AI's Worst Case A "National Economic Crisis"
"Like many things in finance, the outcome remains obvious, it’s the timing that is the hard part..."
I’ve long admired Harris Kupperman, the founder of Praetorian Capital, for his ability to cut through noise and spot big-picture themes before they become consensus.
He has a knack for finding opportunities where others aren’t looking, blending a sharp macro perspective with a pragmatic investor’s mindset.
Whenever I come across his work, I find myself challenged to think differently, and this latest piece is no exception.
In his latest, he updates his case for why the AI revolution may just be a rerun. I know my subscribers will benefit from his perspective and wanted to share it with you all this morning.
An AI Addendum
Last month, I chose to strip away all the hubris around AI and ask one simple question, one that oddly no one had really bothered to ask; how much revenue is needed to justify the current level of capex spend and give AI investors a return on their capital?
I clearly hit a nerve in the industry, when judging by the number of individuals who reached out to chat. Since then, I’ve spoken with people who own datacenters, lend to datacenters, and design datacenters. I’ve spoken with people who are working to improve the cooling technology, or the customer interface. I’ve spoken with hedge fund, PE and VC investors who are fixated on the future of AI, and I’ve spoken with employees who are desperate for a liquidity event before it all collapses. In total, I’ve spoken with over two-dozen rather senior people in the datacenter universe, and there was an interesting and overriding theme to our conversations; no one understands how the financial math is supposed to work. They are as baffled as I am, and they do this for a living.
This is one of those rather surreal situations where everyone senior in this ecosystem knows that the math doesn’t work, but they don’t know that everyone else also knows this. They thought that they were the foolish ones, who simply didn’t get it.
As a result, my blog post seems to have elicited a liberating realization that they weren’t alone in questioning the math—they’ve just been too shy to share their findings with their peers in the industry. I’ve elicited a gnosis, if you will. As this unveiling cascaded, and they forwarded my writings to their friends, an industry simultaneously nodded along. Personal self-doubts disappeared, and high-placed individuals reached out to share their epiphanies. “None of this makes sense!!” “We’ll never earn a return on capital!!” “We’ve been wondering the same thing as you!!”
Yet, no one outside of this insular industry seems to have had their own awakening. Investors in particular seem oddly asleep at the wheel; fixated on the rate of improvement for LLMs, and oblivious to how the economics of all this will work.