A Chip Story You Haven't Heard Before

If you're tired of reading about chips, we have good news and bad news...

The bad news is, we're putting another dollar in the "chip jar" today. We expect we'll have enough cash to buy our own chipmaking factory if we keep up the pace.

Here's the good news, though – at least, if you're ready for a change from the same old semiconductor story...

We're not here to talk about AI. Well, not much.

You see, while chips are mostly used to accelerate AI development, they've also become the hottest commodity in finance... specifically in the lending market.

The biggest asset managers, like BlackRock (BLK) and Blackstone (BX), have established a niche lending space for "neocloud" companies. Neoclouds buy large quantities of chips – particularly Nvidia's (NVDA) graphics processing units ("GPUs"), which are critical for AI development.

They then rent out their processing power to other businesses, raking in boatloads of cash in the process.

And now, they've taken it a step further. Neoclouds are using their stockpiles of invaluable chips as collateral to secure loans from major asset managers... which they use to purchase even more chips.

It's a complex way to access funding. It has also been one of the few viable options available to neoclouds for some time. But that might be changing soon...

Using chips as collateral, neocloud companies have secured more than $11 billion in loans to date...

CoreWeave, the largest of the neoclouds, is a perfect illustration of the benefits of this new loan type. The company possesses more than 45,000 chips. And it has raised more than $10 billion in debt – both chip-backed and not – in the past 12 months.

It even recently announced another $650 million credit line from major lenders.

CoreWeave is only one example of many. Business-intelligence company MicroStrategy (MSTR) has been borrowing against its bitcoin reserves to purchase even more bitcoin.

Plenty of other companies are desperate to grow as quickly as possible. And as it stands, one of the simplest ways to secure cash is by borrowing against hot commodities like GPUs or bitcoin.

That's because these commodities carry great value. So they attract alternative investors and asset managers willing to lend.

However, not every company has access to such valuable assets to borrow against.

That's why, despite the stock market's strong rally, one crucial element has been missing...

We're talking about debt.

Yesterday, we reflected on the commercial and industrial (C&I) loan landscape in the aftermath of two major recessions – the dot-com bust and the 2008 financial crisis. Both times, stocks didn't really kick off their rallies until C&I loan growth improved.

The current market has been waiting years for a similar catalyst. Since the post-rate hike slowdown we experienced in 2022, C&I loans have remained flat.

Take a look...

Loan levels have remained stable, which is a positive sign. It tells us the economy has avoided a prolonged recession so far.

At the same time, growth in lending is essential for a strong bull market. Companies can't expand and invest if they can't borrow.

If you read yesterday's Daily Authority, you know banks have stopped hiking their lending standards...

Borrowing may soon become easier for the first time in more than two and a half years. That's great news for U.S. corporations that need easier access to loans.

With more accessible credit, companies won't need to rely on assets like chips or bitcoin as collateral. And the businesses that don't have such resources will be able to secure funding.

All of this investment is the next step toward corporate earnings growth... pushing us toward a robust bull market.

Regards,

Joel Litman
December 4, 2024