In mid-August, chipmaking giant Nvidia announced a $500 billion effort to jointly finance the AI boom alongside Wall Street’s biggest investment banks, but not everyone is a fan of this development.
Jeff Gundlach, the founder and CEO of Los Angeles-based DoubleLine Capital, was skeptical about the $500 billion fund, saying it “will not likely age well” in a post on X. He second-guessed the group’s logic in employing “assets of unknown life” as collateral in the financial arrangement.
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Then Gundlach took it a step further and compared it to issuing asset-backed securities that were guaranteed by bananas. “Why not do a 30 year ABS deal backed by warehouses of bananas? It’s OK, they’ll be newly engineered bananas of unknown life,” he added.
Nvidia didn’t immediately respond to a request for comment from Moneywise.
On Aug. 10, Nvidia CEO Jensen Huang announced the deal with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR. It’s designed to muster a staggering amount of capital in service of building out the data centers, servers and cooling systems underpinning the AI boom and standardizing its financing.
“We are helping create a new class of productive, investable infrastructure: AI factories,” Huang said in the statement. “In AI, compute is revenue… That is why we are bringing the world’s leading long-term capital providers together to independently underwrite AI infrastructure.”
The ‘bond king’ is tapping into a deeper concern on AI financing
Gundlach is a veteran bond investor nicknamed “the Bond King” for his acumen in trading mortgage-backed securities. DoubleLine Capital currently manages $95 billion in financial assets that include residential mortgage-backed securities.
What Gundlach expressed is indicative of the lingering anxiety within investment circles about AI’s profitability. In Nvidia’s case, their clients are struggling to drum up enough financing to purchase its chips, usually with high interest rates attached if they take out a loan.
AI’s rapid development has stirred questions about how long the computer chips powering the AI buildout — such as those from Nvidia — will retain their value given the loans financing them won’t be paid off for years. It’s possible that the collateral won’t be worth enough to cover the loan amount, especially if AI companies don’t turn sizable profits.
For now, there is virtually unchecked demand among tech companies for AI-powering chips, which is driving up prices and keeping the frenzy going.
On August 15, Gundlach prodded investors to “watch out” for new asset classes assembled under a label of “financial innovation” and supported by “questionable” credit ratings. Earlier that same day, billionaire Mark Cuban said he believed “chips as an asset class will be the new crypto.”
Gundlach’s other warning on private credit
A growing number of investors are also wary about the rapidly growing size and reach of the private credit market and Gundlach is among them. Private credit’s business revolves around lending to companies that are deemed riskier by the traditional banking sector.
In May, he compared private credit to “the Wild West.”
“This is something that is endemic to market cycles. This happened in the IPO of dot-coms back in the late ’90s,” Gundlach told Bloomberg. “They had no revenue, no business plan and they were selling for large prices. And then of course in the lead-up to the global financial crisis, you had the mortgage market exploding in size to about where the private credit market is today.”
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This article originally appeared on Moneywise.com under the title: The billionaire ‘Bond King’ just compared Wall Street’s $500 billion AI bet to a warehouse full of bananas
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