Newmoon Capital

New episode with John Hempton (@John_Hempton), legendary Australian hedge fund manager and short seller. I wanted to get John’s thoughts on the likelihood of an overbuild / bust in AI compute, and what implications that has for the Australian government’s data centre push. John talks me through why he thinks the global compute build-out is “fibre optics Mark II” - i.e. why AI is “the most amazing technology of your lifetime”, yet compute looks like “the worst business in the world”. John’s recipe for the worst business in the world is: “high capital cost, low marginal cost, competition, and technical improvement”. With these ingredients, new entrants push prices down to marginal cost, businesses can't recover their capital costs, and they go bust. To get an adequate return on the $7 trillion of capex expected to be poured into compute by 2030, John estimates you’d need $2 trillion per year in revenue. That would most likely have to come from businesses replacing workers (or not hiring new ones), as consumers won’t get you there. But companies typically don’t fire people for a 10% saving. So to pay $2 trillion a year, they’d need to save at least twice as much, or $4 trillion in wages. The OECD wage bill is about $40 trillion per year. So you’d need to save, for argument's sake, 10% of the wage bill across the entire OECD. But that kind of saving seems politically and practically implausible in such a short timeframe. So expect excess supply and bankruptcies. (Again, none of that is to say the underlying tech is useless - far from it.) John also shares the thing that shocked him most about Anthropic's S-1: namely, how compute-efficient it is. By his estimates, Anthropic has spent only about $12 billion on training compute over the lifetime of the firm. Which makes the $7 trillion build-out look even worse. There's so much more of interest in this conversation, but let me share one last thing. There's an interesting question as to exactly what the productive infrastructure left over from any overbuild will be. It might not be the GPUs, but the fabs and/or energy generation. John tells a great story about how old chip fabs he thought were worthless ended up finding an application making the tiny sensors in car air conditioners and Tesla batteries. After all this, the policy implication for Aus govt is to happily facilitate the compute build-out, but just don’t subsidise the world’s compute the way China subsidised the world’s solar panels (another example of a bad business). Watch below, or wherever you get your podcasts! 0:00:00 – The most amazing technology of your lifetime 00:03:10 – A short seller discovers jaggedness (from first principles) 00:19:40 – The Situational Awareness blow-up 00:24:46 – The worst business in the world 00:31:02 – Fibre optics, Mark II 00:42:41 – The best model was shockingly cheap to train 01:01:26 – Why the $7 trillion build-out can't earn its return 01:11:13 – What survives a compute bust? 01:22:59 – A data centre is a better neighbour than a prison 01:27:30 – A bad business is not a bubble