The Underpants Gnomes' Step 2 (Updated)

Source

Barry Ritholtz posted this up-and-right chart, which is a classic of exponential extrapolation. Given the difficulty, delays, and cost of bringing the current generation of data center projects on-line, highlighted by Oracle's "force majeure" on a 2.5GW project which is clearly not going to be complete next year, the idea that 4-5GW projects will be up and running in 2029 seems optimistic.

Below the fold I apply some skepticism, because this is starting to look like the classic South Park episode Gnomes:

The episode is also known for the nonsensical business plan that the gnomes of the title devise, whose three steps consist of:

1. Collect underpants
2. ?
3. Profit

which later became a common meme used to mock poorly-thought-out business and political strategies.

Dark GPUs

Laying dark fiber
Stealth Communications CC-BY-SA

Wikipedia's Dark Fibre article starts:

Dark fibre originally referred to the potential network capacity of telecommunication infrastructure. Because the marginal cost of installing additional fibre optic cables is very low once a trench has been dug or conduit laid, a great excess of fibre was installed in the US during the telecom boom of the late 1990s and early 2000s. This excess capacity was later referred to as dark fibre following the dot-com crash of the early 2000s that briefly reduced demand for high-speed data transmission.

These unused fibre optic cables later created a new market for unique private services that could not be accommodated on lit fibre cables (i.e., cables used in traditional long-distance communication).

Many are analogizing the current AI bubble to the dot-com era, pointing out that although the dark fiber eventually became very valuable infrastructure, the companies that invested in laying it suffered. Wikipedia notes that the buildout:

was based on the assumption that telecoms traffic, particularly data traffic, would continue to grow exponentially for the foreseeable future. The advent of wavelength-division multiplexing reduced the demand for fibre by increasing the capacity of a single fibre by a factor of as much as 100.

According to Gerry Butters, the former head of Lucent Technologies's Optical Networking Group at Bell Labs, the amount of data that could be carried by an optical fibre was doubling every nine months at the time. This progress in the ability to carry data over fibre reduced the need for more fibres. As a result, the wholesale price for data communications collapsed and a number of these companies filed for bankruptcy protection. Global Crossing and Worldcom are two high-profile examples in the United States.

The analogy being suggested is that the AI data centers will eventually be valuable infrastructure even if delays in construction and lack of real demand mean that the companies building them will suffer.

Below the fold I investigate this analogy.

Crowding Out

In Downgrades and Competition For Capital I discussed how AI's insatiable appetite for funds was raising interest rates not just for AI-related debt, but also for everyone else. The impact of these rate increases will take time to become evident, as borrowers roll over existing debt or raise new debt.

Below the fold I look at impacts that we don't have to wait for, because they are already happening on a large scale.