is this sort of actually the beginning of the end? Not Armageddon, but at least some significant drawdown that constitutes anything close to resembling a real correction.

[30:23](https://realalpha.app/v/ilkjZXwb8dU/?t=1823) Let me start by taking the other side of the argument. One thing that if you're going to have a crazy investment euphoria, it's good to start with some companies who have a lot of money and have really good businesses. And so there's five, four or five of the hyperscalers that whatever happens to AI, they went into the situation having the most profitable businesses in the history of the world. Alphabet, Amazon, Meta, Microsoft, Apple. Apple's not participating, so take them off the list. But anyway, so you've got these cash machines at one end, and that's really good. and to the degree that the ai data center bubble starts to deflate investors might look at those companies and say great they don't have to pay for this crap anymore they can just go back to churning out free cash flow buying back their own shares and paying dividends instead of sinking every penny into a data center down in louisiana right and and those stocks might go up that doesn't I mean, CoreWeave's not going up.

[31:26](https://realalpha.app/v/ilkjZXwb8dU/?t=1886) CoreWeave's going to zero under that circumstance. Yeah, but who cares? But who cares? So, like, the big pillars of the stock market might stay standing under that circumstance. The circumstance being, like, holy crap, we don't actually want to finance this much capacity for AI data centers. A lot of people will feel the pain, but those pillars might stay standing. But you do have another set of companies that have become incredibly important. won't fare so well and that's the semiconductor complex NVIDIA broadcom and work work your way right down right those things would lose a massive amount of value right and that would be a shock right and uh a less biggest shock than if it happened to microsoft but uh you know NVIDIA right Now, Microsoft and the other hyperscalers, but NVIDIA right now is the most valuable company in the world still today, I think. And so that would be a nasty shock for those guys. So would it be a catastrophic 2008 style correction? My guess is no, because of the hyperscalers would probably do okay. Would there be some smoldering wreckage to pick through? Yes. Will you be glad you owned some 10-year treasuries with a 5% yield going in?

[32:47](https://realalpha.app/v/ilkjZXwb8dU/?t=1967) Probably yes again, you know? Certainly. And by the way, the nice thing about the five-year, the 10-year treasury, if I might just return to that topic here briefly. Yep. With a 5% yield on it, and you can get almost a 5% on the five-year, right? The nice thing about that is

[33:05](https://realalpha.app/v/ilkjZXwb8dU/?t=1985) **Robert Armstrong:** even if inflation does go up a little bit and rates don't go up a little bit, you have a little cushion in there.

[33:11](https://realalpha.app/v/ilkjZXwb8dU/?t=1991) You know what I mean? the 10-year yield at 2%, you got no insulation. Yes. Right? You know, once you have a 5% yield and some of that yield is real yield, you got a little give. It's not going to make you rich, but it'll protect you, you know? And that's exactly what people want right now, it seems. Yeah. Yeah. Well, it's really interesting stuff. Robert Armstrong is U.S. financial commentator for the Financial Times, author of the Unhedged newsletter as well. Rob, as always, we appreciate your time. I appreciate coming on the show. Okay, that's it for today. Thanks for tuning in. And if you liked this episode, please be sure to follow us on Spotify or Apple Podcasts or subscribe to our YouTube channel.

[33:44](https://realalpha.app/v/ilkjZXwb8dU/?t=2024) You can also follow us on Instagram, TikTok, and across social media under the handle Prof G Markets. We really appreciate it. Stick around this week. We'll be covering Google and Microsoft's earnings and the next Fed decision. will also be breaking down the markets with the one and only downtown Josh Brown on Friday. Don't miss it. 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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