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?

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom - How to be happy and how to be healthy. Oh, and rich.

33 thoughts on “What Does A Bubble Look Like?”

  1. Let’s build us a natural gas fired combined cycle power plant.

    Fuel:
    need access to large gas pipeline
    need transportation agreement for natural gas delivery – may be firm or non-firm interruptible delivery
    need purchase agreement for natural gas – price may be fixed or indexed

    Interconnection:
    need access to electric grid
    need interconnection studies to connect to grid – takes 3 to 6 years to complete the process depending on jurisdiction
    unknown cost to interconnect until interconnection studies are completed
    Permitting:
    permitting takes 2 to 3 years depending on the jurisdiction
    Water:
    Need access for a lot of water for cooling towers and such – 2,803 gallons per MWh per https://www.eia.gov/todayinenergy/detail.php?id=56820
    For a 600 MW power plant dedicated to a data center and assuming a 90% capacity factor water usage is: 600 MW * 8760 hours * 90% * 2,803 gallons per MWh = 13,259,311,200 gallons per year

    Alternative calculation using 370 gallons per MWh per https://www.netl.doe.gov/sites/default/files/netl-file/WaterReport_Revised-May2007.pdf results in 1,750,248,000 gallons of water per year

    Note: the second water calculation is more likely for a new plant

    Procurement:
    Minimum of 5 years to receive gas turbine after order is placed. Note that you need everything listed above well on its way plus engineering for plant design in order to understand final cost and performance before committing the money to order the major plant components.
    Construction will take you a year and costs are guaranteed to go up to build it as crews will be busy on other projects.

    Starting from scratch it will be 2032 at the earliest before your power plant is online.

    YMMV, but it looks like the early 2000’s when everyone ordered a bunch of gas turbines with nowhere to site them, no fuel available and no one to sell the power to.

    Anon

    3. And then they used the capacity to buy turbine compressors to pipe natural gas very inefficiently.

  2. I’m just sure that, no matter what the bubble is, the large majority chunk of votes enabling it came from extraterrestrials. That’s who we see in lines outside polling places, Marvin the Martin and his 10,000 instant Martians just add water.

    We certainly don’t see boomers from the Midwest thinking they are Charlie Brown and finally this time, they will be the beneficiaries of (their own) wealth stolen by “taxes”. They think they can power those data centers by plugging the power strip into itself.

    1. They really do. But there’s more to it than that, which I’ll probably keep going on next Wednesday.

    1. zaklog: As I noted last year, while I’ve bought/read/enjoyed your books, most of the books on sale are not even close to ‘based.’ Tons written by women, or with female protagonists, or with heroes named “Lamar,” etc. I have skimmed most of the entries and thus far found one – ONE – book that might be worth my time. Otherwise, I’m not interested in diverse heroes/heroines saving pozzed AINO, or exploring the galaxy, or establishing a diverse “Galt’s Gulch” on the Moon. I’m currently skimming a zombie series that started out okay but then descended into “good guy LEOs” against bad meanie White supremacist militia (who are all blond hair/blue eyed, of course) who enslave womyn. Maybe 0.001% of what’s available online is not total junk, and that’s on a good day. And every last one that starts out even slightly interesting/entertaining ends up adding a heroine named “Priya” or finding evil notsees down in Argentina. I’m tired of all the lies and the rot. I have diverse fiction fatigue, bigly.

      1. Silent Order Iron Hand is pretty good. It’s even free this time. I read another one of Fenton Wood’s that was excellent. The Screaming Void, by ArtGainz, was fun. No diversity agenda in any of them. I’ve read several. A few are just badly done. A few have “diversity.” Oh well. You don’t have to buy anything. I don’t see the point in repeatedly posting this, though.

        1. Appreciate the suggestions; I will check them out. And I apologize for posting about this again – it’s just so frustrating to look for something entertaining and/or escapist, and to find myself being told to cheer for the diverse ‘good guys.’ I know – I tell others – that there is not one hobby or interest or area of life the left will leave untouched, but it’s still immensely frustrating to start and return book after book for the same woke garbage. I didn’t mean to dump that frustration on you, though.

  4. The whole system is precariously balanced and if it goes down again I don’t think bailouts will save it like last time.

  5. John, your essay focuses on the massive (and unrealistic?) tangible resources required for the AI buildout. The flip side for AI bubble discussions are the societal results if this buildout actually succeeds. How does AI earn its keep? Mainly by payroll savings to businesses from laying off workers, lots and lots of workers. In fact, paying for AI will require the estimated layoff of around 25% of the American workforce in the next 9 years.

    https://medium.com/the-generator/how-many-jobs-does-ai-need-to-eliminate-to-pay-for-itself-df79573a0412

    Forget investing in housing. Forget investing in apartment complexes. In the coming successful AI world, you wanna invest in manufacturers of tents and sleeping bags.

    3. Scapegoating AI for the layoffs is good for several reason: largely, they think blaming AI is less likely to cause an employee to kill the manager. 2nd: stockholder like the sound of it because it should mean the company is leaner especially in the out years; there won’t be a rehiring and maybe more cuts.
      Numerous articles are covering the point that it is AI Washing -> every company is bragging about using AI.
      sample: https://theconversation.com/tech-companies-are-blaming-massive-layoffs-on-ai-whats-really-going-on-278314
      The AI justification is to reduce headcount, but hasn’t really. It just normal biz. My company had a competitor just down the street. Their standard policy was to fire 10% of the staff every year. And they would rehire different folks during the year. So they demonstrated that every company has around 10% dead wood that needs trimmed and frequently. Musk proven in the tech world it is likely more in the range of 50%.
      However I fully agree that the planned time scales are bonkers. But then, successful salesman work that way. Also depends on where the biz is going in. My company relocated plants to Alabama and South Carolina; they were up and running as fast as the concrete cured. Do note: Ricky is correct that gas turbines are a 5 year build effort and they have been booked up for a couple of decades. Power transformers (the big ones) are the same way, but only a couple of years. I seem to recall that only 1 plant in Japan builds the big ones for the US market, so that’s a big choke point.

      1. I can’t take credit for the Anonymous gas turbine post above, that wasn’t me. We’ve got plenty of smart people here that know how to think, and that smart analysis proves it.

  6. All this complaining about how stupid AI is. Complaint here, bitch there!!
    Like no one has ever heard of AOC.
    On a relative basis, AI is genius level compared.

  7. Artificial Imbecile is for Bolshevik revolution redux?
    The owners of the fourth world welfare turd will make it a crime to criticize them.
    GIGO uber alles.

  8. Several months ago, Charles Hugh Smith postulated that there’s an “Everything Bubble”. You name it…housing, cars, rentals, food, utilities, ad infinitum. All priced at unaffordable levels.

    It’ll be “Black Swan Day” soon. When that occurs, AI = Humpty Dumpty.

    1. The Everything Bubble is produced by the Everything Government, which treats its central planning failures as Too Big To Fail and compounds them with more central planning. But that will end because government is choking its own tax base to death.

      When Black Swan Day arrives and the dollar is hyperinflated, the broken dollar will break the taxing mechanism, which then breaks the government employment mechanism and the enforcement mechanism. There will be a Debt Jubilee because nobody can force otherwise. Your mortgage and student loan and car loan will vanish. The portion of the middle class who does productive work that customers voluntarily pay for will discover it is nearly independently wealthy.

      1. Anon-

        Sweetie & I made a decision to go zero debt 7 yrs. ago after we met in early 2019. Took 3 years but the dog hunted. My gut is that when they pull the plug, any debt backed assets will be repo’ed by the USG/FED.

        We even downsized to get a sizeable cash payout (we’re 73). It’s going into a new metal roof, 26KV Generac (Kohler, natch), municipal water purification system, replacing a 30 yr. old HVAC compressor/AHU, and a few other things.

        If you’re ever in Beaufort, SC, visit The Fillin’ Station, our 5-Star Dive Bar. We fall in from 230-400.

  9. I was in a friend’s shop on Saturday and watched a unsealed carton of Pokemon cards sell for 72k cash, nope no bubbles lol

    1. son24-

      Beaufort Academy hosted a card show in their gym last Saturday. The parking lot was FULL. I’d estimate at least 500 people were there.

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