Andromeda CIO on Private Credit and AI Debt Risks (with Anna Edwards, Guy Johnson)

Yields cautious down , medium term, interviewee explicit

explicit

NDX up , medium term, interviewee explicit

explicit

RUT

Oil up , medium term, interviewee explicit

explicit

Metals

USD

Andromeda Capital Management 6.0
Asset Manager
Alberto Gallo 7.5

Andromeda CIO on Private Credit and AI Debt Risks (with Anna Edwards, Guy Johnson)

ndx

The upside trade is to own real assets. We're not waiting for a collapse in the credit market... real assets, equities, commodities are continuing to go up because currencies depreciate in this part of the cycle. Explicitly includes equities in the 'real assets' that will go up due to dovish central bank policy and currency depreciation, despite the left-tail credit risk.

1 calls

+0

no reliable edge (random outcomes)

wti

The upside trade is to own real assets... commodities are continuing to go up because currencies depreciate in this part of the cycle. Explicitly includes commodities in the 'real assets' basket he is bullish on due to the macro backdrop of loose policy.

2 calls

-11

slightly worse than random

yields

If there's a bigger problem in the credit market, the reaction function would be dovish as we know. He explicitly states that central banks' reaction to credit stress would be to cut rates, implying lower yields.

2 calls

+4

no reliable edge (random outcomes)

Introduces Gallo and asks him to explain the chart showing interplay between AI players and private credit.

Anna Edwards
Alberto Gallo

Private credit funds are 'CDOs in reverse'—taking maximum default risk with zero volatility. 41% of private credit fund allocation is in tech, creating a huge, dangerous concentration in the government-led AI race.

A lot of debt from AI infrastructure is in the hands of private credit funds, which are held by insurers and the wider financial system, creating circularity and conflict of interest.
Counters that some argue private credit is the right place for high-capex AI investments.

Anna Edwards
Alberto Gallo

Why have a market without a price? Why lend to a company that wants to hide something? We would never have a 40% concentration in one line.

Prefers priced, transparent markets.
Asks how quickly a private market problem becomes a public market problem.

Guy Johnson
Alberto Gallo

There are various channels of contagion. You can't privatize the whole market; eventually, there is stress in some of the public securities of managers, lenders, or borrowers.

Mentions Oracle CDS as a traded channel, and infrastructure providers.
Asks if the risk is that AI won't deliver productivity gains.

Guy Johnson
Alberto Gallo

The paradox is if AI software improves too well, we might need less infrastructure and energy. The debt that financed data centers might not be serviced.

If Google's model is more efficient than OpenAI's, some built infrastructure might not be needed.
Asks about the potential reaction from authorities and a bailout.

Guy Johnson
Alberto Gallo

Regulators are on the case; there will be more regulation. If there's a bigger problem, the reaction function will be dovish. The upside trade is to own real assets.

Central banks will cut rates, leading to dollar depreciation, which benefits real assets like equities and commodities. We're likely to see an uptick in defaults, not a full-blown crisis.
Suggests equities just continue up.

Guy Johnson
Alberto Gallo

We're in a K-shaped economy. Loose monetary policy (cutting rates, $40bn T-bill purchases) increases divergence. This creates more upside tail in real assets and a larger left tail because of levered credits in the private space.

Strong companies get stronger, the bottom 50% gets hit by stagflation. No policymaker is trying to re-align the K.

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