Today's number, 2 billion. That's how

many dollars people spend in Turkey on

hair transplants every year. That's

right. One of Turkeykey's fastest

growing exports is indeed hair

transplants, or as the Turkish like to

call it, hope.

Welcome to Profy Markets. I'm Edson. It

is October 9th. Let's check in on

yesterday's market vitals. The S&P 500

and Nasdaq hit new intraday highs and

closed in the green as investors bought

Tuesday's dip. The Dow was flat. The

dollar hit a two-month high as economic

concerns weighed down global currency

peers. And gold continued its rally

above $4,000 to yet another record high.

Okay, what else is happening?

Elon Musk's AI startup XAI is teaming up

with Nvidia in yet another circular

deal. Nvidia will invest as much as $2

billion in XAI, which XAI will then use

to buy NVIDIA chips. This will be part

of a larger funding round for the

company. XAI will raise $7.5 billion in

equity and $12.5 billion in debt. In

total, the company will likely raise $20

billion. So, another circular deal in

AI. We've talked about this many times

before where these big AI companies

invest in these smaller AI companies who

then use that investment, they turn

around, they buy their chips, they buy

their compute. We saw it with AMD and

OpenAI this week. We've seen it with

Nvidia and OpenAI, Amazon and Anthropic,

etc., etc. Well, now we are seeing it

again with Nvidia and this time with

XAI. So, more of the same. Here to help

us break down this deal, we are speaking

with Bloomberg's Ed Lllo. He is the one

who actually broke this story. Ed, thank

you for joining us on Profy Markets.

Yeah, thank you for having me.

So, Nvidia is investing $2 billion in

XAI, part of this 20 billion funding

round. Uh, you broke the story on

Bloomberg. Uh, tell us what do we know

about this deal so far? It it's a

complicated structure because it's not

as simple as a group of investors making

an equity investment directly into XAI.

What we've reported is that basically

the pool of investors with XAI have set

up a special purpose vehicle or an SPV

and the SPV lives as its own entity. It

raises the capital both in the form of

debt and uh cash or equity and then uses

that B capital to buy GPUs up front. XAI

doesn't buy the GPUs up front. It rents

or leases the capacity or the specific

GPUs from the SPV, the group of

investors what over what we understand

to be a 5year term. So like the group of

investors basically get regular

payments, fees or rent. XAI doesn't have

to take the capital burden. It gets

access to the latest GPUs and it doesn't

have to put any debt on its on its

corporate balance sheet. So, it's an

unusual mechanism. I think we're still

trying to report and find out the

specifics of how all of these entities

are bound together, but that's the logic

behind it.

You you mentioned that uh this could be

a deal structure that we might start to

see replicated in in tech and in AI.

this SPV structure. What are the

benefits exactly for XAI? Um, and to

what extent is this kind of financial

engineering?

Well, as you you've probably discussed

on the program a lot of times when it

comes to the building of a data center,

there are different models at play. You

know, if you are an open AI or an

anthropic or an XAI, you don't

necessarily want to have ownership of

that infrastructure. You just want to

use it for either training or inference.

And so the benefit to XAI in in the the

the deal that we've reported is it

doesn't have to take on the capital

burden up front. But also companies like

Nvidia, basically Nvidia leads this

market, right? They com they commit to

updating their technology on an annual

cadence. They have a new generation of

GPU or accelerator every year. And so

the problem with massive infrastructure

at scale and how sources describe it to

us is these GPUs might be the cutting

edge right now, but in five years time

they will be obsolete relative to the to

the to the latest generation then. And

so they are basically a depreciating

asset. The benefit to XAI and this

structure is that it's kind of protected

against that. it doesn't have to have

cash up front and over the course of

that five years um it isn't responsible

nor liable from a creditor's perspective

uh to the value of those of those GPUs.

This might be a stupid question but who

is going to be liable then I mean who

who is on the hook uh for these GPUs?

Yeah, I I mean in in our reporting this

is probably the the one main unanswered

question is like at the end what happens

um you know for the investors

particularly I suppose in the debt

portion of that structure um they get

regular payments right and so um one

thing we do not know is under this SPV

arrangement who if anyone ends up with X

AI equity who ends up on the cap table

but the other way of looking at it is

that they get a guaranteed return. XAI

makes payments to them over time, be it

monthly, quarterly, you know, literally

a lease payment or a rent payment as we

understand it. And so they will have

that kind of visible uh income in 5

years time. What if they have to swap

out those GPUs for a new uh cluster of

the cutting edge generation? I we just

don't know, but we're certainly trying

to find out. This is becoming sort of a

theme in AI where you have one these

extremely complex financial transactions

between these hyperscalers and and these

these AI startups and two this this

circular nature of these deals where

you've got Nvidia investing in XAI and

then part of that deal is that XAI is

going to take that money and then use

that money to go back and and buy chips

presumably from Nvidia. Um this has been

getting a lot of attention recently. We

had it with with AMD and OpenAI as as

another example. Are you concerned

yourself as someone who reports on this

stuff? Are you concerned about these

circular transactions and the prospect

that they might be creating a bubble in

AI?

Well, since we we broke the story about

XAI and the SPV in particular, we

actually know a lot more than we did at

least, you know, before that. Um and the

reason I say that is that uh Jensen Wong

has given some some broadcast interviews

following publication of the story where

he was asked about it explicitly. And so

we we know that Nvidia is participating.

They he you know Jensen didn't say out

loud the dollar figure. He said that he

regretted he wasn't able to put more

into this XAI financing. But uh what he

went on to say is in the case of Open AI

for example, which is a $100 billion

commitment over a longer period of time,

Nvidia makes it has no requirement that

Open AAI use that financial backing

specifically to buy Nvidia chips. The

example that he gave was that they are

free to go and buy AMD chips um using

the the the backing that Nvidia has

given them. The reason I use backing by

the way instead of the word cash or

money is I we still don't have a good

sense of whether that 100 billion is

literally cash or is it chips in lie of

cash or is it equity um you know at

least with the AMD uh open AAI deal we

understand better that AMD issues a

warrant for their stocks open AAI only

once open AAI has funded its own

buildout of capacity. So, you know, to

go back to the root of the original

question, you know, the the leaders in

this industry would push back and say

it's not circular because there's no

mandatory requirement that uh you

actually use the cash or or or money

that's coming from those chip names to

buy their gear. You can go shopping in

the market for any chips you want.

It's very interesting to hear that. I

mean, my response to them, if I if I

could respond to them, would be sure,

it's not it's not mandatory. It's not a

mandatory circular transaction. It's a

voluntary circular transaction. the

prospect and the idea that OpenAI isn't

going to spend that money on worldclass

chips from from Nvidia that the idea

that they're not going to spend money on

Blackwell that that to me seems seems

absurd. Uh I mean sure maybe they'll

spend some of that money on AMD chips,

but I I I feel quite confident that it's

going to go back to Nvidia in some

capacity. I'm wondering if if you if you

feel the same way. Yeah, Bloomberg

published a very detailed piece about

circular financing this week and there's

a beautiful illustration or chart within

that story that shows the flows not just

of capital but it shows the flows of

software cooperation between the

different names and hardware. So if you

say that this is more than just about um

investment and money, it's about in

which direction do semiconductors flow

and in which direction does the software

that is built on that that compute flow.

Um yes there are few players uh but the

the net is a little wider than perhaps

simply saying this is Nvidia and open AI

going back and forth with one another.

Ed Lllo, thank you very much for joining

us. Really appreciate your time.

Thank you. It's great to be on.

That was Ed Ledllo, co-anchor of

Bloomberg Technology. So, XAI is joining

the party, joining the Circular Deal

Party. We've been talking about this for

a while now, but now that we've seen so

many in such a short amount of time, it

appears that everyone is now catching

on. The media, analysts, investors,

everyone is waking up to these circular

arrangements and everyone is realizing

that we could be creating a bubble. Some

of the headlines we saw this week, NBC

News, quote, "Big AI's reliance on

circular deals is raising fears of a

bubble." From Bloomberg, quote, "Open

AI, Nvidia fuel trillion dollar AI

market with web of circular deals." From

Semaphore, quote, "Circular investment

deals by major AI companies spark bubble

fears." So, everyone knows what is

happening at this point. Everyone is

recognizing what is happening. And yet,

despite all of these headlines, despite

all of this attention, no one is

actually slowing down. In fact, we are

seeing more circular deals, more AI

investment. Jensen Hang, Elon Musk, Sam

Alman, all of these tech leaders are

apparently pretty unfased by what we are

all describing. And by the way, so are

investors. I mean, the markets keep

climbing. The S&P and the NASDAQ both

hit record highs. people continue to

invest in AI. So the big question then

if everyone sees what's happening, if

everyone recognizes the problem, they

recognize these circular deals, they

recognize how this could be creating a

bubble, well then why is everyone

ignoring it? That is my question at

least. And I don't have necessarily an

answer, but I do have a feeling. And my

feeling is that there is one thing that

is driving this, one thing only, and

that is FOMO, which is the fear of

missing out. Whether you are Sam Alman

or Black Rockck or even a retail

investor, what is happening here is the

prize of winning AI, that prize appears

to be so great that we have all decided

it is worth it no matter what. Yes, it

might be a bubble and yes, we might get

burned pretty dramatically, but it's the

fear of not being part of AI. It's the

fear of not being part of perhaps the

greatest technological revolution of the

century. That fear is overriding almost

everything. In fact, tech CEOs seem to

acknowledge this. Zuckerberg himself, he

said an AI bubble is quote quite

possible. But he also said that he would

rather quote missspend a couple of

hundred billion than miss the chance at

super intelligence. That is the

philosophy of AI investment right now.

The prize is too big. You have to get on

the train. Even if you're running the

risk of flying off of the rails and

bursting into flames, these AI leaders,

they say, "No, doesn't matter. We have

to do it. You have to do it." Now, where

does that lead us? Where are we headed?

Not exactly sure, but what I can say is

that I am reminded of a scene from one

of my favorite Wall Street movies. And

that movie is Margin Call, a great movie

about the 2008 financial crisis. And

what you have is this scene where Jeremy

Irins is playing the head of a big Wall

Street bank and he's sitting at lunch

and the crisis is unfolding and he's

explaining why these bubbles happen. And

he goes through every bubble and every

crisis. He goes through 1901, 1929,

1987, 2000, and then of course 2008. And

he says, quote, "It's the same thing

over and over." And then he says, quote,

"We cannot help ourselves." Cannot help

ourselves. He says, "We can't control

it. We can't stop it. We can't even slow

it. All we can do is react to it." We'll

be right back. And if you're enjoying

the show so far, be sure to like and

subscribe to the ProfG GP Pod YouTube

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We're back with property markets.

China's stock market is on a tear. The

CSI 300, that is essentially China's S&P

that is up 21% this year and it is

currently above a 3 and 1/2 year high.

The rally is fueled in part due to

excitement over AI with tech stocks

pushing the CSI 300 tech index to its

highest level since 2015. So, a huge

rally happening in China right now. We

wanted to understand what is actually

going on in the Chinese stock market.

So, we're speaking with Prof Media's

very own Alice Horn, host of the China

Decode Podcast, also a China economist

at Green Mantle. Alice, great to have

you on the program.

Thanks so much, Ed. Great to be here.

First, I got to ask you, how's it going

being part of the Profy family?

Well, I'm learning a lot. Uh, and I have

to say that the team moves so quickly.

I'm very impressed, very impressed by

the caliber of the team and I love the

banter with James. He's he's the best

partner ever.

Well, I've I've been loving listening to

you guys. I think you guys are doing a

great job. Um, so we we want to

understand what's going on with this

rally. We're climbing towards this

4-year high. This time last year, the

index was bottoming out. Um, what's

changed? What's causing this rally?

I think uh there are a number of things

at play. Number one, we've seen a pivot

by Beijing towards being more supportive

of the private sector, of tech

companies, uh, and certainly of, um, the

rebalancing of the economy. I think when

you put together that mood music that's

largely a top- down directed mood music,

I think investors both on the mainland

and foreigners are looking more keenly

towards Chinese equities versus this

time last year. Number two, when we

think about the landscape of uh of a

weaker dollar of valuations being a bit

too stretched with the Mac 7 in the

states, I think a lot of investors are

looking elsewhere to diversify their

portfolios. My own sense is that AI is

going to be a two-player game driven by

China and the US. So if you look at the

P ratios of Chinese uh big AI companies

whether it's Tencent, Alibaba or even uh

the semiconductor companies that support

the AI infrastructure, these I think are

priced pretty attractively which is why

we've seen a lot of movement and inflows

uh from foreign investors back into the

mainland. And the third part of it

really is is I think a big push which I

suspect is top down as well as bottom up

towards AI in every aspect of the

economy in technology and society. My

own sense in the 5-year plan which we

discussed this week that will be

unveiled after October 23 is that AI is

going to be a cornerstone and a key part

of the economic policy for at least the

next 5 years. So I think when you put

all that together, it's very clear to a

lot of observers both domestically and

in the foreign investment market that

Chinese tech companies are way more

attractive now uh than they were a

couple years ago and certainly priced

very attractively.

Yeah, tell us a little bit more about

that 5-year plan. What is that 5-year

plan? What are they trying to do with

it? So, China uh followed the Soviet

model starting in 57 with these

five-year plans that are targeted

towards laying out China's economic uh

strategic even military and society

related goals. And certainly what we've

seen in the last few 5-year plans is a

pivot towards being a technologydriven

economy. My own suspicion is that in the

next 5-year plan, we're going to hear a

lot of talk about what Xi Jinping coined

in 2023, the new quality productive

forces. This basically means highquality

techdriven growth that rests on

innovation, especially in some of these

core emerging technologies, whether it's

semiconductors, AI, biotech, uh even

aviation and maritime equipment. I sense

that this is going to be the key pillar

of the next 5 years. And the way that

the government approaches the 5-year

plan is to basically lay out what they

see as as the 8 10 even more strategic

priorities for the government over the

next 5 years to achieve in order to to

meet its internal uh KPIs.

So when we look at the rally that we've

seen in the US, the story is basically

just AI. I mean it's it's driven I think

between 70 to 80 70 to 80% of the gains

uh in the S&P this year. To what extent

is AI behind the rally in China? Is it

the same story happening there that

everyone's so excited about Tencent?

Everyone's so excited about Alibaba

perhaps. everyone's so excited about

Deep Seek. That's why sentiment is is

growing in China or are there other

factors that are that are playing more

of a force um compared to the US?

Yeah, it's a great question, Ed. I think

that AI is only part of the story and

again I and I walk back to what I

previously stated, which is that in the

last few five-year plans, technology has

become front and center as a main KPI

for this government and for Xinping. And

the reason I say that is because when

you look at the PE ratios of say Baba

and Tencent, yes they are higher than

some of these other uh consumer

platforms or even other companies. But

it's not just uh an AIdriven story when

you look at the health of these

companies or even the performance of

these companies in the CSI 300 or even

in the Hang index. What is clear to me

is that yes year-to- date performance in

AI adjacent or AI directed companies

like Baba and Tencent have been very

strong but at the same time what I've

seen is that biotech for instance or

pharmaceutical companies their UT data

performance has actually outpaced even

these big consumer AI tech platforms. So

I think it's a bit more than this and

when we peel back the layers it's very

evident to me that China is trying to

basically domesticate and onshore as

much of the technology stack and supply

chain as possible. So when I look at uh

say for instance BYD or even CL when I

look at the EVs the battery spaces the

biotech the green energy spaces we've

seen very strong performance in those

sectors independent of AI and I think

this is a story more broadly of again a

top down but also a bottomup approach

towards trying to indigenize technology

as much as possible and what happens

when you put that in the biggest

warehouse in the world which is China it

is that you decrease prices but You also

increase scale and China again reflected

in the trade surplus globally is

basically creating a ton of

technological goods that they are then

exporting to the rest of the world. So I

think it's more than an AI story. It is

a really tech superpower story that

again makes the most of China as a

supply chain giant. So just looking at

uh valuations and multiples, China's

trading at around on average price to

earnings ratio of 11. You look at the

S&P at around 2728.

So still a huge disparity there. One of

the themes we've been discussing is we

we think that there is probably going to

be a little bit of a mean reversion and

that is the gap will probably start to

close a little bit. Just wondering if

you feel the same way about that. I

definitely feel that there is going to

be more of a narrowing of the gap and a

mean reversion as you say Ed. It makes

sense uh given historically even I think

these PE ratios are still considered low

uh by Chinese standards. I also think

that as people start to talk more about

the AI bubble in the US and as there is

more kind of hesitancy about being too

exposed to to US equities and US

currency there is going to be a more

rotation into China. We're also already

seeing an EM rotation out of say India

which was once the darling in the last

few years back to China. So I think it

only makes sense that people are getting

more constructive about Chinese

equities. We're going to see a narrowing

in the gap. Uh I will also say that

there is an opportunity of to this

5-year plan and again this is why it's

so important to think about what the

government is going to prioritize as the

strategic sectors because my to my mind

if you look at made in China 20 uh 25 if

you focus just on every single sector

that they targeted you would have made a

lot of money. So again, this is why

these 5-year plans, these industrial

policies are extremely important because

it helps investors figure out what

exactly is Beijing going to concentrate

on and apply a lot of resources and

support.

Just final question here for for people

who are looking at the Chinese markets

and figuring out a way to invest. Um,

just to go through some of the big names

that we should have on our radar. I mean

the the the names that come to mind for

me as you said uh Tencent, Alibaba, uh

BYD. Are there any other big names that

everyone is super excited about in

China? Any other big companies that we

should be thinking about if we're

investing in China?

So I you've already named the big AI

ones. Uh Deepseek isn't publicly listed

yet, but certainly has raised the tide

for all of these AI adjacent and AI uh

directed companies. I would also say on

top of that beyond the usual suspects

everyone talks about BYD and CL we're

already starting to see I think again a

mean reversion because profits are

starting to slow in those green tech

companies and I think that will be a

trend going forward uh but I do suspect

that there are going to be some exciting

stories in robotics as well as in

semiconductors and to in the robotics

field I think unit is a supreme leader

in this field they're already announcing

that they will roll out a pretty

affordable by global standards humanoid

robots in 2026. And then again in

semiconductors I would point to uh you

know SMIC which is China's big uh

fabrication uh firm for semiconductors

high-end leading edge semiconductor

technology still can't rival TSMC but

given that the government is trying to

support indigenous supply as much as

possible I think they along with Huawei

will be the front runners and then

you've got some interesting uh equipment

providers and chip design providers like

Nara and Beer and and the semiconductor

space. So, I think these are some of the

other names that can be tossed around

because again to your previous question,

Ed, it's not just an AI story. It's a

sort of whole technology stack story.

All right, Alice Han, China economist at

Green Mantle and host of China Decode,

part of the Profy family. Uh, always

good to have you on. Thank you for

joining.

Thanks so much, Ed.

All right, that was Alice Horn. If you

want to hear more from Alice on all

things business, politics, and culture

in China, go listen to the China Decode

podcast. that comes out every Tuesday on

the Prof Pod. You can find it wherever

you get your podcasts. Thanks for

listening to Prof Markets from Prof

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tune in tomorrow for a conversation with

Katherine Anne Edwards.