How Iran's $2 trillion threat puts your AI stocks at risk

By Charlie Garcia

The Fed admits it can't cool Big Tech's spending spree. Tehran says it can, and it just named the targets.

Middle East data centers sit on Tehran's target list, meaning the AI trade and the oil trade are now the same trade.

If you own shares in an S&P 500 index fund, you made a bet this month that nobody asked you to sign. You bet the Strait of Hormuz reopens. The artificial-intelligence giants that carry your fund now trade on the same headlines as a burning oil tanker off the coast of Oman.

Check your statement. The S&P 500 SPX sits just under a record high, while the median stock in it is down 16% from its high. The index is a handful of AI giants wearing a fake mustache and a name tag that says "Diversified."

Wall Street blamed the croupier. Tehran sent the invoice.

On the night of Oct. 11, Iran's security chief, Mohsen Rezaei, put a price on the AI boom. "If war breaks out, many cables, data centers and artificial intelligence facilities, valued at $2 trillion, will be within range," he said, according to Iranian state media.

On Oct. 13, South Korea's benchmark Kospi stock index KR:180721, which Bloomberg calls a key barometer of the AI trade, closed down 5.46% after sinking more than 7% during the session. SK Hynix (KR:000660) sank 10%. Samsung (KR:005930) lost about 8%.

Wall Street found two culprits. One was concerns over Chinese competition. The other was Broadcom CEO Hock Tan, who likened many AI investors to casino gamblers. Traders blamed the remark, made at a conference in Singapore, for two straight days of chip selling.

Both are stories about price. The stocks cost too much, or the buyers are drunk, or both. Wall Street has been having that argument for two years, mostly with itself.

Tehran just changed the subject.

Call it range risk: the discount you owe on any asset that sits within reach of a man who has publicly announced what it is worth. Range risk never shows up in a price-to-earnings ratio. To find it you need a map, and possibly a helmet.

The cloud turns out to have a street address

"The cloud" is a marketing term. In real life it is a warehouse of expensive computers, a power line, a cooling plant and a cable. Every one of those can be hit.

Some already have been. In March, Amazon Web Services, Amazon.com's (AMZN) cloud arm, said two of its facilities in the U.A.E. had been "directly struck" by drones. In September, AWS said it could not restore several sites in Bahrain and one in the U.A.E., and that it had "exhausted every option" to restore some data hosted in Bahrain.

The data was not in the cloud. It was in Bahrain.

Abu Dhabi is building Stargate U.A.E. - a 1-gigawatt compute cluster inside a planned 5-gigawatt campus - with OpenAI, Oracle (ORCL), Nvidia (NVDA), SoftBank (JP:9984) and Cisco Systems (CSCO). Reuters reported in September that the U.A.E. was quietly revising the 5-gigawatt plan after the Iranian attacks, with authorities considering air defenses and underground construction.

Nobody gets a quote on air defenses for a server farm unless the server farm has enemies.

Then there is the plumbing. More than 90% of data capacity between Europe and Asia runs through cables under the Red Sea, which enter through Bab al-Mandeb, a strait about 16 miles wide.

About a month ago, the Iran-backed Houthis reached Mayun Island, which splits that strait in two. Yemen's government says it has since retaken positions near the strait. The Houthis deny it. On Oct. 10 a Houthi attack on Riyadh's main airport killed 13 people.

Iran's chokepoint strategy used to be about barrels. Now it covers bandwidth. As Andreas Krieg of King's College London told Al Jazeera, Iran is threatening to do to the Gulf's emerging digital economy what it has already done to its maritime economy.

The Fed can't cool the AI boom. Iran's Revolutionary Guard volunteered.

Now follow the oil.

Before the war, roughly a fifth of global oil and gas flowed through the Strait of Hormuz. In the last week of September, 31 ships a day made the crossing, compared with 138 before the war. Brent crude (BRN00) traded at about $105.70 a barrel on Oct. 13.

That oil runs straight into your grocery bill, then into the inflation numbers. Consumer prices rose 3.7% from a year earlier in September, after the Federal Reserve raised interest rates in September, its first hike in three years.

Beth Hammack, president of the Cleveland Fed, told Reuters on Oct. 12 that bringing inflation down may mean cooling the blistering pace of corporate investment. She worries about an inflationary psychology in an economy where investment by AI hyperscalers has become relentless, making cost no object. She also said higher interest rates won't dissuade hyperscalers but might influence companies in other industries.

Translation: The Fed thinks AI spending is keeping inflation hot, admits its main tool cannot stop that spending, and plans to squeeze everyone else instead. Everyone else is your mortgage, your credit card and the guy who runs the hardware store, all priced off a 10-year Treasury yield BX:TMUBMUSD10Y of 5.20%.

The only institution on Earth now claiming it can stop the AI build-out is the Islamic Revolutionary Guard Corps.

Hormuz stays shut. Oil stays above $100 a barrel. Inflation stays sticky. The Fed stays tight. Every dollar of future AI profit gets discounted at a higher rate. And the Gulf data centers that were supposed to deliver those profits sit on Tehran's target list.

Oil competes with AI for space in your portfolio. That is the small part. Oil also sets the price of AI's money and threatens AI's buildings, both at once.

How to own the future without living next door to it

Nobody is asking you to dump your technology stocks. Just quit pretending they are a separate bet from oil, and ask your portfolio three questions.

How much of your gain is really AI? When the S&P 500 is near a record and the median stock is down 16%, your diversified fund is less diversified than its brochure. Check the top 10 holdings. Then check your emerging-markets fund, where South Korean memory makers like to hide.

What pays you if the strait stays shut? Energy producers make money in exactly the scenario that hurts AI. A modest position is not a bet on war. It is insurance against the war you already own.

Where are the computers? Range risk is not spread evenly. The cost of renting Nvidia's H100 chips on a one-year contract has jumped 60% in a year, according to SemiAnalysis. In a shortage, capacity that can't be reached by a drone gets more valuable, not less. A data center in Ohio did nothing on Oct. 11 and still became a better asset.

For the cautious, CNBC's Michael Santoli wrote on Oct. 13 that investors who shunned diversification face what may be the best buying opportunity for bonds in decades. That same day, as chip stocks fell, Treasuries rallied on haven demand.

Hock Tan blamed the gamblers. Nobody checked the parking lot.

For two years Wall Street has argued about whether AI is a bubble. Bubbles pop from the inside, when the last buyer runs out of money. Range risk arrives from the outside, on relatively cheap drones aimed at facilities holding billions of dollars of equipment.

Hock Tan says the buyers are gamblers. Maybe so. But a gambler only has to beat the dealer. Your index fund now has to beat a man in the parking lot who has already announced what the building is worth.

The house always wins. Unless the house is within range.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. His Capital Mischief Substack covers financial markets and geopolitics. Follow him on X here.

-Charlie Garcia

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