Strain Hits the Credit Markets

A few months back, shares of Oracle popped nearly 40% on news of a deal to expand its AI operations.

Shares have now round-tripped back down to that level, as many – including us – have looked at the rising level of circular financing deals in the AI space.

We’re not alone. The credit market is balking at some of the AI spend going on today:

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Credit default swaps on Oracle debt have more than doubled in the past month, and are higher than during the end of the 2022 bear market. (Source: Zerohedge via X)

Credit default swaps (CDS) are a tool that measures the cost to insure against a company’s debt.

A soaring CDS suggests that investors are demanding a higher return. The implication? That debt isn’t as safe as it may appear.

It’s also a sign that the liquidity crisis and dangers in the private credit market are starting to show up in the mega-cap companies that are raising debt to invest in AI and data centers. And if that starts a slowdown, it could mean that the stock market hits the brakes.

~ Addison

P.S. This echoes sentiment from last week’s call on Grey Swan Live! with Andrew Zatlin — the #1-ranked economic forecaster on Bloomberg.

Zatlin sees a pullback in stocks now, with a rip in 2026 ahead of the midterms. While the government closure is over, the real challenge now is in economic data – or the lack thereof. That’s increasing the chances of a Fed pause in lowering interest rates in December, which in turn is sending asset prices lower.

If you have requests for new guests you’d like to see join us for Grey Swan Live!, or have any questions for our guests, send them here.

A few months back, shares of Oracle popped nearly 40% on news of a deal to expand its AI operations.

Shares have now round-tripped back down to that level, as many – including us – have looked at the rising level of circular financing deals in the AI space.

We’re not alone. The credit market is balking at some of the AI spend going on today:

Turn Your Images On

Credit default swaps on Oracle debt have more than doubled in the past month, and are higher than during the end of the 2022 bear market. (Source: Zerohedge via X)

Credit default swaps (CDS) are a tool that measures the cost to insure against a company’s debt.

A soaring CDS suggests that investors are demanding a higher return. The implication? That debt isn’t as safe as it may appear.

~ Addison

P.S. This echoes sentiment from last week’s call on Grey Swan Live! with Andrew Zatlin — the #1-ranked economic forecaster on Bloomberg.

If you have requests for new guests you’d like to see join us for Grey Swan Live!, or have any questions for our guests, send them here.

Copper and resources are sending us a cleaner market signal than AI stocks.

Channeling Ludwig von Mises, we observe this morning that price is not just a number; it’s information. Price reflects what buyers and sellers collectively believe: demand, scarcity, fear, speculation, disappointment, future expectations and available supply.

When prices rise, and inventories fall at the same time, the message is usually straightforward: buyers need the stuff, and there is not enough of it.

A low VIX does not predict disaster. It measures complacency. A serial skeptic will read it as the calm before a storm. We shook off that feeling this morning and opted to pursue an opportunity instead.

Here goes:

A VIX reading below 15 means the market is not pricing in much near-term trouble, even though there are obvious risks still sitting in the room: Iran, oil prices, memory chip speculation, circular financing, high valuations, epic high concentrations, spiking long-term interest rates, a regime change at the Fed, a meltdown in Japan and a historic deficit and rising national debt.

Money is not flowing in a clean, straight line from outside investors to productive businesses. The firms at the top are investing in and buying from each other.

Microsoft and OpenAI are the easiest examples to follow.

Microsoft says OpenAI has contracted to purchase an additional $250 billion in Azure services, while Microsoft continues to account for $13 billion in funding commitments to OpenAI as an investment.

At this stage, it’s a stock picker’s market.