Back to School Time for AI
‘Humanity, created by God in all its grandeur, is today facing a pivotal choice: either to construct a new Tower of Babel or to build the city in which God and humanity dwell together. Each generation inherits the task of shaping its own era, of guiding history to become a place where the dignity of every person is safeguarded, justice is promoted, and fraternity is made possible. Yet every era also runs the risk of creating an inhumane and more unjust world…’
Magnifica Humanitas
OF HIS HOLINESS
POPE LEO XIV
ON SAFEGUARDING THE HUMAN PERSON
IN THE TIME OF ARTIFICIAL INTELLIGENCE
Talk about a big opener, it doesn’t get much bigger than that! Almost as big as, ‘And G__ said, Let There Be Light.’ Ok, maybe not that big. But at least as big as the biggest baseball opener of all time, April 8, 1993, when the New York Yankees faced the Boston Red Sox at Yankee Stadium, drawing a crowd of 56,000 fans.
A Big Deal
The big news here of course is that this Pope has something to say about AI. When the Pope writes, there are at least 1.42B Catholics on the distribution list. If you want to read the Encyclical Letter in its entirety, you will find it here – encyclicals. The message is timely, exceptional with uncommon insight into technology, human nature, and the key ingredients for rebuilding our crumbling cities. The good news is that we all get to decide what kind of world we want to live in. Decide now, or sooner than later you might not be able to.
And while you’re at it, it is ‘back to school season’ in the USA. Time to put down that Mojito and take this summer refresher course on what has happened on the Geopolitical front, what is happening now, and what is about to happen in the months ahead. Speaking of Mojitos, the US midterm election cycle is approximately three months away. It is an exciting time to assess the state of your union – your mileage may vary significantly.
At the Kitchen Table
Around these parts out west, in Seattle, many people are very unhappy about the price of fuel for their cars for example. July 1, 2026, bad optics raising the tax now from 55.4 cents to 56.5 cents per gallon due to an automatic 2% annual adjustment mandated by a 2025 law. In 35 years, the state government will have effectively increased the tax by 100%.
Feel like you are at death’s door? Tip: to pass away in comfort and dignity without immediately exhausting the inheritance set aside for your children and grandchildren either move away or better plan for the estate tax while you are still breathing. And of course, forget about the spirits in your Pina Colada. After you pay the new State Income Tax coming in 2028, your property tax, and sales tax, be aware that the new alcohol tax is in effect now to curtail your urge to overindulge and or raise additional funds for ‘public services.’
I’m not certain about what those services are but they are certainly not for my benefit, and they sure seem expensive. I am confident there will be a lot more people driving to Nevada or maybe even Canada (total tax Federal plus Provincial sits at 15%) and returning with cars full of booze in the months and weeks ahead.
Looking at the numbers, it seems at least plausible that someone in the Revenue (aka Tax) Department messed up the decimal point and either the electorate can’t calculate or was not given the full picture. Hmmm. Here it is in black and white for comparison’s sake with California:
- Spirits Tax in Washington — Washington has the highest spirits tax in the U.S. at $33.22 per gallon.
- Spirits Tax in California — California’s spirits tax is around $3.30 per gallon, significantly lower than Washington’s.
Expect some hard right turns politically both in the US and in Europe very soon but not that many because from a civilization standpoint we are as polarized as ever. People are fed up, not because our populace is illiberal but because they feel broke.
If you look at the situation from an economic standpoint, inflation is still raging due to supply chain realignment from Covid 19 events and war. If you take the inflation data and make the assumption that inflation is running at twice the government estimate, as some economists do, then it is fair to say that the US dollar has lost about 50% of its purchasing power since 2020. They don’t call it the ‘grim’ science for nothing.
Big Spending
The US deficit itself sits at approximately $40T dollars. Economists like to compare this figure to % of GDP which is about 120%. My view is you should really compare it to total market capitalization to all companies in the US Stock Market which is around $100T. In other words, about 40% of the value in our economy would need to be sold to pay the debt.
Of course, we would never want to do that but at some point, if we do not slow this spending down, we will be in a new world of trouble. Here is a house view of the net worth of people across the US.
Elon Musk is of course at the top when he briefly hit Trillionaire status, which makes nearly everyone else utterly insignificant except for the sub one percent also known as Ultra High Net Worth, i.e. the 200,000 people in this country with assets from 10M up to $250B. Normal people know what debt feels like, just ask 99% of the people you meet. Needless to say, the system is way out of equilibrium when most of the population does not command enough pixels to show up on the Net Worth scale.
The Perfect Pitch
The thesis is of course that the mechanism and foundations for hyper growth are already laid. The AI market has not tanked. Equities are holding at current levels but not going much higher even with blowout earnings. The debt market is telling another story, with corporate bond rates climbing substantially in the technology domain due to continued significant capital outlays for ‘AI’ and the market’s legitimate concern regarding risk. It is a question that every technology company is developing answers for: what do we say to the market that we are doing that requires this much investment? If Economics is the Grim science, what is Computer Science? Theoretical, Phantasmal, or plain Delusional – which is an 11-point word if you like Scrabble.
For big spenders, look no further than Anthropic and their stated 30T Potential Revenue addressable opportunity. Their CEO is somewhere between the Fox in the Henhouse and a Rock and Hard Place. With a premier AI opportunity on the table, of course, ‘Greed is Good,’ said Gordon Gecko in the film, Wall Street, 1987. Great movie night for Back-to-School season and a teaching moment for parents who want to instruct their young adults about one of the more pernicious ‘seven deadly sins.’ On the other hand, these numbers make no sense.
At a 30T market opportunity at 10x earnings, the company would be worth 300T. You can expect a much lower market cap scenario, more likely in 1.5 – 2T range. They want to IPO as soon as late September or October but as an insider I can tell you there are headwinds working against that too.
If you are not keen on Software that steals other people’s stuff by hacking into competitors’ systems like Anthropic and OpenAI Agent Goes Rogue, you might like Atomic Canyon. Atomic Canyon is a long way from IPO, but they have secured a significant grant from the U.S. Department of Energy (DOE) to advance its AI initiatives in support of coalescing the nuclear documentation horde scattered across various agencies, think tanks, and academia, to enhance safety and efficiency in current and future nuclear operations.
That is a wonderful use case for AI and illustrates what we should all be talking more about. Namely, we need new tools to be applied and solve important problems like the energy transition we are living through now. Nuclear power will be a much bigger part of the energy puzzle globally. We do not need to repeat past mistakes. We need to make Nuclear better and that includes operational safety and design excellence.
Missed a Beat
Never underestimate the paranoia of the Silicon Valley AI Supercenter Complex though – ‘there is a red under my bed, there is a little green man in my head…’ – Kinks, Destroyer, 1981. Of course, the red under the bed are the Chinese, who are going full court press on the US market, putting out Open Source (they like to say ‘Open Weight’, ask me later about Chinese humor which is very robust), buying up land for data centers across the US on the down low (yes, we know what you are up to because we compete for the same spaces) and driving into the memory and processor silicon markets at breakneck speed. If you think commercial warfare is a myth, think again.
A competitive market is what we want across this great land and rest assured the best products and approaches will win in the end provided we keep the playing field fair. In the US, enterprises are rushing to try out the new ‘open’ models, which in our view are rip-offs of already stale US models, which of course is unfair. This is being done at scale to reduce skyrocketing costs associated with wildly unpredictable token fees coming from the likes of OpenAI and Anthropic.
Prices are coming down, sure. But the value is unfortunately not increasing, so you get these gap moments to be exploited by competitors like the Chinese company Moonshot with a lot less to lose and everything to gain. Of course, once again the AI Supercenter – Amazon, Google, Microsoft – is ready and waiting to host your Kimi open-source software experiment with your (soon to be their) data in a fresh cloud infrastructure racking up new consumption, usage, and consulting fees all along the way. Yippy!
Anway, never miss an opportunity, the veteran xAI executive, Igor Babushkin, has put together a valley startup called River AI. With placement in the NY Times Business section, Cade Metz, August 12, 2026, these guys are very well funded at $1B and want everyone to know that they plan to create an open-source AI model to combat the centralized control of Large Language Models and associated technologies they see forming across the industry.
Right. Practically speaking that means putting a new kind of ‘computer’ aka NVidia chip in people’s homes so they can own and use AI without oversight…’ Where have we heard this before? You can count us OUT on that one: Alexa, no thank you!
We are all about putting the control of AI into the hands of the people that use it. That is one of our core values at Cloud9 and we were here way before Igor and the valley bros that back him showed up. It means you own the resources, the software, your data, and even the real estate if you so desire. Your business is not a video game: no tokens, no lease back gimmicks, and no ‘sharing’ the communal cloud open-source cool aid at least on the onerous terms offered by the Tech Bros.
Bill’s Latest Mea Culpa
Along the same lines Bill Gates released his latest ‘notes’ on the status of AI. We can say this, Bill reads, he does his homework. But truth cuts both ways. What Mr. Gates recommends for fixing AI is more of an indictment of the system that he helped create than a solution going forward. He kind of admits that he pays an unimaginable sum to massage and broadcast his image, write his content, and garner support for his global agenda. You should consider that when you read it.
To summarize, Bill makes some salient points but his approach to solving what ails AI is unworkable. Ultimately, he thinks it is all about control and it is to a degree. But the answer cannot be another round of centralized decision making and consolidated corporate power. This is not China.
He wants more taxes to encourage outcomes like wealth redistribution, more centralization, and protection from out of (his) control AI technologies and the tech companies driving them. He also believes that most everyone underestimates robotics and the speed at which it is improving -probably true. There is humanity there as well. My view is Bill has the utmost respect for his deceased parents and put together a fine perspective on jobs that ‘should never be turned over to AI.’ Also, opportunities to improve healthcare are virtually limitless at this point.
We agree that healthcare is a critical proving ground for AI – see my recent interview with Dr. Evert Imkamp for our perspective on AI and the need for a personalized, secure, and decentralized healthcare sector.
It Ain’t Over ‘til It’s Over
In summary, we hope that you have had a fabulous summer, full of joy, sunshine, and reflection. People often ask us about the economy and ‘where we are’ from a historical pattern perspective. There is legitimate worry out there in the boardroom and at the dinner table. ‘Is it 1929, is it 2008, is AI the next .com bubble?’ The answer is, no, of course, and YES. We are living through all these things, simultaneously.
In actual fact it is more like 1974 in our analysis: Inflation, Stagnating Economic Growth, and Energy market chaos, particularly related to crude oil and refined derivatives. It was also one of the most amazing periods of innovation and growth for a small New York company called IBM. The point: the future is going to happen whether you invest in it or not. This is not the end. You are living in one of the most powerful economic systems that has ever existed. We have borrowed a tremendous amount of money, true, perhaps too much. It is time to demand a more careful accounting of what we are spending it on and why. It is all about perspective and crucial information.
What should you buy then as an investor? First, invest in the youth of this country. Your time, talents, and energy can make an enormous difference in a young person’s life. And pick up SpaceX shares at a discount during this period of volatility for the sake of robotics and exploration, get in on Anthropic later in the cycle as opportunity presents. We issue the same caution here that we did about Space X. Do not even waste your time buying into the IPO hype around Anthropic, wait at least 60 – 90 days or more before diving in, and buy precious metals because inflation is not going away in the interim. Sell Big Oil and Big Tech.
And…good advice… ‘Keep your friends close, but your enemies closer.’
“The Godfather Part II”: 1974