James van Geelen on the Next Phase of the AI Buildout

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1:53Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe. Yes. Have you ever wanted to tour a data center? I'd love to. Part of me thinks it would be really boring, like if you actually went inside, because it would just be a bunch of the same cables like over and over and over again. But part of me thinks just seeing the scale of it would be amazing. You know what I would do if I toured a data center is I would look at those cables and every nut and bolt and heating thing and get every brand name I could on any little piece of equipment in the entire thing.

2:33And then see, are there any of these that are AI plays that the market doesn't really, you know, any random screwdriver that's being used in this operation? What is the name? Is it publicly traded? So literally picks and shovels. Yeah, just literally. Exactly. Oh, here is a company that makes the doorstop. Are they an AI play? Because they're going to need a lot of doorstops for all these doors. That's what I would do. Okay. So I guess the Joe Hyperscale data center ETF coming to a market near you eventually. That would be a good idea, actually. That's a great idea. Well, today we're going to talk about some of these data centers with someone who has actually gone on a field trip and looked at them.

3:14And then we're going to talk about broader AI because, of course, with markets still basically at records, there's a lot of concern that valuations are getting out of hand. We've had these financing deals, which just do my head in in terms of trying to track who's lending to who and who's buying from who and all of that. So we should talk about it. Totally. Because, I mean, two things, which is, one, we know how important AI is to the stock market. Two, there's all these sort of complicated financing deals. And the numbers change by the day. So just today, we got news that in the latest, OpenAI is allowing some of its employees to sell shares at a half a trillion dollar valuation.

3:52It just seems like it's constant fundraise, constant numbers that go higher and higher and higher every day. Various estimates for how much capital expenditure is going to happen in this cycle seem to go up. I feel like what we really need to do is have one of these conversations every month and just get for real. Like we need to keep like it changes so fast and the stakes seem so high. Yeah, you definitely need frequent updates. The other thing, of course, hovering in the background is the importance of the AI build out to the overall economy. Right. And this is the question like is the I think Deutsche Bank actually put out a note on this.

4:26Is the entire U.S. economy being propped up by AI right now? Maybe that's not a problem. If you know, if the AI stuff actually gets built and materializes into real money. But you can imagine if it is a bubble, then that would be bad. The way I see it is there's essentially two ways this is going to end up. One is, it turns out it was a bubble, we have a massive recession, and we all lose our jobs. And the other possibility is that AI is not a bubble, we have AGI, and we all lose our jobs. And so I'm curious which of the two paths is going to happen. Well, I got to say, there are some alternate possibilities.

5:00Did you see the Dallas Fed chart? I haven't seen that one. So it showed GDP per capita. And one line was like for AGI and it just goes straight up. It's just literally vertical. But then the other line is, what if the robots take over the world and kill everyone? And that line went straight down. So, yeah. OK, OK. Lots of good outcomes here. Yes. All right. So we have the perfect guest, someone we've spoken to before who writes absolutely phenomenal research about AI and actually digs into literally the nuts and bolts of everything. We're going to be speaking with James Van Geelen. He is the author of the Citrini newsletter.

5:40James, thanks for coming back on. Thanks for having me. I feel like the last time we were here, we were also discussing whether AI is a bubble or not. And now we get to do it again. One day it'll be right, right? Analysts going on field trips is one of my favorite genres of research. Explain to us how you managed to do this. So drones have become very commoditized. The likelihood of anything in the world being more than a 10-mile radius from someone with a drone is extremely low. And we kind of use that to our advantage because we've been sitting in front of a screen watching green numbers go up and up and up.

6:22And it's not my fault that they named it Stargate. It kind of lends itself to not taking it as serious as one otherwise might. And someone, I read a tweet that said, well, where's the proof? There probably should be proof, right? So we looked at some satellite images and we went, OK, a year ago, this was dirt. And now there's this thing and it's the size of lower Manhattan. Wow. It's in Texas, right? It's in Abilene, Texas. And I mean, this is actually one of the smaller ones. I mean, if you look at Louisiana Meta's Hyperion, the footprint would start at the top of Central Park and it would go down to Soho.

7:00Wow. That's why they call it hyperscale. So just to be clear with Stargate, this is like the thing that Trump and Oracle and probably SoftBank is in the middle. What is this complex? Who is behind it, this thing that you went and toured and got some drone footage of? So it's essentially a mix of Oracle, OpenAI. There's some involvement from NVIDIA. There's Saudi interest with MGX. There is some financing involved. And it is just one of currently five data centers that are planned with a half a trillion dollars of investment. That's why we went and looked at it. Because when you really think about it, this represents probably the largest infrastructure buildout and effort since World War II.

7:50where are they getting the energy from so that's the that's the best part that was the first thing we saw on the drone is you fly over it and they just built their own natural gas plant huh and going like joe great idea just going and looking at all the but you got to look at the big stuff too right and and without uh i mean without power these are just kind of you know hunks of metal. So you have outside of Stargate Abilene, 10 natural gas turbines. And the interesting thing is these aren't like the really good natural gas turbines, because if you wanted, so natural gas turbines follow along simple cycle, combined cycle.

8:33These are simple cycle. They're each 35 megawatts, which is very much on the lower end. Half of them are from GE Vranova. Half of them are from Caterpillar, a company that Caterpillar owns called Solar Turbines. And the reason why Whether or not you would think, oh, you're spending half a trillion dollars on these things. You could probably get the best thing ever, but that'll take you seven years. Oh, right. Because there's a natural gas turbine shortage. By the way, there's a headline. So there's a headline, an article on the Bloomberg Today by Matthew Griffin. The hunt for winners in the artificial intelligence gold rush has landed on an unlikely target.

9:07Old line industrial equipment maker Caterpillar Inc. So you got to look at every one of these brands that's supplying it. And Caterpillar is up a lot or it's up today. And the stock is done very well. So, OK, Caterpillar. Who else? What else do you see besides these big turbines when you go out and tour this facility? So this stock is a rocket. So that's a people like security. So many people. Huh. And I mean, it's there. I don't know. you've seen like silicon valley and there's that scene where there's like one guy in the data center and he's like yeah you know night and day don't really matter much down here and it's just one guy running but in the build out i mean there are every single hvac technician or guy that knows how to lay fiber or guy that knows electrical or plumbing uh within a hundred mile radius babeline those are they're all there right there's 7 000 people working on building this and this is just one site and uh yeah so people have been talking about the picks and shovels phase of ai investment for a while now but it seems like stuff is still getting built and it has further to run my kind of favorite we can you know and i'm sure we will discuss whether this is a bubble or not but at the end of the day the money is getting spent and my favorite kind of setup in the market is you have something that has a multiple that reflects kind of a wrong reality or doesn't really fully integrate a secular theme and then you have a cycle that's really bad so whether it's kind of the robotics supply chain goes throughout the automotive cycle and if you guys are aware that's been a nightmare.

10:56And then you have some of these, a lot of these companies took really significant drawdowns when Trump got elected because this isn't really tech CapEx. It's much more similar to like LNG terminal CapEx. That kind of entails the same companies that were benefiting from the IRA. So everyone sold them and now it turns out it's kind of like the horseshoe theory, right? You can. Yeah. No, that's super interesting. Like it's just these sort of like old line industrials and they did very well under the Obama administration because of all the factories and all that stuff that we talked about. And then it's like, okay, we're pulling the plug on this, but now there's just this tidal wave of money.

11:36By the way, Caterpillar was a$334 stock on April 2nd, right before Liberation Day, which is sort of where we should benchmark things. Now, 486 at an all time high. What are some of the other companies you see out there? Yeah, for real. Preferably the ones that haven't gone up yet, right? But seriously, like who else is who else is getting a piece of this action? So something that I want to make sure I mentioned just to frame this whole thing. If you look at the building site plans, they have the names of all the data halls and they are literally each called ludicrous building. So it's ludicrous building one, ludicrous building.

12:11Amazing. Wait, is it ludicrous with a K? No, that would be great. I mean, ludicrous spelled correctly is also fantastic. but uh the company i mean really i would encourage anyone to go and look at this video because the the it's it's just a there is such a disconnect between looking at green numbers going up like like caterpillar going okay cool yeah and then you see it and it is mind-blowing i mean they have rows of uh dry and antibiotic coolers that are you know hundreds and hundreds for the liquid cooling loops and then you have uh the kind of uh all the hvac the power generation the transmission we compiled a list of basically 200 companies 50 of which were high confidence in and kind of seeing as part of this build out and the interesting thing is you have these multinational oems the scale of this project is so large that you can call one of them and say okay we want to go with you know, Mitsubishi Heavy or we want to use Eaton for this thing.

13:23And they will say, yeah, OK, well, we can do 60 percent of it. I mean, the biggest companies in the world are. Yeah, they're just fighting. They don't have to fight with each other because the pie is so big. How scarce? You know, there's all this around the country. There's been all this tension. Like, is there going to be enough energy for data centers? What about the water? What about the politics, people. We see these town halls where the locals do on a data center. How scarce are locations like Abilene? I mean, there's a lot of empty space in Texas. Could you see, are there more Stargates or more Abilene's out there waiting where the companies can just say, you know what, we're just going to build our own infrastructure.

14:03We're going to build our own natural gas plant. And we're just going to do it in the desert in Texas where we don't have to worry about NIMBYs or local politics or anything. Is that the future for a lot of this stuff? Yeah, there's already another facility that's planned in Shackleford, Texas, which is not too far from Abilene. Abilene is already planning on expanding by another 600 megawatts. I mean, that's how we're measuring data centers now is just in megawatts and gigawatts. In Louisiana, that's where Meta's building Hyperion. You have some unidentified or unannounced Midwest facility that'll probably be in Ohio.

14:36So basically, yeah, anywhere that you can get the gas, anywhere you can get the power, anywhere that there's the land. There was one planned in Indianapolis. And it's interesting you bring up water because we wrote about water a little while ago as well. And we were basing our projections off of what the water consumption of like existing data centers were. The advancements in liquid cooling have changed that a lot. So there was a huge kind of uproar about, well, this data center is going to use so much water. And if you look at it, this was in Indianapolis. And if you look at it, it's about the same amount of water as a thousand households because it's all closed loop liquid cooling now.

15:15The water just gets recycled and filtered back. so it's really just something where the constraint is still power and getting these kind of turbines and it's and and it's going to increasingly become a thing where it's behind the meter power generation they're just going to build their own power plants they're not going to rely on the grid you guys remember what happened in texas in 21 with erica yeah they you cannot underwrite that as a data center. Like, you just can't be offline. So that's kind of where we're headed is this power and energy kind of bottleneck is the bottleneck. One of the more interesting things we ran across is you look at XAI's data center, and we went through a lot of the filings of all these different data centers.

16:01They're permitted for 15 35 megawatt turbines. And there's thermal imaging of the site that shows they're using 35. Hmm. GE Vernova, another one. That was a 330. You're just typing tickers now. Yeah, that was a$330 stock on April 2nd. That's a$609 stock. Okay. Check out Siemens Energy. Thank you, Joe. Oh, he's doing it. You can keep going. All right. I have kind of, this isn't an essential question. Okay, wait, I got it. I knew this was going to happen. Siemens Energy was a$56 stock on April 2nd. That's 108. Nate. That's a straight lineup. Okay. Okay. Clearly someone's making money.

16:57Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. For enterprise organizations, managing all your food needs is a tall order. But with Easy Cater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting.

17:53Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. you're thoughtful about where your money goes you've got your core holdings some recurring crypto buys maybe even a few strategic options plays on the side the point is you're engaged with your investments and public gets that that's why they built an investing platform for those who take it seriously on public you can put together a multi-asset portfolio for the long haul stocks bonds, options, crypto. It's all there. Plus an industry leading 3.8 % APY high yield cash account. Switch to the platform built for those who take investing seriously.

18:37Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principal. Brokerage services for US listed registered securities, options and bonds in a self-directed account are offered by Public Investing Inc. Member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. Like how big are the walls of these things and what does security actually look like? Because, you know, we talk about people being upset about higher energy prices.

19:09I understand that maybe some of them are building out their own energy capacity, but, you know, in a populist mindset, people might still be upset at AI, still upset that AI is going to take jobs and things like that. they could become targets, right? Yeah, absolutely. I mean, apparently security isn't tight enough to shoot down a drone yet. Oh, of course. Yeah. But when you talk about the walls, like the interesting thing is everything in this data center, you can't just build it like a house. Everything needs to have the right, you know, anti-corrosion, insulation. You can't just be losing heat.

19:43You're already spending so much money on cooling. So everything in the building envelope is also kind of the most expensive thing it could be. And I assume it's like a sealed envelope, I guess. Yeah, exactly. And the opportunity of just how big is this going to be? If you actually believe the people that are building this, and this is kind of an interesting dynamic of the hyperscalers are in somewhat of a prisoner's dilemma. We can't speak to whether they actually believe or not, but the party line is we're building machine god and if we're building machine god then that's kind of a religious zealotry so uh three years ago most of these hyperscalers were making net zero by 2030 uh that is not happening yeah there's no way that's happening uh maybe they buy carbon off it but that's not happening because if you need to do it now you're using natural gas and it then you say, well, once we create machine God, machine God will fix it.

20:45And you can justify a lot of stuff. Wait. Okay. So let's talk about is AI in a bubble? Because when we're conversing about buildings that are literally called ludicrous and we're talking about machine God will solve all our problems. Sounds a little bubbly. Yeah. That's the kind of stuff you look back on and say, oh yeah that was the top i know that we we have to talk about this and that requires some numbers so i have some notes but the interesting i mean you can make a case for either side and it kind of hinges on not so much what ai looks like in the future but more where we are in the cycle if the question is is ai bubble yeah probably it's a new technology it's exciting every single time we've the railroads the you know dot-com probably if it's not a bubble it will be and it probably is already but where are we in the bubble that's the interesting thing for investors so if you look at kind of where are we in the financing side when we had the dot-com bubble the big thing uh are you guys familiar with dark fiber no so essentially they were building out this kind of infrastructure for the internet.

21:59And the conviction of the day was the internet's going to be the biggest thing in the world. Correct. And 97 % of the fiber that was laid was called dark fiber because it wasn't lit up. It was just laying there because eventually we're going to need it. That's not the case right now. Every single time that one of these data centers comes online, you're at 100 % utilization. There's no dark fiber. And we're continuing to need more. I mean, I don't know if you guys saw Sora 2. More than 70 % of the content that we consume is video. So a video model makes a lot of sense. It's also way more compute intensive.

22:37And the final form of AI is not chatbots. It's going to be video. It's going to be robotics, which use video models. So that's kind of like the bullish side. But I totally see, I have some numbers here. So we've had some of these circular deals. And so far, I mean, there's hundreds of billions of dollars for this. Most of the financing is structured much more like toll roads or LNG terminals. The Meta-Syperion was$29 billion. $26 billion of that was PIMCO on debt and then Blue Owl with$3 billion of equity. An off-balance sheet arrangement, which also was pretty popular during the dot-com bubble.

23:21Then you have stuff like GPU collateralized SPVs. CoreWeave has a$7.5 billion Blackstone SPV. There's like an$11 billion GPU-backed loan market now, which compared to the infrastructure thing I can get, that it's like those GPUs are going to be worth, like they will depreciate. So yeah, that's ABS, right? That's like asset-backed securities. Okay. Yeah. But when you look at the where we just saying, where are we in the cycle? Well, there's been there's been a lot of these off balance sheet arrangements. But in terms of that prisoner's dilemma that we spoke about, where nobody's going to back off because then maybe they risk not creating machine God, the debt to equity ratio on most of the hyperscalers is not crazy.

24:09Sure. Oracle has the highest and but they still have a lot of room to lever up in pursuit of this goal. The interesting kind of dynamic of NVIDIA finances its customers and then its customers buy NVIDIA GPUs. And then, you know, that, yeah, that's a bubble dynamic. That's visible circular financing. But the demand is real. Well, this is, I guess, the question. If the demand is real, why are the NVIDIAs of the world financing their customers, right? Intuitively, you think, OK, NVIDIA's demand for chips is maxed out, right? then intuitively you think, well, then there's plenty of money elsewhere.

24:48So do you have a guess for why NVIDIA is impelled to invest in OpenAI, invest in CoreWeave? It's been a longtime investor in CoreWeave and so forth. Yeah, I could take the very skeptical view or the kind of not skeptical view. The not skeptical view is the best thing for NVIDIA is that we accomplish AGI. So anything that it can do to get us closer to that massive, massive infrastructure that's required for that is great for them. as quickly as possible as quickly as possible because uh every year that you don't achieve agi becomes less likely so uh that is maybe the core factor and then there's it's good for for them and uh the the and playing into that the because this this isn't necessarily like the dot-com bubble because the dot-com bubble had fiber and then it had you know pets.com and amazon and all that stuff, this is all pretty much CapEx, right?

25:43Tech is capital intensive again, which means that the bust won't necessarily be like the dot-com bubble where it gives the real players time to shine. If the CapEx spending grinds to a halt because the market goes down, that's the worst thing in the world. So in a way, it's also in their interest, obviously, to make sure that that doesn't happen.

26:18For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side.

27:01The point is, you're engaged with your investments, and public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously. Go to Public.com and earn an uncapped 1 % bonus when you transfer your portfolio.

28:02That's public.com. Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. Another question, actually, and I want to ask it now because I might forget. There was a headline, I think, earlier this week. Again, headlines almost every day. Can you explain why Meta, which is building out, which obviously Hyperscaler, they have tons of data center capacity. Why do they need to do a deal with CoreWeave?

28:41So I saw that Meta is going to pay$14 billion, some number, for capacity on CoreWeave. What do the NeoClouds bring to the table such that the legacy is like, you know what, we want some of your capacity? it's basically i would say anything you can do to shift that capex away from yourself is great right if you're if you're right now a lot of this stuff is funded from cash flow and yeah we're starting to see debt financing take its place but if you the the you're running a company that's existed for a while is one of the biggest companies in the world and yes you could justify taking inordinate amounts of risk to do this but just like anyone else if you have a goal and you can kind of shift away some of that risk to because if, you know, if CoreWeave goes bankrupt, Meta is not it's not it's not the worst thing in the world for Meta.