Why This Economy Refuses To Break | David Cervantes

**David Cervantes** (0:00)
The biggest mapper driver right now is the AI buildout, simply just because of the numbers involved. I mean, we've got basically a trillion capex, and that number just seems to keep going up. Between the government deficits and the AI build, I mean, it's just a pile of money gushing through the economy. It find it very hard to see how an economy goes into recession with those kinds of numbers. Public deficits are private sector surpluses. So one way or another, that money is finding its way through the economy as well, right? The inflationary impulse was broadening and expanding even before the oil shock. I don't see how hikes don't happen, or at least talk of hikes when you get pricing don't happen.

**Felix** (0:41)
Nothing said on Forward Guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice, or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk, terms, and conditions apply. Do your own research.
All right, everybody, welcome back to another episode of Forward Guidance. And joining me this week is a repeat guest, David Cervantes of Pinebrook Capital. David, always great to have you on the show. What's going on?

**David Cervantes** (1:25)
Hey, Felix. Glad to be back. It's been a few months, or it's been a while, but good to be back. A lot's changed in our world since we last chatted.
We're at war, among other things. But yeah, a lot going on.

**Felix** (1:42)
Yeah, it's a constant oscillation between it's over and we're so back, it feels like, both in the economy and markets. And regardless, markets still keep on going higher, and everybody's pulling their hair out trying to figure out what the hell's going on, and what's driving this thing. So hopefully, in the next hour or so, we can start to answer that question.
Yeah, let's just start from the top line. What's your overall macro framework right now? What do you think is most important? What are you most excited about or interested at?

**David Cervantes** (2:08)
I would say the biggest macro driver right now is the AI buildout. And that's just because simply just because of the numbers involved. I mean, we've got basically a trillion capex. And that number just seems to keep going up and up. And now we're, you know, Google tapping the capital markets to fund its next chapter of its own AI buildout is just kind of a sign of the times. I wouldn't say it's anywhere. It's a peak. But, you know, things are moving and it can't be ignored.
It is just so big. And then you kind of combine that with our still large government deficits, you know, between the government deficits and the AI build. I mean, it's just a pile of money gushing through the economy. And it just keeps getting bigger and bigger.

**Felix** (3:02)
Yeah. And it feels like the second, you know, if you just think about the trajectory of that AI build out and the hyperscalers of the last couple of years, like the first phase has been mostly just funded from their free cash flow that they had that, okay, instead of like throwing it into buybacks, we're going to use that for capital expenditure. If you're okay, now we're at the end of that rope. And okay, we've used up all that free cash flow. So okay, now we're going to start to tap the debt markets. And that was happening back in December, January, February. And that was going on. And then you had a lot of prognosticators thinking, okay, well, that'll be it.
We're getting to the point now where we're issuing debt and that becomes a lot more sensitive to how sustainable it is. And then to your point, yesterday we get news on the tape that Google is actually issuing this $80 billion equity raise. So now we're talking about equity dilution and issuing of shares to raise capital for this build out.
Yeah, I'm curious, how do you think about that? How large of a signal is that? And especially in relation to equity valuation. I mean, if Google's issuing shares and diluting their stock, I imagine that means that their equity value is pretty rich. How do you think about that?

**David Cervantes** (4:11)
Yeah, I think what's backing out a little bit, it's not just the equity value, it's what's driving the equity value. And unlike other episodes of Exuberance, I hate to use the word bubble, but Exuberance, there was a lot of PE expansion, and now we have earnings expansion, earnings expectation expansion. I mean, the earnings are solid, don't get me wrong, but there's talk about there's a bubble in earnings expectations and whether or not those expectations are realistic and whether or not they'll pan out. Not only will they question, will they pan out, but will they pan out in time to fund the next step of the AI build out, meaning there's obsolescence that's factored into these plans, right? And look, I'm not a tech person, but I'm hearing numbers like five years thrown around. So not only is this build out happening, but as time passes, things become obsolete, upgrades need to happen. And is the earnings capture going to take place at a fast enough clip to weather the replacement cycle? Or are we still going to be financing things that are functionally obsolete? I think that's the bigger question. That's to be seen. That's a couple of years out, I think.