Friday, 5 April 2024

By Nick Hubble Editor, Strategic Intelligence Australia

[6 min read]

Dear Reader,

Things are getting awkward for the techno utopians.

Their Artificial Intelligence golden child is upending their precious Net Zero energy transition. They may be forced to choose between the two.

What’s the trade off about? Electricity.

According to one estimate, AI’s data centres in the US will need as much electricity as the county’s electrified car fleet! We’re talking about adding a small country’s worth of demand to the grid.

This new demand is blowing all energy transition estimates and plans out of the water.

Total energy demand in the US has been unchanged for decades.

Energy transition plans rest on this presumption holding for decades more.

Hello!

The parts of the county hosting AI data centres are proving them wrong. A JP Morgan Asset Management report highlighted one example:

‘The PJM (mid-Atlantic) region has made sharp increases to projections of future power demand for Dominion Resources, a utility serving 6 million customers in 15 states.  These increases are entirely due to an increase in data centers which serve advanced computing/AI needs.’

What about all those that lambasted the crypto brigade for their energy use? Now, AI promoters are discovering their own obsession is going to drain the grid dry for real.

How much more electricity will we need to produce to fuel AI? How much bigger will the electricity grid need to be to ensure reliable power supplies? How much more will it all cost?

Nobody wants to know…

The nuclear option

The good news is that there’s an obvious solution: build a lot of nuclear power plants. Indeed, leading AI innovators also share a suspicious interest in the nuclear space. This is no coincidence.   

I highlight this in an upcoming issue of Strategic Intelligence Australia.

A long list of billionaires and tech conglomerates are punting on a nuclear revival to try and power their AI services. Here’s the most obvious example I mentioned:

Talen Energy conveniently built a data centre and nuclear power plant next to each other. In March, Amazon’s Web Services division bought the data centre and secured rights to the power plant’s power at fixed prices in a long term contract. The data centre is expected to use about 40% of the power plant’s capacity once expanded.

Yes, a data centre that uses 40% of a nuclear power plant’s capacity!

That’s just one of many examples where nuclear power is being paired with AI data centre projects. But investors in these projects are making a terrible mistake.

There’s a rather big fly in the ointment of using nuclear power to secure enough electricity for AI. Actually, a pair of flies working together to sink the AI-nuclear hopes of billionaires, from Bill Gates to Sam Altman.

Electricity is fungible – a shortage is
everyone’s problem

Firstly, the energy ‘transition’ is failing so badly that there simply won’t be enough electricity to go around, let alone for AI.

We don’t have enough electricity generation coming online. We don’t have a good enough transmission network to move electricity far enough to overcome intermittency.

We don’t have an electricity distribution network which can handle the load of delivering electricity to users. We don’t have enough baseload power to overcome intermittency.

It takes decades to solve these problems. While fossil fuel power plants are being shut down in a matter of years.

Not that the problems are being solved to begin with. The rate of expansion of the US grid is falling, not rising rapidly as it needs to.

Solar and wind projects are getting abandoned. Wind and solar energy production in the first quarter of each year has been outright falling in Germany, for example.

The future lack of electricity is becoming so obvious that even politicians and their auditors are openly declaring it. When the German Court of Auditors warned the country’s electricity supply is not secure, the country’s economy minister didn’t disagree or deny it. He furiously declared this was already obvious and therefore unhelpful!

But surely nuclear power fixes this by providing a lot of baseload power?

Well, just how much nuclear it would take is an open question. And it takes a long time to build nuclear power. In Western countries, that is.

More importantly, I don’t know of many places planning on using nuclear power as a primary source of electricity, outside of France. Everyone is on the intermittent energy bandwagon.

And that creates a deeper problem which even building your data centre next to a nuclear power plant cannot overcome.

Tied at the hip

The second fly in the ointment is that nuclear power projects would be part of the failing grid. They don’t stand alone. And so you can’t just claim a share of their electricity.

Those hoping to secure nuclear power to secure their AI data centres are going to discover this the hard way. Do these billionaires really think people will endure electricity shortages while AI data centres keep their lights on?

Do you think politicians will let Amazon’s data centre use 40% of a nuclear plant’s power if the rest of the grid needs it? Imagine shutting down basic services during a cloudy windless week so that people can use AI image generators to entertain themselves.

I doubt it will fly.

As soon as the wider grid is failing due to too much intermittent energy, AI data centres will face the chop.

They’ll be the first source of energy demand to get cut by political decree. It won’t matter that they’re next to a nuclear power plant. It won’t matter what their contract with that power plant says.

But perhaps I’m being dramatic. It’s perfectly plausible that AI is merely priced out of the market. Energy shortages will spike prices. Unaffordable power prices hit major users first, as German industry has discovered. AI would be top of that list.

My real point is that nuclear power plants are simply too big for their own good. They function as a crucial part of a much larger network. In our energy scarce future, everyone will want a piece of their output. And AI will be far down the list of political priorities.

The billionaire’s plans to make their AI projects impervious to the failure of the electricity grid will fail.

Skynet will be defeated by Net Zero. No Hollywood script writer could’ve seen it coming…

There is only one ray of hope for the
techno utopians

They need a form of energy generation that is big enough to power AI data centres, but small enough for energy users like AI data centres to buy and build independently.

It has to be small enough to avoid becoming part of the wider grid, like the off-grid solar panel we see on homes. But also provide reliable and stable enough power to be a viable alternative to the failing grid.

What fits the bill? I’m keeping that for subscribers’ eyes only. Unlike my old friend Callum Newman, who is revealing his ideas to profit from AI here.

Until next time,

Nick Hubble,
Editor, Strategic Intelligence Australia

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

What a delight!

A presidential candidate — neither Democrat nor Republican — who has begun to address the important issues of our time. Moneywise: 

'The most pernicious and insidious regressive tax on the poor': RFK Jr. slams the Fed, calls inflation and rate hikes 'poisonous medicines.' But he says there's an even bigger problem. Inflation impacts everyone by eroding the purchasing power of money. However, independent presidential candidate Robert F. Kennedy Jr. asserts that it's low-income Americans who suffer the most from rising price levels.’ 

As you’ll recall from yesterday, debt growth is ‘unsustainable.’ It’s growing much faster than the economy that supports it. Somethins gotta give.  

Either the problem is solved intentionally... or unintentionally. RFK, Jr. is a graduate of the London School of Economics. He’s the only candidate to recognise that there is a debt problem. He’s proposing to tackle it. He’s also read at least a few of our Bonner Private Research posts. Whether they had any effect, we don’t know, but if he succeeds in solving America’s debt crisis, we intend to claim credit.  

In his interview at Fox News, Kennedy went on to target high interest rates as a source of woe: 

‘Our kids cannot get into a home because the interest rates have gone from 3% two years ago to — for them, the real cost — about seven-and-a-half or 8% to buy a home,” he said.’ 

Uh oh... was he suggesting that interest rates should be held down by the Fed? Didn’t he know that it was the Fed’s ultra-low interest rate policy that caused today’s huge debt overhang? 

Instead, Kennedy came up with a fairly original and interesting angle: 

‘Kennedy believes that both inflation and rate hikes are mere stopgaps for a more significant issue. 

‘“The long-term issue is spending, because inflation and high interest rates are just medicine and they both are poisonous medicines,” he argued. 

‘As a result, he suggests that “we need to get spending under control” and “dramatically reduce” military spending.’ 

Artificially low interest rates are a problem in themselves. They distort the real cost of capital, tempting people to borrow too much money. Debt increases... leading to a debt crisis of some sort. 

American Milei

But Kennedy is right. The feds spend too much. They borrow too much. They need lower interest rates to support the debt. And they ‘print’ money to help keep rates low. Low rates... high rates... inflation... inflation control – all are linked to excess spending. The dots connect. And if the problem is to be addressed, intentionally, spending is the place to begin. It has to be brought under control. 

It would be nice if a real reformer – maybe like Milei in Argentina or Kennedy in the US -- could solve the problem in an orderly... sensible... way. The wars could be stopped. The budget could be balanced. Peace and prosperity could be restored to the land.  

But it seems unlikely. Biden and Trump are the front runners. Neither has any interest in the problem – or even any awareness of it. And the whole Beltway, Wall Street, University, Media, Military Establishment benefits from the system as it is. Would this ‘Deep State’ permit a turnaround? Probably not.  

So, let’s look at how the debt crisis might play out — unintentionally. We got a hint of it on Tuesday. MarketWatch: 

‘After months of range bound trading, the benchmark 10-year Treasury yield appeared to be settling into a pattern similar to what was seen last October, when the rate soared to its highest level since 2007 and briefly burst through 5%. The 10-year rate — used as a benchmark for everything from student debt to auto loans and mortgages — rose 3.4 basis points to end at 4.363% or its highest level since Nov. 27. Yields as far away as Asia, Australia, New Zealand and Europe climbed in unison.’ 

In simple terms, as the US debt grows — we now see it easily going to $50 trillion by 2034 — so does the interest expense. It was $659 billion in 2023... and next year it will approach one trillion.

No one really cares how large the debt becomes. But the cost of servicing it must come out of current income. And every penny of earnings that we must devote to paying for yesterday’s bungles is a penny less we can enjoy today. At some point, we have few pennies left...  

RFK, Jr. is the only candidate taking the danger seriously. He says the interest will go to 50 cents of every tax dollar within five years. In ten years, it will take 100% of tax revenues. 

Somewhere along the way, the bond market will spook. Interest rates will soar. And the cost of carrying debt — or adding new debt — will be too much to bear. Then, the US will have no choice. Either it admits that it must cut back, drastically... or it panics, prints money and sends the whole world economy into a real inflationary catastrophe. 

More to come...  

Regards,

Bill Bonner,
For Fat Tail Daily