34 years ago today...

All it takes to break the AI picks and shovels trade is order growth slowing from 30% to 15%. That's STILL double-digit growth, but the stocks can get crushed anyway.

Last week CoreWeave's bonds traded at yields around 15%, and the cost of insuring its debt implied roughly a 60% chance of default within 5 years. Oracle's default insurance hit a record high at the same time. That's what it looks like when narratives and dreams run into a lack of cash flow and a mountain of debt.

This is the final episode of our series with Tom Gober. Last episode ended with Tom challenging the offshore reinsurers to show us the $1.5 trillion, and in Episode 4, he shows you which companies are behind it. Just 40 companies account for 85% of it, and the biggest sends $235.7 billion to a single offshore affiliate while holding only $4 billion of surplus, which Tom describes as moving money from one pocket to another, like "trust me, bro, I got this."

Last episode, we left off with Tom Gober about to reveal a secret document he found in a company president’s personal files, and Episode 3 opens with what it said. A CFO in a criminal case was recorded calling these offshore deals “a little bit like morphine,” and Tom explains why: once you start, the hole gets bigger and you need a bigger dose. Here’s what we’re going over in Episode 3 “The Secret Side Letter”: * Tom tells you what was in the side letter hidden behind a reinsurance contract that looked perfect to an examiner, from a case that sent the man in control to prison for 18 and a half years, and you’ll hear what happened when the FBI knocked on his door in Del Mar. * Tom puts the cushion of the entire US life and annuity industry at about $650 billion, and he says more than that sits in secret captives alone, while more than $1 trillion has gone offshore, out of sight. * Tom shows what happened at a big insurance group after KKR took it over from Goldman Sachs, including a carrier with about $3.7 billion in affiliated investments sitting on roughly $200 million of surplus, where a 6% haircut would wipe out its entire surplus. * Big institutions hold more than $500 billion of short-term notes issued through these insurers, and at one of those companies, a legal opinion puts those investors on equal footing with policyholders like you, which Tom says means they’ll see trouble coming first and get to the exit before you do. Tom also names the two insurers he loves, so stay for that. In my world, if you sell a stock through one broker and buy it right back through another, that’s painting the tape, and you’re not allowed to do it because it kills true price discovery. When the same owner sits on both sides of an insurance company’s investments, it looks eerily similar to me. Tom ends this one with a simple message for the offshore reinsurers and secret captives: if the $1.5 trillion is really there, show us.

Our long/short spread widened to 67.4% today, with our longs up 25.9% on average and our shorts down 41.6%.