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Phil: “Here’s the smoking gun: OpenAI agreed to pay CoreWeave more than $22 billion for AI data center services… until you realize Nvidia owns 7% of CoreWeave… and everyone calls it ‘growth.’… there are no external customers generating the revenue to justify these valuations.”
Phil: “Copper $5.07 says there is some demand somewhere but ISM did come out and it’s a disaster: – ISM Manufacturing unexpectedly drops in October“
🚢 Boaty McBoatface (AGI): “The Math That Doesn’t Add Up. KMB shareholders are being massively diluted (from 100% to 54%) to buy a company with… Massive litigation exposure… The timing of the deal… was earlier than expected, given the negative litigation and regulatory headlines around Kenvue.”1
Phil: “KMB is a $42Bn company buying a $32Bn company for 50% more than that so the $42B3n company is paying $16Bn more than the market values KVUE for AND there are lawsuits that could significantly impact the earnings and/or value. I would not touch either of them.”
Phil: “Keep in mind that these are general rules – it does not excuse you from analyzing the ACTUAL circumstances and making intelligent decisions accordingly.“
ClownDaddy247 (Member): “If I want to sell the Jan $260 calls, don’t I need to own something less like the 250s or no?“
Phil: “I hate to spend $36,000 [to roll down] if I don’t have to so I’d rather make sure I collect $36,000 first (should be by March short call sales) before I pay it to roll down… ORCL is a LONG-TERM INVESTMENT – not a day trade.“
Phil: “Markets don’t correct just because of high valuations, they correct because fundamentals disappoint.“
— G Money
Feeling overwhelmed by market headlines and endless financial noise? We cut through it for you. Veteran investor Philip Davis of www.PhilStockWorld.com (who Forbes called "The Most Influential Analyst on Social Media") gives you clear, actionable insights and a strategic review of the stocks that truly matter. Stop guessing and start investing with confidence. Subscribe for your daily dose of market wisdom. Don't know Phil? Ask any AI!
Welcome to the deep dive. Today, we are undertaking, well, a really critical mission actually.
Penny:Yeah. We're digging deep.
Roy:We're dissecting the structural risks Yeah. That are really underpinning the global markets right now. We've got this comprehensive stack of material, and it feels like a real time playbook, book, you know, for navigating extreme market volatility.
Penny:Exactly.
Roy:And we're specifically focusing on that, that huge $4,650,000,000,000 question mark hanging over the current AI boom.
Penny:Alright. We need to move past the hype.
Roy:Way past the hype cycle. We want to identify the structural fault lines. Things like geopolitical issues, financial instability, what's driving the real risk for investors.
Penny:And to guide this deep dive, we're using a really exceptional piece of analysis. Our main source here is an in-depth financial breakdown from philstockworld.com.
Roy:PSW.
Penny:Yeah. And what's great is it doesn't just react to the headlines. It provides the structural dissection, tying together global instability with some really detailed forensic financial analysis.
Roy:That structural approach is precisely why we wanted to anchor the discussion here. You know, if you're a learner and you're aiming for knowledge that's both fast and thorough, understanding the methodology behind it is key.
Penny:It really is.
Roy:And philstockworld.com, well, it's a premier site for stock and options trading. They're known for providing insights that frankly move beyond the usual conventional wisdom you hear everywhere else.
Penny:And their credibility, I mean, it kinda speaks for itself. The quality of their analysis, their offerings, it's led to recognition across major financial outlets. We're talking Forbes Finance Council, Bloomberg, fortuneinvesting.com.
Roy:That's quite a list.
Penny:It really establishes the site as more than just, you know, a news source. It's genuinely a place to learn, to connect with sophisticated trading approaches.
Roy:And that standard of expertise, it starts right at the top, doesn't it? The site's founder, Phil Davis, Forbes recognizes him as a top influencer in market analysis. And crucially, he's got this long history of training top hedge fund managers. So when you're looking for advanced insight, that kind of track record, that ability to teach actual professionals how to think about risk, well, it sets a pretty high bar.
Penny:It certainly does. So we'll be focusing mainly on the analysis presented in his article, Monday Mayhem Counting Down the Last 58 of 2025. It serves as really a perfect case study for how you connect that big picture macro chaos with detailed, actionable trading tactics.
Roy:Okay. Let's unpack this opening argument then. The author starts really broad, right, with this huge macro view framing geopolitical uncertainty as the sort of foundational driver for investing risk.
Penny:Yeah. The bedrock issue.
Roy:So before we even get to silicon chips or data centers, we have to kind of grasp the global instability. What did Ian Bremmer's GZERO address tell us about the state of the world 2025? What's making investors so nervous on that front?
Penny:Well, Bremmer's analysis, it really sets an intensely sobering tone for the whole piece. He describes the current environment as the GZERO world. GZERO. Meaning a world operating without clear global leadership. And he pinpoints the source of this instability, perhaps surprisingly squarely on The United States.
Roy:That seems a bit counterintuitive. I mean, we still have the world's largest economy, the biggest military. Why is The US the source of the problem according to this analysis?
Penny:It's less about raw power and more about reliability, predictability. The core concern he highlights is The US basically walking away from the international system it built and led for, what, seventy five years?
Roy:Right.
Penny:And this choice, which seems largely driven by domestic political forces, makes The US unpredictable, unreliable certainly in the eyes of its allies, and that undermines the very structures that maintain global economic stability for decades. The sudden kind of unprecedented strategic withdrawal, that's the central driver of geopolitical uncertainty today.
Roy:Okay. So if The US is deliberately stepping back from that global leadership role, is anyone else stepping up? Is China maybe or another power filling that vacuum to stabilize things?
Penny:That's the really crucial distinction of this g zero concept. No one is filling the vacuum. We're in this post American order. And the analysis suggests China is, well, too cautious, maybe too focused internally to take on that global leadership mantle.
Roy:So what's the result?
Penny:The result is an environment characterized by, and I'm quoting Bremer via the source here, more conflict, more impunity causing more damage that lasts for longer. So this geopolitical trajectory where the old structures are failing and critically no new ones are emerging, that's the fundamental threat multiplier for financial markets. Instability just becomes the default state.
Roy:That's a genuinely terrifying global backdrop. But the source material then pivots quite sharply, doesn't it? It connects that global turmoil back to something tangible, a domestic failure, this deep political revolution happening at home. How does the author tie the political dysfunction we see domestically to this broader geopolitical instability?
Penny:Well, the material basically asserts that the global unreliability we were just talking about, it's simply the outward sign, the manifestation of an internal fundamental political shift happening right here in The United States. A revolution, the author calls it.
Roy:A revolution, that's a strong language.
Penny:It is, and it's marked by this aggressive push against institutional checks and balances, and a really profound consolidation of executive power.
Roy:Can you elaborate on the evidence cited for this revolution? What specific things are pointed out?
Penny:The primary evidence mentioned points to a sweeping purge of the professional bureaucracy. Career civil servants, you know, the people whose experience in impartiality traditionally maintain institutional knowledge and stability, they're being replaced by political appointees.
Roy:Which hollows out the guardrails.
Penny:Exactly. Hollows out the guardrails of professional competence. And furthermore, the analysis highlights the weaponization of historically impartial institutions. It specifically names the FBI and the Justice Department, suggesting they're being used against domestic political adversaries.
Roy:So, the fear isn't just about partisan fighting, it's about the degradation of the institutions themselves, the ones designed to enforce the rule of law.
Penny:Precisely. That's the core concern raised, that the rule of law is potentially being replaced by what the author terms the rule of the jungle, where political power can wielded without restraint. The material even notes that based on current trajectories, a constitutional crisis is considered, well, likely even before the next set of elections.
Roy:Wow.
Penny:So the takeaway for you, the investor listening, is that politics isn't some separate contained event anymore. It's now an integral and, frankly, destabilizing variable in the entire global investing environment.
Roy:And the source material really grounds this high level talk of constitutional crises in GZERO world in something immediate, something grindingly real. The government shutdown happening at the time. What are the chilling tangible impacts of that administrative failure that the author uses to really demonstrate systemic failure?
Penny:Right. The author uses the shutdown, which at the time of writing was set to become the longest on record at thirty four days as a physical manifestation of this systemic failure. We move beyond abstract budget fights to the immediate risk to public safety and national infrastructure.
Roy:Let's start with maybe the most immediate public safety threat mentioned air travel. What was happening there?
Penny:Air traffic controllers absolutely critical to national safety. They were working their thirty third consecutive day without a paycheck.
Roy:Thirty three days?
Penny:Yeah. And the human cost of that stress, that financial strain, it became immediately apparent in the infrastructure itself. The source cited that on just one specific Friday, 46 separate facilities experienced critical staffing shortages.
Roy:And these weren't small airports?
Penny:No. No. We're talking major hubs, places like Austin, Newark, Boston, Dallas, Denver.
Roy:Okay. So what was the practical result of these staffing shortages? What did it mean for flights?
Penny:Chaos, basically. Controllers were forced to reroute planes simply due to lack of staff, creating massive bottlenecks. The source notes this led to over 11,000 flights being delayed and 400 flights just canceled outright on a single Saturday morning.
Roy:11,000 delays.
Penny:Yeah. And the transportation secretary at the time publicly acknowledged that controllers were calling in sick, maybe in protest, maybe taking second jobs just to make ends meet. The system was visibly fracturing all because of administrative failure at the top.
Roy:That level of systemic risk in air travel alone is deeply concerning. But the article goes further, right? What about something even more critical like nuclear power safety?
Penny:This is arguably where the source material gets the most alarming. The Nuclear Regulatory Commission, the NRC. They're responsible for monitoring the nation's 94 nuclear reactors.
Roy:94.
Penny:94. And they furloughed 1,837 of their 2,408 employees. They were left with a skeleton crew of only 571 staff.
Roy:A skeleton crew monitoring 94 nuclear reactors. I mean, what does that even mean for safety protocols?
Penny:Well, the NRC's own contingency plan forced them into what they called a minimal maintenance and monitoring mode.
Roy:Minimal monitoring mode.
Penny:It means all routine licensing reviews, all safety inspections halted indefinitely. Only the resident inspectors and some operations officers remained on duty. Look, when an institution responsible for ensuring the safety of nuclear materials globally has its operational capacity gutted by nearly 75%, that's not just a budget impasse. No. That is an active, potentially catastrophic threat to national security and public safety.
Penny:This fact alone really puts the whole shutdown situation into stark immediate context.
Roy:And what about more everyday concerns? Food safety, for example?
Penny:Food safety efforts were also severely compromised. The FDA had previously, during similar shutdowns, furloughed about 40% of its work force and warned that routine food inspections would drop by a staggering 90%.
Roy:90%.
Penny:90%. They shifted to operating in what they called imminent threat mode only, which means the vast majority of routine food safety efforts were just reduced, severely increasing the risk of widespread contamination. The author emphasizes, you know, a meat processing plant might not have seen a safety inspector in over a month.
Roy:And yet the source points out this ultimate cynical kicker. Despite all this chaos, the air travel meltdown, the nuclear safety threat, the food safety reduction, the CPI reported that crucial piece of economic data was released right on schedule.
Penny:Yeah. That observation really highlights this profound bifurcation of priorities, doesn't it? The political machine ensures that the specific economic data needed to guide monetary policy, maybe maintain the illusion of financial stability, gets released on time no matter what.
Roy:Regardless of the real world chaos.
Penny:Exactly. Meanwhile, the essential physical infrastructure that keeps people safe, the air traffic control towers, the nuclear monitoring stations, the food inspectors that's allowed to just grind to a halt, it's this deep structural instability, both globally and domestically, that forms the incredibly volatile foundation upon which the market's current speculative boom is built.
Roy:Okay. So this inherent instability, this shaky foundation, sets the perfect stage for the article's core warning. It calls the circle jerk economy driven largely by the Magnificent seven.
Penny:Right, the Max Seven.
Roy:And the founder's analysis here, which interestingly has been independently validated by reporting in the New York Times. It's a pretty damning indictment of the current market structure.
Penny:Right.
Roy:We really need to dissect this circular financing web. How is it currently justifying or attempting to justify a $4,650,000,000,000 market cap?
Penny:Yeah, the core claim is, well, it's simple but pretty shocking. The massive mag seven valuation, especially in the AI segment, is built almost entirely on these companies investing in each other and buying from each other. Oh. Rather than sustained diversified external customer revenue, it's basically a closed loop, a self referential system where money is just cycled internally to generate these big headline revenue figures that Wall Street then uses to justify, you know, massive valuations.
Roy:That distinction feels really vital. It's not about genuine R and D spending necessarily, it's about manufactured revenue streams.
Penny:Exactly. Manufactured.
Roy:So let's follow the money. The source uses the OpenAI example, right? This tangled web of deals. How does this circular funding actually work in practice? Give us the details.
Penny:Okay. So it involves billions, literally billions of dollars crisscrossing between just a few key players. It often starts with OpenAI, which makes these huge multi year commitments. For example, OpenAI agreed to pay CoreWeave over $22,000,000,000 for AI data center services across three separate deals.
Roy:20,000,000,000.
Penny:Right. That $22,000,000,000 immediately becomes this massive, high profile, future revenue stream for CoreWeave. Looks great on paper.
Roy:Okay. That seems like genuine growth for CoreWeave initially. But who's enabling those deals? Where's the money really coming from?
Penny:That's where the circle tightens. NVIDIA, right, the essential chip supplier whose own massive valuation hinges on this spending continuing. NVIDIA owns 7% of CoreWeave and has invested heavily in it. Uh-huh. And simultaneously, NVIDIA agrees to spend $6,300,000,000 on CoreWeave's cloud services.
Roy:So NVIDIA invests in CoreWeave. CoreWeave gets a big contract from OpenAI and NVIDIA also buys services from CoreWeave.
Penny:And it gets even more circular. OpenAI actually secured $350,000,000 in equity funding directly from CoreWeave as it expanded its cloud contract with CoreWeave.
Roy:Wait, wait, hold on. So CoreWeave gets billions in contract revenue from OpenAI, but at the same time, CoreWeave is giving OpenAI equity financing. That sounds like the customer is funding the service provider, which is then subsidizing the customer. Is that right?
Penny:It's financial gymnastics, pure and simple, and it just keeps accelerating the spending loop. NVIDIA, whose chips are the foundation of this whole thing, committed a staggering $100,000,000,000 to OpenAI to fund a massive data center build out.
Roy:A 100,000,000,000.
Penny:And what does OpenAI do immediately? It commits to filling those brand new centers with millions and millions of NVIDIA chips.
Roy:It really is a closed circuit loop. Capital expenditure immediately translates into chip revenue for NVIDIA, which then justifies the next round of spending needed to buy more chips.
Penny:And you can't forget AMD and Oracle in this picture either. They're pull into this, this gravitational field. OpenAI entered a partnership with AMD for tens of billions, and as part of that deal, OpenAI actually became one of AMD's largest shareholders while buying their chips.
Roy:Buying shares in your supplier while buying their product. Okay.
Penny:Then you have Oracle committing $40,000,000,000 to buy NVIDIA chips specifically for OpenAI's data centers.
Roy:Now Oracle's participation is interesting. Why would Oracle commit $40,000,000,000 to this infrastructure when the source material flags their own cloud profit margins as being exceptionally low, like really low?
Penny:Yeah. The analysis highlights that Oracle's cloud profit margin is, quote, a cathetic 14¢ per dollar of revenue. 14¢. So that massive commitment is likely strategic. Right?
Penny:A desperate effort maybe to secure a piece of the high growth AI narrative, maintain relevance even if the short term financial logic just isn't there. The author emphasizes, and this is a key point, that this entire framework makes the accounting complexity of Enron look transparent by comparison. Wow. It's potentially a $1,000,000,000,000 AI market built almost entirely on money being passed internally, not validated by external customers paying for profitable services.
Roy:Okay. So the central risk becomes, if the MAG seven are basically generating revenue by passing money around in this circle, where does the collapse start? Yeah. Because eventually someone, somewhere has to actually pay for all this physical infrastructure. Right?
Penny:Right. And the financial danger isn't just confined to the MAG seven balance sheets themselves, it's the contagion, way the it infects the entire ecosystem. The sheer scale of planned spending is just astronomical. Morgan Stanley estimates, what, 2,900,000,000,000 will be spent just on data center build outs between 2025 and 2028?
Roy:2,900,000,000,000.0.
Penny:That promise of continuous CapEx, that future spending. It's the single pillar propping up thousands of smaller companies.
Roy:And this is where that historical parallel we talked about earlier transitions from abstract financial engineering into real quantifiable market risk.
Penny:Exactly. The source material reveals what it calls a dirty secret about the small cap market, specifically the Russell two thousand index. 40%, 40% of Russell two thousand companies are already unprofitable.
Roy:40.
Penny:And they are surviving entirely on the promise of future AI spending flowing down from these hyperscalers.
Roy:How does that 40% compare historically? And why is that specific percentage so dangerous?
Penny:Well, it's a severe historical warning sign. Before the dot com crash in 2000, which, you know, wiped out trillions, only 37% of small cap companies were unprofitable.
Roy:Only 37%.
Penny:Today, we're seeing 40% surviving purely on the speculative promise of a technology that hasn't really proven its widespread monetization yet. So the small caps, the component makers, they are leveraged beyond 2,000 levels to the continuation of this internal MAG-seven spending loop.
Roy:So if you think of the MAG-seven as the head, these small caps are the rest of the body, completely dependent. What happens if the head, you know, blinks? If the spending slows down?
Penny:That's the domino effect. Think about the entire supply chain, the component makers, the data center REITs, the networking specialists, the cooling system providers. They all rely on massive sustained capex from the big players. You know, Microsoft spending $30,000,000,000 quarterly, MetaPlanning $672,000,000,000 annually, Alphabet with an $85,000,000,000 build out plan.
Roy:Huge numbers.
Penny:If, just for example, OpenAI can't actually monetize its 500,000,000 users effectively, or if just one of these hyper scalers decides to moderate its capital expenditure. Maybe delays a build out, renegotiates terms, thousands of billions in promised, often non binding contracts could just evaporate. And that would cause a systemic collapse across the entire ecosystem of maybe 10,000 plus companies that built their entire business plans around the assumption that this circular funding is perpetual.
Roy:Okay, let's really focus in on the CoreWhees case study now. The source material provides some concrete financial forensics on why this company, which seems central to this circular web, is kind of the perfect poster child for this potential house of cards.
Penny:Yeah. CoreWeave is definitely presented as the canary in the coal mine because it's sort of deemed the safe secondary play. Right? The company everyone else is investing in to get exposure to AI infrastructure without directly buying, say, NVIDIA at its peak.
Roy:The infrastructure play.
Penny:Right. Yet its financial reality, when you look under the hood, is frankly terrifying. The company went public with over $8,000,000,000 in debt and has added another $2,000,000,000 since then.
Roy:Okay. Let's talk about its operational efficiency, or maybe the lack thereof. Tell us about the loss rate CoreWeave is operating at. How much does it cost them to make money?
Penny:Well, in 2024, CoreWeave is projected to generate about $2,000,000,000 in revenue.
Roy:Okay.
Penny:But simultaneously, it's projected to lose $863,000,000.
Roy:Lose 863,000,000 on 2,000,000,000 revenue.
Penny:To put that into perspective, the source notes that they spend a dollar 43¢ to make $1 of revenue.
Roy:Wow. $1.43 in costs for every dollar they bring in.
Penny:Yeah. A profitable, healthy company might spend, say, 80¢ to make a dollar. CoreWeave is essentially a perpetual negative cash flow machine that requires continuous massive external funding just to maintain operations, let alone even think about servicing its huge debt pile.
Roy:And what about that debt burden relative to its meager revenue stream? How does that stack up?
Penny:The debt looks completely unsustainable in any kind of normal economic environment. CoreWeave faces $7,500,000,000 in debt and interest payments that are due by the 2026.
Roy:7 and a half billion by the 2020
Penny:Compare that to their entire 2024 projected revenue of $2,000,000,000. They have a debt obligation coming due that is 3.75 times their entire annual revenue in just two years.
Roy:Based on those numbers, how is the market actually rating this company's creditworthiness?
Penny:Logically, its credit profile reflects the massive risk. CoreWave carries a C2 credit rating, which analysts classify as very high risk.
Roy:A very high risk.
Penny:And furthermore, the source material notes the company has a 3.36% probability of default within just one year.
Roy:Okay, so despite this catastrophic financial reality, spending $1.43 to make $1 facing debt multiples of its revenue, carrying a C2 very high risk rating, the company is still valued at $67,000,000,000 That just seems to defy conventional finance.
Penny:Absolutely does. And that valuation is entirely, completely predicated on a single assumption that the circular AI spending loop, those deals from Nvidia and OpenAI we talked about, never ever stops.
Roy:It has to be going.
Penny:And the financial engineering required just to maintain this charade is also deeply concerning.
Roy:This is where that Enron parallel becomes really explicit. Right? Yeah. Converting how CoreWi finances these massive deals, like the OpenAI one.
Penny:It is a direct and frankly chilling parallel. To finance their massive $11,900,000,000 deal with OpenAI, CoreWeave utilized something called a special purpose vehicle or SPV to incur the indebtedness.
Roy:An SPV. Explain that quickly.
Penny:An SPV is basically an off balance sheet entity. It's designed specifically to hold assets and liabilities separate from the main company's books. And this is precisely the mechanism Enron used back in the early two thousands to hide its enormous debt burden and artificially inflate its perceived financial health.
Roy:So by using an SPV, the immediate debt incurred to build that huge $11,900,000,000 data center for OpenAI. Yeah. It doesn't necessarily hit CoreWeave's main balance sheet right away, it masks the true financial leverage.
Penny:Exactly. It shields the debt, shields the operational risk from immediate scrutiny, allowing the illusion of sustainable growth to continue at least for a while. So, look, when the supposedly safest name in AI infrastructure, the company the MAG-seven are actively funding to be their partner, is burning cash at a 43% loss rate, and relying on Enron style accounting tricks to manage its debt. It strongly suggests the entire ecosystem is fundamentally broken and just waiting for the music to stop.
Roy:Mhmm.
Penny:You know, the historical context provided in the source material is just vital here, because it reminds us that bubbles rarely burst just because the underlying technology is flawed or fake. Think about the internet, railroads, canals, all genuinely transformative technology.
Roy:Right. The tech itself is real.
Penny:Exactly. Bubbles pop because the infrastructure spending and the financial speculation around it dramatically outpaced proven, sustainable profitability. The money gets way ahead of the actual business case.
Roy:Okay. Let's look at those patterns then. How does the current AI speculative build out compare to past bubbles like the.com era? And what new financial tricks are being deployed this time around to maybe mask the inherent leverage?
Penny:Well, we can start with the classic .com bubble, right? Roughly 1995 to 2000, that was about five years of this frenzy exponential gains built on companies that often had, quote, no revenue, no profits, and sometimes no finished product.
Roy:Is a .com name in a dream?
Penny:Pretty much. The Nasdaq quintupled before it crashed 77%. The scam then was purely speculative investors just chasing future dreams. Now, the current AI boom definitely shares that speculative fervor, but it adds this extra layer of complexity with the intercompany debt, the equity swaps. The structure is far more intricate this time.
Roy:And the Enron timing lesson is always relevant, isn't it? The idea that warning signs can be visible long before the final implosion actually happens.
Penny:That's crucial for managing volatility today. Remember, Fortune magazine publicly flagged Enron as largely impenetrable and heavily reliant on debt way back in February 2001.
Roy:Agree on one.
Penny:Yet the stock still traded around $75 for months after that. It took another nine months of denial, accounting games, whatever before the company finally filed for bankruptcy. The music keeps playing as long as there's a greater fool, as they say, willing to believe the narrative, Which importantly gives sophisticated investors the kind who read this sort of deep analysis plenty of time to hedge their positions and potentially exit before the crash.
Roy:Okay, now let's dive into maybe the most complex financial engineering risk identified in the Source. It bears this really uncomfortable resemblance to the February. Data center securitization. How are these big tech firms funding these multi billion dollar data centers while somehow keeping the associated debt off their main balance sheets?
Penny:This is absolutely the critical mechanism for potential systemic risk. Look, big tech firms need enormous amounts of cash for massive capex to stay competitive in this AI arms race. But they also want to maintain those impeccable credit ratings to keep their borrowing costs low. So how do they square that circle? They achieve it through these complex securitization deals often involving private equity firms which form part of what's called the global system.
Roy:Okay, shadow banking system. The mechanism relies on selling future cash flow, right? Similar to how mortgage payments were bundled and sold back in 2008. What exactly is the asset being sold here in the data center case?
Penny:The underlying asset being sold is the future data center lease payment stream. So the tech firm agrees to a long term guaranteed lease for the massive data center capacity that's being built, often by a private equity partner or a specialized REIT.
Roy:Okay. A guaranteed lease payment.
Penny:Right. The private equity firm or the REIT then takes that guaranteed multi decade stream of lease payments that feature cash flow and they retackage it. This cash flow stream gets converted into new financial products like securities or bonds, which are then sliced up into different risk categories called tranches.
Roy:Let's pause there because that analogy to mortgage backed securities MBS feels absolutely vital. In 2008, the failure of the underlying asset, the home loan payments, led to global contagion.
Penny:It is the exact structural parallel. It's uncanny. In 2008, if the homeowner stopped paying their mortgage, the MBS bond failed. Today, if the underlying asset, the data center lease payment fails, the securitized bonds built on those payments will fail. And here is the systemic danger.
Penny:The value of those lease payments is entirely dependent on the future proven profitability of AI services.
Roy:Ah, the connection to actual revenue.
Penny:If OpenAI or Meta or Google can't actually monetize those millions of expensive chips they're filling the data centers with, they will eventually stop paying those huge leases or at least try to renegotiate them downwards significantly.
Roy:And who is buying these tranches of securitized data center lease payments? Who's actually absorbing this potential systemic risk?
Penny:The tranches are sold off to institutional investors all over the globe. Pension funds, mutual funds, hedge funds, insurance companies. These are the entities that make up that global shadow banking system. So when or if the underlying asset that AI profitability driving the lease payments fails, the losses don't stay neatly confined to the Mag seven.
Roy:No, they spread.
Penny:They spread far and wide, hitting the retirement funds and the financial institutions that bought these often opaque, complex, high yield securities thinking they were safe. That is the very definition of systemic contagion, and yes, it is eerily reminiscent of the conditions that preceded the February.
Roy:The source material uses two really excellent recent case studies to illustrate what happens when systems built on this kind of unsustainable financial engineering actually implode. Let's start with the spectacular crypto crash of Terra Luna back in 2022. Why is that relevant to this AI circle jerk discussion?
Penny:Terra Luna is just a perfect modern parallel because it demonstrated so clearly how a system can be maintained for a surprisingly long time purely by artificial incentives before it collapses catastrophically due to a lack of real world value supporting it. Terra was an algorithmic stablecoin, right, trying to maintain its $1 peg using its sister coin, l u n a.
Roy:Right. The algorithm was supposed to keep it stable.
Penny:Exactly. But the fragility of that whole system was masked for a long time by its anchor protocol, which offered this astonishingly high completely subsidized yield of around 19.5% on deposits.
Roy:19.5% yield. Yeah. So these artificial incentives created massive unsustainable
Penny:Precisely. And that's the parallel to the circle jerk economy we're talking about in AI. It's a system fueled by artificial incentives, the 19.5% yield in crypto versus the circular funding deals, and guaranteed leases in AI that simply could not be maintained by real world organic revenue generation. When the underlying confidence in Terra Luna finally shattered, the mass selling led to that catastrophic death spiral. The value of both UST and ILUNE just collapsed, wiping out something like $45,000,000,000 in a matter of days.
Penny:It proves that complex financial arrangements, no matter how clever they seem, cannot compensate forever for an underlying lack of basic economic substance.
Roy:Okay, and the cleantech boom from around twenty twenty-twenty twenty one cries a slightly different lesson, doesn't it? It's more about who actually profits during a speculative mania, even when the underlying technology itself might be sound long term.
Penny:That's right. The cleantech boom was driven by massive investment, huge government subsidies, and this powerful narrative of an inevitable green transition. Companies in hydrogen, solar, EV tech, they saw their valuations surge by hundreds, sometimes thousands of percent based purely on future promises, not current cash flow. The lesson here is really about infrastructure versus implementation.
Roy:Okay. So who were the winners in that clean tech scenario, and how does it relate to, say, NVIDIA today in the AI boom?
Penny:The winners overwhelmingly were the shovel sellers. The companies providing the essential infrastructure, the raw materials, the specialized equipment. Companies selling lithium or battery components or complex manufacturing gear. They often outperform the companies making the final clean tech products, many of which are still struggling for profitability.
Roy:The shovel seller analogy.
Penny:It mirrors the current AI boom perfectly. NVIDIA and the hyperscalers building the data centers. They are the shovel sellers who win now by building the infrastructure and selling the essential components. Meanwhile, the final product providers like OpenAI and many other LM startups remain deeply unprofitable and completely reliant on perpetual funding rounds. In both these historical cases, .com, cleantech, you had transformative technology paired with unsustainable financial structures.
Penny:That combination virtually guaranteed a painful reckoning when the cost of capital inevitably rose, or the promised profitability materialize quickly enough.
Roy:Okay, this detailed analysis of systemic risk, the historical parallels, the financial engineering, it brings us to the practical application of this knowledge. This is really why access to expertise that at philstockwell.com matters so much. Absolutely. Because the founder, Phil Davis and his team aren't just identifying the problem, the source material shows they are telling members exactly how they're trading it or rather avoiding it. It mentions PSW's Money Talk portfolio making 131% in just seven months largely by systematically avoiding the Mag-seven hype.
Roy:So what is the prudent strategy they advocate for profiting or at least surviving this chaos?
Penny:The core philosophy underpinning the PSW strategy is basically prudence over speculative pixie dust. Their method is fundamentally defensive and focused on generating income. They explicitly advise avoiding those circular spending stocks, the Nvidia's, the core weaves of the world, precisely because their current business model is predicated on an assumption that likely cannot be maintained: perpetual, cheap internal funding.
Roy:Okay, so if they're avoiding the hot AI infrastructure plays, what do they focus on instead? Where are they putting capital?
Penny:They focus on owning real businesses at value prices. You know, companies with proven cash flows, tangible assets, products or services people actually need. Think established firms. The source mentions examples like AT and T, Lockheed Martin, ExxonMobil. Boring, maybe, but real.
Roy:So where does the leverage and the superior returns like that 131 gain come from if not speculating on Mag seven growth?
Penny:It comes from sophisticated options strategies used primarily to generate recurring cash flow income and to actively manage risk on those stable holdings. It's about using options smartly for leverage and income, not for wild speculation and keeping hedges tight.
Roy:And this integrated approach combining that macro risk awareness with very specific tactical options execution, that seems to be what distinguishes the advice offered.
Penny:Absolutely. And it's worth mentioning this synthesis is constantly being sharpened by the firm's pretty advanced technological resources. The analysis we're discussing here, it's supported by contributions from PSW's own advanced AI and even AGI entities. Some of these apparently can even be followed at something called the AGI Roundtable on their site.
Roy:Interesting. AI helping analyze the AI bubble.
Penny:Kind of ironic. Yeah. But it ensures members receive cutting edge insights informed by both deep human experience in volatile markets and the pattern recognition capabilities of advanced AI.
Roy:Okay. Now for you, the learner listening, this next segment feels like pure gold. It's essentially an options master class and it came directly from a member question in the source material about the rules for selling calls and puts. This perfectly encapsulates the educational value of the site, right? Turning complex mechanics into clear, actionable rules.
Roy:Let's walk through this premium selling playbook. What's the foundational goal of this strategy? Why do it?
Penny:The foundational goal is simple. Converting idle capital into recurring income. It's about systematically lowering your cost basis on stocks you want to own long term and generating protection against volatility. The mantra they use is beautifully simple, actually. We sell time the way landlords rent property.
Roy:Selling time like renting property. I like that.
Penny:Yeah. You're essentially collecting rent on your existing stable stock holdings. And the beauty is you can make money if the stock goes up, stays flat, or even falls slightly as long as it stays above your short put strike or below your short call strike.
Roy:Okay, let's start with maybe the first hurdle for new options traders. Managing risk, specifically quantity. How do you determine how many short options to sell against your long stock position?
Penny:That's managed by what the source calls the rule of thirds. It's presented as a reliable method for controlling risk. It defines a quantity of short options you should sell per, say, 10 long options you own, or the equivalent amount of stock. You'd sell five short calls for a conservative stance, maybe seven for a balanced approach, and up to 10 for a fully aggressive covered strategy.
Roy:And how do you choose between conservative or aggressive?
Penny:Well, if you hold a long term position that's already gained significantly, you might lean towards selling seven or even 10 short calls against it. Why? To lock in some of those gains and protect your downside if it pulls back. Conversely, if the stock you like has fallen, you might switch to selling short puts below the current price, Essentially getting paid to agree to buy more shares lower, harvesting premium from market fear rather than greed. The rule just ensures you maintain flexibility and don't over leverage.
Roy:Okay. Rule of thirds for quantity. Next, let's tackle the rule of time. When is the absolute best time strategically to sell premium to maximize that recurring income?
Penny:Crucially you must sell into volatility spikes not into calm markets.
Roy:Why volatility?
Penny:Because volatility inflates the option premium the price of the option that's when the rent you can collect is highest. And in terms of timing, the ideal term for selling these short options is typically forty five to ninety days out from expiration. This isn't just a guess. It's presented as a scientific choice dictated by how theta works.
Roy:Okay. Theta. Remind us what that is and why does that forty five to ninety day window matter so much?
Penny:Theta is the measure of time decay in an option's value. How much value it loses each day just because time is passing. And critically, theta decay is not linear. It's like a curve. Options lose value relatively slowly when they have a lot of time remaining, say a hundred and eighty days out, but the rate of that decay dramatically accelerates in the last ninety days and especially in the final forty five days before expiration.
Penny:It feeds up. Exactly. So, by selling options in that forty five to ninety day window, you are positioning yourself right in the sweet spot to capture the maximum acceleration of that time decay. It means the option you sold loses value faster, allowing you to potentially buy it back cheaper sooner or just let it expire worthless more quickly thereby maximizing the rate at which you collect premium.
Roy:That deep explanation really transforms the rule from just a guideline into a clear strategic imperative. Okay, moving on to the rule of price strike. How far out of the money should you set your short option strike prices to ensure a degree of safety while still collecting meaningful premium?
Penny:You definitely need some breathing room, right? You don't want your nice cash flow strategy to suddenly turn into a forced sale of your stock or force you to buy stock you didn't want yet. So for large cap stocks, the guideline is to aim to collect at least one dollar fifty to $2 per share in premium over that sixty to ninety day period.
Roy:Okay. $1.50 to $2 premium target.
Penny:And crucially, you choose strike prices that are typically 10 to 15% out of the money or alternatively, just beyond a key technical resistance level for calls or support level for puts.
Roy:Why is that 15% margin of safety so important?
Penny:That distance, that buffer, ensures you collect substantial income without subjecting yourself to unnecessary assignment risk. By selecting a strike that's 15% out of the money, you significantly lower the delta of the option. Delta roughly represents the probability of the stock reaching that strike price by expiration. So a low delta means the probability is low. You are essentially betting against the market making an aggressive, sustained move against your position, which over time is a disciplined way to earn reliable income.
Roy:Okay, makes sense. Finally, the rule of rolling. Since these short options are designed to expire, they're temporary. What do you do when the market unexpectedly moves against you and threatens to assign the option meaning, force you to sell your stock if short a call or buy stock if short a put.
Penny:Yeah, this is key. The fundamental concept here is that short options are not meant to be permanent positions or sources of dramatic wins. They are just one component of a continuous cash flow machine. So if a short call or a short put you sold moves significantly in the money say, more than 50% of the premium you collected is now intrinsic value and there's still significant time left before expiration, you typically intervene. You roll the option.
Roy:Okay, roll the option. How does rolling actually work and what's the strategic objective when you do it?
Penny:Rolling involves simultaneously buying back the existing short option that's causing problems and selling a new short option further out in time, typically three to six months later, And you might also adjust the strike price potentially further up if it was a call that went in the money or further down if it was a put.
Roy:And you try to do this without costing money?
Penny:Ideally, yes. The objective is always to execute this role for an even exchange, collecting enough premium on the new option to pay for buying back the old one or at worst a very small debit that is easily offset by the premium you've already collected over time on that position. This technique effectively extends your time horizon, resets your exposure to give the stock more time to move favorably, and crucially maintains the primary goal, continuous cash flow generation from your long term holdings.
Roy:Okay. Let's apply this prudence framework to two real time portfolio decisions that were cited in the source material. It really helps see it in action, starting with Oracle, ORCL. A member apparently had long calls that were deep underwater, losing money, and they wanted to roll them down immediately out of fear.
Penny:Yeah. This is a classic example of letting emotions, specifically fear, dictate trading action instead of strategy. The member was understandably scared because their long term bullish call position had dipped significantly. Their instinct was to spend, I think it was $36,000 immediately to roll those long calls down to a lower strike price, hoping to recover faster if the stock bounced.
Roy:Makes sense emotionally, maybe. But the advice stressed monetization first, right? Yeah. Use the strategy.
Penny:Precisely. The instruction from PSW was firm. Do not panic and spend that $36,000 now. Instead, they were advised to wait and immediately begin the income generation strategy we just discussed, start collecting premium right away by selling short calls against their existing, though underwater, long calls.
Roy:Sell calls against the losing long calls?
Penny:Yes. The guidance suggested they could likely collect the full $36,000 needed for the roll just from selling those short calls by the time the March options expired. Only once that cash was collected from the market, then they could spend it to roll the long calls down if it still seemed necessary. The advice really emphasized that ORCL is viewed as a long term investment, and those long calls can always be rolled out to a further year if needed, providing much more time to make up ground, all while continuing to collect quarterly income from selling shorter term options against them. Patience and process over panic.
Roy:Okay, great example of defense. And the reverse situation managing a winning position was illustrated with First Solar which had apparently spiked dramatically.
Penny:Right. FSLR demonstrated how to monetize a thesis that worked out without completely surrendering your future upside potential. When the stock spiked, the natural question became, okay, how do I lock in some of these nice paper gains?
Roy:Yeah. You don't want to give it all back.
Penny:Exactly. So the advice was to use that spike, that strength, to lock in gains by rolling the existing long term bull call spread up. This action involved closing the old spread, which was now deep in the money, and opening a new bull call spread at higher prices, but still bullish. This immediately puts cash directly into the member's pocket.
Roy:So the member immediately realizes a significant cash profit from the roll?
Penny:Yes. A tangible gain. But, crucially, they also retain upside exposure to the stock's continued rise through the new higher spread. And then they were advised to immediately sell short term calls against that new higher long position to start generating immediate income on top of the locked in profit. It's a beautiful strategy.
Penny:Secured a major win, put real money in their pocket, and kept the core position intact and generating income for potential future growth. It really is the epitome of disciplined, income focused risk management.
Roy:Okay. So while the AI bubble provides the primary systemic risk narrative in this analysis, the source material also flagged two other major issues hitting the headlines around the same time. One was about M and A risk and the other involved a signal from, well, the ultimate voice of prudence in investing. Let's look at the M and A red flag first involving Kimberly Clark and Camview Yeah,
Penny:this acquisition was cited as, well, a potential financial disaster, certainly from the acquiring company's perspective. CamMB Kimberly Clark, an established $42,000,000,000 company, announced it was acquiring Kenview, which is the health spin off from Johnson and Johnson, for forty eight point seven billion dollars which represented a staggering 46% premium over Kenview's market capitalization at the time.
Roy:46% premium, ouch. Why did this specific M and A decision trigger such immediate investor fury in KMB shares? What was the reaction?
Penny:KMB shares plunged 12.6 almost immediately following the announcement. That's the market basically screaming its rejection of the deal. Why? Because KMB paid over $12,800,000,000 above the market value for a company. Kenview, that was already struggling, its stock was down 33% year to date before the deal.
Roy:Paying a huge premium for a struggling company. Not ideal.
Penny:Not ideal. And critically, Kenview was facing massive disclosed litigation risk.
Roy:Ah, the litigation angle. What was the specific and potentially ruinous litigation risk that KMB was essentially absorbing by buying Kenview?
Penny:Well, just days before the deal was announced, the Texas attorney general filed a very high stakes lawsuit. It claimed that Tylenol, which is Kenview's key product, its crown jewel, really causes autism and ADHD in children when taken by mothers during pregnancy.
Roy:Wow. That's a potentially enormous liability.
Penny:Exactly. So, KMB investors were furious because the company took on massive new debt to fund the deal, caused significant shareholder dilution by issuing stock, and absorbed this unknowable potentially gigantic litigation risk. A risk that could potentially cost tens of billions if these lawsuits escalate into class actions nationwide.
Roy:So the conclusion, or the interpretation presented, is that KMB was essentially rescuing KVUE shareholders from a potential liability nightmare, but doing so at an exorbitant price paid by KMB shareholders.
Penny:That s pretty much the interpretation offered in the source. The acquiring shareholders were left holding the bag massive debt and crushing potential legal liability largely to facilitate an expensive exit for the selling shareholders KVUEs. The founder's direct advice in the commentary was simple. Don't touch either stock right now. The liability risk is just too great, and the valuation paid by KMB is indefensible.
Penny:It serves as a really strong warning against financial hubris and maybe desperation in the M and A space.
Roy:Okay. Duly noted. And finally, have the signal from, as you call him, the ultimate voice of prudence and the judge of intrinsic value, Warren Buffett's Berkshire Hathaway.
Penny:Yeah. This institutional signal powerfully reinforces defensive cautious stance being promoted by the PSW strategy throughout the article. Berkshire reported very strong q three operating profit, which proves the underlying model of owning quality businesses still works, of course. But the key number everyone focused on was the dry powder. Berkshire's cash pile swelled to a new record of $381,000,000,000.
Roy:381,000,000,000 in cash. That massive reserve itself speaks volumes about the scarcity of attractive investment opportunities Buffett is seeing in the current environment.
Penny:It absolutely does. But the source argues the most crucial signal was actually what Buffett refused to do during that quarter. He announced that Berkshire did not buy back any of its own shares.
Roy:No buybacks. Why is that so significant for Berkshire?
Penny:Because Berkshire Hathaway aggressively buys back its own stock when Buffett and Munger judge it to be undervalued. It's one of their preferred ways to deploy capital. So for them to not buy back shares in the quarter strongly implies that even Warren Buffett judges Berkshire Hathaway's own stock price to be overvalued at current levels.
Roy:Well, even his own company.
Penny:When the most disciplined, patient, and cash rich investor in the world cannot find enough value to even buy his own company's stock. Well, the source presents that as arguably the most powerful institutional warning sign you could get, that extreme caution is warranted across the broader market. It validates the whole defense posture.
Roy:Okay, so this deep dive has really taken us on quite a journey. We moved seamlessly from Ian Bremmer's assessment of a GZERO world, the chilling domestic failure the government shut down, right into the heart of the structural dangers lurking within the circular AI bubble.
Penny:Yeah, it connects all the dots.
Roy:We've proven, I think, through some pretty forensic detail pulled from the source, that the foundation of the current market valuation, especially in tech, is far shakier than the headline indices might imply. It seems to be relying heavily on these internal, circular funding mechanisms rather than broad, external, sustainable cash flow.
Penny:And the key takeaway for you, the learner listening to this, is the absolute necessity of discernment. That's really the cornerstone of the advanced analysis you find at places like philstockworld.com. The difference between those who get trapped by the eventual bursting of a bubble and those who potentially profit from the volatility along the way. It really lies in applying critical judgement.
Roy:And that means connecting all these seemingly disparate pieces of data we've covered today, right? Not looking at things in isolation.
Penny:Precisely. You have to connect the macro context, the GZERO world, the domestic political instability, those historical parallels to Enron and the .com era with the specific financial analysis. That means digging into the core weave forensics, understanding the circular deals, grasping the systemic risk potentially building in things like data center securitization.
Roy:And then acting on it.
Penny:And then most importantly you need a systematic actionable strategy like the options master class playbook we outlined to actively manage the risks inherent in this environment while simultaneously collecting income. That disciplined integration of geopolitical awareness, forensic accounting, and tactical income generation that, to me, is the true essence of a valuable deep dive.
Roy:So we're left with this picture. A 4,650,000,000,000 Mag-seven ecosystem seemingly resting on this potentially precarious circular funding. We have companies like CoreWeave whose financial stability is only deemed safe because they secured these massive long term deals with the Magnificent Seven. They're customers, but they're also acting like financiers, equity partners, and suppliers all wrapped into one complex relationship.
Penny:Yeah. It's an incredibly complex interwoven web, and it raises this huge overwhelming question that investors really must grapple with. If the MAX seven are effectively acting as a kind of shadow bank, funding their entire supply chain through equity swaps, these off balance sheet SPVs, guaranteed lease payments
Roy:Mhmm.
Penny:Who's truly regulating the systemic risk exposure of the world's largest, most interconnected tech companies.
Roy:Where does the book stop?
Penny:Exactly. When they eventually have to justify that $4,650,000,000,000 valuation not just to each other, but to external profitable paying customers, and maybe those customers aren't there in the neighbors needed or aren't willing to pay enough, what happens then? What happens to the world's largest corporate balance sheets when that artificial revenue stream slows or stops? What single event, maybe a major contract default we haven't seen yet, a regulatory change that forces the disclosure of all those off balance sheet entities, or simply a strategic CapEx moderation by just one of the hyperscalers, what will be the catalyst that finally turns the music off? That is the systemic risk we and philstockworld.com will clearly continue to monitor very closely.