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- [00:01]
A
What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs and everyday citizens that challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chase Taylor, head of research at Bulwark Capital Management and the founder of Pinecone Macro Research where he publishes deep dive macro analyses informed by his relentless, relentless curiosity and commitment to systems level thinking and strategic foresight. Chase and I spend the first hour of this episode exploring his methodology, how he extracts signal from noise, and why a multidisciplinary approach to investing is especially important during periods of disruptive sociopolitical and technological change like the kind we are experiencing today. We then apply these ideas to two important technological transformations underway in the global economy. The first is a transformation of the energy system and the dramatic cost declines we are seeing across the so called electric stack. This begins with the addition of new sources of energy to the electric grid, advancements in battery technology for its storage, the use of magnets and motors that turn that electricity into mechanical motion, power electronics that shape it into the precise force needed for today's technologies, and the embedded compute that orchestrates and decides how and when to put that force into action. We discussed the sources of China's dominance in this industry, the horizontal complementarities in its manufacturing ecosystems, the advantages of vertical integration, and what America and Europe need to do in order to remain competitive in this new industrial ecosystem. The second hour is devoted to exploring the implications for investors of the current AI Capex boom, how the US Dollar might behave in a growth slowdown scenario post Liberation Day, and what the Trump administration's military and covert action threats against Maduro's regime in Venezuela can tell us about his policy, and whether we are returning to a more colonial phase of domination by the American empire over the Western Hemisphere. If you want access to this part of the conversation and you're not already subscribed to Hidden Forces, you can join our Premium feed and listen to the second hour of today's episode by going to HiddenForces IO. Subscribe all of our content tiers give you access to our Premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q and A calls with guests, access to special research and analysis in person events and dinners, you can also do that on our subscriber page and if you still have questions, feel free to send an email to infoiddenforcesio and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this wide ranging and in depth conversation with my guest, Chase Taylor. Chase Taylor, welcome back to Hidden Forces.
- [03:34]
B
Great to be on with you. Appreciate it.
- [03:37]
A
You were on with Zach. You're a colleague at Bulwark Capital Management. We're actually all friends, but you and Zach work together. Zach's the principal and CIO of Bulwark. You guys are also members of the genius community and have joined us at many of our dinners and online Q&As. But you guys were on the podcast, like, what, what was it like two years ago or something like that? It feels like a long time ago.
- [03:59]
B
I feel like actually maybe nine, ten months ago or something. No, maybe a year. I promise.
- [04:05]
A
Really? Wow. I got to go back and check. It's great to see you, man. This is the first time you've been on alone. You're also the founder of Pinecone Macro Research, which produces fantastic research reports, and I've spent the last couple of days reading through your most recent ones. Even though people have had a chance to, many of our listeners have had a chance to either read your work independently or listen to the episode where you came on with Zach. Some may not. Some may need a refresher. So just give me a quick reminder here and a quick rundown of who you are, your background, and what it is that you do and what Pinecone Macro Research is.
- [04:40]
B
Yeah, so I'm a country boy from rural southeast Texas. Originally, I spent 17 years in the Air Force doing bomber avionics and then geospatial intelligence. And then I was a acquisitions officer. So bring three different careers inside of the Air Force to kind of a weird skill set that I've put together. And then I have a master's degree in foresight, which most people don't know anything about, obviously, which basically is like the study of change and trying to figure out what the future may look like, essentially. People call themselves futurists. You know, they get that degree, but I don't really use that term too often, but I fell in love with finance during and after the gfc. I started learning about Economics because of it. I just couldn't wrap my head around how so many people could be so wrong and so many people could get that hurt by it. So that was the genesis of my love for markets and everything that ties into them, which is essentially everything. I mean, I joined the air force in 03 and, excuse me, 06. So right after that was when I started doing this. The interest kept growing for me. Next thing I knew, I was writing about it, just doing a free blog and stuff while still in the Air Force. But then in 2018 and I still had a few years left, that was when I started the business. So I essentially had two full time jobs my last few years in the Air Force. And now, as you mentioned, I'm with Zach at Borg Capital as a head of research. I'm basically just a research nerd for the firm and helping with the portfolio and then for my research clients as well.
- [06:21]
A
What exactly is in the degree of foresight? What do you actually learn?
- [06:25]
B
Yeah, you had just read the most recent piece that I wrote and I talk a bit about systems thinking. That was actually one of the classes I had to take. But foresight, it's a discipline now that has actually grown a lot. So a lot of Fortune 500 companies have a staff that does strategic foresight. In a way, it's like trend analysis in a way. It goes deep on the social world and social change, technological change plays a big part, obviously sprinkling in policy and things of that nature. What I like about it is the research framework that is taught that we had to learn. It puts a lot of emphasis on things like weak signals, which is you come across some weird thing online and it could be anywhere. It could be a trashy blog, it could be some study that some great university just put out. It could be anything, but something that jumps out as really anomalous. You put a pin in and start following for that to turn into something a little more, to go from weak signal to a cluster of a little bit stronger signals. That's when you can kind of see like, okay, we have something coming here and you can pay a lot more attention to it. For me, it's helped tremendously in finance to view things this way, to try to see around corners in a way that traditional financial education, economic education is very, very bad at. I actually quit on an MBA program when they presented me a formula, a true formula. This is how much this equity price should be. And I was like having been a practitioner and then being taught this is the formula for the stock price And I was like, that's not how this works. And I argued with the professor and, no, this is how it works. This is. This is the truth. This is the tablet for how much this stock's worth. I'm like, I can't do this anymore. So I quit on the spot. And I was trying to find a different degree program that was a little more outside the box. And foresight's very outside the box. A lot of creativity goes into it. It's interesting.
- [08:20]
A
Wait, dude, I have so many questions because we haven't talked about this before. So when did you get this degree in Foresight?
- [08:25]
B
I just finished my degree in May.
- [08:28]
A
Okay, how long is the degree? Was it a year? Two years.
- [08:31]
B
So, yeah, you can easily do it in two years. I took my very sweet time doing one class at a time and. Took me like four or five years.
- [08:37]
A
Okay, so you took this. This is an online course?
- [08:40]
B
Yeah, University of Houston, which is where I actually went undergrad right before I went to the Air Force. But they have it all online.
- [08:46]
A
So how many other universities offer a program like this? Is this a relatively new thing, or is it actually an old thing that some universities have?
- [08:55]
B
It's old. Not very many universities offer it. You can do this at University of Hawaii. I know. And then there are a few schools in Europe. There's one in Australia that's pretty prominent now.
- [09:07]
A
What careers are usually tied? Have you traditionally been tied to courses like this? Who are the other students that are taking this class?
- [09:14]
B
Yeah, a lot of them work very corporate roles where they kind of carve out their own little business to do consulting type of work, do workshops and stuff like that. But a lot of this, if it goes back to World War II era, Rand Corporation, they were kind of the first people to really do this. And then Chevron has had that, or Exxon, I can't remember now, has sort of that had a futures operation. After, I think, the big oil embargo in the Middle east, they were like, we got to start thinking about stuff like this.
- [09:42]
A
This blows my mind. What are some of the core. So you said complex systems theory, social class complexity science, social change. So what is that exactly? What does that entail? And who are you studying? What are the most influential thinkers and works that you cover in the course? Actually, I should stop calling it a course. I keep calling it a class or a course as a degree.
- [10:03]
B
I will say, though, they do have a certificate program that people can do a little bit of it instead of all of it. But for social change, basically, you think about a lot of the pillars of philosophy and psychology and stuff. It went into all that. But the big thing is to look for change trends socially, that we even went through every kind of cycle that you have ever heard of to include fourth turning stuff. But Kondratiev, you name it. If it was a cycle. We studied that just so we all knew what those things were. But a lot of Freud and stuff, you name it.
- [10:39]
A
Wait, so now why is it important? So the audience should know. This is not. We didn't start this conversation with the intention of doing this, but actually this is so aligned with where I've been and even the ethos of the podcast from the very beginning that I have to dig into it a little bit. So just clarify something for me. How does thinking in cycles relate to foresight? Is it because there's a preexisting pattern and so you're kind of piggybacking off of some level of embedded predictability?
- [11:04]
B
Yeah, most people, I think, in foresight aren't sitting back and using cycles. I think it was really another overlay that you can put onto a project you're working on essentially to think about.
- [11:15]
A
To create structure in what would otherwise appear to be noise.
- [11:19]
B
Exactly. So there's a lot of mind mapping and stuff like that, where we have these crazy flowcharts and bubble charts that show all the connections, and modern tools are pretty great for building out the different connections between different themes and everything to where you can kind of start to see things emerge in a way that is difficult if you're just kind of spitballing.
- [11:42]
A
So let's go back to this other question I have with this, and then we'll eventually tie this off and get into our larger discussion, which is about the electric stack and AI and the investment opportunities and also the larger macro implications of the US China competition and why China, in your opinion, is winning this competition at the moment. I love this idea of learning how to find the signal amidst the noise and how to independently assess or evaluate truth claims without relying on authoritative sources of information. I mean, this is like the essence of what I do and what I've been trying to do on this podcast for years, which is to try and help people learn how to learn how to learn what to pay attention to, what not to pay attention to, and how to constantly reevaluate and reformulate and iterate upon their preexisting understandings of the world and build new frameworks that provide better explanations for the phenomena we encounter and importantly, are more predictive of where the world is going, which I think is more important now than ever because there are fewer commonly agreed upon sources of authoritative truth and because the consensus narratives that were so often stand ins for truth have broken down in this new wild west. I mean, this is like the wild west of information and narratives, in my view. So who were some of the important influences there in your coursework? What were some of the philosophical disciplines that you guys relied on in order to sharpen your epistemic skills?
- [13:27]
B
Yeah, I mean, it's such a multidisciplinary, like, approach. And one of the things I liked was like the different professors were very, very different. So like, some of them were very rigorous on sourcing, very rigorous in general. And some of them were like, like, so go with the flow on it. They would use any source if, if it helped in the process. I mean, it, it's hard to nail it down as like, we had like a framework for the process that we all had to use because it was like the university's framework. But each professor had such a different way of doing things outside of that framework. So it's hard for me to like.
- [14:07]
A
Well, I'm not gonna, I'm not gonna torture here, Chase, because, I mean, you have a gazillion things on your mind. The last thing you were prepared to do is talk about a university.
- [14:15]
B
No, I do really like talking about it because especially to finance people, because finance people are so left brain dominated and they all want to just go get the finance degree. And don't get me wrong, there's very left brain stuff involved here, obviously, but how deeply multidisciplinary is to the point of it being uncomfortable for a left brain person like myself. I took so much from it. It helps me more in finance than a CFA could ever hope to.
- [14:45]
A
Well, I started writing a weekly newsletter and the first one publishes the day before this episode goes out. And it's about the epistemic crisis. What I think is an epistemic crisis that we're facing and the absence of a movement to really address it. I mean, I don't know if you've seen, probably have that there's been this explosion of interest, especially among young men on YouTube, in fitness related content, bodybuilding, MMA, biotracking, and just general wellness and diet and stuff like that. And while I think that there are many reasons that explain it, especially among the younger demographic, one of the most obvious reasons is that people are concerned about their health and they want to do a better job taking care of their bodies. And the backdrop is the larger health crisis in America, and I think Covid and the rising levels of distrust in health authorities has contributed to that. But there hasn't been a commensurate movement to address the epistemic crisis that we're facing. And I feel like there's a real opportunity there to do that more deliberately. So you've piqued my curiosity, Chase. I'm going to go interrogate some of these people at various universities to understand how they're approaching these problems and if there may be some synergies there. Because to my point about iterating on new frameworks, that's especially important to do during times of great change, like we're seeing today, where your baseline assumptions about the world that inform your models may no longer hold, which explains why you keep getting all the right answers to all the wrong questions, as Russell Napier is fond of saying. So I do think there's a real opportunity here.
- [16:28]
B
Yeah, 100%. So we did a big project at the end, like me and a few other of my classmates, on the future of truth, and it was, it's really dystopian, like rabbit hole to go down, obviously. But to think about like, what does the truth look like in 2050, given the way AI is impacting our world, not to mention social media, and we had to develop some sort of digital canon that most of us at least can agree on as some fundamentals. Because I feel like that's one of the things we've lost sight of lately is it feels like the moorings of the canon of what's true, even that is shaking. It's wobbling to a degree. And so we had tried to design a system where we could build an agreed upon canon in a digital age of some fundamental. We can all at least come back home to this stuff.
- [17:17]
A
Yeah. And I think also just we are now living during a time where philosophical questions about the nature of truth and how do we know what we know and what is true and how do we assess truth have never been more important. Because if there isn't some authority that everyone agrees on as being the authoritative source of truth, then we all have to be able to arrive at truth on our own. And then we have to be able to interrogate what that even means. Like, is there such a thing as objective truth? Where does truth derive from anyway? This is for multiple episodes, which I should actually I feel like I've done this a long time ago in different ways, but not with this intention. So let's get into the reason that you came on the podcast today, Chase. Which has to do with the AI Capex boom, the much talked about AI capex boom that you've also been writing about, and the urgent challenge facing the United States to reignite this flywheel of domestic manufacturing and importantly, manufacturing driven innovation that you and others believe will depend critically on yet another Capex boom in electricity production, storage, delivery, pretty much everything else that goes into the electric stack, as I've heard some people call it. These are two complementary conversations, our conversation about AI and about electrification. Because the electricity needed to power AI is only going to grow, even if novel architectures and new software implementations will be more important than previously thought to scaling these systems. Because regardless, the demand for electricity is still going to be a proxy for AI demand. So why don't you just walk me through what got you interested in these topics and why you think they are so important, both for the economy and also because of their implications for investors.
- [19:11]
B
Yeah, so I started off writing that piece really to just go deep on the electricity part in the US because clearly we have challenges creating enough electricity, and maybe more to the point for now politically, to create it at a price that makes sense for regular people that the economy can use. And one of the things that kind of piqued my curiosity, I was thinking about the shale revolution and how much that's done for the US in the last decade that at this point we all just take for granted. Right? Having cheap natural gas is very, very helpful for us from a macro perspective and for just the economy in general. So to have really cheap natural gas maybe ending, I'm not saying the shale's peaking imminently or anything, but at some point that gets a little bit harder. You've high graded all your good stuff and I just assume maybe it's 10 years from now, maybe it's a year from now, it just gets a little more expensive to get this stuff out of the ground and that becomes a macro headwind, it becomes an electricity headwind. Especially as we are strong arming people into taking our LNG exports while perhaps needing more of that for ourself in the future. So I was thinking of it from that perspective of maybe the shale revolution goes from a big tailwind for us to a potential headwind. Growth, inflation, all of it. So I was just doing a ton of research on all these kinds of things and I just happened to stumble on an article I shouldn't call an article. It's basically a book called the Electric slide by Paki McCormick and man, I'm forgetting the other guy's name now. I think it's Rob d' Amico and that whole thing just blew my mind. It's a 213 page PDF of an article. But they go deep on a bunch of history and tech, technical stuff that I think is worth people's time. But you can skip some of that and get to the heart of it easily. But essentially the view that they present here is one I hadn't really considered and to me was a complete game changer. And that it's basically the cost of electricity in China right now is about half of what it is here. They're producing about twice as much as we do. And in addition to that, they're dominating us in storage and solar and things like that. And I think five, 10 years ago, any investors seriously looked at renewables versus fossil fuels. It was kind of like, what are we doing here? This stuff's really expensive, it's kind of less efficient, it's available less. The whole thing just kind of didn't make sense. And the same for a lot of downstream products that would use a battery. Like, it's too expensive, it's too heavy, whatever the case may be. But they do a really good job of illustrating the cost curves of not just batteries, but of those electric motors, of the compute, the whole part of the stack. All that stuff got way, way cheaper. And I think they go back to 1990. And if you take the whole electric stack, it has gone down by 99% and it's basically an annualized 12.5%, something like that. And to be clear for people, the electric stack, it's lithium ion batteries, which is how you store and supply the power. Magnets and electric motors, turning electricity into mechanical motion. Power electronics, which is used to shape electricity into very precise forms that all of our modern technology needs. And then all the embedded compute, which orchestrates all of the how and why and the action of that stuff, all of that got radically cheaper. And all of a sudden this stuff is so affordable that using it in modern products makes a ton of sense. I think one of the things that should stand out to people and people should ask more questions about is how did China go from a car backwater to dominating global auto exports? All of a sudden they make the best and cheapest EVs in the world. I feel like not very many people ask the questions of how did they get there? And this whole thesis does a lot to kind of make that make sense. It's, well, they got really good at batteries, they got really good at making batteries cheap. And then the same Thing for all these like power electronics and electric motors and not are they just the best at manufacturing these things. They're starting to take the lead in new designs of them. They own the supply chains upstream of them and then they're all like, you know, co located and working together. These supply chains are really tight. It's not like a giant global supply chain in the way that a lot of these are. And there's base layers of this technology. They're kind of the same for cars and appliances and lawn equipment, buses. You can just kind of run through a lot of different things. And it's like, well, okay, well, it needs a lithium ion battery. It needs some electric motors to move it. They use the same things, you think back to when we were kids, a car and maybe a forklift and a lawnmower.
- [24:05]
A
Lawnmower is mostly used to be gas powered and probably still are.
- [24:09]
B
Yeah. And all those things were so different to design and manufacture. Now if you're really good at building one of these things, you look over at the other one, you're like, oh, we could do that. And a good illustration of this is you have phone companies in China like Xiaomi going from making phones to making really good cars. And they did that quickly. And I don't think people have made it click in their head that well. Yeah, that's because they understand this electric stack so well. And it's really just reconfiguring the same parts in a new way to make a car. Like, it's not that complicated. So as we sit here today, we are not particularly good at doing any of this, even though most of this stuff was our idea 20, 30 years ago, 40 years ago. And because these things work together so well, the article and I expound on this in my piece. But thinking of each of these different parts of the stack and even in my opinion, up the supply chain is like Legos that snap together every time. Two of these Legos snap together, they create value. It's 2 plus 2 equals 10 every time. So that's why you look at a BYD and they're making iPads and drones and cars and buses and forklifts and trains. And they make all this stuff and they make it really well and they make it at a really, really good price. And I did a Q and A for the genius community with you. And I think the word I use probably 50 times as competitive because my big concern with the tariff wall is like, that makes you uncompetitive. So I have competitiveness on my mind as we navigate the whole manufacturing thing, because clearly this shows to me that we need to do more manufacturing at home. But the right kind of manufacturing and doing it in a way that keeps us competitive, I think is crucial.
- [25:54]
A
So I feel like this conversation, to the extent that it's happened in the US in recent years, let's say post Covid especially, has been, besides the fact that it's been heavily politicized, it's also focused a lot on the electrification of cars and whether electric motors are better than internal combustion engines, whether there's enough range, et cetera. So much of the critique has really been a critique of electric vehicles and intermittent sources of energy like wind and solar. And what it sounds like you're saying is that the downstream consequences of becoming really good at electrification, at harnessing new renewable sources of energy in battery technology and in magnets and electric motors that turn electricity into motion and generate force, create positive flywheel effects that begin to encompass and influence more and more areas of the economy and the creation, manufacturing, and design of products that would not have been thought possible otherwise. And that's not really how we've been having this conversation in America. We've been having this conversation in much more isolated terms. And our support of these industries has largely been seen as a concession to people concerned with climate change or as necessary but economically inefficient responses to an exogenous problem, namely carbon emissions. Whereas in China their perspective seems to be very different. This is not only good for reducing carbon emissions long term, but it's also economically savvy. And they've taken a mission critical approach to owning this space and as much of the supply chain as possible and as many of the downstream innovations that come out of it.
- [27:41]
B
Yeah, exactly. So you think of this as like energy, intelligence and action. They're kind of all in on energy and action. Obviously we're sort of all in on the intelligence side. We both do AI, they just do it different. And I think they're doing it with that applied focus on how it can touch all these things. And to that point, the reason this is important is because more and more things make economic sense to be electrified or have a battery in it than some form of combustion. You mentioned like lawnmower. It's a perfect example. The best electric lawnmower now is pretty incredible. It's so much easier to deal with. I think one of the hard things for us in the US is we just politicized electricity and means of powering a vehicle that became like everything, it seems like two camps, two Tribes that had to take sides. And I think a lot of people took the side of, okay, well all this renewable stuff's bad and EVs are dumb and they just left it there. And I don't think that was a crazy position ten years ago, but because of the cost curves rapidly declining now all of a sudden, okay, well, let's take another look. It's like, well, this stuff's cheap, this stuff is effective. And now the batteries are as cheap as they are. Even storing grid power has become a big deal. And I think that's going to even look at a home generator. Still to this day. A lot of people have the diesel one or one that runs on gas or whatever. I think 30 years from now no one will have that. You'll just have a home battery. Those are already starting to get big and they sell power back to the grid. There's a whole business model around that.
- [29:11]
A
And the efficiency on those is improving at a faster rate than solar, for example.
- [29:15]
B
Yeah, big time. And even talking about the range anxiety, which all those kinds of things, you look at the most cutting edge batteries coming out of China right now, the range is pretty great.
- [29:25]
A
You can also repurpose those when they're plugged into your house. You can repurpose those and turn those into generators. The thing that's really interesting about this suite of technology is that it's more malleable in some sense. It's almost kind of like the revolution that's happened with screens and software where we used to have purpose built analog things and then increasingly everything became software. There's something I think, similar here where there's much more commonality and interconnectivity between parts of the stack on the electric side than there is in the traditional internal combustion world.
- [30:00]
B
100%. And going back to the phone car thing, the first Tesla batteries for their car was basically just a bunch of cell phone batteries. Truly that's where a lot of this stuff came from. The early batteries, I mean, they were bad, but here we are now you have the BYD blade battery. And if you look to go back to weak signals, if you look through a lot of scientific journals and things people are playing with on the cutting edge, it looks like that you have a reasonable promise of these batteries being significantly better 20 years from now when some of this stuff gets applied. I just did a research piece on aluminum and there's an aluminum battery that is completely outperforming lithium. Now it's super early. You're talking basic research level stuff. It's not going to get commercialized tomorrow. But all this stuff we're talking about was in somebody's head in the 80s and 90s. You know, it got it just that China just really commercialized it in the last decade.
- [30:57]
A
Where do you feel like we went wrong or have gone wrong here?
- [31:00]
B
Yeah. So I credit that piece for what I'm about to say, because I hadn't thought of it in this way well enough until I read it. And that's the electric slide. But essentially, profits at the end of the day have driven us to go all the way up the perceived value chain to just like, let's do software and let's design things like chips. We'll let them build it. We don't need to build it. That's like a low value added thing. We'll design it. That's where all the profit margins are. On the surface, that makes perfect sense. But I think over the long run, it makes no sense, because at the end of the day, you cannot separate design and manufacturing. I think that is the core mistake we made was we can separate it. We can have an engineer in Palo Alto tell the factory floor in Shenzhen or whatever, here's how to do it. Because as you iterate manufacturing things, you come up with ideas that impact design, and designers come up with ideas that impact manufacturing. The reality is you need them working literally together. That's something. I think Elon Musk is one of the few people in America that he gets that he has his design and engineering people basically right at each other at all times. Because so often someone designs something stupid from an engineering perspective, or the engineering team wants to do something that negates the whole point of the design. I think we missed out on the fact that a lot of innovation can come from manufacturing. And if you go back to Apple in China, the interview you did on that, this really exploded to me, because if you remember, he highlighted the point where Foxconn turned around with a ipod that they made themselves and presented that to Apple. And Apple was blown away at how good it was. And that was like a perfect example of like, here's your manufacturer that they're not allowed to design stuff, but here they've come up with a product that's actually really good. And it's because they've learned so much doing that manufacturing work. You know, that kind of stuff should have triggered people to be like, wait a second, are we missing out on some of the future of design because we're not doing the manufacturing? And I think that answer is just, yes.
- [33:01]
A
Yeah, what was also amazing about that interview and the book, is that you realize even China's leaders didn't understand that. In fact, Apple was instrumental in explaining to them how valuable their participation within the Chinese economy had been to sparking this flywheel of innovation driven by hands on, iterative manufacturing. And the fact that you're doing that thing makes you better at the other thing or lots of other things. Yeah.
- [33:32]
B
And if you're the manufacturer for this whole stack and you're talking to each other, like talking that flywheel again, 2 plus 2 equals 10. And the more you combine these things. Another point I'll make is if you study the greatest business leaders, the industrial titans of history, almost all of them used pretty intense vertical integration. You think of Rockefeller, he did not just make oil and kerosene or whatever, he was doing, the barrels and the transportation, he wanted all of it. And that made them very, very efficient, but really drives down costs, gives them more control over the whole process. And I think globalization in the modern world, we undid a lot of that and for not all bad reasons. That makes plenty of sense. But now I think we see the reemergence of that kind of work for the BYDs of the world where they're controlling the whole thing and that's helping them drive down costs. Again, goes back to competitiveness. You're more competitive. If you do that, you have more.
- [34:26]
A
Leverage over your suppliers.
- [34:28]
B
Oh, big time, right? Yeah. And there's that horizontal integration too, of the multidisciplinary thing, like taking innovation and all these different adjacent fields and applying it to yours. A Lego in this other industry hasn't fit in your Lego ever. But now all of a sudden it snaps in and it's like, oh, well, we can do that. Okay. Think about drones. Drones wouldn't exist if we hadn't had some of the innovation we've had with electric motors and making them more lightweight and batteries more lightweight.
- [34:58]
A
Now, going back to the conversation we had at the beginning about foresight, doesn't it also make you better at predicting where things are going? Yes, because you can see so many of the different applications for the products that you're creating.
- [35:13]
B
Exactly. And that systems thinking approach of realizing that things are not just the sum of their parts, like the way they interact with each other, the feedback loops, makes it much more. There's a compounding effect just inherently built into some of this stuff. We're talking about the future, we're talking about where the world is in 20 years, who gets to build that world? And at the moment. The way we have this structured, it's not us. The US Will be an emerging market being like, you guys want some soybeans and some natural gas? And I don't know, that's what we have.
- [35:43]
A
So it feels like I sent you a clip yesterday from that movie, the Counselor. There's this scene where this guy is speaking to someone else, and the conversation is essentially around acceptance. And one of the people, the Counselor hasn't really accepted the predicament he's in. He's still in a state of denial and wanting to be able to go back in time and change things in the past and that not being possible. And I feel like we remain in a state of denial here in America today, and we haven't even entered the race yet. That's what it feels like. And I'm curious if you agree with that and if you do, I don't necessarily want to try to understand why that's the case, but I am curious to know what you think needs to happen and maybe if you've identified people or companies or actors within or departments within the government that are actually trying or making progress or putting forward positive visions for what we need to do in order to become competitive again in these areas as a country.
- [36:41]
B
Yeah, that clip really nails it. It is an acceptance problem. And I don't even think people even realize this yet because again, we tend to see the individual Legos and think about what got us here more than where we need to be in 20, 30 years. It's just like a giant blind spot. Obviously, we have gotten around to realizing rare earths, right, in the last year. That's been kind of obvious for 25 years. Something like that. I don't know that you need to be careful with that at least. But we didn't really grasp it until the mousetrap snapped on us this year. And it's like, oh, maybe we should do something about it. So the odds of us doing something about the rest of this, especially because a lot of these things are politicized in America, it makes it tough. But to me, as far as, like, okay, what do you do about it? First of all, you accept it. You realize exactly where you're at. You have to figure out what's important. And electricity is important.
- [37:33]
A
And I feel like we're in that just quickly to interrupt you and then. Please continue. It feels like we are in that process right now when people like Patrick McKee or Dan Wang publish their books or Kyle Chan publishes his letters on Substack and more and more People read them and share them. It feels like that is part of a process of, let's say the top 1% or 10% of intellects in the United States who are beginning to realize where things are. And then that message will eventually resonate throughout the economy and then we get acceptance. But it feels like that's where we are. We're still in the process of reaching acceptance.
- [38:05]
B
Yeah, exactly. I think those people, it's kind of like the weak signal that, okay, some people are actually starting to figure this stuff out. It's just the road to get there becomes the hard part. And one thing I've noticed, maybe it's just my opinion, but we keep trying to slap band aids on everything and look for really easy fixes and easy sources to blame.
- [38:24]
A
That's another quick one, that we are still in a blame mindset in America which is also very amenable to what's in the incentives of politicians. And we need to move past the sort of who's to blame pointing fingers to actually what are we going to do about it?
- [38:38]
B
Exactly. Let's work on solving the problems instead of sharing the blame. Whenever it comes to China, everything is so defensive from our perspective. Even the language, decouple de risk contain. It's all so back footed. Instead of being like, they're doing a really good job of competing with us now and we can debate how much of it was fair or whatever, but at the end of the day they're out competing us in a lot of really important areas. And it just gets worse in the future, in my opinion, based on what we're doing now. So the whole how do you fix it? Thing, to me, it absolutely fundamentally starts with education. That is where the biggest erosion has happened in my opinion. That's what has to be the number one priority. As I write in that letter. All this stuff's about human capital. And I don't care how good your policy is. If you don't have the human capital, if you don't have the engineers that can build the things, think up the things. If you don't have robust, well funded university labs, government labs, corporate R and D, most corporates, they don't love doing R and D these days because, well, that hurts the bottom line. That's where everything has to come from, is these institutions. And when I was a program manager in the government, I got to spend time with MIT rocket scientists and I worked at the Air Force's rocket laboratory. So you're just huge nerds thinking about what a satellite thruster needs to look like in 25 years. So seeing the yield that stuff generates when people are just given money and time to tinker and think about hard problems and that's what gave us that giant lead. That's why we are the ones that thought up most of these actual things that are being commercialized in China. So for me it all comes down to that. But a hardware focus over just software is huge. I think we've had a very myopic focus on software that needs to make a dramatic shift to hardware. And when I think of the Palmer Luckies out there that we need more Palmer Luckies is the first thing I would say. A non bloated entrenched defense contractor that's trying to build physical hardware at a decent price. And I give Elon credit. Same thing for SpaceX. Taking things into space, a lot more competitive because of some innovation.
- [40:54]
A
I really do wonder what the opinion perspective view is from Beijing when they look at us today going through this government shutdown period where we haven't even entered the race yet. And I wonder what they think, what are they thinking is happening here? Because I can't even really fully understand. I do think part of. I think you really nailed it when you talk about decoupling de risking containing that speaks to a scarcity mindset, a mindset of we accomplished xyz, that's as good as it gets. We got to hold onto what we have because if we lose it, that's it. That's the mentality of inheritors of wealth. It's like this is all I'm going to get. I don't know how to make any more of it, so I got to try to protect it. I think that. But this also is reflective of a state of privilege and comfort that's not consistent with what made us a great power and a great country and a global leader to begin with. And it's why a lot of the conversations in my opinion, around reshoring iPhone manufacturing in Texas feel like fantasy talk at the moment. Because doing that requires sacrifice and we just haven't gotten to a place in America yet where the incentives are there to do that.
- [42:13]
B
Yeah, I hadn't thought of it from a individual family's wealth perspective, but it's a perfect analogy. Honestly. I say in that letter that China takes serious education way more seriously. And I think that shows that there's a work ethic gap for sure. To go back to Apple in China when it talks about they needed a factory floor cleared out or whatever and they thought, oh yeah, I'm sure, they'll have it done in two weeks. And they came back the next morning and it was just all done and the executives were mind blown. I think there's just a.
- [42:43]
A
There's a hunger gap and a hunger.
- [42:45]
B
Yeah, 100%. And the average macro investor, the one thing you can guarantee they'll smash China for is that they don't let consumption grow significantly. And I'm not saying this is all good by any means, but there is this forced hunger that comes top down. They don't let people get very comfortable. They don't let people stop working hard. They don't want rampant consumerism and things that probably do have contribute to us getting a little bit lazy. But at the end of the day, this is just human nature. You get a bunch of stuff, you don't keep the same edge you had. It's why coaches and sports struggle really hard to keep their teams up against bad opponents and stuff. So I think that's just part of it. The question is how to get back out of it.
- [43:30]
A
And they're very explicit about it. Xi Jinping talks about this when he uses the phrase eating bitterness. And I encourage people to read Joseph Turigian's book, which is a history of the Chinese Communist Party told through the life and times of Xi Jinping's father, to really see what is the environment that produced these people, what is their history. And the other thing I think about is that in some sense we're kind of following the Europeans. Europe was the dominant continent until the end of World War II. It was the source of the first industrial revolution. It produced so much literature and culture, and eventually America took over. But because of the Cold War and the threat of the Soviet Union, the United States was incentivized to help bring Europe along for the ride. And so at the end of the day, Europe lost its empire, or the Brits lost their empire, and other countries in Europe lost their influence, their political influence globally. But they gained in terms of lifestyles because they were able to benefit from alliance with the United States. We're not in a similar position today, so we can't afford to just kind of go quietly into that good night. And again, I find it concerning that we haven't. We're still in this place of culture wars and fighting between ourselves and shutting down the government and looting the government and all this stuff. It's an absolutely terrifying place. And I haven't seen a movement within on either side, really. I mean, there are elements of people both on the left and right, but the politicians on both sides still seem to be playing that game. And the people that have money and have done well in the United States, again to speak to incentives, they may want to see positive change for the country, but they're only willing to risk so much, right, because they don't want to expose themselves to losing what they have. You can even see this when it comes to housing developments in wealthy areas. People don't want you housing because they don't want to affect the value of their own homes, even if other people need houses and they can't afford them. And all that is undermining the political consensus in the country. Chase, you write quite a bit about AI. I want to talk about that too, because one of the operative questions that is in people's heads these days is whether we're in an AI bubble or an AI CapEx bubble. And that's something you've written about. I want to talk about. I also want to talk about the dollar because there are some indicators that we might be heading into a growth slowdown. And the question that I have in my mind is, are the same dynamics going to hold this time around that have held in previous recessions because of the role of the US as the primary consumer of the world's surplus and because of the dollar's role and the role of US Government debt internationally as a place of refuge for investors and businesses looking for safe havens to park their cash? Or are we going to see a post Liberation Day dynamic where the dollar behaves more like an emerging market currency and sells off in the face of economic weakness to the extent that we have time, Chase, I'd love to talk about Venezuela and what US Policy is there and how it fits into some of this talk about bolstering the Monroe Doctrine and America's own retrenchment into the Western Hemisphere. This is something that we've talked about in the comments section of some of our posts in the Genius community, and it's something that I know you've thought quite a bit about. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want Access to the second hour of today's conversation with Chase, head over to HiddenForces IO. Subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app. Just like you're listening to this episode right now. Chase, stick around. We're going to move the rest of our conversation onto the Premium feed.
- [47:34]
B
Sounds good.
- [47:36]
A
If you want to listen in on the rest of today's conversation, head over to HiddenForces IO, subscribe and join our Premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces IO, you can follow me on Twitter cofinas, and you can email me at infoiddenforcesio. As always, thanks for listening. We'll see you next time.