Nvidia’s Risky Business

On January 1, 1870, Jay Cooke, a celebrated figure for financing the Union during the Civil War, signed a contract that would ultimately contribute to a world conflict. In 1864, the Northern Pacific Railway Company was established with the objective of connecting the Great Lakes and Puget Sound through tracks stretching from Duluth to Tacoma.

They received 40 million acres of land in exchange for completing the construction. However, Northern Pacific struggled to secure financing for six years, despite the success of the Union Pacific and Central Pacific railroads. They approached Jay Cooke in 1866 but were unable to secure generous federal guarantees like their competitors.

Cooke, familiar with the influence of federal government finances, declined their offer. Eventually, Northern Pacific presented him with an irresistible deal: a 12 percent commission on every bond and $200 of Northern Pacific stock for each $1,000 in bonds sold. Cooke soon discovered that other institutional investors were hesitant to invest in his bonds, so he resorted to the same tactics he used to sell war bonds: appealing to patriotism, controlling the media, and promising substantial railroad fortunes, backed by industrial-scale distribution.

He personally managed a team of 1,500 salespeople and funded 1,300 newspapers through advertising and direct payments, a strategy fueled by his Civil War connections. While retail investors could already purchase railway bonds, Cooke made them his primary funding mechanism. This was undoubtedly an innovative approach, particularly given the lack of access to government or bank loans for those unable to secure financing.

However, Northern Pacific's capital demands were enormous, and by September 1873, credit had tightened globally following a crash on the Vienna stock exchange and the demonetization of silver. Cooke, who had been financing Northern Pacific between bond issuances, could find no more buyers. The subsequent bankruptcy of Jay Cooke & Company triggered the Panic of 1873, leading to widespread railroad bankruptcies across the country, a prolonged depression, and deflation that lasted for decades.

Some argue that these financial conditions set the stage for the tumultuous landscape in Europe four decades later. Northern Pacific eventually completed their rail line, albeit after multiple bankruptcies along the way; ultimately, they became one of four railroads merged to form the Burlington Northern Railroad. Burlington Northern would later merge with the Atchison, Topeka and Santa Fe Railway to create BNSF Railway, which Berkshire Hathaway acquired in 2009.

The parallels between this historical event and the current AI era are not lost on Liaquat Ahamed, who wrote the new book 1873. Ahamed even includes a chapter dedicated to translating monetary sums, concluding that the $500 million invested in U.S. railway bonds annually during the boom years would be equivalent to $600 billion today.

This historical context resonated with Microsoft CEO Satya Nadella, who cited 1873 as a "must-read" book during Microsoft's recent earnings call. With Microsoft being the only hyperscaler still maintaining substantial free cash flow, it raises questions about the financial strategies of other major tech companies. Notably, between September and November, Oracle, Meta, Alphabet, and Amazon collectively issued $80 billion in debt for infrastructure expansion.

By July 7, these four companies had already raised $194 billion in debt this year alone. As a result, spreads are rising, and 86% of the bonds issued this year are already trading at higher yields than at issuance. The recent announcement by Google of a $85 billion equity raise, including a $10 billion special issuance to Berkshire Hathaway, highlights the growing concern among investors.

This move serves as a sign of the significant demand for Google's services and a validation of Berkshire Hathaway's investment in the company.