AI Electricity Usage, Mag Seven, Producer Prices, Credit Card Interest, Broker Returns, The Penny, High Schooler Endorsement Deals, Inflation Report, 401(k)s & Consumer Problems

How much electricity will AI need?

To train AI models companies use graphics processing units, also known as GPUs. They are now starting to build larger clusters of GPUs, which requires even more electricity. How much electricity you may ask? AI data centers use about 30 Megawatts of electricity at a time. If you don’t understand megawatts, let’s just say it’s a lot of power. Picture 30 Walmart stores and how much electricity they use at any given time, that is estimated at 30 megawatts. Fast forward five years into the future when there will be more data centers and larger AI models.

It is estimated they will require 5 gigawatts of electricity. 5 gigawatts is a huge amount of energy, it is about the same amount of energy needed to power a city like Manhattan in New York. Also, a big concern is within the next five years these massive data centers could consume up to 17% of US electricity. You may be thinking just build more power plants. The problem is data centers can be completed within 18 to 24 months, but to build a power plant can take over three years and that’s provided all permits and regulations are met on time.

There’s also the concern of how do you get that energy to the data centers, you’re going to need more transmission lines, but that can take 10 years or longer to get that task completed. Wind and solar are not the answer because data centers need power 24 hours seven days a week and when the sun goes down or the wind stops, there’s no power. I see some roadblocks ahead with fast moving AI, maybe we need to slow down a little bit?

Mag Seven capital expenditures could be a big problem!

The Mag Seven, which includes Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla has been a group that has dominated the stock market the last couple of years. Much of the excitement around the stocks have been tied to advancements in AI, but there has still been little evidence these companies (outside of Nvidia) have been able to profit from the trend. A major concern I have is these companies are investing tons of money and the big question is how profitable will these investments be? It is estimated Alphabet, Microsoft, and Meta will spend $200 billion on artificial intelligence this year alone and their budgets have continued to grow. If we look at total capital expenditures, also known as capex, the budgets have grown immensely for many of these companies.

Amazon is projected to spend around $105 billion on capital expenditures in 2025, up 27% from 2024, which came after a 57% increase over 2023. Microsoft has guided to $80 billion in capex for its fiscal 2025, up 80% from 2024, which was up 58% from the year before. Alphabet estimated capex of $75 billion in 2025, up 43% from 2023, which was up 63% from 2022. Meta has a forecast of $60 billion to $65 billion of capex in 2025, up 68% at the midpoint from 2024, which was up by 37% from the year before. The big problem with major capex is investors won’t see much of a difference in earnings, but there will be major hits to free cashflow. Capex is generally expensed or depreciated over time, which means it won’t hit earnings in a major way initially, but it could weigh on earnings growth over time as that expense remains for years to come and potentially grows if capex budgets continue to climb.

As an example, Meta is projected to see $68 billion of net income this year, but free cash flow could slide 25% to $40 billion. Investments of this magnitude need to pay off, especially considering the high valuations for these stocks. Time will tell if these investments work out for all these companies, but I must say I’m skeptical they will all be winners from this movement 5-10 years from now. Investors need to look at the full picture and understand all the moving parts, which includes how all the financial statements work together. At our firm we don’t just look at earnings, we also want to see good cash flow and a strong balance sheet.

Producer Prices come in hotter than expected 

The Producer Price Index, also known as the PPI, showed prices in January climbed 0.4% compared to last month. This topped the expectation of 0.3% and led to an annual increase of 3.5%. Core PPI, which excludes food and energy, produced an annual gain of 3.4%, which was lower than last month’s reading of 3.5%. While these data points were a little hotter than expected, economists now have inputs to estimate the closely followed PCE report.

It is interesting that after the release of the CPI and PPI, which were both higher than expected, estimates for core PCE actually look quite favorable. On a monthly basis core PCE is expected to show a 0.22% increase, which would be a nice deceleration from December’s reading of 0.45% and on annual basis estimates are looking for a reasonable 2.5% increase. We will have to see what the actual results look like for the PCE later this month, but with these reports now in hand I continue to believe that while inflation is not at the Fed target, I still don’t see it as a major problem. 

The True Cost of Credit Card Interest

Everyone knows that paying credit card interest is a bad thing, but it’s less well known how that interest is accrued. Interest is calculated using an average daily balance method, which means every single purchase begins accruing interest immediately. Purchases made on a credit card throughout a monthly statement period increase the outstanding balance. After a month of spending, if the full statement balance is paid by the due date, which is generally 20 to 25 days after the statement period ends, no interest will be due, even though it was accruing during that time. This is known as the grace period which is essentially an interest-free loan on those purchases.

For example, if you spend a total of $5,000 through a statement period during January, you will not need to make a $5,000 payment until the end of February to avoid any interest. However, if you do not make that full payment by the due date in February, your grace period is void and you will owe accrued interest from the date those purchases were made in January, not from the due date in February. Also, any additional purchases made in February and afterward begin accruing interest immediately without a grace period, even though those statement periods have not ended yet.

Since interest is calculated using the average daily balance method, the unpaid balance and interest compounds on itself making it more and more difficult to pay off. Credit cards have a monthly minimum payment, which is usually $25 to $50 dollars, which paying prevents a mark on your credit report, but it does not stop interest from accruing. Credit cards can be a great tool as they can give you points and fraud protection, but those benefits are greatly outweighed when a balance is being carried.

Is your broker giving you real returns?

I’ve been in the industry for 40 years an and I have seen many different things. I think overall the industry is pretty honest, but it does attract many sales people because of the potential for high income that one could earn. I have unfortunately seen over time that many brokers don’t give the real investment returns for their clients. They may not lie about them, but they will definitely leave out certain facts. It is important for the client to ask questions when hearing the investment returns to verify they’re getting the whole story.

Advisors who charge a management fee when quoting returns can simply state the gross return, not deducting the management fee. In other words, they say your return was 10% but they did not take out their 1.5% management fee, which would be a net return to you of 8.5%. Also many advisors use mutual funds and ETFs, which also charge a fee. The mutual fund or ETF return is generally net of this fee, but it is important to know that that could be costing you perhaps another .5% from your total return, now you’re net return has dropped down to 8% using the previous 10% gross return. Another trick that brokers use when quoting returns is to only quote returns on part of the portfolio.

As an example let’s say you have a $100,000 portfolio and $20,000 is in the money market, $20,000 is in bonds and $60,000 is invested in equities. In situations like this I have seen brokers only quote the return on the $60,000 that is invested in equities when things are going well for that portion of the portfolio. When I quote returns to my clients, I do it on the total amount they have invested with us and if we have a large amount in the money market, that was my decision and therefore I should quote the return on the total portfolio I’m being paid to manage, not just the equity portion. Brokers are also big on alternative investments like private equity and private loans. There is really no way to know exactly what that investment is worth because there is no active secondary market, but many times brokers will quote the investment value or an estimated market value when speaking with clients . That’s going to overstate returns because if they try to sell that alternative investment, the true market value could be 20 to 25% below what they were carrying the value at.

I remember my first job in the financial industry over 40 years ago and the manager said don’t give performance or returns, you can lose clients that way. He thought it was better to talk about other things but never talk about the portfolio returns. I believe that could be the norm in the industry, but I always quote returns for clients good or bad because that is the reality of investing and if you understand the reality of investing, you will do well long-term.

Should we get rid of the penny?

I was surprised to see in 2024, the U.S. Mint spent 3.69 cents to manufacture each penny, which means the cost of each penny has been above its face value for 19 straight fiscal years. It’s not just the penny that is more expensive to produce than its face value though. A nickel obviously is worth 5 cents, but it costs the Mint 13.78 cents to make. The current administration has pointed out penny production as wasteful spending and stated “Let’s rip the waste out of our great nations budget, even if it’s a penny at a time.”

With the advancement in technology and a shift towards more electronic payments it does seem silly to be spending money on manufacturing pennies when they don’t even cover their cost. Based on the initial information I have seen I would agree with ending penny production as a way for the U.S. to save money. 

High school athletes are now receiving endorsement deals

Back in 2021 endorsement deals were allowed for college athletes due to NIL which stands for name, image and likeness. NIL deals have roughly doubled from 2023 to 2024 to $338 million for these young athletes. There was concern that these younger athletes would have problems handling the fame and fortune. There have been some stories, but overall they seem to be going OK.

Beginning in 2024 big companies like Adidas, Nike and other smaller brands began to look at high school athletes with some as young as 15 to 16 years old for NIL brand marketing. Most of the payouts are small between $500 to $3000 per month depending on the endorsement deal, but also if the student athlete has the potential to become a pro athlete in 5 to 6 years down the road, there have been deals signed that are in the six figures.

My kids were student athletes and they did spend a lot of time practicing, going to school and doing homework, which left little time for a part-time job. I suppose there’s some benefit to young athletes benefiting from the world of social media and marketing. I am a little bit worried about some of these young athletes who have a lot of growing up to do that could have problems with too much fame and fortune too soon and not spending enough time on their education.

Inflation report looks problematic on the surface

The consumer price Index, also known as the CPI, showed an increase of 3% for the 12 months ended in January. This was higher than the estimate and December’s reading, which were both 2.9%. The headline annual rate has now climbed for 4 consecutive months after September’s 2.4% reading. This likely is due to less benefit from energy prices which climbed 1% over the last 12 months. At times in 2024 energy saw nice declines, which helped reduce the headline inflation number. Food costs were also a little hot at 2.5%, largely thanks to a year over year increase of 53% for the price of eggs.

The core CPI, which excludes food and energy was also hotter than expected. The annual increase was 3.3%, above the expectation of 3.1%. While this matches the December reading, this measure appears to be stuck. Since May 2024 the annual core CPI has been in a range of 3.2% to 3.4%. While shelter costs remain high and a large factor for the higher inflation, the annual rate of 4.4% was the smallest 12-month increase since January 2022.

While I wouldn’t say this report was a major positive, I don’t believe it provides any reason for the Fed to change course and look at increasing rates. This ultimately is just one data point that is subject to change in the coming months, but with this current data I would say this makes the case for the Fed to continue to hold rates steady. Tariffs will remain a question mark for inflation as well and it will be interesting to see how they impact the annual rates and the Fed’s forecasts in the coming months.

Over half of people are saving in 401(k)s

I was so excited to see the most recent news that over 50% of American workers in the private sector are now saving in their 401(k) retirement plans. I’ve been saying for years the 401(k) is the best investment that one can do bar none. The investor gets a tax deduction for that investment if they opt for a pre-tax deduction, they get to keep the investment and it grows tax deferred. If invested properly, I would argue that any other investment would not be as good.

At last count, there is now $8.9 trillion in 401(k)s with 70 million people invested in 715,000 different plans. It is spread pretty much across the broad spectrum with less than 10% of 401(k)s over $1 million. I would like to see that increase for people, but people need to understand how to invest longer-term in equities and stop thinking short term by putting all their money in money markets or short-term bond funds. One thing that has helped to get so many people into 401(k)s was recent federal requirements since the end of 2022 that automatically enrolled workers by depositing 3% to 10% of their pay and increasing that rate by one percentage point a year until reaching 10% to 15%. It is estimated that roughly 2/3 of people who get automatically enrolled stay with a program.

A new law for part-time workers who have worked at least 500 hours for two consecutive years must be allowed to contribute to the plan as well. This is all great news, now if we can educate people to stop taking loans or distributions from their 401(k)s before retirement, we would have less problems with people not having enough to retire during their golden years. 

Is the consumer having problems?

Based on watching CNBC after the January retail sales report was released, I thought the consumer was having some major problems. Much of the news fixated on the monthly decline of 0.9% versus the expectation for a 0.2% decline. The interesting thing I was reading later in the day after people had time to digest the report was January was a difficult month in terms of weather, not to mention the devastating LA fires definitely did not help sales. With all this I was disappointed there was not much discussion around the annual comparisons considering those show a consumer that remains healthy.

Compared to January 2024, headline retail sales were actually up 4.2%. Gains were quite widespread with essentially every category showing gains. There were only two categories that saw declines with sporting goods, hobby, musical instruments, & book stores falling 4.1% and department stores dipping 1.4% compared to last January. These two groups are quite small in the grand scheme of the economy though as they accounted for just around 2.6% of total retail sales in the month. After digging through the full details of the report, I would definitely saw the headlines were quite deceiving and I actually see this as a healthy report for the most part.