Let\u2019s dive in.<\/p>\n
A few months ago, I asked why our economy<\/a>, despite steady growth in official numbers, feels so creepy and unstable. My conclusion was that the U.S. is in a \u201cChinese finger trap\u201d 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\u2019re stuck, until some outside event occurs. <\/p>\n This week, there was an announcement from an AI company most people haven\u2019t 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<\/a> 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\u2019s providing cheap capital to Meta.<\/p>\n Blue Owl is an entity known as a \u201cbusiness development corporation,\u201d which is to say, an unregulated shadow bank. During the financial crisis, shadow banking got a bad name, so it rebranded as \u201cprivate credit.\u201d But it\u2019s 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.<\/p>\n This week, the company made an announcement with significant implications. Here\u2019s the Financial Times.<\/p>\n 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. <\/p>\n 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. <\/p>\n 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.<\/p>\n I don\u2019t know if this announcement has any broader implications. But in my conversation<\/a> 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. <\/p>\n Here\u2019s another notable sign<\/a> of something weird in the economy writ-large. Data center developers are now approaching multiple utilities with proposals for the same project, leading to \u201cphantom\u201d forecasts of demand that isn\u2019t actually there. Essentially, it\u2019s hoarding.<\/p>\n 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 \u201cbullwhip effect.\u201d Buyers overstate how much they want to buy in the hopes they\u2019ll 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\u2019s what happened globally after World War I, leading to, among other things, Mussolini\u2019s takeover of Italy.<\/p>\n 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<\/a> $40 billion in data centers in Texas. And \u201cAnthropic announced<\/a> 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.\u201d So the investment boom is continuing.<\/p>\n At this point, data centers are pretty much what\u2019s 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.<\/p>\n 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\u2019s central planning, Silicon Valley-style. OpenAI\u2019s 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\u2019t crazy.<\/p>\n If you want a nice deep dive into the problem, the Center for Public Enterprise has a good report titled \u201cBubble or Nothing<\/a>.\u201d 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.<\/p>\n Here\u2019s the key point:<\/p>\n 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 \u201ccircular\u201d transactions with shaky long-term cash flow-generating potential should be cause for worry.<\/p>\n Yup. And to further highlight the themes in the report, journalist Ed Zitron published some information showing<\/a> that operating costs for OpenAI are potentially much higher than previously reported. That\u2019s not good.<\/p>\n I\u2019ll 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\u2019t believe there\u2019s enough cash in the economy. A key reason is that Wall Street banks are experiencing instability in money markets. The New York Fed convened<\/a> 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\u2019s amazing that Wall Street banks get such an attentive government. <\/p>\n Finally, shipping analyst Craig Fuller says that the freight sector is doing poorly, and Southern Business and Development is<\/a> \u201creporting that economic development project activity in the American South, the world\u2019s third largest economy, is at the lowest mid-year point of any year since the SB&D 100 ranking was established in 1994.\u201d Says analyst Mike Randle, \u201cThe numbers are worse than any recession I have ever covered since 1983.\u201d I don\u2019t know how to reconcile this data with the data center construction boom, it\u2019s just very weird.<\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/ie\/wp-content\/uploads\/2025\/11\/https:\/\/substack-post-media.s3.amazonaws.com\/public\/images\/40f1efc5-10e5-497a-bce9-b09fbe629501_900x.jpeg\")
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