The market tied the selloff to the new Democratic Congress and what it might mean for AI infrastructure, but that focuses on the wrong level of government. What the AI trade needs is permits, power connections, water connections, and a few tax breaks. People think Washington controls these things. Most are controlled at the state level. When a data center gets built, the governor holds the pen that allows it or blocks it. Congress and the president cannot stop or encourage data centers or the AI buildout at the state and local level.
The midterms did not put a third of US capacity at risk in the states in question. The buildout matters a lot for jobs, the US economy, and the investment it pulls in, so these data centers are still likely to be built.
The selloff spread through the whole ecosystem
The selling hit more than the infrastructure builders like GE Vernova (GEV) and the chipmakers. It also hit the software firms that put AI to work. Palantir (PLTR) fell over 9%, against about 2.5% for software broadly. What is being missed is that putting AI to work threatens people's jobs and income. People worry about affordability now. They will worry more that they will not earn enough to live because not enough jobs are being created. The AI trade works at many levels, and the state level controls much of what drives or restrains growth.
Governors, electricity prices, and the affordability trade-off
Governors, including in Texas, say they want to ease the affordability problem by holding back electricity prices and not letting data centers bid those prices up. But electricity prices rose only about 4% over the last year, while CPI rose about 2.5% to 2.75% to 3%. The order of magnitude is small, and it is very localized. The governor's pen, or a power regulatory commission, can approve or reject a permit or a power connection.
Every governor also wants to claim they are bringing in jobs. If data centers bring high-paying payrolls, that is worth trading off against the cost of living. That is where the fight happens - a tough county-by-county, state-by-state process that is dull for national and financial news but is where the physical buildout and the profit margins get laid down.
The AI trade is a hostage to politics
The recent move in interest rates reminded everyone the AI trade is not safe from interest rates. The elections taught that it is not safe from politics - it is probably more of a hostage to politics than to interest rates. The lesson for investors: pick trades carefully, and watch the macro trends.
Today's productivity numbers point to one such trend. Labor's share of total output has dropped to about 53%, the lowest since data collection began in 1947. The affordability problem is less about high prices and more about people not earning enough to pay for what they need. Falling productivity will get blamed on AI, as people say AI is taking the high-paying jobs and handing them to machines. The pressure will fall on the companies that put AI in place to preserve jobs, lift people's productivity, raise incomes, and avoid replacing workers. That is the next wave of political battles, and the firms that manage it will be the most successful.
What the Fed will do
Many people ask whether the Fed will step in to calm the markets. The likely view from Washington: this is not systemic. It is a big selloff, but it is concentrated and is readjusting prices that had risen a lot in the past. In terms of immediate Fed action, forget it.
The Fed's concern is whether AI's disinflationary effect, coming from higher productivity, can hold down inflation. The question is how strong those forces are and whether they can offset the energy shock. The likely answer is no. So intermediate policy moves lean toward continuing to tighten rates to slow the economy. The problem is it slows the wrong parts - the interest-sensitive sectors like housing are already flat on their back. The current political scare is also damping enthusiasm for capex spending, which has driven GDP and output for the last year and a half, so that momentum is probably coming off. The Fed is likely to do nothing and let the economy's sectors rebalance.
Can people afford their normal cost of living? No - not for more than 50% of the population, who live paycheck to paycheck and do not own stocks. That, plus labor's share of output at its lowest since 1947, sets up the next political battle.
The PMIs and consumer sentiment surveys are not really showing up in the markets, but they clearly shaped the election, driving what people say about affordability. The market tells a very different story about how people are actually spending.
