Summary
Highlights
Blue Owl, an alternative fund manager, refused a partnership with Oracle, a significant move given their past collaborations. This event is seen as a sign of trouble in the credit markets and the AI space, indicating that the AI bubble cannot be separated from the credit cycle. IBM's CEO admitted that the numbers for AI don't work, relying solely on Wall Street hype and long-term promises. Blue Owl's decision signals a change, questioning the unlimited funding model for AI and its overall plan.
Blue Owl, as a lender, needs assurance of repayment. Oracle, trying to catch up in AI, faces negative revenues next year due to capex spending, requiring more borrowing just to sustain operations. Oracle's stock is crashing, and cash is being burned, making it a risky investment. Blue Owl, having faced its own issues with redemptions and questions about the private credit space, cannot afford to be associated with Oracle, which is increasingly seen as the 'black sheep' of the AI industry due to its soaring credit default swap prices and downgraded debt.
Wall Street's sentiment towards AI has shifted from bullish to bearish, with increased scrutiny and talks of a bubble. Blue Owl's decision to back out of a deal with Oracle, a company with negative free cash flow, highlights this caution. The sustainability of AI projects relies on continued access to funds, and the model where companies like Oracle lease data centers from equity owners, with questionable cash flows, adds layers of risk. Investors are now asking critical questions about where their money is going and how it will return, signaling a tone and action shift in AI funding.
Oracle's AI strategy relied on an endless supply of funds, but this assumption is now challenged. Both Oracle and Blue Owl stocks have been pummeled, reflecting concerns about AI exposure and the broader credit cycle. Even with declining interest rates, private credit funds like Blue Owl are struggling, indicating investor avoidance due to perceived risks and questionable lending practices. The drying up of credit means companies like Oracle can no longer easily borrow to stay competitive, impacting their ability to build essential infrastructure like data centers.
The assumption of endless money for AI fueled unrealistic financial planning. As the credit cycle shifts, smaller companies at the margins, unable to secure continued funding, face potential bankruptcy. The decision by a major player like Blue Owl to refuse lending to Oracle creates a domino effect, leading smaller lenders to also tighten their credit. This tightening of credit, impacting large and small businesses alike, reveals overleveraged entities as the 'rug gets pulled out.' This scenario is analogous to Bitcoin's struggle, which is an indirect play on the leveraged, risk-taking behavior driven by the AI hype.
The market is witnessing a fundamental shift in behavior regarding AI. The herd mentality in financial services means that if large entities like Blue Owl start questioning investments, smaller players will follow suit. This spread of skepticism, along with the obvious hallmarks of a credit cycle (greed, overlooking problems, assuming infinite money), points to an inevitable downturn. The current signals, though not definitive, strongly suggest that the limits of the AI hype machine have been reached, and a deeper examination of the credit cycle and 'garbage lending' is overdue. There's a lot of smoke, indicating potential fire.