Team Favorite: Britain’s Debt Problem, AI’s Local Burden, Poland’s Economic Boom, The Aluminum Shock

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0:26So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. At Venture Global, we think about what can be done, not what's usually done. Through innovation, Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time.

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1:48This is Wall Street Week. I'm David Weston bringing you stories of capitalism. The data center frenzy is in full bloom, but the neighbors are restless. Is there a way for the rest of us to get the benefits from AI without compromising the interests of those who will be living next door? Plus, earlier we brought you the story of the brain drain from New Zealand. People and talent are flowing the other way for Poland. It's one of the fastest growing economies around, driven in part by the best and brightest returning home. And we use it for everything from military equipment to packaged goods. Aluminum is ubiquitous.

2:26And now it's caught in between Trump tariffs and a war in Iran. But we start with the drama that is politics in the United Kingdom, as the fifth prime minister in eight years is fighting to avoid yet another turnover at number 10. And the markets are keeping score. How much say does the guilt market have in who gets to run the country? John Authors is Bloomberg's senior editor for Markets. So, John, there's a lot of political upheaval drama playing out in the United Kingdom right now. At the same time, bonds are selling off, gilts. Yes. The yields have gone up. Is there a connection between the two, and if so, what?

3:05Yes, there's certainly a connection, which is that Britain has even more than where we are here in the U.S. The rest of the Western world, it has a fiscal problem. We don't have much headroom left to spend money in the UK. Any sign of concern about political instability will, in its own right, worry bond markets. And specifically at the moment, because Keir Starmer is in a lot of political trouble, any challenger, even those who you could argue are to his political right, will want to do something to show they've made a difference once they take over from him. And that's going to involve spending some more money on something that's going to involve being more lenient on fiscal policy than Labour has been so far.

3:51So plainly, the risks are towards more fiscal spending. That's plainly something the Giltz market dislikes. There's a long history of friction between a labor government that has its origins in socialism and the unions and bond markets, naturally. There is also a more recent history between the conservative government and the bond market. Yes. Read Liz Truss. We remember that. But one of the things you pointed out in one of your columns is actually the yields on gilts right now are above where they got to under Liz Truss. Exactly. I mean, there are, to be fair to the current Labour government, there are reasons for that in that interest rates have risen across the world since then.

4:36And what really can endanger a financial accident is when yields rise very fast, which is absolutely what happened under Liz Truss. She took the market by surprise and thereby slipped on a banana skin, whereas what we've got at the moment is more of a slow motion car wreck with Labour. But yes, the ultimate fact is true. The higher the yields go, and they are now even higher than when they toppled Liz Truss, the less room for manoeuvre any government has. and to some extent this is a systemic problem for the UK because as we've just said, Liz Truss was and is conservative. This is universal across the parties, a certain lack of trust and the British two-party system is breaking down at present and both Greens, who are basically a British woman to defeat the AOC, Bernie Sanders left and the Reform Party under Nigel Farage, who are obviously very similar to the Donald Trump margarite, both of those are, on the face of it, more inclined to splash money around and do things that the bond market really dislikes than the incumbents.

5:52There's a very worrying dynamic about the entire British political situation, or at least it's very worrying if you're a guilt investor. We know from your column that you are a student of popular music. And I don't know if you remember the Aretha Franklin song, Who's Zoom and Who? Yes, that's 1985. I remember that. That was actually my first time in America. But anyway, carry on. But if you take the bond market, the guilt market on the one hand, and the political system on the other, who's Zoom and Who? I mean, you've explained how the political turmoil can affect the guilt market. Is the guilt market affecting what's going on in politics as well?

6:29At the moment, I mean, certainly in the Liz Truss incident, yes. That was very much the case, that it was the bond market that basically said, no, you can't do this, and forced the expulsion of first the Chancellor and then the Prime Minister herself. This time around, that's less clear. You could certainly say that at this point, the bond market has become a kind of a sheet anchor or a straight jacket for whoever is in charge, but it will be more uncomfortable for a party of the left that actually has fewer hang-ups about spending taxpayers' money. But the overall position is difficult either way.

7:12The other thing that's quite interesting compared to history is that it used to be the currency market. So Harold Wilson being forced to devalue in the pound and then going on television to say that the pound in your pocket, of course, isn't worth any less, which absolutely wasn't true. and then Labour government of the 70s being forced by a run on the pound to go to borrow from the IMF. And John Major's government basically never recovered from the Black Wednesday attack on sterling by George Soros and others. So it used to be the currency market that really inflicted pain. And now that currencies do tend to float more gradually, more easily, and now that we've had many years of being used to extremely low bond yields, that cheap money is being treated as a fact of life or a birthright almost, it's the bond market that has now taken over as the anchor, the great limitation.

8:14The United Kingdom has a historically high ratio of debt to GDP, but they're not alone in that. They may be a little bit more than some of the rest of us, maybe a little less than some as well. Is what we're seeing in the UK simply what's going to happen in other parts of the world, including the United States, just sooner? Yes. There's a reason that the UK has more of a problem, or more of an instant problem, which you can explain easily enough from geography and history. The UK is an island which got rich by trading with other people. The US is basically a continent that got rich by trading with itself.

8:49So exports have always been a much more important part of the UK equation when you have pressure on the currency, when you have inflation elsewhere, it will affect the UK much more swiftly, much more dramatically. It is much more dependent on the generosity of others than the states. That said, America's share of GDP, public debtors' share of GDP was, In round numbers, 20 years ago before the global financial crisis, 60%, occasioning great alarm, the Simpson-Bowles, if you remember that, attempts to cut the deficit. It's now 120. And whatever you think of the relative merits of Joe Biden and Donald Trump, both of them spent money, whether through tax cuts or fiscal largesse or both, in a way that suggested that this just wasn't an issue.

9:54It will become an issue at a time. The US is a bigger, more closed economy than the UK and it has the exorbitant privilege of the dollar. It's not disciplined by potential runs on the currency like the UK is. But ultimately if you're borrowing more than you have and can't generate the money to repay it, you're either going to get very bad inflation or you're going to go bust. You're not going to go bust. You're going to get very bad inflation. And that is ultimately the risk that afflicts this country, too. You were a young lad, a young boy during the Wilson time and the crisis when there was really high inflation in the U.K.

10:44And as you say, the pound was devaluing. And I think some would say that was a predicate for what happened with Margaret Thatcher. and a fundamental revision of the economy. Is there any prospect that could happen again in the UK? Could we have a new Thatcher? We certainly can't see her yet, although that being said, if you think back to 75, 76, Margaret Thatcher wins the leadership of the Conservative Party in 75, doesn't actually get the general election where she becomes prime minister until 79. She certainly didn't seem to be quite the radical departure that she would turn out to be in 75.

11:24So maybe there is somebody out there who is hiding in plain sight already. I think the points I would make about the Thatcher regime, I was 12 when she got in, 24 when she left. My generation of Brits still basically think she's running the world. And you could also argue there's an analogue to that in the States, which didn't get into anything like as much trouble in the 70s as Britain did, but did get into a lot of trouble. Paul Volcker is the key figure who changes America around. He is appointed by Jimmy Carter. As was Alfred Kahn on deregulation. Yes, and would the American economy have boomed the way it did in the 80s if you hadn't then had Ronald Reagan, who really believed this stuff, who was a really enthusiastic advocate for it?

12:10Almost certainly not. But it was much easier for him to do what he did because he actually had the building blocks in place. Again, the ancien regime had accepted that the game was up and shifted before you then had the really exciting free market politician, Thatcher or Reagan, to take things forward. So I think the key moment is when is the game up? When does the market, does the economy force a change? change. It's conceivable it could happen here that Donald Trump grasps that you just need to actually start cutting entitlements and cutting back on defence budgets or whatever. But I think it's more likely that circumstances force a change from the Ancien regime, and that's the critical change, rather than that voters elect in the person who will make the change.

13:14Coming up, the money is pouring in. The construction is underway. Data centers are paving the way for our AI future. But some communities want to know why they have to be in their backyard.

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15:11This is a story about good fences making good neighbors. The promise of artificial intelligence has brought a wave of data center building across the country. And in success, we hope that AI will benefit the economy, investors, and the vast majority of Americans. A trillion dollars is an enormous amount of infrastructure. You have to have complete confidence that the trillion dollars you're putting down would be performant for as long as you could see. If you're building a multi-billion dollar data center in the US or around the world, and you have a 15 plus year contract with a company with a$3 trillion market cap, that feels pretty good.

15:51If we knew how to get a trillion dollars right now, which we don't, would we be able to deploy that profit within the next few years? And I'm not sure about that, but I feel confident we can make$500 billion of value back. But while we all wait for the full benefits of AI to be realized, what does construction of these massive AI data centers mean for the people living around them? And how much of a say do residents have in the type of fences keeping things in or out? Not now, not ever. Push back today to a proposed AI data center. Amazon comes to town, starts emailing our town manager, and wants to build an enormous data center.

16:33And the citizens did not know about this, even though it was going to be a$500 million investment. That sort of massive capital investment brings with it the prospect that the data centers being built today will be with us for a long time to come. Ultimately, to be paid for the risk that we're taking, We're looking to get a lease that's somewhere in the neighborhood, David, between 13 years and 17 years. Mark Gansey is the CEO of DigitalBridge, an alternative asset investment firm specializing in data infrastructure. He's among the major players making long-term bets for AI, massive bets that are being distributed across a wide array of investors.

17:14So on the equity side, you're seeing the traditional players, the big infrastructure players. And so what we're seeing today is we're seeing the large megafunds, these big, big infrastructure players, really lean into the AI thematic. And as a part of that thematic, when they think about infrastructure, they think about putting billions of dollars of equity to work behind these large data center platforms and projects. On the debt side, it's actually really interesting today. Of course, we see bank syndicates, we see construction financing, club deals on the bank side. And now, David, you're beginning to see the emergence of private debt capital.

17:48So private debt capital financing projects that are a little tougher, perhaps less investment-grade exposure, or perhaps even more risk on the power side. Projected investments in data centers have climbed past$3 trillion. That's a$3 trillion long-term bet on the future, which requires a business plan with some pretty attractive returns. That is the long-term nature of the cash flows. So when we go to build that facility, we're getting an imputed yield. And today, most data center yields are somewhere between, David, on a cash-on and cash-return basis, somewhere between 8 % and 12%. It just depends on who the credit is.

18:26So if you're dealing with an investment-grade tenant like Amazon, you're going to be at the low end of that guidance. If you're dealing with a brand-new startup, or perhaps you're dealing with a quantum compute player that's non-investment-grade, you're looking at something more like an 11-12 cap rate. But you do need to be paid for the risk that you're taking. And that risk is measured in long-durated cash flows with some form of an escalator. But while investors anticipate that future payout over 15 or 20 years, in the communities where data centers are going up right now, there are immediate potential effects on the people who live near them.

18:59To say that I have significant concerns is sort of an understatement. Dana Nessel is the Michigan Attorney General, whose job includes looking out for the interests of Michigan taxpayers, ratepayers, and citizens. She is appealing the state's expedited approval of a very large data center set to be built in Saline Township, just south of Ann Arbor. Well, it appears as though the project is underway. The first that I learned about it was really on Halloween of last year, that this was going to be an enormous project, a project bigger than any of its kind we've seen. It's not that Attorney General Nessel denies the potential upside of data centers in Michigan, but she wants to test the projections and promises, weighing both the benefits and the burdens of things like changing electricity rates, land values, and water needs that her citizens will face, the sorts of things that may require some pretty good fences.

19:57If you talk to Michigan residents, they don't want these in their backyard. Nobody knows yet what it's going to mean for that community. They don't know what it's going to mean for their water. They don't know what it's going to mean in regard to noise pollution or other types of pollutants. Until we have some of those questions that can be more fully answered and better policies put in place at the state level, most people don't want to see these massive data centers continue to be erected. Michigan residents aren't the only ones with concerns. Pew Research Center found that an overwhelming share of Americans think data centers are mostly bad for the environment, home energy costs, and their overall quality of life.

20:42But Gansey says he's seen a version of this play before, and that it can be handled in a way that satisfies the need for growth and the concerns of citizens. Do you need to take into account the reaction of the community? 100 % it's a factor. I've been doing this for 32 years, building digital infrastructure. And where I got my sort of humble start was building cell towers, David, in 1994. And at that point in time, nobody wanted a cell tower in their backyard. And that was the rise of nimbyism, not in my backyard. Well, the sector got organized. We navigated through it. We explained the benefits of mobile communications, emergency services, and ultimately the fact that most Americans wanted ubiquitous mobile coverage.

21:24And so that carried through the early 2000s into 2010, 2020. And today you don't hear a lot of skirmishes around cell towers because largely the industry has made peace with the local community. State leaders like Nestle don't deny that things might work out for all concerned. But for that to happen, she believes we all need to know in advance the scope of data center construction, the effects it's likely to have on the community, and what commitments the developers and owners are making to address the possible local downsides. The request was made before our utility regulator, the Michigan Public Service Commission, for this contract that was filed for an ex parte hearing, meaning a hearing that would take place behind closed doors that we wouldn't be allowed to be part of.

22:15So the contract that was posted publicly was heavily redacted, And that included redactions to some incredibly important information, you know, involving things like exit fees, what would happen upon the termination of the contract. Even, you know, basic terms and definitions had been redacted, customer credits. Even the signatories to the contract had been redacted so that we can't even know who signed this contract or what company they're affiliated with. which is pretty insane when you think about it. How are we supposed to know whether or not ratepayers are getting a fair deal if we're not even allowed to see the contract itself?

23:01All of this comes against the backdrop of a rapidly evolving technology that is growing at a rate we've never seen before, raising questions about what happens if things evolve in ways that fall short of the best case. As an infrastructure investor, Gansey says they're ready for that. How do you anticipate the further growth as well as the obsolescence of some of the technology you're putting in? Well, I think the great part about being the owner of the railroad is you don't own the actual cars that run on the tracks. We own the land. We build the power plant. Sometimes actually we're building power adjacent to the data center.

23:39We build the physical real estate structure inside the four walls. We bring the fiber connectivity. We bring the cooling. We bring the backup power. we create the data hall conditions where the UPC units are in and the cooling is in and the cable trays. But eventually, David, our customers put in the technology. So what makes our business great is we are candidly, we're GPU and TPU agnostic. And what I mean by that is we're not involved in the active compute. That is a bet that we don't make a digital bridge. What we are in the business of doing is providing that mission critical real estate and infrastructure to the top technology providers in the world, and we let them make the decision what kind of server they're going to buy.

24:18That may take care of the investor risk, but what about community risk? In Michigan, abandoned auto plants still dot the landscape, a constant reminder of an earlier era of technological promise and the costs that followed. Who will bear the cost this time remains uncertain. In the event that the bubble bursts and something happens and this hyperscale center in Saline Township is no longer needed, somebody is going to have to pay all of the extra costs of this new infrastructure. sure. And who's going to pay it? Well, it's either going to be borne by the rate payers in this state, and we already are subject to some of the highest rates and the worst reliability anywhere in the country, or it'll be the taxpayers.

25:08They'll have to bail out the utility companies who are making these, in some instances, terrible bets that AI is going to be around for a long If you look at these contracts, it's clear that the cost is supposed to be borne out not over the course of a few years, but over the course of really a few decades, you know, up to something like 18 years. But we can't even see the exit fees in the next few years. Those that have encouraged these data centers to come here without any sort of guardrails at all. I think they've set us up for a very difficult future here. Which brings us back to those fences neighbors need.

25:53Gansey sees a way to build what's needed in a way that accommodates everyone and doesn't stand in the way of progress. You're seeing red states and blue states both look at the data center opportunity and quandary in the same way, which is it can't hurt consumers. So the industry has to get organized. and has to explain ultimately the benefits of why these data centers exist. Why are they creating jobs, not losing jobs? Why is it going to be good for them long-term from a property value perspective? And why it ultimately isn't going to rise their utility bill and take away all their water? We got a pretty big uphill challenge.

26:29We need data centers to build the technology of tomorrow. The long-term promises are big, but so are short-term costs that may fall on the shoulders of local communities. That's why we need to construct some fences carefully to protect our neighbors. And to do that, we need to bring everyone to the table. Up next, Poland has gone from a laggard to a European economic leader, in large part by attracting back all those talented Poles working abroad.

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