A (3:14)

All right, so let's talk about the unraveling. What are you seeing? Because so over right of center in, in Trumpistan, I can imagine many people believe that the tariffs are working. We're on shoring American manufacturing, we're building up our manufacturing base. Jobs are going to be returning as a result of all this. We have China right where we want her. And it's really just a picture of American strength. I mean, Trump is the kind of guy you just can't screw around with. Finally, we have a president like that. How are you not seeing this?

B (3:50)

Let's start with the tariffs. When you do a flat tariff and you tax things at the border no matter what they are, you need to break down manufacturing into two broad categories. First, you have your simple products, things like plastics or furniture, textiles, where there's only a half a dozen manufacturing supply chain steps. And in a high tariff environment, it's relatively easy to relocate some of those steps within the tariff wall. So we are seeing significant build out in the United States for things like furniture and glue and paints and all of that kind of stuff. More complex manufacturers, the hundreds or thousands of steps are very different. So here's automotive, aerospace, electronics, computing. When there are thousands of steps and you only produce say half of the steps in country, you have to pay the tariff every time an intermediate product crosses the border and the end product ends up costing significantly more. So simple math, it's easier to take the steps that are within your tariff zone, move them outside of your tariff zone, and then you only have to pay the tariff once. So what we're seeing right now is a steady de industrialization of the value added, high skilled, labor intensive jobs and instead replacing them with much lower value added jobs and things like plastics or maybe things that are automated because our labor force is too much. So we've seen contraction in the manufacturing sector for the last six months. And the number that I pay attention to the most right now is it called industrial construction spending. It's a data point put out by the Federal Reserve and it's been negative since tariff day. So people are finishing the industrial projects they had started before April, but no one's really launching much that's new.

A (5:27)

Hmm. So what are you expecting to see in the economy over the next 12 months as a result? I mean, does this, is this anonymous with inflation what you just described, or.

B (5:36)

Well, if you go back to before April, we knew we were preparing for the fall of the Chinese system. We were preparing for the end of globalization. We knew we needed to expand our industrial plant, probably needed to double it half, and probably needed to increase the power plant by 50% to go with that. There's no way you do that on anything less than a 40 year timeframe without a lot of inflation. And I would argue we needed to do it in the next five to six years. So inflation was already part of my forecast, but now we have de industrialization going on on top of that. And so if we can't turn this around and get back to building things again, and that requires a very different federal policy, we're going to enter a period where we're going to lose the products from abroad. At the same time, we no longer are producing very many of them here. So we have to still go through that industrial buildout. But now against a backdrop of goods shortages. So the debate now is do you want high inflation plus productivity or high inflation plus a goods shortage? Neither of these are pretty.

A (6:36)

So obviously there's been a huge build out with respect to data centers for AI and progressing. Yeah, that's the one thing that has been a bright spot for the market. It remains to be seen whether it's a catastrophic bubble in the end, but.

B (6:52)

It'S definitely a bubble. Let's be clear whether it's catastrophic. Yeah. Who knows?

A (6:56)

Yeah. I mean, and it can be a bubble. I mean, we should be clear. It can be a bubble without AI itself being a bubble. Right. I mean, there could be this overinvestment in a build out, even if AI is in fact the future. Right.

B (7:07)

Well, there's a lot of unknowns in that statement. So I don't want to, I don't want to overly come down on one side or the other. Fifteen years ago, ten years ago, people were aware of large language models, but I don't think there was anyone in the AI space who really thought that LLMs were the thing that was going to break open. And here it is. So expecting the model we're on right now to be what we use in five years or 10 years or 15 years is a bit of a stretch from my point of view. Technology doesn't go in a straight line like that. Also, LLMs require a massive amount of processing compute capacity with graphics processing units. And GPUs are the most advanced chips that humans make. And GPUs cannot be made without a fully globalized system. So I actually look at today's build out like this is great because every data center needs power to go with it. We need the power regardless. And if we're entering a world where globalization breakdown breaks down, we won't be able to make the gpu. So anything that's installed now is all we have. So while I'm not a believer in the trajectory that we're on, I have no problem with any of the steps we're taking right now.

A (8:09)

Do you think we're in the process, however gradual, of onshoring our dependence on Taiwan, or is that not in the cards?

B (8:18)

No, there's, there's 100,000 manufacturing steps for high end semiconductors. The FAB facility is an important one, it's an unavoidable one. But there's another 40,000 that are like that. And once you actually have your FAB facility, the next step down is testing and packaging, incorporating into components. We do very little here. I'd argue that's much more important. And on the front end is the design and the logistics. We do do that. That's the highest value added part of the process. So this obsession with fabs is actually taking one of the lower value added steps that's most capital intensive and putting at the center of the conversation. And that's just bad reasoning from my point of view. We should be focusing on things that are downstream, closer to the end consumer. If you're worried about national security, well.

A (9:06)

So I want to talk about national security and foreign policy and talk about China and Central America, South America. But just to close the loop on this, what do you think if this process of what you're calling deindustrialization continues apace for the rest of Trump's term, what are you expecting to change over the course of four years?

B (9:26)

I mean, there's so little with this administration that goes in a straight line. So that's a really loaded question. Key thing to remember is that Donald Trump still hasn't fleshed out the government. He fired the top several thousand positions, filled very, very few of them, and then surrounded himself with a cabinet that has very little technical experience in anything. So if you think back to Obama, we had a cabinet that was all Academics that had never done anything in the real world. Now we have ideologues who have never done anything in the real world. So to expect to get good advice going to the president, even if he was open to hearing it, is pretty thin. And we've now had major policy changes on drug policy, on illegal narcotics, on the Red Sea, on Israel, on Ukraine, on vaccines, on tariffs, because, and I quote, it's what I feel. We get no straight lines on that. And so you can imagine what's going on in the business community right now. This is the reason why industrial construction spending is falling. No one knows what policy set is going to be tomorrow or next month or next year. And without some degree of continuity or some degree of guide, everything is up in the air and everything is on hold. So if this sort of ambient chaos holds and we just hit our 600th tariff change since January 20th, no one's going to put money to put anything in the ground because they don't know if it's going to be worth their time.

A (10:45)

So what's going on with Venezuela and Mexico? I know you focused on cartel violence. Yeah, yeah. Trump has obviously been threatening to deal harshly with the cartels. I think it remains to be seen what he's intending with respect to Venezuela. But how do you view our ramping up hostilities on both those fronts?

B (11:07)

Well, let's start with the understood reality on the ground. Venezuela is a very weak state, where the state security services have been so focused on crushing political dissents for so long that they've lost control of large tracts of territory. And so some of the cocaine smugglers in Colombia have now used Venezuela as a way to get their stuff to the wider world. It's a minority. It's less than 10% of the flow. Most of it still goes north into Central America and ultimately Mexico, especially Mexico, before coming north to the border. But there is a flow that goes through Venezuela. I'd argue most of that flow eventually goes into Europe as opposed to coming to the United States. But it is real and there is a degree of collaboration among members of the Maduro government in facilitating those flows. I don't know if calling it a cartel is the right term. That implies a degree of overarching control that probably doesn't exist, but it is a problem. So anything you want to do against Venezuela on a state security point of view, there's an argument to be made there. However, the Trump administration has yet to brief Congress about any of the details. So none of the intel that supposedly identified the ships has ever been shared with Congress. And what I'm hearing from the military is that there really wasn't any ever. And that's before you consider the legal implications of some of the specific decisions we had. Both Trump and Hagseth brag about performing war crimes the week of Thanksgiving. Because if you take out an enemy combatant and they've been completely disarmed of any sort of offensive capability and then you shoot them, that's a war crime. Every treaty the United States has ever signed on international law codifies that. And so now they're backtracking. It's like, well, maybe that's not what we meant. In addition, we now have the USS Ford down there, which is our top super carrier. Badass piece of military equipment. And it was only on the Monday after Thanksgiving that Trump convened a national security meeting with the joint Chief Secretary of Defense, Secretary of State, to begin the discussions about what the. The goals in Venezuela are. So to this point, the policy has been, let's shake some sabers and see if Maduro will just leave. Now they're starting to have the early discussions about what the policy might be. Very much horse on the wrong side of the cart.

A (13:29)

Yeah, it's remarkable that these kind of extrajudicial killings of people on boats in the Caribbean is. I mean, it's being kind of roundly condemned, but on its face, it seems like it has to be in violation of some law or past practice, because, I mean, we don't even kill drug smugglers when we catch them and convict them of drug smuggling. I mean, that's not a capital offense. And yet now we're simply annihilating people who are alleged to be smuggling drugs. And we have been shown no evidence that that's even true. And as you just pointed out, there's this recent case of this really patent war crime where we've bombed the boat, now people are scrambling in the water, and we bomb them again just to make sure everyone is good and dead. I mean, that is just unambiguously a war crime. But the whole idea that we can be just killing people who are suspected of smuggling drugs, has that been a past practice? Is that in line with any of our laws?

B (14:34)

Certainly not officially. I'm never gonna say that it wasn't done, because there's a lot that happens with COVID covert action in Latin America that, you know, maybe is distasteful but is not technically illegal by US Laws. And the. The, really, the limiting factor here is the War Powers Act. So that was something that was put in Place by Congress, bipartisan in the aftermath of Vietnam. Passed by a 2/3 vote. President vetoed it. It over came the veto. It was like the biggest overcome of the veto that we've ever had in modern history. Every administration since then, including the Trump administration, has said that the War Powers act is unconstitutional. It's an unconstit check on presidential authority, but it has never come up to the courts. And Congress since then has never called the President to account. So either the President has presented his case after 30, 60, 90 days to justify and then Congress votes to authorize the military action. That's for example, how Iraqi freedom happened, or the President is done within 30 days and folds the situation down. This is the first time that the War Powers act has been directly challenged over that 30 day threshold. But Congress has done nothing. And unless and until Congress actually decides to act, technically it's legal. Doesn't mean it's right, doesn't mean it'll work.

A (15:53)

Congress has been sitting on its hands on virtually every question. What about Mexico? What's happening with our posture vis a vis the cartels? And, and what are the implications of that?

B (16:06)

This is actually more of a Biden administration question than a Trump administration question. Under the Biden administration, a significant amount of progress was made at cracking down on the Sinaloa cartel, which for most of the last 15 years has been the most powerful organized crime group, not just in Mexico or in the United States, but in the world. And there was a general agreement that it was the most effective of the drug smuggling organizations because El Chapo ran it as business. But El Chapo was eventually arrested and has now been put away. And combine that with the effects of the last five years prosecution of his old organization, his sons basically running the place, like Uday and Kusay, if you remember those Iraqi assets. And has it been two years? Is it only a year? Relatively recently one of Los Chapitos, that's one of El Chapo's sons, convinced the guy who was the chief accountant of the organization to get in a plane and fly to El Paso.

A (17:01)

Yeah, yeah.

B (17:02)

To look at some real estate. And the DEA was waiting. So we basically had a shattering of the organization at the top. And there is no longer one Sinaloa cartel, there's like a dozen. And they're fighting one another. That sounds great. But the second largest drug trafficking organization in Mexico in the world is called the Jalisco New Generation Cartel. And they are an order of magnitude more violent. And now they are the most powerful entity and they are taking over A lot of former Sinaloa territory. So by taking out the Big Bad, we've helped inadvertently to create a new Big Bad that by many measures is a lot worse. Because Sinaloa, their kind of guiding idea was you don't shit where you sleep. You bribe local law enforcement, so they're on your side. Jalisco. Their idea is that the shit is the point. And so the first thing they do when they go into a new territory is shoot the mayor, shoot the police chief, randomly shoot a bunch of people in town so everyone knows who's in charge, and so nobody stands against them. Different model, a lot more violent, not as effective in the long run, but it generates a lot more activity that we are now seeing, among other things, in the murder rate in Mexico.

A (18:12)

So has the Trump administration done anything new on that front? I know he said that he wants to send in Seal Team 6 to deal with the cartels. Have we done anything that's actually changed our posture with respect to them?

B (18:24)

Not hugely, from my point of view, and I don't see that as a reason to love or hate the Trump administration. The core problem is demand. And as long as Americans like their cocaine, you know this is going to happen. And we've discovered that if you take out the kingpins in the case of the Caloa, you create a more fractious environment where there's a lot more competition. That's, for example, one of the reasons why fentanyl has risen. Cocaine requires a supply chain that involves a half a dozen different countries, and it takes about four man hours between the fertilizing, the growing, the processing, and the smuggling for every dose of cocaine. Well, fentanyl, you can buy a bunch of ink precursors on the open market, make a batch of a million doses in your garage in a week, and it takes four man seconds to get the fentanyl in. So we've, by cracking down on cocaine to agree, we've inadvertently created a new product set, and taking out cartel leaders will have absolutely no effect on that. And one of the things we've ironically seen with the border is by stopping the flow of illegals, it's made it very, very, very easy for all the drug smugglers to just ship stuff in containers. So, again, I don't blame Trump for that switch. This is one of those things that as long as people want their narcotics, there is going to be an economic pipeline of some form for it.

A (19:44)

What do you know about the recent pardoning of the former president of Honduras, who was a convicted drug smuggler? If you'd like to continue listening to this conversation, you'll need to subscribe@samharris.org Once you do, you'll get access to all full length episodes of the Making Sense Podcast. The Making Sense Podcast is ad free and relies entirely on listener support, and you can subscribe now@samharris.org.