Podcast Summary: BG2Pod with Brad Gerstner and Bill Gurley

Episode: DeepSeek, Open Source, Tariffs, DOGE, Market Impact | BG2 w/ Bill Gurley & Brad Gerstner
Release Date: February 5, 2025
Hosts: Brad Gerstner (@altcap) & Bill Gurley (@bgurley)
Description: An open-source bi-weekly conversation delving into technology, markets, investing, and capitalism, featuring insights from industry leaders Brad Gerstner and Bill Gurley.

1. Introduction to Current Global Dynamics

Brad Gerstner and Bill Gurley kick off the episode by discussing the intricate balance between globalism and national interests. Brad emphasizes the U.S. President's constitutional duty to prioritize the American standard of living, while Bill underscores the interconnectedness of global markets, highlighting the impracticality of imposing excessive trade barriers.

Notable Quote:

• Brad [00:00]: "If you're the President of the United States, you're looking out for the standard of living of people in the United States, who you have a constitutional oath to."
• Bill [00:17]: "Pulling up the wall and trying to get people to make a $40 microwave in America is going to fail."

2. Open Source AI and DeepSeek's R1 Model

The conversation shifts to the advancements in AI, particularly focusing on DeepSeek's groundbreaking R1 model. Bill delves into the technical innovations that set R1 apart, such as its ability to separate parameters for faster processing, making it more cost-effective than competitors like OpenAI.

Brad highlights the global adoption of DeepSeek, noting its significant user base in countries like India, China, and Indonesia. The duo discusses the implications of open-source models versus proprietary systems, advocating for the former's benefits in safety, security, and fostering innovation.

Notable Quotes:

• Bill [04:26]: "They did choose to be the most open model we know of today... with the MIT license, which has no restriction whatsoever on how you do this."
• Brad [03:16]: "These usage charts for DeepSeek are really quite amazing... it's a global phenomenon."

3. Tariffs and U.S. Trade Policy

Brad and Bill examine the recent surge in U.S. tariffs targeting Mexico, Canada, and China. They analyze the potential economic repercussions, especially on the tech industry's supply chains. Bill provides historical context by referencing the McKinley tariffs and their role in industrialization, contrasting it with today's globalized economy where supply chains are deeply intertwined.

The discussion touches upon the specific impact on the semiconductor industry, with tariffs on GPUs and chips posing significant challenges for U.S. tech giants like NVIDIA and AMD. Brad speculates on the long-term consequences, such as increased costs for manufacturers and potential slowdowns in AI research due to higher operational expenses.

Notable Quotes:

• Brad [35:07]: "If our number one goal is to win the race in AI, this is a classic case where in the short run, it's self-defeating."
• Bill [38:01]: "I don't believe that creating a lot of, you know, bringing the wall up, around AI, I don't believe that'll be in the US's long term best interest."

4. Constitutional Debate: Executive Authority vs. Congressional Power

A significant portion of the episode is dedicated to the constitutional debate sparked by Elon Musk's intervention in federal spending. Brad narrates Musk's direct actions to curb what he perceives as wasteful government expenditures, leading to accusations of constitutional overreach by House Speaker Chuck Schumer and other Democrats.

Bill provides legal insights into the doctrine of impoundment and the separation of powers, suggesting that while Musk's actions might seem overreaching, there is historical precedence for executive discretion in budgetary matters. However, the potential for a Supreme Court showdown remains a point of contention.

Notable Quotes:

• Brad [42:26]: "If you believe that to be true, there is a much more principled architecture that he wants to move to."
• Bill [42:26]: "The Supreme Court has long upheld this... the Supreme Court has said separation of powers generally support the idea that it's Congress who appropriates funds."

5. OpenAI's Stance on Open Source and Future Implications

The hosts discuss Sam Altman's recent acknowledgment that OpenAI might have been "on the wrong side of history" regarding open-source strategies. Bill reflects on how open-source fosters pure competition and democratizes innovation, allowing for widespread optimization and enterprise adoption.

Brad speculates on the future landscape, suggesting that while OpenAI might open-source certain models like R1, proprietary models will continue to dominate the forefront, with subsequent generations being released in more open forms. This dynamic balance between open and closed systems is seen as pivotal for global AI advancement.

Notable Quotes:

• Bill [16:16]: "More transparency leads to more understanding, more safety, more security, more free speech."
• Brad [24:43]: "Mark Zuckerberg has said he reserves the right not to release all the models in the future."

6. Impact on Tech Investors and Market Uncertainty

Brad and Bill articulate the compounded uncertainties tech investors face due to rapid technological advancements, unpredictable trade policies, and potential political upheavals. Brad emphasizes that these factors necessitate a reassessment of investment strategies, with a probable increase in market volatility affecting asset valuations.

Bill cautions that policy shifts, like the recent surge in tariffs and executive spending cuts, can have cascading effects on tech companies' profitability and innovation trajectories. Investors are urged to remain vigilant and adaptable in this "golden age of uncertainty."

Notable Quotes:

• Brad [64:19]: "All else being equal. I think that the super cycle is on fire... but at the same time, I also am humble in the face of what's known and knowable about the next 12 months."
• Bill [70:36]: "The most successful sovereign wealth funds in the world are all in autocracies. They're not in democracies."

7. Sovereign Wealth Funds: Potential Benefits and Risks

The episode concludes with a debate on the establishment of a U.S. sovereign wealth fund. Brad supports the concept as a strategic financial lever to manage national debt, emphasizing the necessity of achieving a return rate surpassing the country's borrowing costs. However, he expresses concerns about potential crony capitalism and equitable management.

Bill offers a more skeptical perspective, drawing parallels to historical mismanagement cases like the Malaysian sovereign wealth fund. He stresses the importance of independence in fund management to avoid political interference and ensure fiduciary responsibility.

Notable Quotes:

• Brad [70:36]: "I'm leveraging up the balance sheet of the United States to earn the spread between the sovereign wealth fund returns and the 5% that we're paying to borrow all the money."
• Bill [72:08]: "If I look at Goldman Sachs... if the government's going to be the lender of last resort, I would argue they should take all of the equity."

8. Conclusion and Final Thoughts

Brad and Bill wrap up the episode by acknowledging the complex interplay of technology, economics, and politics shaping the current landscape. They reiterate the importance of open-source principles in fostering innovation and caution against policies that may inadvertently stifle the very advancements driving market growth. The hosts encourage investors and industry leaders to stay informed and adaptable amidst the ongoing changes.

Notable Quote:

• Brad [74:03]: "As a reminder to everybody, just our opinions, not investment advice."

Key Takeaways:

• Open Source vs. Proprietary AI: Open-source models like DeepSeek's R1 offer significant benefits in innovation and security but face challenges from proprietary giants like OpenAI.

• Trade Policies Impacting Tech: Recent U.S. tariffs on key trading partners could disrupt global supply chains, particularly in the semiconductor industry, affecting tech companies and AI research.

• Constitutional Authority in Budgeting: Elon Musk's attempts to curb federal spending highlight ongoing debates about executive power versus congressional control over the purse strings.

• Investor Uncertainty: The convergence of rapid technological changes, unpredictable trade policies, and political interventions increases market volatility, urging investors to exercise caution.

• Sovereign Wealth Funds: While potentially beneficial for managing national debt, sovereign wealth funds carry risks related to mismanagement and political interference.

This episode of BG2Pod provides a comprehensive exploration of the current challenges and opportunities at the intersection of technology, economics, and politics, offering valuable insights for investors and industry stakeholders navigating this complex landscape.