Silicon Valley and Washington Are Beggin’ the Same Lenders for Money

“When you take a modest loan from a bank, the bank owns you. If it is a massive loan, you own the bank.”

~ Jeffery Fry

The AI revolution isn’t cheap, and neither is running the federal government. Big Tech is hunting for financing to build out its data center empire just as the Treasury is looking for buyers to absorb its growing debt load. (Source: Shutterstock)

Note from Addison: Today we continue a series we’ve been calling “Financial Reckoning and the Trifecta Solution.” It’s perhaps entertaining enough to parse the debt crisis that’s been festering our entire adult lives. But we thought we’d venture a few solutions, too. Not that the political status quo is going to change on Capitol Hill any time soon.

Behind the tabloid drama unfolding at Nvidia is more than just a technology revolution. The demands of the AI buildout are inciting a monetary revolution, as well.

You have to admit the CEO of the world’s largest company, producing the most coveted product the world has ever imagined, getting honeypotted by a sovereign adversary spy makes for great James Bond-level, kitschy drama. Jensen Huang’s life was fascinating enough already without watching him melt down in a real-life Shakespearean tragedy.

The fate of Huang’s fortune, his wife’s gazillion-dollar foundation, and the investigation being cooked up by Congress are all details for another day. What concerns us today is its impact on the dominant investment theme for the better part of this decade.

To begin: the four biggest companies building AI infrastructure are spending approximately $725 billion this year, according to research in Final Reckoning.

Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT) and Meta Platforms (META) are buying processors, constructing data centers and securing electricity for facilities that require enormous amounts of power.

Their executives have approved expenditures on a scale few private businesses could have contemplated 20 years ago.

And some of those companies are borrowing substantial sums to finance their plans.

Billions are pouring into data centers, chips and power infrastructure, with the assumption that somebody will eventually figure out how to make all that spending pay off. (Source: Bloomberg)

That’s where the government’s borrowing predicament becomes rather more interesting.

The Corporate Bond Offering

Strategic Fortunes chief strategist Ian King has documented the financing behind the AI construction boom, including a major bond offering that, in our research, is attributed to Amazon.

When a corporation sells bonds, the offering specifies how much the company wants to borrow, what it will pay investors and when the principal comes due.

The company obtains cash. Its executives decide how to deploy it.

The investors receive contractual claims.

The Treasury sells securities to institutional investors under similar payment obligations, although government and corporate bonds carry different risks and protections.

A pension fund can purchase either type of security. The manager must decide what return is acceptable for the risks being assumed and the payments the fund expects to make to retirees.

Between Big Tech’s appetite for AI financing and the government’s seemingly endless need to borrow, investors are facing a growing parade of borrowers looking for capital. (Source: Global Market Insights)

Our original argument is that the AI borrowing boom could complicate Treasury financing when the federal government also needs enormous amounts of money.

That remains an investment thesis, not proof that corporate borrowing has already caused a particular increase in Treasury yields.

But the competing securities exist, and their buyers have decisions to make.

What the Executives Are Buying

The AI companies aren’t borrowing merely to accumulate bank deposits.

They are spending on buildings, chips, data storage and the infrastructure needed to operate the equipment.

And every new facility must obtain electricity.

The Trifecta Solution proposes placing some of that infrastructure on suitable public land, with state or federal authorities acting as commercial partners.

Its authors suggest leases, publicly owned energy facilities and a 15% Sovereign Compute Fee connected with AI infrastructure.

No completed commercial agreement in the supplied material establishes that fee.

A public authority would have to identify a site, establish what it could legally offer, negotiate terms with a developer and account for construction and operating costs.

The developer would have to decide whether the agreement was attractive enough to sign.

Only then could the authority determine what payment the public would receive.

The Shareholder and the Landowner

If you own Alphabet, Amazon, Microsoft or Meta through an index fund, you’re exposed to the executives’ decisions about capital expenditure and borrowing.

Those companies need the resulting investments to produce sufficient future earnings.

If they succeed, their shareholders may benefit. If the spending disappoints, investors may reconsider what they’re willing to pay for the shares.

Under a public-land arrangement of the kind proposed by the Trifecta, a government authority could occupy a different position.

It might own the site or infrastructure that the developer pays to use.

The public authority’s revenue would depend on the actual contract, and the taxpayers would still bear whatever costs and risks the authority had accepted.

The investor would then have two documents worth examining: the corporation’s financing terms and the public authority’s lease.

The executives borrowing money have already begun committing enormous sums.

The Trifecta’s public revenue will remain an idea until the political will in the country takes the national debt, the health care nightmare and sovereign abundance seriously.

~ Addison

P.S. Every generation gets its own “financial reckoning”…

The Great Depression. The inflationary 1970s. The dot-com bust. The financial crisis of 2008. We may be approaching another one. This time the catalysts are coming from Washington, Silicon Valley and Wall Street at once, and the first could hit as soon as November 16.

That’s a lot to keep an eye on. The good news is you don’t have to do it alone. Ian King, Money & Markets chief investment strategist Adam O’Dell and I have joined forces for the first time in The Alliance, a new service built around our combined expertise.

We’ve put together a 12-position Final Reckoning Portfolio to help investors prepare before November 16 and navigate what comes next. It also comes with weekly updates, alerts and fresh investment ideas. Click here to get the full details.