Data Centers Get Political

Good morning and happy Friday.

Legal sports betting is in the air and everywhere.

Delta Air Lines and DraftKings announced a new partnership at the Consumer Electronics Show to bring DraftKings-powered gaming experiences to Delta's in-flight entertainment seatback screens. The details remain scarce, and it's a bit unclear what they're selling, because in-flight gambling is illegal in the US (though the law is murkier when flying internationally). You can just hear the flight crew preparing the cabin for takeoff, instructing passengers to keep their tray tables in the upright position, place electronic devices in airplane mode, and hammer that Packers +200 moneyline before the wheels go up.

Jolly Old England had a rude awakening this week, as the United Kingdom was transported back in time to one of the most tumultuous years in its fabled history.

Not 1208, when no one could get married, baptized or have a funeral during a feud between King John and Pope Innocent III. Not 1348, when the Black Death made landfall. No, this was a throwback to 2008, as Britain's borrowing costs hit a post-Great Recession peak. A different kind of pestilence. (Our lawyers are advising us to make clear that Liz Truss — who is threatening to sue Prime Minister Keir Starmer for defamation — is not responsible for any of the bad news we are about to report.)

Royal Pain

The borrowing cost on the UK's 10-year gilt this week officially touched the highest level in about 17 years, and the 30-year gilt yield rose to levels last seen in 1998. The yield for both has increased roughly 1 percent, or 100 basis points, in the past year. In the relatively sleepy world of bonds, that's a lot of movement — even more alarming considering they're both up by roughly 50 basis points in the past month.

So why the selloff? In October, the new Labour Party government, elected in July after 14 years of Conservative rule, said it would borrow £142 billion ($174.7 billion) more in the next half decade than previously planned. Britain also has £2.8 trillion ($3.5 trillion) of public debt, equal to almost 100% of GDP and up more than a third since the 2008 crisis. But markets already knew this stuff in October, so what gives now?

• Investors are responding now because UK inflation has been persistently worse than in other major economies — the 3.5% price increase in November was the highest in the G7, according to the OECD.
• Donald Trump. The US president-elect's combative proposed trade policies could stoke inflation even more. Current levels are already high enough to have made the Bank of England cautious about cutting interest rates, a move that could help revive the UK's growth. The country's economy actually shrank 0.1 percent in September and October.

Chancellor Rachel Reeves projected confidence, ignoring calls to cancel a trip to China and insisting she has "an iron grip on the public finances." She also reminded markets of plans for a spending review in June that has asked government departments to find 5% of their budgets to trim. But if borrowing costs remain high, that might require even greater cuts to offset the extra debt expenses. The pressure right now is already so strong that the pound, which is normally propped up by rising yields, fell to its lowest level in more than a year Thursday in a breakdown of that traditional correlation.

Take a Wage Hike: Some tax changes from the government's fall budget that could add even more pressure on inflation haven't kicked in yet. In April, employers will be hit with a hike in their National Insurance contributions for employees and a national living wage increase. Both could be passed on to consumers, throwing a wrench in prospects for interest-rate cuts. There, we got through a whole story about the UK with hardly a word about its new influencer-in-chief, Elon Musk.

Written by Sean Craig

The LA wildfires have led to evacuation orders covering 180,000 people and left at least ten dead, and they have burned down hundreds of buildings, among them some of the most high-value properties in the city.

California was already contending with a home insurance crisis due to unpredictable weather events, and according to data from the world's largest re-insurer, the issue of uninsurable locations is not limited to the Golden State.

Celebrity Blowback

One of the neighborhoods devastated by the LA wildfires is the Pacific Palisades area, where celebrities including Paris Hilton and Billy Crystal have had homes burn down and the average house costs $3.3 million, according to Redfin. It's not only wealthy homeowners whose properties are catching fire, but the loss of that real estate will have an outsized impact on the California home insurance industry. Analysts at JPMorgan believe the insurance losses from the LA wildfires could total as much as $20 billion, the Financial Times reported.

Pacific Palisades itself was well on its way to becoming uninsurable even before the wildfires started to rage. Per Business Insider, California's largest home insurer, State Farm, dropped 69% of policies in the upscale neighborhood last March. Now, like a wildfire, that uninsurability is likely to spread:

• Darren Nix, CEO of Steadily Insurance Company, told Business Insider that premiums on homes far, far away from wildfire risk zones are likely to experience 15% to 20% annual increases as insurers look to hedge against the losses they incur elsewhere in the state.
• Another knock-on effect for Californians is that mortgages will be harder to come by as affordable home insurance becomes more and more of a pipe dream.

Unisolated Incident: California isn't alone, with Florida also facing a particularly acute home insurance crisis due to increasingly frequent extreme weather events. Last year, US home insurers suffered the worst underwriting loss in a century, something that appears to be a global trend. The world's largest reinsurer, Munich Re, said in a report Thursday that natural disasters in 2024 cost $140 billion in insured losses, making it the third-most expensive year for the insurance industry since 1980.

Written by Isobel Asher Hamilton

Your data isn't here — it's in the cloud. Which is… a rack of servers in a data center. And where's that data center? Well, that's an increasingly fraught question.

On Thursday, The New York Times reported that the Biden administration is making a lame duck push for new regulations that could influence where data centers — particularly those powering artificial intelligence software — could be built.

Centering Yourself

The White House has focused heavily on placing export controls on AI chips and AI models (the latter of which experts say is largely performative). Now it may be finally looking to regulate the third leg in the stool of AI infrastructure: data centers, where the vast majority of AI computations are executed (though Nvidia promises to soon bring this technology to your home office, too).

Which makes Thursday's news not all that surprising. Even less surprising? Big Tech companies aren't exactly on board with the plan:

• The new rules, which could be announced as soon as Friday, would place further restrictions on where US-made AI-powering chips could be shipped, which would then sway where data centers would be built. Per the NYT's reporting, the export controls are designed to promote the building of data centers in the US and in allied nations, and away from adversary nations like China or Russia, as well as Middle East nations attempting to lure tech companies with massive incentives.
• Nvidia, Microsoft, and Oracle are among companies that lobbied hard against the new controls, arguing they could hurt international sales and push some potential clients into buying tech from Chinese firms.

Which way the Trump 2.0 administration will lean on the issue is difficult to say, though tech companies have worked hard to curry the incoming president's favor. On Thursday, Google and Microsoft gave $1 million each to Trump's inauguration fund — joining a list that includes just about every other major tech firm.

Pay Up: Across the globe, Malaysia has emerged as a data center hot spot for Big Tech, with just about every major US firm taking advantage of the nation's cheap land, labor, and proximity to major markets. But earlier this week, Malaysian government officials told the Financial Times that tech firms should soon expect to pay a premium on the vast amounts of energy and water required to power and cool the server farms. In other words: The party might soon be over.

Written by Brian Boyle