AI Is NOT In A Bubble, It Just Needs MORE POWER

0:00Hello everyone. The Treasury Secretary was all over television this weekend. He was hyping up the US economy. We saw multiple mega deals in the AI industry this morning, and Jordi Visser explains why Bitcoin is having its IPO moment. We're live today from the desk of Anthony Pompliano.

0:25Before we get into today's show, I need your help. We currently have 36 ,021 subscribers on YouTube, but my goal is to get to 1 million. The people are saying it's not possible, but with your help, we're going to get there. Hit that subscribe button and let's get into today's show. All right, ladies and gentlemen, the Treasury Secretary Scott Besson, he did the media interview rounds this weekend and he wanted to explain where's the U.S. economy at? How's our relationship with China going to evolve over time? And whether certain parts of the economy, are we in a recession already or not? But before we get to all of the alpha that Besson dropped, we got to talk about it a second.

1:00Why is he the person who's going on TV? Why is Scott Bessett the chosen one from the administration to go do all these interviews? Well, here's Donald Trump, the president of the United States, explaining recently why Bessett is always on television. Take a listen. Well, Scott Bessett, you're doing a great job, Secretary of Treasury. Thank you, Scott. Thank you, Scott. Great. How good is he on television? You know, he soothes the markets. I don't soothe the market. I sometimes disturb the markets. He soothes the markets. I said, Scott, go in and clean it all up for me, Scott. And he goes in, bop, bop, bop, bop, bop.

1:37And he's really terrific. He's done a great job. And I'm thinking about him for the Fed. See, now the cameras are going, breaking news, but he won't take the job. He likes being Treasury. So we're not thinking about him really. Oh, yeah. All right. Well, there you have it. Mr. Soothing the Market went on TV this weekend, and he explained how the U.S. doesn't want to decouple from China. But he says that we definitely need to de-risk our dependence on the country. Take a listen to how he explained it. Well, I think it's naive for the Wall Street Journal editorial board, who I call a bunch of grumpy old men, to think that the Chinese weren't going to roll out these rare earth restrictions.

2:14They've been putting this plan together for 25, 30 years, and the U.S. has been asleep at the switch. And now this administration, we're going to go at warp speed over the next one, two years. and we're going to get out from under the sword that the Chinese have over us, and they have it over the whole world. And this time, we have rallied the allies, and so it is going to be all the Western democracies, the Asian democracies, and India are also going to join us in this in trying to form our own supply chains. We don't want to decouple from China, but we need to de-risk. They've shown themselves to be an unreliable partner in many areas.

3:00Makes sense to me. Besson's got a fairly rational take on China, in my opinion. But it was his perspective on the U.S. economy that really got people talking. Here's what he said about the possibility of the United States of America's economy being in a recession already. I believe that we are in a transition period here. As we are seeing, the Trump administration has cut back on government spending, Jake. What has gone unnoticed during the shutdown is for the fiscal year that in September 30th, the government spent less than it did the year before. And because the GDP grew, the GDP, which had been 6.4, the deficit to GDP, which had been 6.4, 6.5 percent deficit, the highest one we weren't at war, weren't in a recession ever, we were able to bring it down to 5.9 percent.

3:50So we are bringing down government spending. And I would think that the Fed would want to assist with that, because if we go back and look, MIT just published a study that said 42 percent of the great inflation of 2022 came from excess government spending. So if we are contracting spending, then I would think inflation would be dropping. If inflation is dropping, then the Fed should be cutting rates. But do you think that the U.S. is at risk of a recession if the Fed does not continue to drop rates? I think that we are in good shape, but I think that there are sectors of the economy that are in recession.

4:32And the Fed has caused a lot of distributional problems with their policies. I wrote a 7 ,000-word essay on that. You know, we've seen the biggest hindrance for housing here that are mortgage rates. So, you know, if the Fed brings down mortgage rates, then they can end this housing recession. Low end consumers who have gotten killed under President Biden, these high rates are hurting them because they have debt, not assets. So I think that there are sections of the economy that could go into recession. Now, those two minutes are very important for every investor to pay attention to. My big three takeaways were that we're in a transition period, the Fed should be cutting rates more, and certain sectors of the economy are already in a recession.

5:21Now, most people, you know, all the hysteria, the people who are being called the panikins, they're going to focus on the last point about the recession in certain sectors. But I actually think that Besson's argument for lower interest rates are much more important. The government's cutting spending as best it can, and they need the Fed's help to make a larger dent in the spending problem. You can't have the Federal Reserve and the Treasury working against each other. Now, Jerome Powell knows this. He's not a dummy, but he continues to inch interest rates lower and lower as if he's scared of something breaking.

5:48He's just a little timid. And here's the thing. That is better than not cutting rates, but it would be best if the Fed had us closer to 2.5 % or 3 % interest rates right now. The Treasury Secretary is on television, and he's telling you what to expect. Lower interest rates and more innovation. and that's all going to fuel an economic boom. Now you can fade them at your own risk. I'm not gonna do that. But I've learned over time to simply listen to what the treasury secretary is saying. And every investor is gonna be very happy if Besson's promises, if Besson's dreams actually become reality. The US stock market's been on an absolute tear this year.

6:24It's been awesome. The S &P 500 is up more than 16%. NASDAQ, that's up 23 % year to date. This outperformance is largely being attributed to the investment boom related to artificial intelligence. AI, AI, AI. That's all anyone can talk about. But one question lingers in the mind of every investor. Are we in an AI bubble? Should you be worried? The answer to that question is going to determine the portfolio returns of tens of millions of Americans. Before we discuss whether we're in a bubble or not, it's important to understand what is actually happening in the economy. Not promises, but actual reality.

6:57The best description that I've seen comes from Adam Kobisi. He recently wrote about the AI construction boom and it really underscores exactly what's occurring. The Dodge Momentum Index surged 60 % year over year in September. It's the highest on record. Now, this index serves as a leading indicator of non-residential construction, and it tracks projects that typically move from planning to groundbreaking within a year. So in other words, the surge in AI-driven data center projects, all of that construction that's happening, it's set to translate into a powerful construction boom across the US in 2026.

7:31AI's impact on the real economy is accelerating, according to Atom. Now, it's not just Atom, though. Goldman Sachs and Mike Ziccardi, they explain that a big reason for this explosion in construction is that mega-cap companies continue to exceed expectations on their AI capex spending. The expectations were already really big, but they continue to exceed them. So whether we're in a bubble or not, we know that companies are sinking insane amounts of money into building data centers and also hooking power up. In fact, the investment in power generation is very important to pay attention to because the market now, all of the stock investors, they are realizing that power, not chips, power is the limiting factor for hyperscalers.

8:11But don't take my word for it though. You may think I don't know what I'm talking about. You probably think Microsoft CEO Satya Nadella, he does know what he's talking about. And here is Microsoft CEO explaining the lack of power supply on a recent episode of the BG2 podcast. You know, I asked Jensen on this pod if there was any chance over the course of the next five years, we would have a compute glut. And he said it's virtually non-existent chance in the next two to three years. And I assume you guys would both agree with Jensen that while we can't see out five, six, seven years, certainly over the course of the next two to three years for the reasons we just discussed, that it's almost a non-existent chance that you have excess compute.

8:51Well, I mean, I think the cycles of demand and supply in this particular case, you can't really predict, right? I mean, even the point is, what's the secular trend? The secular trend is what Sam said, which is at the end of the day, because quite frankly, the biggest issue we are now having is not a compute glut, but it's a power. And it's sort of the ability to get the builds done fast enough close to power. So if you can't do that, you may actually have a bunch of chips sitting in inventory that I can't plug in. And in fact, that is my problem today, right? It's not a supply issue of chips. It's actually the fact that I don't have warm shells to plug into.

9:31And so how some supply chain constraints emerge, tough to predict, because the demand is just going, you know, is tough to predict, right? I mean, it's not like Sam and I would want to be sitting here saying, oh my God, we're less short on compute. It's because we just were not that good at being able to project out what the demand would really look like. Now, it's crazy to hear the CEO of a multi-trillion dollar company saying he has the compute capacity. He's got the chips sitting in racks, but didn't have the power or the data centers to plug them in. That completely changes the way that investors are going to view the AI market.

10:06You actually have the chips. You have the compute capacity. It's power and infrastructure. That's the problem. Strategist Shea Boulard explains the real constraint is not compute, but power and data center space. This is exactly why access to power data centers has become the new leverage point. If compute is easy to buy, but power is hard to get, the leverage moves to whoever controls energy and infrastructure. Every new data center that Microsoft, Google, Amazon, Meta, and Oracle are trying to build, those data centers need hundreds of megawatts of steady power. Duh, you gotta power the computers.

10:39Getting that energy online now takes years, which means the players who locked in power early and built vertically across the stack are the ones with the real control. Now, hyperscaler growth is no longer defined by how many GPUs they can buy. That's been the big race for the past few months or years. But now it's going to be defined by how quickly they can energize new capacity. So Shea wrote that analysis before this morning's mega announcements of energy deals with the hyperscalers. He looks pretty smart right now. VanEck's Matt Siegel points out that$15 billion in Bitcoin mining deals were announced this morning.

11:12The sector market cap is only$65 billion in total. Imagine if all the major oil companies announced deals worth 20 % of their market cap in one day. That is how fast artificial intelligence is rewiring the global energy stack. Now, the two deals this morning, what were they? Who's involved? IREN and Cipher. They are both Bitcoin mining businesses that are making the transition into AI data center providers. IREN announced a$9.7 billion AI cloud contract with Microsoft and Cipher announced a$5.5 billion deal with Amazon's AWS. These mega deals proved the point that Satya Nadella was making. There is significant supply-demand imbalance for data centers and energy production.

11:50You don't gotta be Albert Einstein to realize that the companies who solve this problem, the companies who can actually provide the data centers and the power, they're gonna create significant value for the shareholders. And it's hard to have a bubble in AI when every person you talk to in an industry is yelling from the rooftop, demand is drastically outpacing supply. Bubbles only pop when a market gets saturated with supply and there's no buyers left. And we are very, very far away from that moment. It doesn't mean that we're not going to get there at some point in the future. In fact, I think we will get there at some point.

12:20But it does mean that you can stop listening to all the market crash predictors right now, because we ain't there yet. Even the President of the United States believes in AI. Here's what he recently said about everyone wanting this new technology. Everybody wants AI because it's the new internet, it's the new everything. It's one of the biggest things anyone's ever seen. So everyone wants it. I mean, the only problem is if you don't get it. In order to get it, you have to be able to produce tremendous amounts of electricity. And we're allowing them to produce and make their own electricity this way.

12:55They don't have to rely on government. And by the way, they're making electric plants that are so sophisticated and so incredible, so much beyond that companies that make and service electricity, you know, Todd Edison and all the different companies that do that and do it well, but they've never seen anything like what's happening. It's almost a revolution in the making of electricity and the level of sophistication. Now, it's hard to be bearish on a sector when the most powerful man in the world is actively creating policies that act as a tailwind for the industry. But with that said, I want to make sure that I present a full picture.

13:32If I personally had to look at one aspect where risk could start to metastasize, it would be the use of leverage to fund CapEx investments. We know that companies are reaching the limit of how much cash flow that they can actually use for these CapEx investments. Mike Zaccardi shares a great chart to highlight where we are currently. And you can see we're starting to get towards that upper bound of how much cash flow can actually be used. Rohan Paul highlights that the recent Bank of America research shows borrowing to fund AI data center spending has accelerated at a dizzying pace in September and October.

14:01Makes sense. If you can't use your free cash flow, then you've got to start to borrow to be able to fund these investments. Regardless of whether you are a bull or a bear on the AI bubble debate, no one is going to solve it. Only the market can do that. The market is the referee. And right now, the market is telling us that AI companies are still undervalued compared to the value that they will likely create by solving one of society's hardest problems. I keep getting questions as to why Bitcoin's price is not going up. Every day, it seems like there's headlines of people getting into the industry, buying Bitcoin, new companies raising more money, but the price won't go up.

14:39Jordy Visser, who I sit down with every single weekend, he had a great point. He says that Bitcoin is having its IPO moment and we're seeing capital shift from the early investors to more mature investors. Take a listen to how Jordy explained this. Beginning in May and in early July, there were a lot of, I wanna say rumors flying around, but they weren't just rumors. And this is not speculation, anyone can go look this up, But there were stories about China cracking down again on Bitcoin miners and non crypto ownership and blah, blah, blah. And it got poo pooed and everything went on. Since those stories came out, there's been an overhead of supply that have gone through.

15:19And I just want to make sure people realize there's two themes as a traditional finance person that has spent a lot of time trying to take the lens that I learned everything through, which was as a trader, as a macro person. So I think the reason I shake my head at Bitcoin is because every possible thing to everyone listening that you would want for Bitcoin is happening right now, meaning the government is supporting things. The financial guardrails are shifting. We've got news after news every single day about the financial guardrails becoming more digital economy. It's things that are necessary for the network effects to kick in.

15:59All of that has happened. We still see inflows from retail. We still see the banks now opening it up for people to go through. But there's clearly a bunch of whatever it is, OGs, Bitcoin miners out of China, whoever it is, large amounts. Mike Novogratz publicly said it. If you go back to July, there have been billions and billions of dollars of, let's say, original investors supporting Bitcoin, regardless of how you want to term it. So I'm writing a substack. I think what people should think about is we don't have an IPO for Bitcoin. But this last four months to me feels like sourcing the pricing of the IPO where the original investors are getting out of large chunks.

16:41Now, why is there ever an IPO for monetization? If someone has nine billion in Bitcoin, I mean, I think they should diversify a little bit. If it was related to China, guess what China has now that they haven't had since 2014, 15? A bull market in stocks. Guess what else people have? Well, they have the chance to invest in AI. AI is a 10-bagger in many cases. You've been able to do it in the public markets. So I think at some point, Bitcoin becomes a boring asset to people who are looking for three-baggers, four-baggers, five-baggers. It becomes a diversification. So I think this is just a distribution of a few massive holders.

17:23and the weaknesses I have heard about Bitcoin as I've gotten into it from institutions, it's too volatile, not too volatile anymore. We've taken the implied volatility and the actual realized volatility down to 30 and below in some cases. So the vols come down. Okay, what's the next thing? Well, it's too concentrated in ownership. I mean, I've gone through the numbers. When you add Satoshi's wallet, you add the other whales, you're talking about about a third of it has been owned by not many people. I think like 10 ,000 is the number I heard, regardless of what the right answer is. Every month, the Bitcoin Ibit outstanding shares goes up.

17:58It's up again this month, even though the price is down. So I think everyone that's depressed has actually become entitled. I think they think it's a risk asset. Oh, there's another one. This is just a risk asset. Okay, well, it's not going up with the NASDAQ, so that's good. Lower correlation. Well, it's just digital gold. Well, it's not going up with gold. So guess what? In portfolio theory, for everyone who hasn't bought any yet, I think with your stocks, with your gold, with your bonds, Now there's every argument to make. It's lower volatility now, lower correlation with the other traditional asset class, diversification from gold.

18:29I think this thing is going to move higher. I was wrong about where I thought we'd be at this point. It's still up for the year. I think once this consolidation is done and we're through the IPO process and the fundamentals take over, next year, once we get through clarity and the beginning of tokenization and the stories of Zelle and everything along those lines, I think we're going to have an acceleration in this. Now I gotta say, I really enjoy talking to Jordy every single week. He's always got smart things to say, but this point, this one is pretty prescient. And I think that he's onto something here.

18:58If Bitcoin is having its IPO moment, then it just means that you're seeing capital transfer hands and ultimately Bitcoin's thesis is still relevant and it will do just fine moving forward. We just are gonna do it with new people holding the asset. That's it for today's show. Thank you guys so much for watching. I really appreciate it. Please remember on YouTube, we currently have just over 36 ,000 subscribers. My goal is to get to 1 million. Hit that subscribe button and I'll see you guys live tomorrow from the desk of Anthony Pompliano.