The Tom Woods Show – Ep. 2736 The GDP Racket & the AI Profitability Problem

Date: February 19, 2026
Host: Tom Woods
Guest: Kevin Duffy (Principal, Baring Asset Management; Author, Coffee Can Portfolio)

Episode Overview

In this episode, Tom Woods welcomes back Kevin Duffy for an in-depth discussion about the deceptive nature of GDP numbers, the real state of the U.S. economy, the viability of current AI investments, the future of tech behemoths, and how Chinese innovation is shaking up the global economic playing field. Interwoven is a frank evaluation of investment strategies in an era of monetary debasement, the outsized importance of a handful of U.S. “Magnificent Seven” tech companies, and how both individuals and advisors should be thinking about risk in these extraordinary times.

Key Discussion Points & Insights

1. Bitcoin, Gold, and Portfolio Competence

[01:42–04:05]

• Kevin Duffy: Admits to missing the Bitcoin bandwagon, citing it's outside his "circle of competence."
  • “It's just a monetary competition… The old monetary regime of fiat currencies is crumbling.” (C, 01:59)
  • Duffy personally favors gold (“I happened to be betting on gold”), and feels Bitcoin operates in waves of speculation that he’s not comfortable with.
• Tom Woods: Appreciates Duffy’s rare honesty and notes Duffy’s portfolio performed very well nonetheless, barely lagging gold.

2. Evaluating Financial Advisors & The End of the Index Fund Era

[04:05–07:12]

• Woods recounts a key Gene Epstein question: “Have you outperformed the S&P?” and raises skepticism about advisors vs. passive investing.
• Duffy points out S&P 500’s concentration risk (~36% in top 8 tech/AI firms), making it far less diversified than it appears.
  • “The problem with the S&P 500… even though there are 500 companies in it, it’s not a diversified index.” (C, 05:13)
• Duffy stresses that the economic environment is shifting drastically and that forward-looking, scenario-based thinking is vital in choosing an advisor.
  • “The financial advisors that I want to hire would be somebody who is imagining this new landscape and is not just extrapolating the past.” (C, 06:37)

3. Investment Themes: Debasement, Contrarianism, and China

[07:12–10:09]

• Duffy views “monetary debasement insurance” as one major theme but cautions: “I’m a contrarian also… very intrigued by what’s going on in China.” (C, 08:44)
• Argues that pessimism must be balanced by identifying where growth and opportunity might be, e.g., undervalued Chinese innovators.

4. Contradictory Narratives on China

[12:22–15:03]

• Tom Woods: Notes the wildly divergent opinions about China, all apparently plausible.
• Kevin Duffy: Finds the growth in Chinese incomes undeniable and notes the current mood among Chinese investors is “bunker mentality”—a contrarian’s signal.
  • “Right now, the retail investor in China is hiding in a bunker.” (C, 13:29)
• Duffy sees a vast, competitive, and entrepreneurial talent pool in China, especially in tech and AI.
  • “The talent pool is there. I think over time things will become… more liberal.” (C, 14:10)
  • Warns U.S. tech hegemony is likely ending and that U.S. investors underestimate the risk of Chinese competition.

5. The AI Hype, Profitability Problem, and U.S. vs. China

[15:03–19:07]

• Woods notes concerns in Duffy’s newsletter about the sustainability and returns of vast U.S. AI investments.
• Duffy explains Chinese firms have become more disciplined, forced by past exuberance, property busts, and sanctions into capital discipline (C, 15:44).
• U.S. Tech Giants (“hyperscalers”) are pouring mountains of money into AI—$2.9 trillion estimated from 2025–28—sometimes with “almost no questioning,” risking massive over-investment:
  • “Are they going to get a return on that investment?” (C, 17:30)
• Duffy highlights that many U.S. AI initiatives seem “like a giant donation”—users and society may benefit, but profitability may not materialize for investors.

Notable Quote

• “It appears that this is a commodity business… OpenAI is just losing. I think it's a tremendous amount of money, like, you know, billions of dollars a month.” (C, 20:06)

6. Is AI A Bubble Or Legitimate Revolution?

[18:06–23:18]

• Woods shares that new AI tools are genuinely transformative for productivity but still questions if investor hopes will be met.
• Duffy distinguishes between consumer utility and investible value:
  • “As an investor, I think I'm just not willing to take these risks… There’s plenty of other things that are going on right now that are interesting to me as an investor. So I would rather watch this from the sideline.” (C, 23:18)
• He does reveal that he’s recommended “bear” positions on some AI high-flyers (e.g., Nvidia).

7. Dissecting GDP: The “Racket” Explained

[27:21–30:43]

• Duffy breaks down how current GDP growth is inflated by questionable investments (notably AI capex) and unsustainable consumption (driven by a “K-shaped” wealth effect).
  • “What is the quality of that investment? The quantity is high. Quality is, is not very high.” (C, 27:52)
  • U.S. government spending goes into empire maintenance (e.g., bombs), while China builds infrastructure.
  • “The average weighted tariff rate in the United States was 2.5% ... it’s now 15%.” (C, 30:19)
• Duffy argues the reported prosperity is skewed, the returns on all this expenditure are dropping, and tariffs are worsening the squeeze on middle- and lower-income Americans.

8. Is the Economy More or Less Fragile Now?

[31:06–33:44]

• Duffy identifies both positive and negative forces:
  • China’s productivity and a move away from U.S. dominance as positives, especially if U.S. imperial overstretch fades.
  • Innovation and entrepreneurship in the U.S. remain strengths.
  • Warns the “emperor” may destroy the currency in the process, but overall trend is long-term human prosperity, with not just the West, but the BRICS and others driving progress.

Notable Quote

• “The empire is kind of the root cause of all the problems that we have. It leads to the money printing and leads to all these other things. Until we get to the root of that…” (C, 32:19)

9. The Magnificent 7 & Concentrated Stock Market Gains

[33:44–37:16]

• Woods notes 7 giant firms drive most of the S&P 500’s gains, leading to a vast disparity—the “Magnificent Seven” vs. “Mediocre 493.”
• Duffy observes this reflects a real bifurcation in the economy and investing landscape.
  • “All the attention has gone into these companies and at the same time the other [companies]... have been somewhat neglected.” (C, 36:21)
• Cautions that blindly extrapolating the successes of the last tech revolution (internet) to the present (AI) is risky. The competitive and capital environment is different.

10. Investment Advice for the Average Saver

[37:30–39:49]

• Duffy’s “what NOT to do” list:
  • Don’t buy (government) bonds (“all paths...are leading to monetary debasement”).
  • Don’t blindly index to the S&P 500.
  • Have some gold; a small allocation to Bitcoin also acceptable.
• Stresses risk-awareness and understanding current extraordinary conditions.

Notable Quote

• “The easiest thing to do might be just to have… It’s almost what not to do, Tom. Don’t invest in bonds...You should really have a view anticipating that one of the surest things is that all paths are kind of leading to monetary debasement.” (C, 38:38)

Timestamps for Key Segments

• Bitcoin, Gold, and Portfolio Strategy – [01:42–04:05]
• Choosing a Good Financial Advisor – [04:05–07:12]
• Investment Themes: Debasement & China – [07:12–10:09]
• Chinese Innovation & Contrarian Moves – [12:22–15:03]
• U.S. AI Investment—Bubble or Breakthrough? – [15:03–19:07]
• The AI Profitability Problem – [19:07–23:18]
• GDP: What It Really Tells Us – [27:21–30:43]
• Fragility and Opportunity in the Current Economy – [31:06–33:44]
• The S&P’s Magnificent Seven and Market Distortion – [33:44–37:16]
• Practical Investment Guidance – [37:30–39:49]

Memorable Quotes

• “It's just a monetary competition… The old monetary regime of fiat currencies is crumbling.”
  — Kevin Duffy [01:59]

• “The problem with the S&P 500… even though there are 500 companies in it, it’s not a diversified index.”
  — Kevin Duffy [05:13]

• “Right now, the retail investor in China is hiding in a bunker.”
  — Kevin Duffy [13:29]

• “It appears that this is a commodity business… OpenAI is just losing. I think it’s a tremendous amount of money, like, you know, billions of dollars a month.”
  — Kevin Duffy [20:06]

• “Are they going to get a return on that investment?”
  — Kevin Duffy [17:30]

• “The empire is kind of the root cause of all the problems that we have. It leads to the money printing and leads to all these other things.”
  — Kevin Duffy [32:19]

Final Takeaways

• Skepticism on Metrics: GDP and S&P 500 performance are increasingly misleading as indicators of actual prosperity or investment health.
• Risks & New Paradigms: The investment and economic environment is fundamentally shifting—previous “rules” (like safe passive indexing) may soon break down.
• AI’s Real Winners: While AI will yield consumer productivity benefits, investors in many AI ventures may face poor returns; Chinese firms’ efficiency (born from necessity) provides real competition.
• Contrarian Opportunities: With fears and skepticism high in places like China, contrarians may find value, but investors must stick to their "circle of competence."
• Actionable Advice: Avoid government bonds, question S&P 500 orthodoxy, allocate to gold, possibly a little Bitcoin—focus on what not to do in a dangerous era.

For more, visit thecoffeecanportfolio.com.