Tariffs, Free Trade, Export Controls, H20 & Rare Earth Ban

00:00:00.000 | almost everyone in the AI space that I see with a microphone in front of them says,

00:00:05.800 | the US has to win the AI war. I don't know what that means. And if I guess as to what it means,

00:00:12.800 | I don't think it's possible. Because it's an infinite game.

00:00:16.400 | It's an infinite game. And no one that I talked to would argue, we're going to somehow prohibit

00:00:23.120 | them from moving forward in AI. Let's not forget, it wasn't that long ago that OpenAI,

00:00:29.020 | they'll say borrowed or copied the innovation that happened at Google and DeepSeek. Like,

00:00:34.680 | this is how innovation works.

00:00:36.400 | Bill, great to be back in person. Good to see you, sir. That was fun last night. We have to give a

00:00:53.080 | little shout out to our friends Vinny and Bill Lee and some others who we got together with in Austin

00:00:58.040 | last night for some poker. I think you did all right last night. You had some winnings. And you

00:01:03.120 | had some more winnings. In fact, I brought you some flowers. This is for your Florida Gators.

00:01:06.660 | You bring you your flowers.

00:01:07.640 | Thank you. I'm sure the listeners are tired of hearing. I started the last two podcasts,

00:01:13.120 | one before the Sweet 16 and one before getting into the final four. And then,

00:01:17.180 | of course, everyone knows the Gators went all the way. I had a bunch of friends out. We spent the whole

00:01:23.360 | day month, the Monday of the game day on the river walk outside the team hotel, saw a bunch of old

00:01:27.980 | friends. I know fandom is a weird thing because you don't actually do anything. You just go along for

00:01:33.420 | the ride. But it creates a very special experience. And I'm super proud of what they did in that team

00:01:39.700 | and how they won. I had talked about it before. And it was dramatic, too. But it was a great time.

00:01:44.400 | Just a great time. What have you been up to?

00:01:45.980 | Speaking of games, that was an exciting upset by the Warriors in game one over Houston the other night.

00:01:52.180 | I hope our guys make a run at it this year. Certainly looks like they're a totally different

00:01:56.560 | team with Jimmy Butler on the team.

00:01:58.100 | No doubt.

00:01:58.860 | I think they're 25 and four or something like that since the Jimmy Butler trade.

00:02:02.700 | Completely.

00:02:03.240 | I'll tell you, man, I'm thinking a lot. In fact, this is something you really drilled into me

00:02:10.520 | ages ago about thinking about just complex systems. When I look at all the things this new administration

00:02:19.200 | is trying to change simultaneously, you and I talked three months ago. I said I was worried about the

00:02:24.940 | markets. Discount rates had to go up. There was more uncertainty in the world. But when I start

00:02:29.600 | thinking about what's going on, what this administration is trying to accomplish, all at very large scale.

00:02:34.860 | So think about this. Whatever you think about each one of these individual things, they're trying to

00:02:41.580 | totally transform global trade. So that's trade negotiations with 100 countries. We effectively

00:02:48.740 | have an embargo between us and China today. 140% tariff, export controls. And so we have to renegotiate

00:02:57.560 | that deal. Besant said today it really hasn't even started. That's going to be a slog. On top of that,

00:03:03.720 | we have taxes. If we don't lock in the tax bill, it doubles at the end of the year. We have this

00:03:09.540 | reconciliation package. We have doge and deficit reduction. We have questions around the 10-year

00:03:15.520 | and whether or not deficit is going to actually be larger this year. We have the war in Ukraine,

00:03:20.780 | right, and lots of back and forth there. We have dealing with the volatile situation in the Middle

00:03:26.720 | East. I mean, it sounds like we were on the verge maybe of seeing an Israeli attack on Iran. And all

00:03:34.640 | of these things are happening simultaneously. And so one of the things that's just on my mind,

00:03:41.600 | if you look at the discounted rate of dealing with any of them successfully, and then you multiply those

00:03:48.100 | discounted rates together, right, the probability that you're going to land this plane and just a really

00:03:53.700 | smooth landing, I think is challenging to see, right? We're going to have some wins. We're going

00:03:59.460 | to have some losses. And so today, I know we want to revisit some of these conversations around

00:04:05.420 | tariffs and free trade and these export controls and kind of where we are in the market. But I would

00:04:11.420 | just say, we're attempting something very high difficulty level. And if this administration is

00:04:17.840 | able to land the plane on all these, it will be quite an accomplishment.

00:04:21.120 | Yeah. And you bring up complex systems. This is the reason I spend so much time down at the Santa

00:04:25.580 | Fe Institute because that's all we talk about. But a couple of features of those things that relate to

00:04:30.720 | exactly what you said. First, it's very hard to know which variables are dependent in a complex

00:04:37.600 | multi-variable system. And there may be one you don't know about that it flips and the whole system

00:04:44.380 | takes on a different shape. And this makes these things very hard to predict, which is why I don't

00:04:49.820 | like talking about macro for that exact very reason, that there's so many variables, it's very hard to be

00:04:55.840 | accurate and correct. And even if you are, it might just be by happenstance because you might not know

00:05:00.380 | the exact variable that caused it. So it is, it's difficult. And unfortunately, and I'll state again,

00:05:07.120 | I don't like talking about macro, but we're kind of forced into it because the market and even the

00:05:12.540 | destiny of many of the high-tech companies that we would prefer to focus on seem to be caught up in

00:05:19.420 | this whole thing. For sure. For sure. I mean, I just saw a random tweet before we came in here,

00:05:23.880 | you know, somebody estimating that the revenue hit to Meta this year from reduced advertising by

00:05:31.460 | the merchants, Chinese merchants on Meta like Timu is like $7 billion. Wow. Now think about that.

00:05:38.040 | That's pure profit, right? There's no incremental variable costs against serving those advertisers.

00:05:44.360 | So if that just disappears, you know, it's very, very high margin business. And so again, just the

00:05:50.260 | downstream consequences of small changes. It's a little less because they'll backfill with something

00:05:53.540 | else that may not pay as much credit. Yeah. You know, perhaps, but, but I think,

00:05:57.440 | you know, what it reminds me is, you know, it feels like there's news every hour. It's pretty exhausting,

00:06:03.600 | but we got to lock in, you know, there's a super busy calendar ahead. So why don't we start with

00:06:08.800 | just maybe updating where we are on, on, on tariff negotiations and revisiting, I think some important

00:06:15.420 | arguments about free trade. So last time we were together, we really framed this by saying on the one,

00:06:22.320 | it seemed there were two different, you know, kind of sides in this administration. On the one side,

00:06:28.080 | we had kind of a more tactical, narrow view of tariffs, maybe the Besant consensus, I called it,

00:06:34.740 | which was a fully loaded gun, rarely discharged, you know, and have targeted tariffs to re-onshore

00:06:41.540 | critical national industries. And on the other side of this, we had what I described as more the nuclear

00:06:47.580 | Navarro approach. This is that we generate trillions in tariff revenue.

00:06:52.100 | That we tariff everybody, high structural tariffs, we replace the internal revenue service with the

00:06:57.720 | external revenue service. And this is much more structurally different, not, not, not tactical at

00:07:04.720 | all. Well, where are we now? Markets are now down 15% during this period since, quote unquote,

00:07:11.260 | liberation day on April 2nd. The markets are clearly worried about a global trade war.

00:07:16.780 | We now have export bans. So China implemented an export ban on rare earths on April 5th.

00:07:23.340 | We retaliated or at least implemented an export ban of our own last week on NVIDIA chips we'll get into.

00:07:30.000 | And all of these bans and tariffs are quite controversial, even among Republicans. Remember,

00:07:35.720 | the Republican Party on Capitol Hill has historically been against tariffs. And so I think there's an increasing

00:07:41.800 | concern on Capitol Hill about where all of this is headed and what it means for the economy.

00:07:48.740 | And so many people are saying this is feeling quite chaotic. They're nervous about the tenure. They're

00:07:54.520 | nervous about the impact on the dollar. Besant's saying it's going to be a slog and this is going to

00:07:58.960 | take a while. But the president says on Friday, he thinks it'll all, you know, we'll have it resolved in

00:08:03.740 | the next three to four weeks. So what is your reaction to all of this? What I want to do is

00:08:08.780 | take it up a level because I think there's an important conversation. Republicans have historically

00:08:14.020 | been a party of free trade and lower taxes, right? I think of Reagan or Milton Friedman. And yet today,

00:08:20.960 | there seems to be this growing consensus around tariffs. So let's just go back, make the case for

00:08:26.300 | steel man the case for why this may be a misadventure in the first place, Bill.

00:08:31.340 | When we were talking at the beginning of this podcast journey about skilled immigration, we played

00:08:37.300 | a short clip from Ronald Reagan, which was one of his last speeches that he gave in office. And this week,

00:08:44.220 | with all this tariff discussion, there was another Reagan clip floating around that I think does just

00:08:50.460 | this great a job of kind of summarizing something in a very efficient way. So if you don't mind,

00:08:56.620 | let's play that clip real quick. And today, many economic analysts and historians argue that high

00:09:03.260 | tariff legislation passed back in that period called the Smoot-Hawley tariff greatly deepened the depression

00:09:09.920 | and prevented economic recovery. You see, at first, when someone says, let's impose tariffs on foreign

00:09:16.340 | imports, it looks like they're doing the patriotic thing by protecting American products and jobs.

00:09:22.100 | And sometimes for a short while it works, but only for a short time. What eventually occurs is,

00:09:29.220 | first, homegrown industries start relying on government protection in the form of high tariffs.

00:09:34.420 | They stop competing and stop making the innovative management and technological changes they need

00:09:40.500 | to succeed in world markets. And then, while all this is going on, something even worse occurs.

00:09:46.340 | High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars.

00:09:53.060 | The result is more and more tariffs, higher and higher trade barriers, and less and less competition.

00:09:58.780 | So soon, because of the prices made artificially high by tariffs that subsidize inefficiency and poor

00:10:05.220 | government, people stop buying. Then the worst happens. Markets shrink and collapse, businesses

00:10:11.060 | and industries shut down, and millions of people lose their jobs. The memory of all this occurring back

00:10:17.220 | in the '30s made me determined when I came to Washington to spare the American people the protectionist

00:10:22.740 | legislation that destroys prosperity.

00:10:25.940 | So, I mean, for me, you know, everything I learned up until this point in time

00:10:32.340 | is congruent with what Reagan said. You know, tariffs lead to increased inflation. They lead to reduced

00:10:39.940 | innovation. Putting a protective blanket over our companies in our country lead to them being less

00:10:47.220 | globally competitive. And then fourth, which you mentioned, you know, it leads to retaliation.

00:10:52.660 | And, you know, I've just been kind of revisiting a lot of my priors. One of my favorite economists who

00:10:59.780 | spends time down at Santa Fe, Ricardo Hausman, put out a great piece who said, "We're not adding up

00:11:05.380 | everything the right way. We're only looking at physical goods, their services and intellectual

00:11:09.940 | property and net income that comes from companies like Metta operating around the globe." You know,

00:11:16.260 | Neil Ferguson did an incredible hour with Barry Weiss that I would just tell everyone to go listen

00:11:22.740 | to. And every one of these things takes me back to what I learned over 20 or 30 years,

00:11:28.980 | that these things aren't going to work out in the long run. And so, I'm skeptical. I mean,

00:11:35.700 | I'm always open-minded to revisiting my priors. And if someone wants to put out an argument why this is

00:11:41.060 | all going to work. And you and I were talking earlier, but I find there's a lot of conflation

00:11:47.060 | going on, you know, about different reasons arguing for why different actions are happening. You know,

00:11:54.820 | the tactical, you know, we need to have these specific technologies, you know, be resilient so

00:12:01.700 | we're not overly dependent on one country to this bigger thing where we're going to replace all of

00:12:06.820 | tax income. And I think you could do a little bit of the first. The latter is just violates all my

00:12:13.540 | priors. So I'd have to start fresh and I'd have to be convinced that all these great thinkers that came

00:12:20.900 | before us were wrong. Right. You know, so if our friend David Sachs were here, and I think he brought

00:12:26.660 | you up on the All In Pod last week, if he were here, he would say, okay, free trade is all well

00:12:32.820 | and good. Very Jeffrey Sachs. But he'd bring up John Mearsheimer. And he would say, you know,

00:12:38.900 | the reality is we're in a great power struggle. We have a peer rival in China, you know, today,

00:12:44.980 | and that national security must take priority over free trade and might make the argument,

00:12:51.780 | I think, that in particular, creating resilience in these industries, rare earths, you know, chip fabs

00:12:59.380 | in the United States, auto manufacturing, steel, aluminum, et cetera, are essential to our national

00:13:06.340 | security. And so therefore, it's not inconsistent with free trade. What would you say to that?

00:13:10.660 | Well, you know, we talked in the past, I think, to the extent you were doing something very tactical,

00:13:16.500 | it could be proposed as such. The tone and the bravado of the description of what we're doing

00:13:24.260 | isn't consistent with that. There's also, if you're using the word resilient, you know,

00:13:29.460 | that can include other countries that are allies. It doesn't have to be on the shores of the U.S.

00:13:35.220 | And I know people who, in the first Trump administration, were told to diversify away

00:13:40.500 | from China, and they built, you know, supply chains in Vietnam, and now they're, you know,

00:13:45.540 | worried about tariffs there. And so there's, there needs, we talked about this, but there needs to be

00:13:50.740 | a consistency in order for people to adjust to those things. Right.

00:13:54.500 | One more piece I would mention, and we'll put links to all these things, is Thomas Friedman has

00:13:59.060 | an op-ed in the New York Times that says, "I just saw the future and it was not in America." You know,

00:14:05.380 | he takes it further. He believes that in advanced manufacturing, we're not just not doing it here,

00:14:12.660 | but we're not on the cutting edge of what it would take to do here. If you recall back in a day and age,

00:14:20.020 | when Japanese manufacturing and just in time was this huge thing where all of America was convinced

00:14:27.700 | Japan was ahead of us in auto manufacturing. And he says, "We need to adopt that philosophy about

00:14:34.020 | manufacturing in China." And he goes to the point of saying, "Look, we need to force them to do JVs here,

00:14:42.980 | so we can learn from them." Yes. Now, no one's talking that way in the administration because

00:14:49.540 | there's so much vilification, there's no recognition of where they might be better than us. But, but

00:14:55.460 | those problems, I guess, the point I'm making is those problems are worth solving. But I, I'm still not

00:15:01.540 | convinced that we have a, I think we have a huge labor problem trying to be competitive in manufacturing.

00:15:07.300 | Right. Neil makes a great point about the argument that, "Oh, we shouldn't have done this. We,

00:15:12.740 | we regret global trade." That argument takes, you're allowing yourself to imagine, you're taking

00:15:20.900 | where we are today and competing with an imaginary version of how things evolved if we didn't embrace

00:15:27.780 | global trade. Right.

00:15:28.900 | And assuming that we would have manufacturing and be in a better place. And I think that's,

00:15:34.420 | he used the word fanciful, which I would agree with.

00:15:38.020 | I mean, I might also argue, you know, in response to Mearshamer, it was an incredible debate last

00:15:42.500 | year at the All In Summit between Mearsheimer and Jeffrey Sachs, you know, that, and he comes

00:15:47.940 | out of the realist school of political international relations. And I think there's a lot of truth to

00:15:54.420 | it, right? I mean, you can't stick your head in the sand and pretend that we don't operate in an

00:15:58.740 | international system. In the middle of the Cold War in the 1970s, right, we had all sorts of embargoes

00:16:03.860 | on, on Soviet Russia that were probably smart embargoes. A lot of people think that what, you know,

00:16:10.660 | the historical telling is that what brought the wall down ultimately against Soviet Russia was

00:16:17.140 | that our economy was triumphant. And so I look at the situation today and I think what part of the

00:16:23.620 | problem is that it's not clear out of the White House what the goal and objective is, right? If the

00:16:29.540 | goal and objective is Navarro, then I think there's broad opposition within not only, you know, the

00:16:36.740 | Democratic Party, but also the Republican Party to the scale of tariffs and disruption that that's

00:16:42.260 | going to have on the economy. But I think it's fairly non-controversial that we should have tactic,

00:16:48.020 | narrowly tailored tariffs and tax subsidies and incentives in order to re-anshore some critical

00:16:54.340 | capabilities. You know, I mentioned a few, chip fabs, some pharma, critical rare earths in production.

00:16:59.940 | I mean, we don't want to be dependent on the Chinese for whether or not we can produce an automobile or

00:17:05.300 | whether or not we can produce a phone, you know, etc. And so I think that, I think that some of that makes a

00:17:11.300 | lot of sense to me. What doesn't make a lot of sense to me is that we launched what was kind of

00:17:19.140 | this nuclear-style tariff war against every country on the planet, right? And so just the sequencing of

00:17:26.820 | events here, I think is a bit confusing. It should not be this McKinley-style multi-trillion dollar

00:17:34.500 | tariffs if what your objective is, principally where the agreement is, is to re-anshore some of these

00:17:40.100 | critical industries. And what I think is missing from this, all we're talking about is tariffs,

00:17:44.660 | right? We need to be talking about what is the accelerationist agenda that we're going to put

00:17:49.700 | together in order to get these chip fabs. There's a lot of things we can, we can put together AI funds,

00:17:54.740 | we can put together tax incentives and other packages to get people to build, you know, to build here.

00:18:00.500 | I think that gets lost in the conversation. If we think that this alternative path is all about this,

00:18:06.980 | this re-anshoring bill, is that consistent, do you think, with the Reagan and Milton Friedman view

00:18:13.380 | of free trade? Like if it was, if it was more tactical like that?

00:18:17.220 | I think if it were more tactical, I'm, I'm, I'll probably push back on you and disagree. I don't think

00:18:22.420 | our current, um, democracy is set up in a way that's really good for, um, the country to deploy dollars to

00:18:29.620 | help industry. And I gave this speech at the original all in summit about regulatory capture.

00:18:36.020 | Right.

00:18:36.180 | And I just, I can't imagine that if our, well, first of all, the, the AI boom in the US has attracted more

00:18:43.540 | capital dollars than I've ever seen accumulated in the history of mankind. So why sprinkling a little

00:18:49.780 | more on would be helpful, but also you get into this game of picking winners and losers. Now,

00:18:54.580 | Friedman highlights, and I, and I think this is true, you know, the, the Chinese government

00:19:00.020 | is just much more successful at, at state involvement in innovation. And if you maybe

00:19:08.580 | go back to the space race or the Manhattan project, um, we were capable of kind of mustering forces in

00:19:15.620 | that way, but I haven't seen it done recently, like the past 40 or 50 years.

00:19:20.980 | In many ways, in many ways, the private sector has done a more efficient job of, uh, you know,

00:19:25.540 | of taking on the Manhattan, uh, project, you know, style projects. I mean, you look at what's going

00:19:31.140 | on in Abilene, Texas and Denton, Texas, you know, around, uh, building out incredible

00:19:36.820 | supercomputer clusters all done really without government involvement. And I think that's,

00:19:42.500 | you know, an efficient and preferred mechanism, uh, you know, where a lot of,

00:19:46.020 | to your point, there's a lot of capital available.

00:19:47.940 | But there are areas where I don't think we will move forward much without government involvement.

00:19:53.220 | A great example would be in energy. So, so, you know, as we talked about many episodes ago,

00:20:00.020 | you know, Korea and China are delivering fission nuclear at one fourth, the price we are.

00:20:06.740 | And I think that Korea example, South Korea is very important because that is a democracy.

00:20:12.260 | So here's one country that's, that's authoritarian, one that's a democracy, and they're both achieving

00:20:17.860 | it. Uh, and we are 4X over that. That's gonna require some type of government involvement to figure

00:20:26.100 | out why we can't build that better and faster. And to be fair, there's a lot of movement around

00:20:32.100 | the country, mostly at the state level about removing red tape as a, uh, as something in

00:20:38.340 | governor celebrate, which, which is helpful and, and may move us in this direction. So those,

00:20:44.020 | I tend to, if we're going to help something along, I think, I think figuring out why our

00:20:50.100 | government's become friction and mud and changing that is probably going to be more impactful than

00:20:57.380 | the government doing the work themselves or picking winners with capital.

00:21:00.820 | We're, we're, we're quick to blame others around the world for our challenges, right? But I, I think

00:21:07.700 | we need to spend at least as much time accelerating ourselves. And part of that acceleration is getting

00:21:13.220 | rid of needless regulation. It's looking at our own systems and asking that question. Why does it cost

00:21:18.740 | 4X more to build a fission reactor today in the United States than it does in South Korea?

00:21:23.220 | Hey, yeah, totally. And, and by the way, I, one thing you just spurred in my brain,

00:21:28.020 | I was listening. Friedman also did a podcast with, with Ezra Klein and yeah, I'm just going to steal

00:21:34.580 | his story. I don't know that it's true, but he says that when China attacks a new industry these days,

00:21:42.260 | that they encourage a ton of startups. I didn't know this. He said, so when they went after solar powers,

00:21:48.420 | they encourage like a hundred startups. So rather than pick a winner, they give money to

00:21:53.220 | everybody. So in a, in a thousand flower bloom kind of way, and that those hundred compete their

00:21:59.780 | way down to five. And he said, there's a lot of fraud and grift and waste for the ones in the losers.

00:22:07.540 | But what you get out of the five are, is something that's actually honed by a market force. And I

00:22:14.260 | don't think anyone that thinks about authoritarian China thinks about the state using market forces

00:22:20.900 | to get to a higher level of, of efficiency and production. But if, if what Thomas said is correct,

00:22:28.500 | they're actually using this kind of competitive market force to hone the better players in these

00:22:35.140 | industries. Let's talk a little bit about, you know, I think a lot of things get conflated when

00:22:39.780 | we talk about tariffs. And one of the most important is export controls. You know, so an export control

00:22:44.740 | is effectively a license requirement that acts almost as an embargo on all trade in a particular good.

00:22:51.060 | So on April 5th, China implemented this rare earth ban. And then we reciprocated last week with

00:22:57.700 | the ban on all Nvidia H20 chips, uh, going to China. So when you, when you look at the rare earth ban,

00:23:04.660 | and I have a list here of the materials that were banned on April 5th, and you have things,

00:23:09.860 | you know, that go in critical elements into magnets, samarium, terbium. And so these are

00:23:17.620 | about 60% of these materials are mined in China. Okay. So you do have other places on the planet that

00:23:25.140 | are, that are, uh, mining these rare earths. The problem is 90% of them are refined in China. When

00:23:33.220 | they banned those rare earths, um, these are the magnets that go into EVs, phones, computers, machines,

00:23:40.820 | of all sorts. This was called by some in and around the white house as a kill shot, a kill shot against

00:23:48.180 | the U S economy, um, that causes massive problems in industrial production. You know, when I think

00:23:54.580 | about, um, again, the destabilization that comes from over dependency on something like if every magnet

00:24:03.300 | that goes into every machine in the United States is coming from, from China, and now we've effectively

00:24:08.580 | banned it, even though the ban was in response to the tariffs by the United States, right?

00:24:14.020 | What is the off ramp to this? You know, I now see just this afternoon while we started recording the

00:24:19.860 | pod, Trump has said that, you know, he doesn't expect, uh, the, the tariffs to stay anywhere close

00:24:25.780 | to where they are in China. He doesn't think they're going to be zero, but they won't be anywhere close

00:24:29.540 | to where they are. You know, he's, and we see kind of a unilateral walking down of these tariffs,

00:24:36.260 | but these export bans are really dangerous, Bill. So what are your thoughts about an export ban,

00:24:41.940 | perhaps just compared to, uh, the tariff itself? Well, I mean, I go back to the Reagan video,

00:24:46.580 | right? He says this will eventually lead to retaliation and escalation. And, and

00:24:52.020 | the fact that this video was recorded, whatever eighties, what is that? Uh, 45 years ago, like,

00:25:00.500 | like, like this isn't a new perspective. So you could argue, oh my God, I can't believe this

00:25:06.020 | happened. Or you could say, well, if you studied history, you should have expected this to happen.

00:25:10.580 | Right. In fact, there's this Milton Friedman video going around and he talks about retaliatory tariffs.

00:25:15.460 | And he says, okay, let's say that somebody shoots a hole in the bottom of your boat.

00:25:19.620 | Right. And so, you know, it's taking on water. A retaliatory tariff would be like you shooting

00:25:26.020 | another hole in the bottom of the boat. And then they shoot a hole in the bottom boat just sinks faster.

00:25:30.260 | Yeah. Right. And he's saying, uh, you know, but in fact, what we did last week is the U.S. did ban

00:25:37.140 | H20s going to China. And this was a pretty controversial move. And in fact, I was, you know,

00:25:43.380 | looking at some of the analysis that was done this week and the newly launched Huawei cluster matrix

00:25:49.460 | 384 is China's competitor to the GB 200. So semi-analysis is out with, you know, an assessment of this and

00:25:57.860 | many others. And basically what they concluded is that Huawei is already on the frontier or near the

00:26:05.140 | frontier with respect to chips. In fact, one of the analysts on CNBC this week said, to be honest,

00:26:10.820 | we basically just handed the China AR market to Huawei anyway. Right. And as Bernstein analysts,

00:26:18.020 | because they said what it effectively does is clears the decks for Huawei to have monopoly profits in

00:26:24.660 | China. They no longer have to compete with CUDA and NVIDIA in China, even though we were sending

00:26:30.340 | them the H20 was a nerfed chip, right? It was a chip that was two or three generations behind what we

00:26:36.900 | have in this country. But it was, you know, some people think of retaliation to the rare earths.

00:26:42.420 | Other people think it's just part of, you know, the AI strategy to try to win the AI war against China.

00:26:49.620 | Well, and let's just take the argument that it was a retaliatory move. How good must it feel to be

00:26:56.500 | NVIDIA and Jensen and the executive team there that you become a pawn in these games that you had

00:27:02.260 | nothing to do with creating, you know? And in fact, you designed this product specifically to meet

00:27:09.380 | the expert control rule that was in place before this one, which is very similar to this Vietnam thing

00:27:16.020 | that we were just talking about. So you can't be happy with that. I reposted when this all happened,

00:27:21.940 | a great video that Deirdre did over at CNBC, um, about how this will be good for Huawei. And I think if you

00:27:29.860 | asked Jensen, he would say, yeah, this is great for Huawei. And it's not just that you get an isolated

00:27:36.020 | market where everyone, but, but every participant in the AI market in China may have been working with

00:27:42.740 | NVIDIA. Now they start working with this and they all collectively help improve it over time. And,

00:27:49.300 | you know, there, I read one article that said that China's, you know, getting some of their very first

00:27:56.180 | commercial planes off the ground. One of the reasons is they became reliant on Boeing and Airbus.

00:28:01.460 | And so by, by denying your exports to a market, you increase the incentive they have to develop

00:28:09.220 | their own technology. Well, particularly when they have the capability of China. I mean,

00:28:12.340 | the fact of the matter is if they had no capability to develop it, it would be one thing, right? I think

00:28:17.140 | more like the, the, the race around nuclear arsenals, if you will. There's some countries that will never

00:28:22.900 | have the capacity to build said nuclear arsenal. But the fact of the matter is China is so close

00:28:28.900 | in this regard with respect to the H20s. From my perspective, it's a very close call. I don't

00:28:34.100 | think we should be sending GB 200s or cutting edge chips to China. I think that there's a legitimate

00:28:39.140 | national interest in, you know, quote unquote, staying out in front on AI. I think there's a debate

00:28:45.460 | to be had about that. That's where I come down on that side of the issue. But the H20s, it seemed to me,

00:28:51.540 | was a very self-defeating way. I think that the competition with CUDA in China distracted the

00:28:59.460 | competition, denied the monopoly profits within China for these Chinese internet companies. There

00:29:04.500 | was some insinuation last week that Jensen was intentionally, right, skirting all of this,

00:29:11.460 | you know, these rules around China and that there was, you know, maybe 30 or 40% of all their sales were

00:29:17.140 | going into China. You know, as I look at this, I think we have to be really careful.

00:29:22.660 | You know, I think that these tariffs all of a sudden, right, can find us in a place where we're

00:29:32.100 | demonizing. I think Nvidia and Jensen are national heroes for the work that they've done and the

00:29:38.820 | leadership they've given us in global AI, right, American success stories. Totally agree.

00:29:44.100 | And this idea that somehow they comply with the exact attributes of the H20 prescribed by the US

00:29:52.980 | government. Prescribed, and I want to go back to that. You know, and then they sell those in China,

00:29:55.940 | and then after the fact we go back and somehow start demonizing them, I think is a very dangerous thing.

00:30:00.340 | So when I gave that speech a while back on regulatory capture, I made the argument that

00:30:06.100 | when in America, inside of America, when we want to accomplish something through policy,

00:30:12.020 | we gather a bunch of people and we get a bunch of ideas, and then we write some complex piece

00:30:17.380 | of legislation. And what I highlighted is that in many cases, it fails. And in some cases,

00:30:24.100 | it spectacularly fails. So what does that mean? You get the exact opposite outcome from which the policy

00:30:31.860 | is intended to create. Now, the fact that this happens all the time inside of America is an

00:30:39.060 | interesting fact, because in some ways, expert control is external regulation. So we're trying

00:30:45.060 | to implement a policy now, not just in a place where we control most of the pieces, but in a world where we

00:30:52.740 | we don't control many of the pieces. And then we expect that policy to work perfectly. And the

00:31:00.500 | problem is, you know, borders are porous, money finds a home, right? You know, I always tell people

00:31:07.460 | that try and build internet businesses, internet arbitrage is undefeated. And global markets kind of have the

00:31:13.860 | the same thing. Like we're just coming off of a remarkable, I would use the word spectacular again,

00:31:19.940 | spectacular failure of Russian sanctions, economic sanctions, right? So why do we think, oh, that didn't

00:31:29.540 | work, right? But I'm going to go do this and make it work. I heard people who said we have to ban

00:31:35.620 | H20 saying, oh, well, the Biden rules didn't work, they failed, right? So oh, so you mean global expert

00:31:44.660 | controls didn't work. So we're going to redouble them and see if they work again. And I just, you know,

00:31:50.500 | I think if there were a piece of technology, like, say, a fighter jet that you're giving to maybe one other

00:31:55.940 | country or two, that's a super deep ally. That's one thing. If you're going to sell something in 120

00:32:02.180 | countries around the world and try and tell one country they can't have it, there's no way that's

00:32:08.420 | going to work. Like, and especially these goods have digital attributes. I mean, you know, it's just,

00:32:14.500 | it's going to, it's going to work around. And, you know, I think it's going to get worse before it gets

00:32:19.460 | better. I have seen hints that the same people that push the H20 want to, you know, put even more

00:32:27.860 | restrictions on ASML, which is a Dutch company, or fine TSMC for building Huawei chips. That's a

00:32:35.300 | company that's headquartered in Taiwan. Right. So I'm sure Jensen's miffed that his company's become a pawn

00:32:41.620 | in this game. How do you think these companies, we talked about ASML in the past where the management

00:32:48.260 | there has already expressed some reluctance to be our, you know, whipping, whipping post or whatever.

00:32:55.300 | But like, I don't know that we just are allowed to start grabbing pieces of chessboard that we don't

00:33:01.460 | even own and bringing them into this competition. And you said earlier that the way we implemented

00:33:07.140 | tariffs, we've, we've alienated many of our allies and partners. You know, I won't be surprised at all

00:33:13.620 | if we wake up one day and one of these companies tells us no. Right. Yeah. You know, again,

00:33:18.420 | it comes back to defining the objectives narrowly enough that you don't end up in this big retaliatory

00:33:24.420 | and escalatory posture. Again, I think it's a reasonably close call around H20s. My sense is

00:33:34.100 | that Nvidia understands and is on board with not selling leading edge chips to China, right? Like they didn't

00:33:43.060 | fight the fact that they weren't selling GB 200s to China. And the H20 is, if you just looked at the

00:33:48.660 | facts on the table, the Huawei Ascend 920s, the number of these that they're now producing, the

00:33:54.500 | way that they're interconnecting these things together. Yes, they may be slightly less efficient. It may

00:33:59.620 | take two or three times the number of chips and amount of power in order to end up at the exact same

00:34:04.580 | place. But we just talked about there are a hundred nuclear power plants under construction in China.

00:34:09.700 | Power is not their limit. Well, and they produce those plants at one-fourth the price we do. So if it

00:34:15.140 | comes down to power, and many people in the AI world like to say it's going to come down to power,

00:34:19.620 | well, I guess they're going to win. Well, I mean, so there's an interesting question here. If you think

00:34:23.540 | about the off-ramp on these for President Trump, again, there's a lot of suggestions over the weekend

00:34:29.220 | that, you know, if you think we're going to land the plane in three to four weeks, Bill, the only way

00:34:33.460 | you do that is basically through unilateral concessions, right, that you define as victory.

00:34:39.140 | So, you know, all of these countries are calling us, they want to do deals. And so we're going to walk

00:34:44.100 | the Chinese tariffs back to 30 or 34%. And we're going to suspend maybe for 90 days, the H20 ban in the

00:34:51.700 | hopes that they will reciprocate by suspending the rare earth ban or something like that. So I don't think

00:34:57.860 | we've seen the end of this when it comes to this NVIDIA ban. But, you know, the flip side of this

00:35:03.940 | is NVIDIA just had a big announcement, right, with the White House, about a $500 billion investment,

00:35:10.820 | right, in combination with a bunch of other companies, Foxconn, TSMC, etc., building fabs in

00:35:18.020 | the United States. I know the first GB200 is rolled off the assembly line out of those fabs in Arizona.

00:35:25.460 | To me, again, we need to rebalance and focus on accelerating, right, and re-onshoring these

00:35:32.180 | critical industries in the United States. I think the distraction that we can keep China

00:35:37.140 | away from frontier level AI, that will be a losing strategy in my mind. I don't think we need to go

00:35:42.580 | out of our way to make it easy on them. But I think the obsession and the time spent and the distraction

00:35:48.420 | for US CEOs to try to how to how they comply with all of this, I think is not particularly great.

00:35:54.500 | And I'll just give you where, you know, maybe the next frontier where this is going. I've heard,

00:35:59.860 | you know, increasing chatter that somehow we're going to try to ban DeepSeq models.

00:36:04.980 | Yeah.

00:36:05.380 | Right? And somehow prevent US hyperscalers or cloud companies from integrating DeepSeq models into

00:36:13.220 | their stack.

00:36:13.220 | I've heard the same thing.

00:36:14.100 | So talk to me about that and the slippery slope associated with that.

00:36:19.460 | Before I go deep on DeepSeq, which I want to do, I want to mention a couple of things from a very

00:36:25.940 | broad level. You know, one is, back to this Friedman post, he mentions a quote from a book,

00:36:31.300 | "How, Why, How We Do Anything Means Everything." And the quote is, "Interdependence is no longer our

00:36:37.940 | choice. It's our condition. Our only choice is whether we forge healthy interdependencies and

00:36:42.900 | rise together or maintain healthy interdependencies and fall together." And, you know, there's a book

00:36:50.660 | that I've been rereading that the Collison's talked about once called "Finite and Infinite Games" by James

00:36:57.220 | Carrs. And there's a reality that a lot of our strategy that we think about and how we compete in

00:37:04.740 | the world comes from finite games. A finite game is a game that has a beginning and an end and a winner.

00:37:10.340 | So a football game, a basketball game, that kind of thing. Infinite games are different. They just go

00:37:15.700 | on forever. Stock market, you know, most large companies, they're infinite games. Like,

00:37:20.340 | there's no clock that ends. There's no one that declares a winner. I fear that a lot of the attitude,

00:37:28.020 | the vitriol, the language, the tone that's used between us and China is borrowed from finite game

00:37:36.260 | thinking. Like, that we're some, you know, win the AI war. What does that mean? Like, is there someone

00:37:43.220 | that's, is the clock going to end, like the Warriors versus the Rockets? And they say, "Oh, we won." Like,

00:37:48.740 | there's no chance of that. And, and, and most of the people that are even the biggest China hawks,

00:37:54.340 | I said, I say to them, "Do you think you're going to prohibit China's long-term AI development?" And they

00:38:00.500 | said, "No." You know, and I, I just think we, we, there's a lot of zero-sum thinking going on. Win,

00:38:06.500 | lose. I totally believe in this interdependence. I, I think there's zero chance that you're going to stop

00:38:14.180 | China or somehow like, I even, I use the phrase, increase the gap. There's, there's a lot of

00:38:21.060 | arguments that the AI gap has been shrinking, not, not rising. Eric Schmidt had a big interview today

00:38:27.140 | where he said it was shrinking or this week. We'll put show notes on that. And a lot of people are

00:38:33.620 | saying they're catching up. That semi-analysis thing says Huawei's getting there. And so this argument that,

00:38:39.620 | "Oh, we've got to do everything we can. We have to act now to win the AI war." That's like almost this

00:38:45.860 | belief that we're going to increase the gap and that it's a finite game that's just going to end one

00:38:50.260 | day. And I don't believe in either of those things. Right, right. And so I think the tone's wrong. I think

00:38:56.020 | you got to get out of this enemy threat. Like all those words allow you to hate. You know, there's

00:39:02.100 | a great, great quote from the Godfather, which is, "Don't hate your enemies. It clouds your judgment." Yeah.

00:39:07.300 | One of my favorite quotes ever. The whole piece of this Friedman article, which I think everyone has

00:39:12.820 | to read, he just went over there and spent time. It's not what you think. Like they are way ahead

00:39:19.460 | in a lot of different areas. They're super smart. They're not, you know, I think a lot of people

00:39:24.820 | thought, "Oh, we have a democracy and capitalism." And people get confused between those two. And they

00:39:30.660 | think, "We've got the perfect American exceptionalism. We're the only place where you can

00:39:35.140 | have innovation." And because we talk about, "Oh, they steal, they steal." We don't ever spend the time

00:39:42.260 | to go see if innovation's happening over there. It is happening over there. You know, and these people

00:39:48.820 | are educated in the same schools and universities. Like the thought that they couldn't, you know, be

00:39:54.660 | educated or can't innovate is going to lead you to a lot of really bad policies.

00:40:00.500 | And worse yet, and worse yet, right? If you believe they're on the frontier and they're

00:40:05.620 | going to have a frontier compute stack with frontier models, whether we help them or not, which I think

00:40:11.620 | even those people who are more China hawkish agree with that statement, right? And if you wanted the rest of

00:40:19.300 | the world to run on U.S. compute and U.S. models, what's the number one thing you would not do?

00:40:25.460 | You would not anger the rest of the world by launching a tariff assault on them simultaneous

00:40:32.340 | with your tariff assault on China. And so it is a mysterious policy. And when you look at all of

00:40:39.460 | these headlines that are coming out, the EU now negotiating directly with China, right? We now have

00:40:45.460 | Japan and South Korea and Vietnam negotiating with China. You have the Middle East, you know,

00:40:51.060 | entering into, you know, deals with China. I'm not sure again, that we're advancing our cause,

00:40:57.460 | right? By making it harder on everybody else in the world and telling them they are the cause for the

00:41:03.380 | demise of the U.S. middle class.

00:41:05.380 | Well, and I'll go even further. Like, the tone they're adopting is more statesman-like than us.

00:41:12.740 | If you read the tone in those discussions, and they highlight that they haven't invaded anybody

00:41:19.700 | in a very long time. The U.S. has been involved in a lot more wars around the globe. So our ability,

00:41:25.860 | and I brought this up a few podcasts ago. I, you know, I think you're, you mentioned DeepSeek. So,

00:41:31.460 | so we all believe that there's a imminent DeepSeek ban, the level of which I don't think we fully

00:41:38.820 | know right now. But, you know, my immediate reaction is, oh, I guess Europe and South America will run

00:41:44.100 | on DeepSeek. Like, because the minute we start vilifying even that, you know, it, it is, I believe,

00:41:52.340 | right now, the best performing, most open, you know, if you had a quadrant, the one that's,

00:41:58.180 | it's on the upper right on performance and openness, you know, and if we ban it, boy,

00:42:04.740 | it's just kind of, one, you know, even more people working with Huawei chips and DeepSeek

00:42:10.740 | trying to optimize it. But two, you know, in this world we've created where there's so much animosity,

00:42:17.140 | I think people would be glad to use it in these other countries.

00:42:20.260 | Well, the first thing it dawns on me is I ultimately don't think, you know, somebody

00:42:24.820 | asked me on CNBC, you know, they, I said, your decision as to whether be in the market

00:42:29.780 | comes down to whether you think the president is more, you know, kind of tactical free trader in

00:42:35.620 | the spirit of the Besant consensus, fully loaded gun, rarely discharged, or whether you really think

00:42:41.540 | he wants to reorient the world in the way Navarro discusses it. I still believe the president is

00:42:48.180 | fundamentally a free trader, that this really is about making the US more resilient. And he has to,

00:42:53.940 | he has to bring us back there, right? Because if we, if we head in the direction of Navarro,

00:42:58.900 | it's quite clear to me that we're going to so anger the rest of the world, that the chance that the rest of

00:43:05.540 | the world is going to run on US compute. I think, I think what we do in that instance is you move

00:43:10.660 | everybody in the direction of China, it backfires. We don't widen the gap with China with respect to AI

00:43:16.660 | or global trade or anything else. In fact, we, we shrink the gap.

00:43:21.140 | By the way, by the way, there's one, I think, hilarious irony with the, with the Navarro point of

00:43:26.580 | view and combined with the, with, with the export control, which is, if we're gonna, if we're upset

00:43:34.340 | that there is this trade imbalance, you know, the worst thing, the last thing you'd want to do is start

00:43:39.700 | penalizing our best creators, our best manufacturers, our best companies. Right.

00:43:45.460 | How are you going to solve the trade imbalance if we tell people they can't buy our best stuff? Right.

00:43:50.660 | We're going to make them buy our stuff. Which is just an example. I, I, I think, I think Nvidia sold,

00:43:56.020 | you know, 12 or $15 billion worth of H20s. So if you ban those, then your trade deficit with China

00:44:02.820 | goes up by $15 billion. That's my point. That's my very point. And let's not, let's not wash over the,

00:44:07.300 | I think Nvidia is such a high performance companies worth so much money, such a large market cap,

00:44:13.380 | so much cash, no liquidity issues that this $5 billion write-off they're going to take is kind

00:44:19.700 | of NBD move on. You know, it didn't affect stock that much, but a $5 billion write-off, they're just

00:44:25.700 | going to throw a bunch of inventory in the trash can. Well, I mean, that's, that's, that's, that's

00:44:30.180 | remarkable. Think about that, Bill. Right. Some of the people who are arguing, right. Including some

00:44:35.300 | USAI companies that they shouldn't be able to sell the H20s to China. Right. If Jensen or the team at

00:44:42.100 | Nvidia turned around and said, great, you buy them. Nobody would buy them because they're so

00:44:46.580 | underperforming. Right. And yet it makes the point for them. But think about this 15 billion in sales

00:44:53.780 | of H20s. Right. That probably results in, you know, eight, $9 billion of, of earnings, you know,

00:45:00.900 | back to Nvidia. You tax that at a corporate rate, that's two or $3 billion to the U S treasury. Right.

00:45:06.740 | We are effectively taxing the Chinese on a nerfed product to provide profits to Nvidia to further

00:45:14.260 | distance the lead, uh, you know, against Huawei and to put money in the U S treasury. And we just

00:45:19.620 | unilaterally disarmed around that in a way that doesn't even advantage us against Huawei because

00:45:24.260 | their chips are already surpassing the H20. And that leaves out, and I agree with a hundred percent of

00:45:30.020 | that. And there's even more because of escalation. So, so, you know, it's, I, I, once again, I go back

00:45:37.460 | to this finite game mindset. I, I think people are evaluating a decision on an expert, export control,

00:45:46.100 | or a tariff or a ban, um, without totally in isolation as that one decision. And what will

00:45:54.260 | its impact be? But any one of these decisions and certainly the combination of them could lead to

00:46:00.420 | escalation that could go as far as leading to a hot war. And so you have to accept responsibility

00:46:08.660 | of making any one of these decisions that there are, you know, butterfly effects and escalatory effects

00:46:15.860 | that you may wade into. Right. By doing that. Right. I mean, you can think about it this way.

00:46:21.700 | We define, some people define artificial intelligence as existential, right? Like that is absolutely

00:46:28.980 | essential to your national security. It's essential to your national economic security. Now, if you are

00:46:35.620 | firing a shot at somebody that says, I'm going to deprive you of being able to build your national

00:46:41.220 | security or your national economic security, right? Like it's, it's a serious, it's a serious thing.

00:46:46.900 | I, um, I, I want to go on record as saying like almost everyone in the AI space that I see with a

00:46:53.700 | microphone in front of them says the U.S. has to win the AI war. Yeah. I don't know what that means.

00:47:00.260 | Yeah. And if, if I guess as to what it means, I don't think it's possible. Right.

00:47:04.340 | And so. Because it's an infinite game. It's an infinite game and no one that I talked to would

00:47:10.180 | argue we're going to somehow prohibit them from moving forward in AI. Let's not forget it wasn't

00:47:16.580 | that long ago that open AI, they'll say borrowed or copied the innovation that happened at Google and

00:47:23.700 | DeepSeek. Like this is how innovation works. Ideas spread like the wind. They move fast. People study what

00:47:30.100 | other people do. It happens all the time. And when only when we apply these labels of theft or copy or

00:47:36.820 | steal, do we start vilifying, but, but it happens all the time in our own ecosystem. Right. Right.

00:47:42.180 | It's how these things evolve. And so, yeah, I don't, I don't think there's a finite game to win. You know,

00:47:48.740 | it's funny. I was, I did some research on something because I was very curious. I went back and studied,

00:47:53.940 | and it's so easy with AI, I went back and studied the space race. And when, when the space race was

00:48:00.340 | underway, if you go back and look at the quotes from all the senators and, and President JFK and

00:48:07.060 | everything, one of the reasons, maybe the primary reason they said, we got to win the space race,

00:48:12.420 | is they all believed that the entire globe would be covered in this mesh of rockets and satellites that

00:48:22.180 | would be used to control the military of the globe. And whoever got to space first was going to have this

00:48:29.860 | control. Now that never played out, but I see a very similar vein in AI where people, especially

00:48:37.380 | people that believe in AGI and ASI and magical AI think that it's just going to explode. And then

00:48:43.380 | whoever controls this uncontrollable force will control the globe in a zero sum way. And I, I, I just,

00:48:51.940 | I don't buy it. Like, I don't think that's going to happen. If that does happen, we're going to have

00:48:56.500 | a much bigger problem. I think you and I would maybe find a point of agreement here.

00:49:00.660 | Like what is the North star that should guide us? And I think the, the point of agreement,

00:49:06.420 | if we were giving advice would be that the re-onshoring of critical national industries

00:49:12.820 | through, you know, some tactical means is an important objective. Okay. But I, I think you and

00:49:20.660 | I would also agree that we need to shift the focus radically on accelerating our own race,

00:49:27.540 | right. And, and refocus from spending all of our time trying to slow down everybody else.

00:49:33.780 | And the objective should be the KPI should be, do we widen the gap, right? Do American companies,

00:49:40.260 | are they as successful in AI as they were in the internet? Like, I think anybody who looks back at

00:49:45.540 | the last 20 years would say that the United States has won both in terms of, of, of free trade and in

00:49:53.220 | terms of the global internet competition, one as defined by improved the standard of living,

00:50:00.660 | driven the growth, the, the, the economy in the United States, uh, in a way that was successful

00:50:05.700 | for the United States. You know, I, I, in one argument with someone, I used the, the simple

00:50:11.220 | metaphor that comes from swimming, any, anyone that becomes a competitive swimmer within a year or two,

00:50:18.740 | you know, a coach tells them don't look to the side, you know, cause that's wasted energy and

00:50:23.860 | someone might pass you just swim as fast as you can. Just look ahead. And I feel like, you know,

00:50:29.300 | it's, it's almost worse than just looking to the side. We're trying to intentionally inhibit the other,

00:50:35.380 | other player now going back to fight since, since I'm trying to deflate the football.

00:50:40.340 | Yeah. Yeah. It's exactly. Imagine if you were just watching a finite game and one team insisted

00:50:47.300 | that the other team have a technical disadvantage, what would your reaction be? How would you think

00:50:53.060 | about that player? Right. You, you would probably assume they're scared that they're unsure of themselves.

00:51:00.500 | Right. Like, like, well, and also if you told your team at the start of the season, don't worry,

00:51:05.780 | you don't have to train very hard because I've handicapped the other team. They don't even know

00:51:10.260 | what I've done to them, but I've, you know, I've tainted their system. So they're not going to be very

00:51:15.460 | good as opposed to just focusing on your own training and winning the game.

00:51:19.140 | But I might, I might, I might end by going back to, uh, you know, this argument from the Friedman

00:51:24.100 | police that, that it's an interconnected world. And there are a lot of very smart, successful,

00:51:32.020 | capable, innovative engineers, researchers, founders in China. And if you think you're going to like,

00:51:39.700 | keep them down or permanently, you know, prohibit them from playing in AI, I think that mindset is

00:51:47.140 | going to lead to some spectacularly problematic policy.

00:51:51.140 | Yeah, I agree. Well, maybe talk about, we can wrap Tesla reported tonight. Um, and,

00:51:57.860 | and the markets are clearly struggling down one day, 4% up the next day, 4% clearly struggling,

00:52:04.900 | trying to get their hands around, uh, you know, where we are. So since we were here last time,

00:52:10.420 | you know, the S and P's down 10% NASDAQ, I think as of yesterday was down 20% peak to trough.

00:52:17.700 | And the question people ask me all the time, is this all priced in? How many units of risk

00:52:21.860 | do you have in the market? We have Besant doing a talk tomorrow morning on the financial system.

00:52:27.540 | The VIX is still over 30. There are fears and rumors out there about is our 10 year, you know,

00:52:33.860 | do we have demand for it on a global basis? The dollar is under assault here. So-

00:52:39.780 | And many of these conversations weren't happening five months ago.

00:52:43.380 | Right. Exactly.

00:52:44.020 | We were just talking about AI and Nvidia and-

00:52:46.260 | I mean, I go back to this Stan Druckenmiller quote, where, you know, after the, you know,

00:52:53.300 | the president's election, he said, this is the most, this is the biggest shift from an anti-business

00:52:57.780 | administration to a pro-business administration in my 50 years of being in the business, right?

00:53:02.500 | Yeah.

00:53:02.820 | That is how CEOs generally felt at the beginning of January, moving in, uh, to this new presidency.

00:53:09.780 | And it's really mind boggling to think in nine, you know, in a few short weeks,

00:53:14.420 | how quickly we went from that level of optimism to this level of concern. And I was just looking at a

00:53:20.260 | chart, you know, Apple's down 21%, Nvidia's down 25%, Google's down 20%, Tesla's down 40%, right? We have

00:53:28.820 | major moves in the market.

00:53:30.580 | Well, and look, I mean, in both Tesla and Apple have a huge amount of revenue in China.

00:53:35.780 | Right.

00:53:35.860 | And when you sense that this thing may be escalating or that there are ripple effects going back and

00:53:42.980 | forth, what one, one plausible thing that could happen is either one of them get kicked out of

00:53:48.020 | the country.

00:53:48.580 | Right, right.

00:53:49.300 | That could happen.

00:53:50.180 | Yes.

00:53:50.580 | And so, of course, you have to discount this stuff.

00:53:52.980 | Of course, of course.

00:53:53.940 | And the question now, of course, is, is enough discounted given where we are? And so, you know,

00:54:00.420 | I said at the end of January, early February, when you and I did the pot, I said, we've taken

00:54:04.500 | down our units of risk because there's just more uncertainty in the world. Discount rates need to

00:54:08.980 | come up. Multiples are coming down. And we did. And I would say over the course of the past several

00:54:13.620 | weeks, we've had very little risk on directional risk along the market. You can like Nvidia,

00:54:19.140 | but if you wake up one morning and 12 billion of their sales are gone because they can no longer

00:54:23.620 | sell, you know, chips in China, that's something again, that, that is the macro that is hard for

00:54:29.060 | you to forecast.

00:54:29.700 | You know, going to Nvidia, I've heard rumors that they, that they want that the government,

00:54:33.940 | US government, US government, and I, but not to sound like a victory lap, but I said a few episodes

00:54:39.540 | ago, the biggest risk on Nvidia was the government and that turned out to be true here. And they may

00:54:45.860 | not be done. I've heard arguments that they want to do

00:54:48.980 | a customer audit. I don't know what that is or involves.

00:54:52.260 | Well, they were suggesting it last week. I think even on, uh, even, even on our, our, our friends

00:54:57.380 | pod where, you know, maybe you should look into all these shipments or all these sales that are,

00:55:02.900 | that are, that are going to Singapore or whatever. And again, I, I welcome all, all of that. Like,

00:55:08.100 | I think all companies should have to comply with us rules and regulations. I suspect that they do.

00:55:13.540 | But again, if I just step back here, gold's outperforming, uh, the S and P so far this year

00:55:19.780 | by about 40%, right? What does that tell you? People are moving into safe havens. They don't

00:55:25.140 | know where this is all going to land. Here's one of the things that really concerns me, Bill.

00:55:30.100 | If we look at consensus earnings expectations for the S and P so far this year, we started the year,

00:55:36.420 | we expected 15% growth. We expected the S and P to do $273 a share. Now the consensus is 12%

00:55:44.660 | growth. So $265 a share. So consensus earnings expectations for the S and P have barely moved

00:55:51.780 | down. And when I think about the chaos of the last eight weeks, every CEO that I talked to says,

00:55:58.420 | we're on hold, we're tightening our belts, we're taking a more cautious approach to the year. We

00:56:02.900 | can't make decisions. We don't know where tariffs are going to be. We don't know where this is going

00:56:06.900 | to be. It's hard for me to think that you can literally wipe two months out of the year in terms

00:56:12.820 | of, you know, where, uh, decision-making is going on in these companies and only have a 3% adjustment,

00:56:19.380 | uh, to S and P earnings. Now, what are we seeing this, uh, over the course of the last two weeks? Well,

00:56:24.420 | Scott Kirby from United airlines comes out. He gives two different guides and he says, you know,

00:56:30.340 | if there's a recession, which we may have, you know, then earnings are going to be seven to eight

00:56:34.980 | bucks. And if there's not a recession, earnings will be 12 bucks. So you have companies that are

00:56:39.140 | doing highly unusual things in terms of saying, we don't know that we don't know the future.

00:56:43.220 | So we're either not going to give you a guide at all, or we're going to give you this wide dispersion

00:56:47.540 | and a guide. So I think for most managers, people are looking at this, they're at max caution. I think

00:56:54.420 | from an altimeter perspective, we were pretty cautious. And now we're looking at again, leaning

00:56:59.060 | back into markets on some of these down days where it's big risk off, because I think ultimately the

00:57:05.380 | president is going to make deals. You know, Besant is going to get deals done. I think we're going to

00:57:11.300 | probably land somewhere in this kind of five to 10% tariffs for the rest of the world, right? If you add

00:57:16.980 | that up, that's going to be somewhere order of magnitude $200 billion of tariffs. And you're not

00:57:22.020 | going to end up at 140 on China, we're probably going to get rid of these export bans and embargoes

00:57:27.460 | and land the plane somewhere around 25 or 30%. Now, mind you, that's still a three to four X increase

00:57:34.820 | over the tariffs from last year. But I think what the world needs is predictability, and they need it

00:57:39.780 | soon. I think if we're still having this conversation in eight, 12, 16 weeks,

00:57:44.820 | with this level of uncertainty around tariffs, I think it's going to have a much bigger headwind

00:57:50.100 | to those S&P earnings for the year. And as those earnings come down, we know that the market's going

00:57:55.540 | to have to come down with it. So the S&P as of end of the day today is only down about 10% for the year.

00:58:00.980 | And if you think about all the things that have changed, that feels to me like just the air coming

00:58:05.140 | out of the balloon in terms of like the certainty and the uncertainty that we have in the market,

00:58:10.420 | I think the next move down, if we have it, is going to be around growth. And we really haven't

00:58:15.220 | got a lot of growth earnings. Tesla's out tonight. And even though earnings came in a lot lower than

00:58:20.660 | expected, I think people are looking through that as kind of one time. But by the time we get another

00:58:26.100 | month or two into the next earnings season, if we continue to see this level of uncertainty and drifting

00:58:33.860 | down, I think we're going to have problems and further problems in the market.

00:58:36.580 | I admire your hopeful optimism and the data points that I see in the past 24 hours about how soon

00:58:45.540 | something might come together. I think there was an announcement that India, we had finalized the

00:58:52.740 | terms of reference. I don't know what that means, but it doesn't sound like you're very close to being

00:58:57.940 | done. Right. That was J.D. Vance today in meetings with Modi, came out of the meetings,

00:59:02.660 | said we had a big breakthrough. We came to terms of reference on what the trade deal will be,

00:59:10.100 | but it will still take months in order to hammer out the deal.

00:59:12.820 | Right. So months, I think months is too long.

00:59:14.660 | Yeah.

00:59:15.060 | I think the, you know, the reflexivity already starts to take place, everything you just described.

00:59:20.420 | And once it does, some of it is certainly self-reinforcing. So you start decommitting

00:59:27.540 | CapEx, you start decommitting, you know, basic capacity on different manufacturing lines, planes,

00:59:36.340 | whatever, and it will become self-reinforcing. You raise prices when you decommit because you have

00:59:41.860 | less land, like that's inflationary. Everything starts, the fear of it starts to become the reality.

00:59:48.340 | Right. I guess, you know, a thought experiment. If I described everything to you that has happened

00:59:55.380 | thus far this year, and I asked you, should the market be higher or lower from the all-time highs

01:00:01.780 | where we started the year? You would say, of course, it should be lower. Right. And I don't think that

01:00:07.460 | down 10% on the S&P sounds to me like irrational, given the level of uncertainty that we've injected in a

01:00:15.460 | very short period of time. And so to me, if you're, you know, if you're thinking about units of risk,

01:00:21.780 | you know, it still feels to me like you're in that bottom third, right? Of whatever your normal

01:00:26.900 | exposures are, you're in kind of that bottom third, you know, everybody wants to buy the dip and go all

01:00:32.900 | in. And, you know, I think we need a lot more certainty as to where this is going. I do think that

01:00:38.500 | it would be very helpful. And it sounds like the president is starting to make some of these comments

01:00:42.820 | just this afternoon to disavow ourselves of this, you know, Navarro style, replace the internal revenue

01:00:50.260 | service. If we can just get a four-year forecast that it's about re-onshoring a few industries,

01:00:56.540 | land the plane on China or on Japan and India, and then on China, I think that gives us what we need to

01:01:02.740 | plan, you know, but there are a lot of other things that have to come together in order to keep the

01:01:07.600 | market moving forward. So, you know, we didn't even get to talk about the impact this is going to have

01:01:14.120 | on startups and on, you know, what we're seeing in kind of the startup ecosystem. We'll come back and do

01:01:19.300 | that next time. But I think that, listen, I'm kind of tired of talking about tariffs, but it is the most

01:01:27.520 | important thing and it is impacting everything that we're looking at, both on the public and on the

01:01:32.800 | venture side of the business today. So, you know, it's unavoidable. We have this really important

01:01:37.920 | divergence, I think, in terms of points of view. And what's interesting to me is kind of the free trade

01:01:44.200 | side of this argument has largely been drowned out. And, you know, so I appreciate you steel manning that

01:01:50.220 | side of it. I mean, look, I assume most people that have at least had a finance class have studied

01:01:58.900 | comparative advantage, but it's very mathematical. Like, it's very deterministic. Like, doing stuff

01:02:06.320 | you're good at and letting other people do stuff they're good at is a win-win-win-win-win. And you

01:02:11.880 | start backing that up and you're going to get lose-lose-lose. I'm certain of it.

01:02:16.900 | Yeah. Here, here. Here, here. Let's land the plane and get back to building America.

01:02:21.600 | Okay. Take care, man.

01:02:22.840 | As a reminder to everybody, just our opinions, not investment advice.

Tariffs, Free Trade, Export Controls, H20 & Rare Earth Ban | BG2 w/ Bill Gurley & Brad Gerstner

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