Oracle's Debt and AI Market Risks

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Let's check in on yesterday's market vitals The major indices climbed as chip stocks rallied. Intel popped nearly nine percent after the company announced it is reducing its headcount. Meanwhile, Brent Crude climbed as strikes continued in the Middle East and President Trump dismissed the idea of immediate talks with Iran The yield on tenure treasuries rose to its highest level in two months on inflation expectations on Kauscii, the yieds of the rate hike before twenty twenty seven hit sixty two percent What else is happening Just when you thought it was over, tariff chaos is back with a vengeance. Trump announced that the US would be imposing fifty percent tariffs on most Canadian goods next month claim that Canada had discriminated against U. S. industries Prime Minister Mark Carney said that he and Trump would accelerate trade talks before they take effect Meanwhile, a twenty five percent tariff on certain imports from Brazil takes effect today And on Friday The ten percent tariffs the Trump administration imposed in February are due to expire. US trrade Representative Jameson Greer said, quote, We expect to see some action soon as the administration prepares a new round of replacement tariffs. So lots of tariff news to get into here. Joining us to discuss this news, we are speaking with Peter Harrell Visiting schcholar at the Institute of International Economic Law at Georgetown Law School Piza Welcome back to the show. It's great to see you Ls has happened here on the tariff front and it's a subject that we talked a lot about Last year stopped talking about for a while, I guess because other stuff was happening. Now we're back to talking about it What's happened with tariffs over the past Six months Yeah Well, I think part of why we stopped talking about it was we all hoped that maybe although Trump would maintain high tariffs, he'd do so in a more orderly and disciplined fashion than he did last year. And as we're seeing this week, that's not really the case. You know, if you go back to February, Trump lost a case at the Supreme Court where the Supreme Court ruled that the legal basis he'd been using for many of his tariffs last year was illegal. And the Trump administration pivoted back in February to kind of a phased set of fallback tariff plans with the idea being first they'd have what's called a Sction one hundred and twenty two tariff, which would be in place from late February until Friday morning here in the east cooast of the United States. And then they would have something called a three hundred one tariff would come into place to kind of replace the one hundred and twenty two Friday morning as well. So they'd kind of pictured an orderly process. That's not where we are. like although they'd signaled there'd be order, what we in fact have seen is the one hundred twenty two is going to expire Friday morning. They've not yet finalized successor tariff, the three hundred one tariff. Maybe they'll do that today. Maybe they'll do that tomorrow. If you are importing a product into the United States today, from Asia, from Europe, you don't know what tariff rate you're going to pay on Friday at this point. So that's kind of chaotic data point number one. Chaotic data point number two is that Trump decided, as he said, Ed yesterday that he wanted to impose fifty percent tariffs on tens of billions of dollars of U S. imports from Canada, which is sort of allegedly over Canadian discrimination against the United States using literally a provision of the Smoot Holly tariff actct that may or may not still be on the books. Obviously a piece of this is that he's trying to negotiate with Canada over a trade deal and he wants to put pressure on Canada, but that's sort of chaotic peace number two and then chaotic peiece number three, as you say, is we have these tariffs on Brazil, which are kind of around the fact that Trump doesn't like Brazilian tech regulation and he also doesn't like their online payment platform. And so he's threatening is imposing tariffs on them as well. and you know, probably more to come the way this is going. dial into the Canada tariffs for a moment. I mean, there are all of these different laws and these different sections of the law that he's using to enact these tariffs, you mentioned section one hundred twenty two, which we had and expires and then maybe they were to use three hundred one. The Canada tariff from my understanding is using three thirty eight I don't know what that means, but I have a quote from Scotland Som of the Cato Institute who said that this is the quote nuclear option for Trump tariffs. Is that the right way to describe it? Like what is different about these tariffs versus the ones we've seen so far. So it's called Sectction three hundred thirty eight because it was seection three hundred thirty eight of the Tariff act of nineteen thirty, better known as the Smoot Hoully Tariff A. So he's literally using the Smoot Hall of Tariff act here. This is a provision of law that actually has probably does not appear to have ever been used to impose tariffs before. I mean, since nineteen thirty has never actually been used used in nineteen thirty five and probably in the nineteen forties to threaten tariffs, but were never they were never actually imposed. So what Trump is doing here is dusting off this very old statute, which may or may not really be legally valid anymore because As Scott said, what Trump wants is a flexible authority. The problem Trump has had with the one hundred twenty two tariffs and with the three hundred one tariffs is they all require either investigations or they have like a limit on rates or they have all these constraints on them. What Trump clearly likes, I think, about three hundred thirty eight is that it is a, you know, again, assuming it's still lawful, a very flexible law that, you know, he thinks just lets him say Canada is discriminating against the United States up to fifty percent tariffs. So that's what he's reaching for is something that gives him that kind of flexibility that he so enjoys to put tariffs on on short notice at very high rates You know, sort of at his whim. Something I don't fully understand here. I mean, the Supreme Court literally said that the tariffs were illegal. That happened back in February And since then, There have been a multitude of different ways by which Trump has continued to enact tariffs and And and he's figured out multiple different loopholes or different sections of the law by which to do that. And here we are, I mean, several months later It's been over a year since the initial Liberation Day Tariffs are still in effect, and it seems as if he can just keep on doing this, I guess keep on kicking the can down the road of just, o, I'll use this section, I'll use this section. I'll use this section. And then I guess the Supreme Court has to play catch up. I mean, couldn't this go on for the next several years? Couldn't this just be the remainder of his presidency four years of tariffs. I mean, what is stopping him from continuing to do what he's doing. Yeah. so I think you raise a very important point, Ed, which is that I think we are quite likely to see Trump continue to use lots of differenterent tariff authorities All of which have been and will be challenged in court, but his idea is to kind of run out the clock and kind of keep them going through throughout his term and then you know, somebody else can pick up the pieces afterwards if the courts, you know, much later rule all of these fallback tariffs unlawful as well. I mean, just to unpack that a little bit So the first statute he used was this thing called IEPA, which actually didn't have the word tariff or duty or anything in it. It was kind of an emergency powers statute And that's the one that the Supreme Court ruled unlawful back in February. And so now having lost the use of this emergency powers statute that didn't have the word tariff or duty. Now what he's doing is using differentere statutes that are definitely tariff statutes. you know, they contain the word tariff, you know, the president may impose tariffs, that kind of thing. But that he is he is using them in a different way and much more aggressively than they've ever been used before. And so now we are seeing what, you know, as he uses these other tariff statut now, but uses them in these, you know, potentially unlawful ways. What we're seeing is lawsuits come to challenge them, but our court system, you know, any lawsuit is going to take at least a year to go through the courts. And so he's just going to keep trying to play play out the clock. Now, but this is where I find three hundred thirty eight and what he's doing on Canada kind of dangerous here One benefit that we had gotten from the Supreme Court decision in February is that Trump was not really turning tariffs off and on on and off by whim. So he'd maintained a ten percent tariff under one hundred and twenty two. He has, you know, said that they're going to maintain that under three hundred one, but actually you hadn't seen a lot of changes in and tariffs. you actually didn't see many changes in actual tariff rates between February and this week because these other laws had required some process or had some limits. What he's trying to do with three hundred thirty eight is not only maintain high rates under these other statutes three hundred and one and one hundred and twenty two, but three hundred thirty eight is something that lets him kind of you know, using his Sharpie turn the tariffs off and on again and bring that chaos back in addition to the high rates. We've actually had, as we talked about at the beginning E, you know, a couple of months without the chaos even if the rates remained high. Something I don't understand and you know, maybe you can help me with it or maybe not, we'll see Why is he doing this? Because as we've seen As we've seen through the multiple inflation reports that we've gotten over the past several months, where the inflation number goes higher. We had three point a fivealf percent, which sure it was lower than four point two percent, but the target rate for the Federal Reserve is two percent. We were hovering around that number. Then we slapped the tariffs on. We added a full percentage point to inflation. Th we invaded Iran and we blocked up the strait of Hormuz added a full percentage point of inflation possibly higher. Now we're hovering around four percent and this is the biggest problem for American households right now, which is inflation and its effect on the affordability crisis. And this is what people are so upset with him about What I cannot for the life of me understand why he would be after it was ruled illegal by the Supreme Court Double down, not with ten percent with fifty percent. on Canada How do we even justify this Every independent study, at least I've seen, E suggests that Something like eighty five percent to ninety five percent of these tariffs are being paid by Americans either in the form of cost passed through to customers or by companies temporarily eating some of the cost, planning to pass it through, you know, on a go forward basis. So it's not really that the foreigners are paying most of these tariffs We are definitely paying these tariffs. And as you say, inflation is front of mind I think it's hard to explain this policy agenda other than the personality of Donald Trump. I think that there is, you know, a substantial amount of support both in his administration and, you know, among some quarters in Washington for you know, targeted tariffs to protect even fairly aggressively some specific industries here in the United States. And I think you'd find broad support. better or for worse, not saying I like the ecomics of it, but for you know more tariffs to protect the steel making industry, which he has done or more tariffs to protect you know maybe the auto industry. Again, I think what he's done is not actually been helpful to those industries, but there is support for that concept. There's very little support for the and breadth of tariffs and the kind of rates're messing on Canada other than that Donald Trump has loved tariffs personally since the nineteen eighties. And what you are seeing is a presidentially driven objective here that his administration is implementing. And I do think it is coming from him because One thing we saw after the Supreme Court ruled the tariffs illegal back in February and they started reimposing. they actually reimposed them at lower rates, right? They had been an average rate of about fifteen percent before the Supreme Court ruled them illegal. they brought back in ten percent ish tariffs So I think some of his administration kind of gets what you're saying Ed and would like to see a bit of a decline in rates, but Trump clearly just wants more tariffs. And I think that is what we're going to see going forward kind of despite the economic costs. It seems as though this is kind of the blunt instrument he has found with which he can bludgeon people that he doesn't like nations that he doesn't like and in the process also bludgeon himself or at least the American people. That seems to be what's happening. I mean, he said, I don't know what Canada has done wrong, but supposedly they have discriminated against the U S And this is his response. I mean, you say you think this will continue to what extent Do you think this will continue? Is this move the first of many tariff moves against individual nations, over the next few months is this kind of the canary in the coal mine, I guess. Well, I am worried about that I do think he likes the way he can bludgeon foreign governments. I also think we have to take seriously, Ed that Although every economist, we can sit here, we can read the studies that say the Americans are paying the tariffs, I think Trump may genuinely believe just wrongly that the foreigners pay the tariffs. I think we have to kind of take seriously that he may just believe that, although he's completely wrong on it. And he is, you know, as George W. Bush used to say, the decider. So, you know, here we here we are. I worry this is going to be the beginning of future moves. As I as I said, I think You know we had seen some efforts after the Supreme Court loss by Jameson Greer as U S. trade representative and some of the other folks in the administration to have a someomewhat more disciplined. Aain, still kind of high rates but somewhat more disciplined tariff process that was kind of like, okay, we're just gonna have ten percent on everybody. You might not like ten percent, but it's kind of manageable. It's not higher than ten percent is clearly interested in getting back into the game of when he's mad at Europe because they won't support his Iran war tariff Europe. He's clearly, you know, mad at Canada because it's not giving him what he wants on USMCA, but more than that, it's not becoming the fifty first state. so tariff Canada. And I am worried that this is a harbringer of more chaos to come, although I hope I am wrong on that. All right, Peter Harrell is visiting schcholar at the Institute of International Economic Law at Georgetown Law School. Peter. Thank you so much for joining us. It's great to be on. thank you Off for the break The Paramount Warner Brothers deal hits a snag And for even more markets insights, you can subscribe to my weekly newsletter, simimply put at simply putut. proftymedia dot com The supportupport for the show comes from Gusto. Be honest, there's probably one task on your list you constantly pushhing the next week because it's just so tedious For a lot of business owners, that task is payroll Gusto is here to take that entirely off your plate, so it becomes the easy part of your job instead of the dreaded one Gusta is an online payroll and benefit software built for small business. It's all in one, remote friendly, and incredibly easy to use, so you can pay, hire, on booard and support your team from anywhere Automatic payroll tax filing, simple direct deposits, health benefits, commuter benefits, workers Com four hundred one K, you name it. 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Ask anything with the new metaglasses It's me the We don't need the jingle twice. Stop it. This is about vacation inflation and how prriceline negotiates amazing deals on hotels, flights, and rental cars. S Yeah, but I didn't mention that you can save up to sixty percent off hotels in the Priceline app Fine. No one deals more deals than Please stop Tine We're back with Profty Markets. Paramount's bid for Warner Brothers just hit a major speed bump. On Monday, a judge paused Paramount's one hundred ten billion dollars takeover of Warner Brothers discovery. The temporary restraining order was granted at the request of twelve state attorneys generenal, who sued to block the deal on antitrust grounds They argue it combines too much of the cable and movie business, meaning higher prices and fewer shows. The pause lasts fourteen days, but it doesn't end there. On august third, the judge will hear arguments for a longer freeze one that could last months. And if the deal doesn't close by september thirtieth, Paramount owes WBD a ticking fee of more than six hundred million dollars a quarter On the news, both Paramount and Warner Brothers discovery fell three percent. This development leaves investors asking a very important question Is this deal ever going to close? To answer that question, we're speaking with Rohan Giswami Business reporter at Senfort Rohan. Great to see you. Paramount Warner Brothers, the deal that we've been talking about for months, yet another roadblock What's happening here? What do you make of it? It's why cost lemonade and contested cemone is so fun Because on one hand, you've got Paramount, which has been quite resistant to the idea that they would be willing to spin off or sell any of these assets. And it is rapidly facing a reality that it might have to Right, As you point out, the TRO, the temporary restraining order is only for fourteen days. Now we can get a second one. It's another fourteen days, but that's kind of a point. It brings us to this august third showdown around this preliminary injunction, and that's really the whole battle right Because it's in that situation and in that hearings, the judge will decide whether the state's case has merit or whether it doesn't. Now it should be clear here, right, whether or not the judge finds in favor or against paramount for the states here, right? We are in for a long slog here The question now becomes, is Paramount going to decide that it wants to spin off or sell some assets and make an offer to the states, Hey, maybe we'll get rid of a studio, maybe we'll get rid of CNN, we'll get rid of some of the cable assets, orr does it say, as it's intimated publicly and privately, that it's willing to take this fight to the Supreme Court? The Elisons, of course, have a bottomless pocket, but even they don't want to be paying six hundred million dollars, maybe one point two billion dollars if this stretches another quarter after this if they can avoid it Just looking at the list of IP that they would own. they would own, I mean, if this deal goes through. The Ellisons paramount, they would own HBO, CNN, TNT, TBS. they'd own all this IP like Harry Potter and Dy Comics, Game of Thrones. I mean, it's a lot of stuff And it seems to be that seems to be the problem really, at least in the lawsuit that it's too much stuff. I mean How much merit is there to the antitrust argument in the lawsuit? And would it be enough to say, okay, we'll shed this asset and this asset and we'll take these other ones? You know, if you'd asked me my personal opinion, and this is again based on conversations with rival media executives, with antitrust lawyers before the TRO was issued, I would have said, not much. This is a political suit Banta has cobbled together an interesting coalition of Democrats that oppose this deal for different reasons, whether it's Dave Aales's ideology, or they have a general hatred of monopolies and think all mergers are bad. this was a complicated group of people that came together to try to stop this lawsuit. Then came the judge's ruling on Monday on the TRO, and she made an interesting series of points that seem to suggest she's not really buying Paramount's arguments. If you re on the clock, you remember that the state's made An argument that Paramount's deal would be ani competitive in three spots. So there's general theatrical releasase, that's all movies. Then there's blockbuster theatrical releases, which was a new category that sort of raised some eyebrows. How do you define a blockbuster? Are those really a thing anymore when like Hollywood can spend two hundred million dollars on a movie? and it's a flop And then cable news, cable TV, I should say, right? So these three categories are where Warner was the Warner Paramount combination was supposed to be anti competitive. Didn't really buy that argument, the judge seems to have, and that's all that matters in the short term, right? Paramount, if they get a negative decision here that rules against them, is going to appeal. They're going to take this the Supreme Court. I mean David Elson is indfagible here. He is not going to give this up But it's going to cost them. So then the question really becomes at what point to go back to my previous point, at what point does Paramount try to cut their losses? Now Robanta has privately intimated, publicly denied intimating this, but has privately intimated per puck that CNN divestiture would be enough potentially to stave off further action. Again, reinforcing this idea that this is really about Politics not antitrust It is striking. you look at the states that have sued, All twelve of them have a Democratic attorney general. U It's hard to not see this based on that data point as at least somewhat Politically inclined And I'm not saying that that actually takes away from the merit of the lawsuit, but it does seem like that's a lot of what this is about. We know that the Ellisons have gotten closer and cozier with the president. We know that the president has said nice things about David Ellison and called him a great guy. He's called Larry a great guy too, his dad. So I mean, to what extent do you think this really is about politics, about the having something like CNN another important cable asset under the control of a guy who seems to be At least close with the president. I mean, there's a terrible irony in the fact that David Ellison donated to Joe Biden's reelection campaign, donated a huge amount of money. This is a guy who was historically a Democrat. Now, of course, I haven't asked him what his political ideology is today. and any number of observers can look at what he's done to CBS or the hires he's made and gone well, mayaybe he's not a Democrat anymore But I would actually argue that the politics of the case really do matter If you look at other situations where the states have intervened, thinking about live nation right to break up the ticketing giant, or in a situation where HPE bought this company called Juniper, you actually had a bipartisan coalition of attorneys generals from the state sue to try and break up or stop those mergers. Here, where it becomes inherently political and problematic is in who and why they've brought this suit Be Again, on the face of it, Bonta. and Elizabeth Warren and Chris Murphy and others in this coalition have laid it out in no uncertain terms, right? We This is a fight between people who are aligned with Trump and not align with Trump. It is a very political situation It Does't have a bear in law, it shouldn't, but of course it will, and it does. Just thinkinking about how the shareholders feel about all of this.ot great. N great Paramount stock is down twenty five percent. onever the discovery stock is down five percent. I mean Yeah, how do the shareholders feel about this? and do they have a say in what will be a transformative decision and moment for the company? No. they are they are along for this ride, whether they like it or not. Zlow, David Zazlaw, that's the of Warner Brothers of course. in in remarks at Eployee Town Hall did say, you know, look, if this deal does get broken up We'll go back to running our business and we'll figure out from then. Remember before they started this process, Warner Bothers had been on the road to a split, akin to what you and I talked about last time, Comcast has done The problem, of course, becomes that's very little consolation for shareholders. This is not a stock that should trade at the levels that it has. It has been inflated by greed, by ego, by David Elson's sort of limitless pockets and desire to build a media empire. Take that away and the stock will, of course plummet, investors will rotate out. This will very well become you know a dead man walking or a private equity takeout or what have you Right. So shareholders have very limited recourse. Now of course what they can do and you'll see this in contested situations is put public pressure on the AGs, whether that's hiring their own lobbyists, engaging their own consultants, launching grassroots campaigns. Again, these are sophisticated hedge funds that will use any and all tools at their disposal to get a deal done. But it's really going to come down to, and we have no doubt that David Ellison will execute on this Paramount's ability to fill their fiduciary duties under the merger agreement. Now, you'll recall there are multib billion dollar break fees associated with this merger. Those are not things that anyone wants to pay out of hand. So that's one motivator. The other motivator as we know is David Elson really, really wants these assets, reallyally, really wants these assets. And so he is extremely motivated from conversations with people around him and around the company to get this done at any cost. Even if that means, as we reported last week, leaving California al togetherether. I mean, all options are on the table for this guy to get the deal across and to make it clear to the states, hey, don't don't mess with us here. Final question, and you know what's coming. prediction. Yeah. How does this all pan out? Do the Ellisons Pull it off before September. What do you think? I think they do Before September, M I think I'll back up then, do they pull it off? They pull it off. I don't know if it'll be by September, but look, I think never say never. They are at we are never going to spin anything off or offer any concessions to the states. We're going to fight this to the ground We'll see how they feel when they're on their hook for six hundred million dollars. Right That looks very different. I think they get this done, whether it is through a structural remedy, right, getting rid of the cable assets, getting rid of a studio, getting rid of CN, or by litigating this all the way up to theupreme Court, which Mon Delbrahim, the chief legal officer at Paramount, the former antitrust chief under Trump one point zero, has said they are going to do. My money is on the Esons at on Paramount. This is based not just on my opinion, but conversations I've had with other media CEOs, with bankers, with lawyers with people around this But it's going to be a long slog, and it's not going to be fun for shareholders at all. So you know Buckle up Rohan Gaswami is Business reporter at SEM four, Rohan, thank you so much. And always a pleasure Oracle's very bad year just got worse. As you may already know, Oracles stock has gotten battered this year down thirty five percent year to date It's even had its credit rating downgraded to triple B minus. That's just one rung away from junk status, but yesterday, the company got even more bad news. The state authority of Wisconsin, where Oracle is looking to build a massive one gigawatt data center, just demanded that Oracle pay a collateral bill worth Seven billion dollars. Why Well largely because of Oacles. Shitty credit rating. Oracle borrowed forty three billion dollars to build data centers over the past year. That's against its sixty seven billion dollars in revenue. Revenue doesn't pay debt down, free cash flow does, and Oracle's free cash flow is negative. It burned roughly twenty four billion dollars over the same period. taking on record debt while running negative cash flows, well, that is a great recipe for a default, which means that every time anyone agrees to loan Oracle money, they are now taking on an increased level of risk, which means they must now charge Oracle higher interest rates to compensate for that risk The result highigher borrowing costs and a seven billion dollars collateral bill, which will cost Oracle more than one hundred million dollars a year. We have said it before. we will say it again, bubbles aren't built with equity. they are built with debt. And increasingly, the AI buildout is becoming reliant on debt. Oracle is the company most obviously in the danger zone, and that's why the markets are now flashing red. But let's be clear, it isn't alone. An estimated four hundred eighty nine billion dollars of AI related debt has been issued this year And the hyperscalers, such as Oracle, account for only forty percent.