Lots of monopoly-related news, as usual. YouTube and Disney settled their battle over pay-TV, Lina Khan may try to cut the price of hot dogs at sporting events, and new evidence proves that corporate concentration is a cause of inflation.
The biggest story of the week in terms of monopoly was the release of disgraced financier Jeff Epstein’s emails with a variety of powerful economic and political figures. But I wrote about that yesterday and I don’t have much more to say. Instead, I want to make a few observations about some odd signs about the economy that emerged this week. And I’d like your feedback on what you’re seeing.
Let’s dive in.
A few months ago, I asked why our economy, despite steady growth in official numbers, feels so creepy and unstable. My conclusion was that the U.S. is in a “Chinese finger trap” economy. We are dependent for growth on monopolies and an AI bubble, which juices the all-important stock market. Trying to grow an economy in a more stable way could lower stock prices which would paradoxically lead to a downturn. So we’re stuck, until some outside event occurs.
This week, there was an announcement from an AI company most people haven’t heard of named Blue Owl. Blue Owl is a shadow bank that is funding key parts of the data center build-out. Like a lot of fly-by-night companies jumping into this area, the company has opportunistic origins. It started as a private equity play on real estate just after the financial crisis, went public in 2019 in a sleazy manner known as a special-purpose acquisition company, or SPAC, and rolled up a bunch of similar funds. Today, it’s providing cheap capital to Meta.
Blue Owl is an entity known as a “business development corporation,” which is to say, an unregulated shadow bank. During the financial crisis, shadow banking got a bad name, so it rebranded as “private credit.” But it’s the same thing, these are entities who accept investment/deposits and then invest that capital in risky assets. Investors, largely wealthy individuals and institutions, assume they can withdraw their investments when they choose, similar to a bank. During the financial crisis, the shadow banking sector had trouble meeting requests for redemptions.
This week, the company made an announcement with significant implications. Here’s the Financial Times.
Blue Owl has blocked redemptions in one of its earliest private credit funds as it merges with a larger vehicle overseen by the asset manager in a deal that could leave investors with large losses.
Investors in the fund being acquired could face losses of about 20 per cent on their holdings and will not be able to withdraw their money in advance of the merger, according to a press release.
The deal underscores the risks that retail investors have taken in pouring hundreds of billions of dollars into private debt funds carrying limited liquidity rights.
I don’t know if this announcement has any broader implications. But in my conversation about the AI bubble with long-time Wall Street analyst Herb Greenberg on Organized Money, Blue Owl came up as a key financing vehicle. And the fact that the company is willing to freeze out investors strikes me as, well, striking.
Here’s another notable sign of something weird in the economy writ-large. Data center developers are now approaching multiple utilities with proposals for the same project, leading to “phantom” forecasts of demand that isn’t actually there. Essentially, it’s hoarding.
Hoarding is what happen in overheated markets, such as the post-Covid moment when everyone was looking for chips. But this can lead to something called the “bullwhip effect.” Buyers overstate how much they want to buy in the hopes they’ll get something that is in shortage, and then when suppliers start making more of it, all of a sudden the demand evaporates because it was never real in the first place. This dynamic can throw an economy into an overheated state, and then a depression; that’s what happened globally after World War I, leading to, among other things, Mussolini’s takeover of Italy.
Are we seeing mass hoarding of data center capacity? Who knows? I mean, the immense build-out from blue chip firms continues. This week, Google announced it is investing $40 billion in data centers in Texas. And “Anthropic announced that it will invest $50 billion in data centers across the US, including in New York and Texas, which has an abundance of land and relatively cheap energy.” So the investment boom is continuing.
At this point, data centers are pretty much what’s growing in America. I recently had a conversation with an elected official who told me that data center construction is a huge construction jobs boost in rust belt areas. The template he sees are old closed down factories linked to a power source, being revamped with a new natural gas turbine to run giant server farms to power artificial intelligence. He posited a tension between political support for the new temporary jobs and political anger over higher electricity prices.
We have a one-legged economy, with the AI build-out serving as a driver of real estate values, the stock market, and GDP growth. It’s central planning, Silicon Valley-style. OpenAI’s Sam Altman scared Wall Street and D.C. a few weeks ago when he came out and pretty much said his company would need a bailout at one point, that AI is too big to fail. But his point isn’t crazy.
If you want a nice deep dive into the problem, the Center for Public Enterprise has a good report titled “Bubble or Nothing.” In it, Advait Arun discussed the subtle use of accounting tricks to disguise the losses, as well as the problem of rapidly dropping value of the GPUs which are the keystone asset of data centers.
Here’s the key point:
The fact that the AI sector is not only the main source of growth in an otherwise sclerotic economy but is also a concentrated set of hyperscalers engaging in “circular” transactions with shaky long-term cash flow-generating potential should be cause for worry.
Yup. And to further highlight the themes in the report, journalist Ed Zitron published some information showing that operating costs for OpenAI are potentially much higher than previously reported. That’s not good.
I’ll close with two more data points. The first is the Federal Reserve is likely to stop shrinking its $6.6 trillion balance sheet, which means that the central bank doesn’t believe there’s enough cash in the economy. A key reason is that Wall Street banks are experiencing instability in money markets. The New York Fed convened the big banks this week and is encouraging them to borrow more from the Fed through one of its obscure borrowing facilities, just to tamp down volatility. Few think this dynamic implies some sort of crisis, but I will say, it’s amazing that Wall Street banks get such an attentive government.
Finally, shipping analyst Craig Fuller says that the freight sector is doing poorly, and Southern Business and Development is “reporting that economic development project activity in the American South, the world’s third largest economy, is at the lowest mid-year point of any year since the SB&D 100 ranking was established in 1994.” Says analyst Mike Randle, “The numbers are worse than any recession I have ever covered since 1983.” I don’t know how to reconcile this data with the data center construction boom, it’s just very weird.
All that said, I’m not a forecaster, and I don’t predict crashes or anything like that. This bubble, if it is one, could have years to go, and could scream much higher. (There are some indications of that.) Indeed, there isn’t a lot of private debt on a macro-level, which is what usually kicks off a real financial crisis. The big tech firms funding the AI data center build-out have the money to lose. But given how angry voters are at first Biden and now Trump over this economy, this AI data center build-out is the most unhappy economic growth engine we’ve ever had.
And now, the rest of the monopoly round-up, after the paywall. Lots of fun stuff. CNBC reports rich New Yorkers are apparently trying to get therapy after learning Lina Khan will be co-chairing Zohran Mamdani’s transition team, a judge will start looking into the corrupt Hewlett Packard-Juniper deal this week, Netflix is warned off bidding for the iconic Discovery/Warner Brothers studio, and Republican state law enforcers express skepticism of the giant Union Pacific-Norfolk Southern railroad merger.
Read on for more.