It’s Only Money

The Future Wants a Deposit

“The future looks incredibly promising. Unfortunately, it appears they want a deposit.”

The bond market rarely gets the attention of the stock market. It is less exciting, harder to explain at a cocktail party, and generally unconcerned with a good story.

Artificial intelligence has a very good story.

It also has an enormous bill. Data centers, semiconductors, power generation, transmission, cooling, and construction require extraordinary amounts of capital. Much of that investment is being made today based upon economic benefits expected years into the future.

That creates an interesting problem: the money has to be spent before the productivity arrives.

Over the next nine months to two years, the AI buildout will continue alongside already significant government borrowing. Utilities need capital. Technology companies need capital. Governments need capital. And this is not occurring against a particularly clean global balance sheet. Japan has struggled with its debt burden for decades, while the United States continues to run substantial deficits of its own.

In other words, there are an awful lot of people reaching for the same pool of money.

Normally, the market has a wonderfully simple way of dealing with excessive investment. Bad projects fail. Capital gets repriced. Investors become more selective. Money moves somewhere else.

That mechanism works reasonably well when the projects involved are allowed to fail.

AI may present a more complicated problem.

The technology is increasingly being viewed not simply as another commercial opportunity but as strategically important infrastructure. The United States, China, and other nations increasingly see leadership in artificial intelligence as economically and militarily significant.

That changes the incentives.

If investment slows because capital becomes expensive, companies may not simply decide to wait. Governments may not want them to.

Which raises a question worth considering:

What happens when something becomes too important strategically to allow the normal discipline of capital markets to work?

We aren't there yet.

But the amount of capital being committed to artificial intelligence means investors should probably start paying attention to something considerably less exciting than AI itself.

Who is financing it?

Because before the future arrives, somebody has to write the check.

Pat Volk

Resolute Wealth Management