L/S mgr, banks specialist. ExSBCWarburg/UBS. Securities industry since March1987. BSc(Syd, Biology) Skier. Cyclist. General advice only for wholesale investors.
Sydney, Australia
Joined December 2009
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James Falkiner retweeted
A lot of ink has been spilled on GPU financing lately. I spent over a decade trading ABS on Wall St, and structured over $2B+ of debt financings as an operator (including at @tryramp). Figured I'd try to make sense of this market, so I went back to a framework I knew well: aircraft ABS and aircraft engine ABS.
My take: a GPU neocloud runs on airline economics, and the debt behind it looks a lot like aircraft engine ABS.
The parallels:
• Perishable inventory. An empty seat after the door closes is gone forever. So is an idle hour on an energized H100 rack.
• 85%+ of cost is fixed (servers, 10-year rack leases, 10-14% debt service). One more hour of compute costs pennies of power.
• Utilization is everything. Airlines break even around 80% load factor, a levered GPU cluster around 65-75%. The returns live in those last 25 percentage points.
• NVIDIA is Boeing and Airbus rolled into one. Powered shells and grid interconnects are the new airport slots.
• Wall St copied the aircraft financing playbook: take-or-pay contract plus servers in a bankruptcy-remote SPV, 70-80% LTV.
Part 1 of my blog post goes into a lot more detail:
alexyangsong.com/blog/alumin…
#FOMC If Warsh moves to PCE TM (Dallas) will that change how we see the outlook for FFR.
NZ (Auckland) provides some interesting context for Australia/Sydney w.r.t. interest rates and house price trends. Auckland house prices peaked in Nov '21, about the time that interest rates (OCR) started rising. The OCR then rose from 0.25% to 5.5% and the real rate hit almost 300bp. The RBNZ is now back in a tightening phase as the CPI TM remains above 3%. Auckland house prices are now still down 27%, and falling at about 4% pa.
Sydney is the market leader, it is down 11% from the peak (3/2026) and falling at 18%pa. The vast majority of loans are variable (ARM) rate, typically at a rate 180bp above the RBA cash rate.
At the peak Australian housing stock was worth about A$11tn, or ~400% of GDP. About 1/3 of the housing stock is mortgaged with $2.6 Tn of debt, about 2/3 owner occupiers, 1/3 investors.
Since the peak, actual listings have risen 20% to about 40k or 1.3% of all Sydney houses. There are probably another 10k available for sale but unlisted. Sydney, at the peak auctioned about 900 properties a week and sold about 75% of those. Now about 600 are offered each week, and only 35% (200) are sold. Apart from auction sales, another 1800 are sold each week via private treaty.
Regulators tell us about 2% of all mortgages currently have negative household cashflow but other comments about negative equity are very rubbery as they lack a price level. From what we can see about 10% of borrowers are distressed, 5% very distressed.
There is not enough regulatory pressure on our banks to tell the truth about asset quality in resi mortgage books. Banks have to offer changed loan conditions to borrowers who declare themselves suffering hardship. These changes may include principle repayments deferred if the loan is P&I, maybe repayments are suspended if there is enough borrower equity. Actual interest rates charged are not amended.
The regulator, APRA, doesn't require banks to report their stock of hardship loans, or the flows in and out of the bucket. $CBA.AX recently reported 147k new hardship cases, so sector new hardship cases are likely running well over 500k pa. Technically hardship loans can be thought of as loans that have been evergreened. Hardship loans are a type of substandard loans, with a few being currently classified as non-performing.
NPA rates reported by banks remain very low (~1%) , as do relevant provisions. In my view the real NPA rate in Australian banks resi books (75% of total loans) is now about 3-5%. Resi mortgage portfolios typically carry a risk weight density of 25%. Overall CTE/Asset leverage ratios are about 4.7% whilst Tier 1 ratios are obviously much higher, and flatter the banks.
Just more mushroom talk from the RBA.
"Conditions in the housing market have softened,... ...Financial stability risks...remain contained: ...only a small share of borrowers are in negative equity or facing severe repayment difficulty."
rba.gov.au/speeches/2026/sp-…
James Falkiner retweeted
S&P 1500 Software revenue per employee has gone parabolic.
If you are looking for evidence that AI is starting to impact the real economy, this is exhibit A.
James Falkiner retweeted
We (Jonathan Elkobi, me) are happy that @chinaquarter has accepted our new piece “The End of Fiscal Autonomy. ” Yes, it’s provocatively titled but this is an important data point for analyzing China’s economy. A large literature suggests that local autonomy, including fiscal “federalism” has been a key ingredient to growth and local reform initiatives. If local governments literally have little to no autonomy, their incentives and ability to use local initiatives to generate growth also declines. Below, I summarize our findings with link of pre-pub version at the end.
Quick primer: Chinese budgeting is broken into 1. ordinary budget to finance public services, civil service salaries and 2. Extra budgetary fund (EBF) used to finance land acquisition/sale, infrastructure projects and other discretionary spend. The source of the problem is here—ordinary revenue at the local level has grown very modestly over a 6-year period (21%), while EBF revenue (land income) has not grown at all due to the property crackdown. Central transfers made up the bulk of the growth in non-debt sources of income for local governments. (1/N)
James Falkiner retweeted
Important question. I’d argue that the constraint ultimately is debt capacity limits. If productivity rises faster than wages in a capital-rich economy, demand can only keep up with supply to the extent that fiscal and household debt rises to fill the gap.
Looking at it another way. The quite timely decision to raise the caps would give banks additional headroom to issue covered bonds and thereby partially offset any future rise in overall funding costs.
The higher cap also enlarges the share of mortgage assets that can be removed from the pool. Banks have incentives to place better-performing loans into the cover pool to protect covered-bond ratings and funding access. The result is greater structural subordination of depositors and senior unsecured creditors if, for example, general asset quality is falling.
The CET1 deduction that applies to cover-pool assets above the statutory percentage would not begin until 12% rather than 8%. Banks could therefore top up cover pools further before triggering that deduction, but they would still hold capital against the loans themselves.
In a softening asset quality environment, the larger permitted pools would increase the volume of assets that could have additional alternate credit enhancements.
In summary, the cap increase would function as a partial buffer against rising funding costs caused by, say, mortgage deterioration, while simultaneously increasing asset encumbrance and the concentration of residual risk on shareholders. $ANZ.AX $CBA.AX $NAB.AX $WBC.AX MQG.AX $XXJ
afr.com/policy/economy/chalm…
Uppity oil and new K raises! That will do it.
$META Meta Announces New Class C Common Stock
— Introduces publicly listed, non-voting Class C shares effective January 19, 2027.
— Shareholders to receive one Class C share per Class A or B share, effectively a 2-for-1 stock split.
— New shares intended to fund AI investments, acquisitions & employee compensation.
— Structure preserves Zuckerberg's control and existing shareholder voting rights.
— Class C shares expected to list on Nasdaq.
Australia is heading for a recession of epic proportions, driven primarily by a long, drawn out housing bust. It’s increasingly likely the drawdown will exceed 40%, but 50% shouldn’t be ruled out. The ramifications for $XXJ are serious.
James Falkiner retweeted
Also fwiw, there’s no phantom stash of Iranian crude that magically teleports into China the second sanctions get waived.
Every single floating barrel parked outside the blockade at places like EOPL has already been fully hoovered up by China anyway.
#oott #Iran
Before you get drunk on the headlines, let me walk you through the actual mechanics.
Under General License HH, shipping entity Roxette Maritime Shipping and Trading S.A. and seven associated vessels got slapped onto the SDN list today.
Concurrently, General License GG authorizes all transactions ordinarily incident and necessary to the wind-down of transactions involving 'Karnakis and Karnakis' or any entity owned 50% or more, directly or indirectly, by them ("Karnakis and Karnakis Entities").
The newly designated, sanctioned hulls under Roxette Maritime are: ANEMOS (IMO: 9205952), GLORIS (IMO: 9449510), PRIDE (IMO: 9487407), DESTINY (IMO: 9385491), FLAMINGO 1 (IMO: 9474199), HARMONY (IMO: 9449522), and PRINCE (IMO: 9548316).
Through this GL HH, the following narrow carve-outs are authorized:
1) Offloading at destination is permitted strictly for non-Iranian cargoes that were already loaded aboard these hulls prior to October 21.
2) Essential humanitarian provisions necessary to maintain the health, safety, and lives of the crew on board remain permitted.
3) Emergency marine repairs and environmental containment/salvage operations arising in transit are cleared.
4) The hard sunset on all safe-harbor activities is November 20, 2026. Any discharge or operational activity past this cutoff will be treated as outright illicit, triggering secondary sanctions risk.
5) This is strictly a damage control exit window. Fixing new charters or lifting fresh stems with designated entities is categorically prohibited.
6) Entering into new commercial agreements involving property or interests in property of blocked persons remains banned. No transactions prohibited under ITSR—including dealings with Iran, the Government of Iran, or Iranian-origin goods/services—are authorized.
7) Any payments owed to blocked persons must be routed directly into blocked accounts under ITSR compliance.
The cargo loaded on the ship may not be the property of Roxette Maritime, but legitimate non-Iranian cargo belonging to general global trading companies or third-country buyers.
If OFAC dropped an absolute blackout on all vessel ops without a wind-down clause, innocent charterers would be left stranded with hundreds of millions of dollars of physical product rotting in the middle of the ocean with zero legal recourse.
This is textbook collateral damage control and maritime risk prevention. But of course, the broader peanut gallery is entirely too fucking lazy to read beyond the raw headline.
Watching tourists claim Washington is "sending a surrender signal to Tehran" or crying "TACO" is so laughably brain-dead it physically hurts.
Literally takes 1 minute to pull the actual OFAC annex and read the fine print.
ofac.treasury.gov/media/9372…
ofac.treasury.gov/media/9372…
#oott #iran
Interesting perspective.
I'm an American bank guy who goes to rural France 4-5x/year. My academic background is European History.
The conservative forces of rural France have crushed urban liberalism many times since the Revolution (1848, 1871, 1959 and one could argue Vichy in 1940 as well). That's why they're on the 5th Republic. It's setting up for that again next year.
Background: France is run by highly educated mandarins for the benefit of the retiree class. There is little economic growth or job opportunity for the young because taxes and regulation are so high. President Macron's mild attempts to reverse this have been very unpopular with the retiree class.
The school funding protest is really about lack of opportunity post-graduation, which is valid. The Stalinist LFI and the essentially unemployed immigrant youth are exploiting the government's unwillingness to unleash its experienced and violent but not numerous riot police on the students.
Near-term, if the students stay home tonight, the police can start breaking heads with less fear of repercussions. If they don't, the govt is waiting for a spectacular outrage to justify it.
Long-term, the next Presidential election is in the spring. One should assume that National Front will win by a lot with dire consequences for the immigrant community.
Financially, France's social spending and still very capable (and conservative) military can not be maintained, yet the National Front wants to increase them. A financial crisis and EU exit can't be ruled out. Nor can a transition to a new form of government.
TLDR - we haven't yet seen the guys that Gerard Depardieu used to play in cop and detective movies. They about to come on to the stage.
Is “…the cost of compute is now set by the cost of capital, and the spot rental rate no longer tells you much.”
I've been critical in the past of AI compute indexes and the willingness to price compute based on the spot rental price, but now that the AI reset is sinking into the repricing of AI buildout debt its time to realize that the cost of capital is what determines the price of compute.
The most important number in GPU pricing right now isn't $/GPU-hour. It's the gap between what a hyperscaler pays to borrow (~90bp over Treasuries) and what a neocloud pays (~1,100bp).
The cost of compute is now set by the cost of capital, and the spot rental rate no longer tells you much.
The price of an H100 isn't one number. The same chip in the same rack costs a different amount depending on whose balance sheet it sits on. A ~1,000bp funding gap is a structural cost advantage that no amount of operating skill closes.
For example, take one GPU-hour apart. Most of it isn't power or space. It's paying back the chip, the interest on the loan that bought it, and the return the equity expects. A $40–55k all-in GPU, 75% debt-funded, at ~7,000 utilized hours a year is a financing instrument that happens to do matrix multiplication.
As the +500bp on neocloud debt (10%→15%) adds $0.20–0.30 to the break-even cost of every GPU-hour, which is then added on to the rental price.
That's 8–10% of the H100 index, from a credit spread alone, driven almost entirely by the cost of capital.
That means that the compute spot index is a derivative of the AI infra debt credit curve and the squeeze on neocloud margins.
It could be argued that the Giteau Rule (2015) actually accelerated the loss of elite players to o/s because it increased the chances they could have their cake and eat it.
Want to know what progressively happened in the period from early 2000's? Australian players, particularly elite level, increasingly played their professional rugby in France, the UK, and Japan where the salaries were/are much higher. By 2015 the Giteau rule was introduced, and that made matters even worse.
