Why the AI data centre doubters are delusional

It has become downright fashionable to warn about the AI bubble. Which means we need to find something else to write about…

But not so fast.

There’s a peculiar reason why AI’s doubters may yet be proven wrong. It’s a rare force in financial markets that upends the usual rules.

The heart of the claim is quite simple: neither the US nor China can afford to lose the AI race.

In many dimensions, it is an arms-race in disguise. And not just militarily, but also economically.

AI gives economies the boost they need most right now: the promise of productivity improvements.

Workers can achieve vastly more per hour using AI. Machines can run vastly more efficiently using AI. Resources can be discovered faster using AI and mined more cheaply. New medical and chemical processes become viable. And, of course, warfare becomes far more deadly and efficient.

With so much at stake, AI is too big to fail. Governments will soon join tech companies in moving heaven and earth to win the AI race.

The AI bubble’s pop will give them precisely the excuse they need to get involved.

AI will morph into a political beast

China just spent three decades undermining the world’s industrial capacity in a deliberate act of geopolitical sabotage. The world now relies on China for countless strategic goods.

Alas, along comes America’s AI, which threatens to reverse China’s dominance. It is a technological leap which puts its leaders well ahead of their rivals in countless ways.

So far, the Americans dominate AI. But the Chinese are not far behind.

China’s advantage lies in the power its political will can bring to bear. America remains a dodgy democracy, half of which is in bed with China anyway.

Even if the American profit motive has given the West a head start, China’s capacity to catch up and then surpass is proven across all sorts of other industries.

However, if the American political establishment were to wake up thanks to some sort of Sputnik Moment, all that could change…

My point is that analysis of the AI boom assumes it is subject to the rules of capitalism. Valuations, returns, cashflow and all sorts of other financial metrics.

But what if we are dealing with something more akin to the Space Race or Marshall Plan? Something that is being run for entirely different motivations and purposes than investing returns. And so it should be judged by entirely different metrics.

Of course, none of this is to say that the AI bubble will work out well for investors once the politicians get involved...

Bubbles burst, industries roll on

Was America’ abandoned when the Mississippi Bubble burst in 1720?

Did England give up on ruling the waves when the South Sea Bubble popped later the same year?

Did the trains stop when America’s railroad bubble imploded in the panic of 1873?

Did the tech wreck of 2000 destroy the internet?

Did the subprime bubble’s crash in 2007 end homebuilding in America?

Did the end of the green bubble in 2021 disconnect the wind farms and solar panels?

Of course not! Capital values and capital are two completely different things.

Investors rely on pricing. The economy relies on the assets it can use.

In many cases, devalued capital is precisely what the economy needs to recover after a bubble. Because it is cheap for more productive users to acquire and repurpose.

Bubbles are giant misallocations of capital to unproductive uses. When they pop and asset prices fall to reflect this low productivity, those resources are reallocated to more productive uses. This is how economic growth re-emerges.

Prevent the bubble from popping and you never get this re-emergence. You get stuck in the doldrums.

One reason America’s growth over time is so much better than other regions is that it allows failure.

Japan is the textbook opposite, with government directing banks to keep zombie companies alive despite their lack of profitability. The result is poor dynamism – low economic growth.

Unfortunately, America has abandoned many of the principles that made its economy great. It is now a land of bailouts, subsidies and regulations. It props up failure instead of allowing creative destruction.

So, in coming years, as the AI bubble bursts, we can expect to see government bailouts for AI companies.

After all, America cannot afford to lose the AI race to China. Its politicians will act.

The point is that investors who want to profit from AI need to find a new angle. The AI bubble will pop, destroying asset values. Governments will bail out AI companies. And the whole initiative will boom under the government’s geopolitically motivated guidance.

So, which industry will end up reaping the profits?

Energy.

Like all tech-driven booms, the AI boom is voraciously energy intensive. The big question right now is which forms of energy will be chosen to fuel it.

And who owns them.

Find out here which forms of energy we expect to surge into the limelight as AI demand soars, even as the AI bubble pops.