China, AI Immigration, Rare Earths & Chips, Tariffs, Market Check | BG2 w/ Bill Gurley & Brad Gerstner

29:14And all that makes sense to me. And this particular action, I think, has the potential to run counter to all those positive things. I wish there had been more follow -up on the Trump promise. I would be hugely supportive of that. We've all seen the list of all the immigrants that have been so successful and critical to Silicon Valley's own success. And you know, you and I've also talked about the fact that some people say 50 % of AI researchers are of Chinese origin. And I believe now the patent count in AI coming out of China is larger than the US. And so yeah, one interesting takeaway from what we just talked about is maybe the Chinese government isn't as interested in entrepreneurs being as successful economically, you know, from an equity standpoint.

30:12So if we're that land of opportunity, they would want to be here. They would want to be a citizen here. They would want to build their companies here. And so I really think, you know, and look, I'm all for, you know, not having spies, right? That makes sense. But when you take these kind of broad statements and, you know, and they have the potential to be slippery slopes, right? Where the next step is what? You start, you know, studying LinkedIn for every single AI company for any one of Chinese origin. I think that has the potential to take on kind of a McCarthy, like, you know, perspective that could be very dangerous to our long -term competitiveness.

30:57Well, I think part of it too is just about brand USA. Like what is the brand we want to project into the world? Yeah. Like it's not just about the students who are already here. It's about the generation of students who are still in China or still in Southeast Asia or anywhere else in the world in South Africa, like Elon and Sachs and, you know, and others. You know, is this a place that they feel like is capricious and can just change on a dime and all the sudden throw them out after they've invested time and energy here? Or is this truly the land of opportunity, the place they want to go build their dreams?

31:30And I think that the cost to the US brand on a global basis, we have been the place for the last three, four decades or much, much longer, but certainly in the age of technology, everybody's wanted to come and do these things. It's in order to our great national benefit. Trillions and trillions of dollars worth of US enterprise, our economic growth, our economic productivity, our standard of living is higher. We've stayed ahead in all of these critical national security areas precisely because we've been so inviting to people around the world and we were making the argument, you know, when we had Aaron Levy on that we needed dramatically increase the number of H1B visas and make it a lot easier for people to get them.

32:13And so when I hear this, I mean, I have to say out of everything that's occurred in the administration, in some respects, I could not have been more thrilled by the president's promise on the all -in pod. I thought that was a big turning point. Yeah. I think for folks in Silicon Valley. And so to see this felt like a 180 on this, I certainly hope that it was misinterpreted, that it's very narrow, that we are going to project an inviting and welcoming brand America. Certainly, man, right now it is so critical in the age of AI to get the world's best researchers here. Like you said, I saw a study that suggested that 40 to 50 % of the AI researchers in the United States are best researchers are Chinese.

32:59So if you're gonna go after Chinese students studying AI at Stanford, by definition, the slippery slope is not that far to say I gotta go after these researchers. There are a lot more risks to our national security theoretically than the student studying at Stanford. Again, I'm with you, I'm all about being tough. You gotta be here legally. I don't want anybody spying on us. But I think it's a very dangerous place and really destructive to our national brand if we do this. And so when I saw your tweet about this, the best way to stay ahead of China is to poach their talent. You know, just a few weeks ago, we were talking about an AI visa, right?

33:38That if you were an AI researcher from China in the United States, we had to give you a family, an AI visa to come over here so that you don't have so much pressure on you to go back to China. So we need to find out where we need to bottom this out. But I certainly want to weigh in that we need to focus on recruiting. Just merely trying to understand China why it's successful and all those things. Some people label you as a China file just because you're not a China hawk. And I worry more in general that the China hawk mindset leads you to policy that's really bad, especially people that jump to that place.

34:26And a lot of people are these days, right? And so I just think that, you know, policy is one of those things where you can have an intent and you can implement a policy and you can get the exact opposite outcome, which was one of the things I talked about back in the... Well, the export controls... The export controls on China probably is what caused Huawei to catch up so quickly. Yes. The Biden era diffusion rule was going to allow the Chinese AI stack to win the global race in AI. And now we see, and I think SACS has appropriately called this out, we see this conflating between people who are just AI decelerationists and want to stop AI and capture it for themselves, right?

35:13Now they're kind of positioning themselves as China hawks so that they can gather a bigger alliance in order to slow this down. I think it's all bad policy. From my perspective, we need to focus on our own race, look at the lane ahead, run as fast as we can. And if you and I want to win championships and build a championship basketball team, we should not care where in the world the basketball player comes from. We just need to get the best players on our team to win the championship. And we ought to take the same approach to AI and technology. And I, you know, other people have said this, so I don't want to belabor it too much.

35:48But, you know, the entire Manhattan project was heavily impacted by immigrants. So like many of the great things that have been accomplished in this nation are because it attracts people from around the world. And we get to cherry pick the best in the brightest. And so yeah, like the fact that the skilled immigration numbers have been stuck, I think, at two to 250 ,000 a year for like 20 years is insanity. And we should be doing the opposite of this. We should be figuring out exactly how to increase that number. Brett, staying on the topic of China, the rare issue has come back to the top of the headlines.

36:32And the relationship between the two countries still is at an impasse. What are you hearing? What's the latest here? How could it broadly affect companies in the US? You know, well, there's this Wall Street Journal headline that you and I shared. I think it's a China -placed tough on rare earth exports and in parts powerful lessons on the pains of dependence. And it pointed to car companies risk factory shutdowns, you know, over this rare earth magnet shortage. And we had been hearing about this. Remember earlier in the year, I think I called it, you know, a kill shot by China can really cause massive disruption because they really are global monopolists in the production of key magnets in almost every electric motor and electric parts.

37:17And so the real question is, you know, is there a way out of this? How do we see this, you know, playing out? And I see a real parallel bill here between rare earths and AI chips, okay? In both instances, each country views them as existential, right? China views AI chips as existential because they know AGI is critical to national security, national economic security, et cetera. We view these magnets as existential because we got to keep our critical industries going. We use this to not only build electric motors that go in our test list, but we use them in electric motors that go into parts that are critical to our military.

37:58So I was thinking about this, right? President Xi's talking, or President Trump is talking to Xi on Friday, a couple days from now. And if I were the president, what would I do? I think I would trade rare earths for access to USAI chips, specifically this now deprecated Blackwell 30 chip. And let me explain why. Let me maybe make, you know, four or five points as to why I think this would be a great trade for the US at this point in time. Okay. Number one, this, you know, this B30 is this deprecated chip. So one of the concerns we had about the H20 was that there was too much high band with memory on it, right?

38:36And that if you cluster enough of them together could be used for training. So what they did on the B30 is they took, it took HBM off it all together. And it also doesn't use this co -os from TSMC. So it gives them a chip that's competitive in the market, but it actually deprecates it from a training perspective. It still provides a big gap to where the US frontier chips are, the Blackwell 200 and 300, but it is competitive in the Chinese market. And so what does that do? We've talked about this the last few weeks that keeps, you know, half of the world's researchers and the developers in the AI ecosystem are in China.

39:15It keeps them in that CUDA ecosystem, allows Nvidia to compete. And I think slows down their ability to run the table around the rest of the world. I think when we ban chips to China, it's going to accelerate while way like we just talked about unintended consequences. It's going to bring everybody into their developer ecosystem. And it's going to reduce the amount of developers in the Nvidia ecosystem. So I think that's a bad thing. Number two, selling them these chips, right? Which I don't think materially advances their cause on AI generates billions and billions of dollars of taxes to the US government, right?

39:53It reduces our trade deficit. Remember, if we're selling them 40 billion dollars worth of chips and all of a sudden we take it to zero, we've just increased our trade deficit by 40 billion dollars. And finally, it produces billions in revenue or in profits to Nvidia, which they can then plow back in to making sure that Nvidia stays at the front of the AI race, which is a proxy for the US stain in front in AI. So that's point two. On point three, it gets us right. If we do this trade, and I don't know that China would do this trade, but if we did this trade, then it would get us access to those rare earths right now, which is absolutely critical.

40:31And it buys us time to stand up our own rare earth supply. There's no doubt what this moment has revealed to both China and to the United States is that we have to get back to our critical industries, precision manufacturing, rare earths, etc. But that's going to take years to do. And China, I'm sure, is saying to themselves, we've got a weaner dependency off of Nvidia, but it also takes them years to do. So it allows us to continue to build that out without the disruption. If we don't do this, then we're going to have a massively disrupted economy over the next six quarters, slowing down economic growth and causing problems and critical shortages in parts to the military, in parts to our US auto industry, etc.

41:13So I would say the next point, I'll call this the final one, and then I want to get your reaction. Right. If we keep the chip ban in place, here's my biggest concern. I think it dramatically increases the chances that China is forced to move on Taiwan. Right. We're out there telling everybody in the world that AI is totally existential. We have lots of our leaders who are saying AGI is going to be eclipsed within the next two to three years. But yet we're telling one of the largest economic powers on the planet, but we're going to prevent you from having it. Right. And so there's a way they can they can say, well, if that is so existential as a risk to our country, we just have to go take Taiwan, which I don't think I think would be horrible for the United States.

41:59By the way, I think it'd be terrible for China as well. But it would be a hugely risky event in the world, particularly because the US needs another three to four years to diversify our supply chain away from China. Yeah. So three three reactions to this first, you know, and they're all in agreement. But yeah, it'd be tough to balance trade if if if we don't let them have the stuff we're really good at like this stuff you trade. Well, I mean, this is compared to this is like economics 101 like the country, you know, you sell the stuff your best at. So if you take that off the table, they're not going to buy our crap.

42:40And so like there's no way to get to trade balance if you're taking our best stuff off the table. I totally agree on Taiwan. I've made this point for a while. I think Jeffrey Sachs makes the same point. You need to be careful that the actions you're taking aren't aren't the exact ones that encourage that to happen the most quickly. And then thirdly, you know, part of why we're in this battle over these these rare earth components is that we we did these export controls. And it wasn't just about the Nvidia chips. I think recently we are trying to tell the world they can't buy the Huawei chips. So this is outside of America trying to enforce an export ban on China's products selling into Europe, selling into South America.

43:26I think that is, you know, something that is is beyond the scope of what our government should be capable of doing. And I've talked about this in the past like I expect, you know, SML to just ignore us telling them they can or can't do something. And I worry and I've mentioned this before, but I worry that rather than build a wall around China, we're going to build a wall around America. Yep. Well, it's, it's well said and listen, I think huge credit goes to David Saxon Howard Lutnik so far for repealing the Biden diffusion rule by reopening up the global markets, making sure America's running as fast as we can.

44:09The American AI stack can win around the world. I think it's a closer call for them on US chips to China. But this deprecated chip, I hope they take a close look at it. I think it would be a great win -win trade for both countries. We need those rare earths. And by the way, I'm not saying that this is a permanent state of nature. Think about this bill. Today, we have about 0 % of of of of leading edge chips fabbed outside of Taiwan, right? Almost nothing in the United States. And by 2020 or by 2030, so four or five years from now, people think that we'll have upwards of 15 to 20 % leading edge capacity in the United States, which is a huge step forward.

44:50I saw a presentation this week involving the United Arab Emirates, where if they were to build an advanced fab with TSMC and give the US some sovereign influence over this fab, right? So if it was a joint deal that we could increase the market share of the United States advance, advance nodes to almost 40 or 50 % in four years, that would be an extraordinary rebalancing of the global supply chain when it comes to advanced chips. But we're not going to do that if we're if we're in a war over Taiwan, right? And so it would seem to me that now would be the time that you would find, you know, this reasonable middle ground, we would run like hell to build out capability in Arizona and in other countries like the UAE that are friendly to us, you know, where we're building out this this leading edge capability.

45:42It would seem to me a much smarter policy than pursuing the one that we're on now where we have global embargoes, the Chinese on rares and us on chips enough said on that. I want to jump. I know that we're we're we're time short. Let's let's talk a little bit about just what's going on in the market. You had some thoughts. Well, I mean, I'm more I'm more sitting here in your thoughts. So you were you were cautious at the beginning of the year, you got less cautious that the market has rebounded yet many of the biggest issues that I think people care about the the whether or not we can get some agreement with China what's going to happen with the tariffs and there's new information on that judges blocking and not blocking the the the tariff talk.

46:29And then the debt issue, which now, you know, is is there's a whole bunch of of noise, you know, being stirred up by Elon, you know, now saying he doesn't support the big beautiful bill. So there's there seems to me to me to be as much uncertainty as a as there's ever been this year. But I'm very curious on your take. Well, the market's clearly not not a green with you at the moment, Bill. You know, we've had this incredible bounce. The NASDAQ's up 20 % from its intraday lows. Yes, now it's it's just above flat for the year, maybe up 1 % the S and P also has had a huge balance now up like 2 % for the year.

47:09Yes, I think it was on May 2nd or early in May where where we talked about us changing the flight path because I saw this approach to getting to the other side of tariffs, the bests and consensus winning, signing the reconciliation bill that would extend the tax cuts and have new tax stimulus. And so as I sit here today like the the bounce makes a lot of sense to me. But where we go from here matters a lot. And so what are the key things that I'm looking at? Well, first on tariffs, China's the big enchilada, the president's talking with President Xi on Friday. And you have to believe that the bests and consensus or or or a cord that was negotiated in Geneva that we are going to get to a status where global tariffs are going to land in that territory, you know, on a blended basis around the world of, you know, 10, 15%.

48:01Right? So we talked about, are they going to be trillions or are they going to be hundreds of billions? It's got a land of that lower quadrant or I think the market moves lower and I think that's still where we're headed. But they're definitely the topic we just talked about. There's some binary outcomes, I think, as it relates to us in China, it looks like Europe is making good progress. Now on the reconciliation bill, it looked like that was making incredible progress. I still think it will. Listen, I think that Elon is appropriately, you know, pointed out that the challenges with the debt. But I would really encourage people to look at this Ray Daliopiece.

48:39And also what Bessent has now been saying, they call it 333, but it's how to get us to 3 % GDP growth, right? And how to get us to a debt to GDP ratio of 3%. You can't just cut $2 trillion in a single year. That would be an 800 basis point headwind to GDP. It would throw us into a recession, if not depression like like state, because you have so remember government spending is a component of GDP. And so there, it's about what is the flight path? And I would like to see Bessent lay out this four or five six year plan to this 3 % debt to GDP ratio. It's not going to happen in the reconciliation bill because again, as many people have discussed, the reconciliation bill does not touch discretionary spending.

49:28That will come by way of the Recision Act that was just sent to Congress. And the speaker of the House has said that he's going to vote on and I expect that they will pass. So there's, you know, I think it's a confusing set of issues. But to be clear, I think that we need to see the the reconciliation bill pass because that's what extends to the tax cuts, which I think are critical. And the absence of that, you get a $4 trillion tax increase and markets go a lot lower. In addition to that, the no tax on tips, the no tax on overtime, the the ability to have a deduction against your social security taxes, that's probably three or four hundred billion dollars of new stimulus to the economy.

50:11That's what's going to give you the growth bill to get you back to 3%. So I think if you're a market participant, I believe that we're going to land the plane on both of those. And if you believe that we're going to land the plane, then I see accelerating economic growth in the back half of the year and into next year. But this is, you know, be optimistic, right? But the proof is is in the pudding. We've got to see those things land there. And if they don't, I expect the market will be back down 10 to 15 percent, which is where we were just a few weeks ago. So there's still a lot of volatility out there.

50:44There's been a lot of talk about the 10 year rates bill. And one thing I just want to point out, because the 10 year rates have gone from 42 to bounce back up to 44445. And a lot of people are hand -rearing about this and saying this just goes to prove that we're in this national, you know, debt spiral and nobody wants to buy our debt. But I just want to point out. I think they compare them to Spain and other countries that were in, you know, liquidity crisis, not too long ago. Yeah, but I just want to point out like several other people have yields. The 10 year has been in a 4 to 5 percent range bill for the last two years.

51:24And, you know, this is far, like there are people, remember, Larry Summers at the end of 2022 saying that the 10 years going to 7 percent, right? That's what caused a hyperinfl, we're going to have hyperinflation. What have we seen? Core PCE just came out lower than people expected, right? We're now on a core PCE run rate that causes me to believe that the Fed will now reduce rates. The market saying they're going to cut rates twice in the back half of the year. Why? Because we're still in restrictive territory. The Fed has said we're in restrictive territory. They've said there's not a new neutral rate.

51:58And so the bond market to me at these levels is not that concerning. Seriously, I would like an important national discussion on a balanced budget amendment or some other mechanism to get us to this 3 percent target. I think that's super important. But if you're saying, okay, should I be really scared that we're on a path to 7 percent interest rates over the course of the next six months? No, I think you can very well find yourself in the exact opposite position. I think if they sign the reconciliation bill and they land the deal on China, right? And then you get a couple rate cuts in the back half of the year because inflation continues to come in.

52:37This market's going to be a lot higher. So don't take yourself out of the game. But I think it is a wait and see approach. And what do you put the probability on the deal with China coming together? I put his pretty high probability. And remember, I was asked about this on CNBC in the heat of the crisis. And I said it, you know, because Trump was putting Navarro on the Sunday talk shows, embassant, and they had two very different points of view. And I said, you have door one door choose and the presidents got to choose, right? And I said at the time, I think at the end of the day, he wrote a book called The Art of the Deal.

53:13He is a negotiator. He is a fair trader. He wants a fair deal for the United States. He wants to re -enshore critical national industries. But I do not think he wants to slam the brakes on the global economy and put the global economy into a recession, which he knows it would. And so I expect we'll get a deal done with China. But that means that China has got to step up and be willing to deal as well. I think the tea leaves read pretty good on that, but we'll know a lot more over the course of the next few weeks. Okay. We'll ask you. I have a couple of things for our lightning round bill. Okay.

53:46You know, you talked, we had a great discussion last week on this Delaware situation. I think you've been out in front on this telling companies that if you sat on their board, they got to consider exiting Delaware. Otherwise, they may be breaching their fiduciary duties. I saw Fortune magazine actually quoted you, wrote their headline with something's a rye in Delaware. New study reveals lawyers and tiny US states are winning fee multipliers from major companies up to 66 times their normal hourly rate. You got two and a half million views on this Delaware clip after you got a little promo from from Saxonylon.

54:23But was there any feedback you got this week? Did you hear from companies? Are they reconsidering whether or not they want to be in Delaware? I think a lot of companies are reconsidering and there are two things that I would add that have become clear to me since then. But one, people talk about, well, who is at risk here? I think it's actually the highest profile companies that are at risk because they're the ones that an activist judge is going to want to make an exception out of. Maybe if you're a smaller market cap company, maybe it's not something you need to think about with urgency. We discussed this.

55:03The reason people were in Delaware is because it was predictable. That was when you're a young entrepreneur and they say, oh, in corporate Delaware, you're like, why would I do that? Someone says, oh, well, they've had corporate law for a long time. It's very predictable. Oh, okay. And so everybody does it. Well, that's no longer true. And so I think everyone has to consider it. The other thing that I verified, I think, is really important. We live in an age where companies are staying private longer. I think many entrepreneurs, many board members think that litigation around shareholder events are tied solely to public companies.

55:41That is not true. If you're incorporated in Delaware, you can be sued. If your shares are trading more freely in the secondary market, you're at risk as well. And so I would just say, just because you're not public doesn't mean this shouldn't matter to you. And in fact, I can imagine someone who has an activist been being particularly excited about bringing a case against a private large unicorn. You certainly influence it there. I can tell you this. I've had a couple of companies ask me in the wake of that whether or not they should be reincorporating. So I think there is a movement of foot. Something else we talked about in relation to corporate governance bill on a prior pod.

56:27And this is these proxy advisors, ISS and glass Lewis, right? They have a monopoly on giving advice, particularly to passive shareholders about how they should vote their shares in the annual vote. And we've come to discover that they're probably not the best and most objective when it comes to doing it, or they may have political agendas that are misaligned with your own. Senator Haggardy had a tweet yesterday that caught my eye. He said, the two largest proxy advisors have 97 % market share. They wield control over millions and millions of votes. They've hijacked corporate governance and investigation into their anti -competitor and abusive practices as long overdue.

57:09I hadn't heard about this in, you know, a few months, but any reactions to that? Yeah, I don't know if you remember, but when we did, we did an episode early on about stock -based comp. And before that, I had reached out to ISS to talk about how they come up with their different, you know, philosophies. And it was very clear to me that there was no one there thinking from a first principle perspective about, you know, what are the types of policies or actions that a board could take, that a company could take, that would align interests with shareholders? And, you know, I would think that if you run a large index fund, if you're BlackRock or whatever, and you're voting, you know, your shares for or against different policies, that the number one thing you should care about, perhaps the only thing you should care about is whether they're looking after the interest of shareholders.

58:02And we clearly crept away from that in the past, you know, 10 or 20 years. The senator that you're talking about said on it on when he was given this talk that these two companies are now both over 80 % owned outside the US. And it they both have corporate philosophies that extend beyond what we just talked about, which, you know, I've always I grew up in the school that fiduciary duty is the number one responsibility of all board members. And that means looking after the, you know, shareholders. And so I think, you know, that that two things should happen, you know, first, I do wonder, and this would be a question for the senator like, why are so many companies paying attention to what these people say?

58:54Are they just loyal? I mean, are they just lazy? Do they, do they not want to do the work themselves? And admittedly, if you're running index fund, you're on thin margins. So maybe you don't have time. But they should wake up and realize that they're not solely looking after the interests of shareholders and they have other interest in mind. And ironically, in this gets back to policy, one of the key reasons so many companies have supervoting is so that these two companies can tell them what to do. And so, you know, it's ironic because most people think of supervoting shares as being less good governance, you know, lesser former good governance.

59:33But if these companies that are measuring you and telling, you know, index investors how to vote aren't looking after shareholders interest, then, then you may need to take that step precisely to get away from them. And so I would encourage, you know, the Black Rocks and all the ETF people to not just simply vote with what these people say. And maybe what we need, maybe we need an alternative to these two things. You and I've, you know, talked about SPC. I mean, I think there's a number of things you could use AI that you would put into a model to to say, what is the type of good governance that align shareholders interests?

1:00:14And, and maybe be good to see something like that, Papa. I love it. I love it. You let's incubate that, Bill. Okay. Let's let's incubate that. Anybody out there? Let's find some some of the guys who are playing the AI founders and engineers who are playing in the ultimate or poker game last night. They were looking for ideas. This is a great one. Okay. Well, I would encourage any of our listeners. There may be someone already doing it that's already working on our alternatives to these two companies. And if you are reach out to us, we could we could help fund it, help promote it. And, and it'd be exciting to see.

1:00:51Yeah, no, that'd be great. Well, it's been another good one, buddy. Great seeing you. Until next time. Take care.

1:01:07As a reminder to everybody, just our opinions, not investment advice.