What Does A Bubble Look Like?

“I had it all, even the glass dishes with tiny bubbles and imperfections.” – Fight Club

You know what really gets my goat?  A Chupacabra.

I’ve been in a bubble before.  What happens in them is, well, interesting.

First, the money isn’t just where the attention is.  Nvidia® and OpenAI™ and Anthropic© are where the attention is focused.  But it’s a bubble, right?  Honestly, if the irrational exuberance over A.I. was just about those three companies, it would be pretty boring.

But it’s not.  A bubble is insidious because it doesn’t impact just one part of an economy, it sinks its tendrils in seemingly unrelated things.  That’s good, because change is the basis of growth, creating new combinations in the economy to create value.  I’ll stress the “creating value” part because often that’s confused with “red line go up and to right good, down and to right bad”.  A stock price should be related to the value the company creates but is often masked, at least for a while.  I mean, Enron©, right?

Looking at the A.I. bubble now, well, it’s everywhere, and often in irrational and uncomfortable places, like the backseat of a Volkswagen®.

What’s got two legs and lives off a dead beetle?  Yoko Ono.

Things are built in places for reasons.  When things are being built in stupid places, well, it’s probably that someone isn’t thinking straight.

Let’s take data centers.  What do data centers need?

First, power.  We’ll get back to this subject (and most that follow) again, but unless there’s power, none of the chips run.

Second, space.  You need a place to put the chips.  It’s most often a building, on land.  Well, to be honest, that’s where it’s third most common.  The most common is in the dreams of Sam Altman, the second most common is in a warehouse because the datacenter hasn’t been built yet.

Third, access to robust communications.  You’re building something that has to listen and talk, so it needs to be hooked into the data sphere.  Thankfully, thanks to the Dotcom bubble, that fiberoptics are everywhere.

What the hell is laser hair?  And why do people want to get it removed?

Fourth, access to a place to dump the waste heat generated by all that electricity usage.  Most often, this implies access to water for use.

Each of these has its own solution, but meeting all four requires a bit of thought.  I mean, the South Pole would be great except for the whole “access to communication” bit.  So, selection is a balancing act.  Pacific Northwest, with power, land, water and data access, not so bad.  Pennsylvania?  Also pretty good.

Let’s take the factors, one by one.  Power.  As we’ve discussed before, the power usage for data center construction is screaming “bubble” from the top of its lungs.  People building data centers are signing contracts for power, either from utilities or by buying natural gas generators or . . . fusion?  Really?  That’s what they’re planning?  Why not power them off of Elon’s Tweets®?

Looks like even Buc-ee’s® went A.I.

Yeah.  It’s a bubble.  Just because Fred’s Datacenter Depot and Truck Stop© signed a contract doesn’t mean that they have money or even loans to build it.  Yet, chained investment is spurred on through public utilities and engine/turbine manufacturers.  They’re building new lines, expanding capacity, all for a level of power generation that’s absurd.  Thankfully, you can also get a Slim Jim™ at Fred’s©.

What about land?  These are the lucky ones, since people with hundreds to thousands of acres of land are able to sell the land for ridiculous prices if they win the data center lottery.  The nice thing for these folks is that they actually get paid.

Third:  communications.  There are a lot of fiber networks in the US, so this makes a lot of the country okay for buildout.  Greenland?  Notsomuch.

Besides, I have other plans for Greenland.

Then there’s water.  I use the Mississippi for a proxy cutoff line, since east of it, wet, west of it, dry.  YMMV, and there are places like the PacNorthwest that get a lot of water.

But Utah or Nevada?  Or Colorado?  Sure, these places get cold in winter, but are they even thinking about water usage?  These are the places where the phrase, “Whiskey is for drinkin’ and water is for fightin’.” came from.  They’re dry.

But, there’s a never-ending stream of data centers being announced pretty much everywhere.

Announced.

But my experience in a previous bubble tells me that all of these companies that are attempting to build all of these data centers are needing more in common than just millions of Nvidia© chips.  They’re needing copper for wiring.  They’re needing pipes to move water.  They’re needing concrete.  They’re needing steel beams.  They’re needing rebar and glass and aluminum to build some of the largest buildings every conceived by man outside of the Pyramids and that ballroom next to the White House.

And that’s just for the building.

What is the difference between USA and USB?  One connects to your computer to access all your data, the other is computing industry hardware standard.

They’re also in need of power.  That’s another Big Kahuna, and it’s already raising rates to consumers in various states as utilities plan to build out power plants to serve demand from data centers that . . .

May never be built because they can’t be built because there’s not enough stuff to build them or enough electricity to power them even though, “Hey, we have signed contracts!”

That’s the flip side of a bubble.  It’s irrational.  You end up with insanity like 87% of venture capital going to A.I.  49% of investment-grade bonds are going to . . . A.I.  As Michael Burry notes, during the Dotcom boom, only 40% of venture capital went to dotcom companies.  So, 87% is better and safer than 40% because it’s more, right?

I hear that farmers can use a hoe to make money honestly.

Things inflate because everyone wants them.

Copper.  Silver, which is (currently) not behaving like an economic metal, but like an input to data centers.  Concrete.  The very people that know how to build data centers are in amazing demand.

But a bubble?

Nah.  Don’t call it that.

I could go on for another three thousand words about how frothy we are at this moment in time, but this time really is different.  Most of this bubble is built on debt to build things that are impossible to build in promised timelines using resources that aren’t available.  At least when the dotcom bubble burst, we had lots of unused fiber optic cable in the ground and when the housing bubble burst, we had houses left over.

What happens when a debt bubble bursts that hasn’t built the data centers it promised and evaporates a huge percentage of the venture capital that was sunk into it and all we have left are mountains of Nvidia© chips sitting in warehouses surrounded by confused pimps?

Well, that’s just another way that A.I. will change the world, I guess.

Won’t that be interesting?