Smart Investing Newsletter

On Wednesday, September 16, at 2 p.m. Eastern, the Federal Reserve announced its decision to increase interest rates by 0.25% to the range of 3.75% to 4% from 3.5% to 3.75%. This was the first rate hike since July 2023.

You always hear about the obvious expenses involved in building data centers: incredibly expensive chips, massive energy requirements, cooling systems, and the cost of constructing the facility itself. But there’s another major expense that doesn’t get nearly as much attention: insurance.

I keep coming back to the same question when I look at the incredible amount of money being poured into artificial intelligence: Where is all of this capital ultimately going to earn a return? Since the beginning of 2024, roughly $500 billion has been spent on chips, $350 billion on power infrastructure, $200 billion on construction and $100 billion on networking.

If you’re unfamiliar with the term, the upper arm of the “K” represents higher-income Americans, who are spending more and generally doing better. The lower arm represents lower-income consumers who have been struggling with higher prices and tighter budgets.

There is a growing risk in the AI infrastructure buildout that isn’t getting nearly enough attention: how much of this spending is being financed, and how much of the risk is sitting off the balance sheet.