Tariffs, Free Trade, Export Controls, H20 & Rare Earth Ban | BG2 w/ Bill Gurley & Brad Gerstner

0:00Almost everyone in the AI space that I see with a microphone in front of them says the US has to win the AI war Yeah, I don't know what that means Yeah, and if I guess just what it means. I don't think it's possible right and so because it's an infinite game It's an infinite game and no one that I talked to would argue we're gonna Somehow prohibit them from moving forward in AI. Let's not forget it wasn't that long ago that open AI They'll say borrowed or copied the innovation that happened at Google and deep seek like this is how innovation works Bill great to be back in person good to see you sir that was fun last night We have to give a little shout out to our friends Vinnie and Bill Lee and some others who we got together with in Austin last night for some poker I think you did all right last night you had some winnings and Yeah, some more winnings in fact I brought you some flowers this For the gators you bring your flowers.

1:07Thank you. I'm sure the listeners are tired of hearing I started the last two podcasts one before the sweet 16 and one before getting into the final four and then Of course everyone knows the gators went all the way we had I had a bunch of friends out We spent the whole day the Monday of the game day on the river walk outside the team hotel saw bunch of old friends I know fandom is a weird thing because you don't actually do anything you just go along for the ride But it creates it creates a very special experience and I'm super proud of Of what they did in that team and how they won I had talked about it before and it was dramatic too, so but it was a great time just a great time What are you been up to speaking of games?

1:47That was an exciting upset by the warriors in game one Overheoused in the other night. I hope our guys make a run out at this year Certainly looks like they're a totally different team with Jimmy Butler on the team and I think they're 25 and four something like that since the Jimmy Butler trade I'll tell you man. I'm thinking a lot in fact this is something you you really Drilled into me, you know ages ago about thinking about just complex systems Um When I look at all the Things this new administration is trying to change right simultaneously you and I talked three months ago I said I was worried about the markets discount rates had to go up There was more uncertainty in the world But when I start thinking about what's going on what this administration is trying to accomplish all at very large scale So think about this whatever you think about each one of these individual things they're trying to Totally transform global trade.

2:44So that's a you know trade negotiations with a hundred countries We effectively have an embargo Between us in China to a hundred forty percent tariff export controls You know, and so we have to renegotiate that deal Best since it said today it really hasn't even started that's going to be a slog On top of that we have Taxes if we don't you know lock in the tax bill it doubles at the end of the year We have this reconciliation package We have doge and deficit reduction You know, we have questions around the 10 year and whether or not deficit is going to actually be larger this year We have the war in Ukraine Right and and lots of back and forth there we have dealing with the volatile situation in the Middle East I mean it sounds like we were on the verge Maybe of seeing an Israeli attack on Iran And all of these things are happening simultaneously yeah, and so I think one of the things that's just on my mind if you look at the discounted rate of Dealing with any of them successfully and then you multiply those discounted rates together Right the probability that you're going to land this plane and just a really smooth landing I think is is challenging to see right it's we're gonna have some wins.

3:59We're gonna have some losses And so today, you know, I know we want to revisit some of these conversations around tariffs and free trade and these export controls and kind of where we are in the market But I would just say like we're attempting something very high difficulty level And if you know if this administration is able to land the plane on all these it will be quite an accomplice Yeah, you bring up complex systems. This is the reason I spend so much time down at the Santa Fe Institute because That's all we talk about right a couple of features of those things they relate to exactly what you said first It's very hard to know which variables are dependent in a in a complex multi -variable system and and and there may be one you don't know about that it flips and the whole system takes on a different shape And this makes these things very hard to predict which is why I don't like talking about macro For that exact very reason that there's so many variables.

4:54It's very hard to be accurate and correct and even if you are It might just be by happenstance You might not know the exact variable that caused it So it is it's difficult and unfortunately and and I I'll say it again I don't like talking about macro but we're kind of forced into it because The market and even the destiny of many of the high tech companies that we would prefer to focus on Seemed to be caught up in this whole thing for sure for sure I mean, yeah, I just saw a random tweet before we came in here You know somebody estimating that the revenue hit To meta this year from reduced advertising by the merchants Chinese merchants on meta like team who is like seven billion dollars Wow, don't think about that.

5:38That's pure profit Right, there's no incremental variable costs against serving those advertisers So if that just disappears, you know, it was very very high margin business And so again just the the downstream So let's just go back to something else. It may not pay Yeah, man, you know, perhaps but but I think you know what it reminds me is you know It feels like there's news every hour. It's pretty exhausting But we got to lock in you know, there's a super busy calendar ahead So why don't we start with just maybe updating where we are on on on Terrific negotiations and revisiting. I think some important arguments about free trade So last time we were together We really framed to this by saying on the one it seemed there were two different You know kind of sides in this administration on the one side we had kind of a more tactical narrow View of tariffs maybe the best -ent consensus I called it which was a fully loaded gun rarely discharged You know and have targeted tariffs to re -enshore critical national industries and on the other side of this We had what I described as more the nuclear Navarro approach This is that we generate trillions in tariff revenue that we tariff everybody high structural tariffs We replace the internal revenue service with the external revenue service and this is much more structurally different not not not tactical at all Well, where are we now markets are now down 15 % during this period since Quote -unquote liberation day on April 2nd The markets are clearly worried about a global trade war We now have export bans so China implemented an export ban on rare earths on April 5th We retaliated or at least it implemented an export ban of our own last week on Nvidia chips.

7:29We'll get into And all of these bands and tariffs are quite controversial even among Republicans remember the Republican party on capital Hill has historically Ben against tariffs and so I think there's an increasing Concern on capital Hill about where all of this is headed and what it means for the Economy and so many people are saying this is feeling quite chaotic It's they're nervous about the 10 year they're nervous about the impact on the dollar Best -ent saying it's going to be a slog and this is going to take a while But the president says on Friday he thinks it'll all you know, we'll have it resolved in the next three to four weeks So what is your reaction to all of this what I want to do is take it up a level Because I think that there's an important conversation Republicans have historically been a party of free trade and lower taxes Right, I think of Reagan or Milton Friedman and yet today there seems to be this growing consensus around tariffs So let's just go back make the case for a steel man the case for why This may be a misadventure in the first place Bill when we We're talking at the beginning of this podcast journey about skilled immigration We played a short clip from Ronald Reagan, which was one of his last speeches that he gave in office and this week with all this tariff discussion There was another Reagan clip floating around that I think does just is Greater job of kind of summarizing something in a very efficient way So if you don't mind.

8:56Let's play that clip real quick And today many economic analysts and historians argue that high tariff legislation passed back in that period Called the smooth hauly tariff greatly deepened the depression and prevented economic recovery You see at first when someone says let's impose tariff some foreign imports It looks like they're doing the patriotic thing by protecting American products and jobs And sometimes for a short while it works But only for a short time what eventually occurs is first homegrown industry start relying on government protection in the form of high tariffs They stop competing and stop making the innovative management and technological changes They need to succeed in world markets And then while all this is going on something even worse occurs High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars The result is more and more tariffs higher and higher trade barriers and less and less competition So soon because of the prices made artificially high by tariffs that subsidize inefficiency and poor management People stop buying Then the worst happens market shrink and collapse businesses and industry shut down and millions of people lose their jobs The memory of all this occurring back in the 30s made me determined when I came to Washington To spare the American people the protectionist legislation that destroys prosperity So I mean for me You know everything I learned up until this point in time is congruent with what Reagan said You know tariffs lead to increase inflation They lead to reduced innovation putting a protective blanket over Our companies in our country lead to them being less globally competitive And then forth which you mentioned, you know, it leads to retaliation and You know, I've just been kind of revisiting a lot of my priors One of my favorite economists who spends time down at Santa Fe, Ricardo Houseman put out a great piece who said We're not adding up everything the right way.

11:06We're only looking at physical goods their services and intellectual property and net income that comes from Companies like meta operating around the globe You know Neil Ferguson did an incredible hour with Barry Weiss that I would just tell everyone to go listen to And every one of these things Takes me back to what I learned over 20 or 30 years That these things aren't gonna work out in the long run and so I'm I'm skeptical. I mean, I'm always open -minded to revisiting my priors And if someone wants to put out an argument while this is all gonna work But I and you were not talking earlier But I find there's a lot of conflation going on You know about different different reasons arguing for why different actions are happening You know the tactical you know, we need to have these specific Technologies, you know be worth be resilient so we're not overly dependent on one country to this bigger thing Where we're gonna replace all of tax income right and I think you could do a little bit of the first the latter Is just just violates all my priors Right, right, I'd have to I'd have to start fresh and I'd have to be convinced that all these great thinkers That came before us were wrong, right?

12:22You know, so if our friend David Sacks were here and I think he brought you up on the all -in pod last week If he was here he would say okay Free trade is all well and good very Jeffrey Sacks But he'd bring up John Meersheimer and he would say you know the reality is we're in a great power struggle We have a pure rival in China, you know today and that national security must take priority Over free trade and might make the argument. I think that in particular creating resilience in these industries rare earths You know chip fabs in the United States auto manufacturing steel aluminum etc. Are essential to our national security And so therefore it's not inconsistent with free trade.

13:09What would you say to that? Well, you know, we talked in the past I think to the extent you were doing something very tactical It could be proposed as such The the tone and the bravado of the description of what we're doing isn't consistent with that There's also if you're using the word resilient, you know, that can include Other countries that are allies that doesn't have to be on the shores of the US and I know people who in the first Trump administration were told to To diversify away from China and they built you know supply chains and Vietnam and now they're you know worried about tariffs there and so the there's there need we talked about this but there needs to be a consistency in order for people to adjust to those things One more piece I would mention and we'll put links to all these things as Thomas Friedman has an op -ed in the New York Times that says I I just saw the future and it was not in America You know, he takes it further.

14:06He believes that in advanced manufacturing We're not just Not doing it here, but we we're not on the cutting edge of what it would take to do here If you recall back in a in a day and age when Japanese manufacturing and and just in time was this huge thing Where where all of America was convinced Japan was ahead of us in auto manufacturing and he says we need to adopt that philosophy about Manufacturing in China and he he goes to the point of saying look We need to force them to do JVs here so we can learn from them. Yes now No one's talking that way in the administration because there's so much vilification There's no recognition of where they might be better than us But but those problems I guess at the point I'm making is those problems are worth solving But I I'm still not convinced that we have a I think we have a huge labor problem trying to be competitive and manufacturing Neil makes a great point about the argument that oh, we shouldn't have done this.

15:12We regret global trade That argument takes you're allowing yourself to imagine you're taking where we are today and competing With an imaginary version of how things evolved if we didn't embrace global trade Right and assuming that we would have manufacturing and being a better place and I think that's He used the word fanciful, which I would agree with I mean I might also argue you know in response to Mir Shimer It was an incredible debate last year the all -in summit between Mir Shimer and Jeffrey Sachs You know that he comes out of the realist school of political of of of a political International relations and I think there's a lot of truth to it right I mean you can't stick your head in the sand and pretend that we don't operate in An international system in the middle of the Cold War in the 1970s Right We had all sorts of embargoes on on Soviet Russia that were probably Smart embargoes a lot of people think that what you know the historical telling is that what brought the wall down ultimately Against Soviet Russia was that our economy was triumphant and So I look at the situation today and I think what part of the problem is that it's not clear out of the white house What the goal and objective is right if the goal and objective is Navarro then I think there's broad opposition Within not only you know the Democratic Party but also the Republican Party to the scale of tariffs and disruption That that's going to have on the economy But I think it's fairly non -controversial that we should have tactic Tactical narrowly tailored tariffs and tax subsidies and incentives in order to re -enshore some critical capabilities You know, I mentioned a few chip fab some pharma critical rare earths and production I mean we don't want to be dependent on The Chinese for whether or not we can produce an automobile or whether or not we can produce a phone You know etc.

17:08And so I think that I think that some of that makes a lot of sense to me What doesn't make a lot of sense to me is that We launched what was kind of this nuclear style tariff war against every country on the planet Right and so just the sequencing of events here. I think is a bit confusing It should not be this McKinley style multi trillion dollar tariffs if what your objective is principally where the agreement is is to re -enshore some of these critical industries And what I think is missing from this all we're talking about is tariffs right we need to be talking about What is the accelerationist agenda that we're going to put together in order to get these chip fabs There's a lot of things we can we can put together AI funds We can put together tax incentives and other packages to get people to build you know to build here I think that gets lost in the conversation If we think that this alternative path is all about this this re -enshoreing bill Is that consistent do you think with the Reagan and Milton Friedman view of free trade like if it was if it was more tactical like that I think we were more tactical I'm I'm probably pushed back on you and disagree I don't think our current democracy is set up in a way that's really good for The country to deploy dollars to help industry and I gave the speech The original all -in summit about regulatory capture and I just I can't imagine that if our well first of all The AI boom in the US has attracted more capital dollars than I've ever seen accumulated in the history of mankind So why sprinkling a little more on would be helpful But also you get into this game of picking winners and losers now Friedman highlights and I think this is true You know the the Chinese government is just much more successful at at state involvement in innovation If you maybe go back to the space race or the Manhattan project We were capable of kind of mustering forces in that way But I haven't seen it done recently like to pass 40 or 50 years in many ways in many ways the private sector has done a more efficient job of You know of taking on the Manhattan Project you know style projects.

19:30I mean you look at what's going on in abelene texas and debt and texas you know around Building out incredible supercomputer clusters all done really without government involvement and I think that's you know an efficient preferred mechanism You know where a lot of to your point. There's a lot of capital available But there are areas where I don't think we will move forward much without government involvement a great example would be an energy So so As we talked about many episodes ago You know career and China are delivering vision nuclear at one fourth the price we are and I think that career example South Korea is very important because that is a democracy So here's one country that's that's authoritarian one that it's a democracy and they're both achieving it And we are 4x over that that's gonna require Some type of government involvement to figure out why we can't build that better and faster and to be fair There's a lot of movement around the country mostly at the state level about removing red tape as a Is something in governor celebrate which which is helpful and and made movies in this direction So those I tend to if we're gonna help something along I think I think figuring out why our governments become friction and mud and changing that right is probably going to be more Impactful than the government doing to work themselves or picking winners with capital We're we're quick to blame others around the world for our challenges Right, but I think we need to spend at least as much time accelerating ourselves And part of that acceleration is getting rid of needless regulation It's looking at our own systems and asking that question Why does it cost 4x more to build a vision reactor today in the United States than it does in South Korea?

21:23Hey, yeah totally and by the way One thing you just spurred in my brain. I was listening Friedman also did a podcast with with Ezra Klein and Yeah, I'm just gonna steal his story. I don't know that's true But he says that want when China attacks a new Industry these days that they encourage a ton of startups. I didn't know this He said so when they went after solar powers they encourage like a hundred startups So rather than pick a winner they give money to everybody So in a in a thousand flower bloom kind of way and it does hundred compete their way down to five And he said there's a lot of fraud and grift and waste For the ones in the losers But what you get out of the five are is something that's actually honed by a market force And I don't think anyone that thinks about authoritarian China About the state using market forces to get to a higher level of efficiency and production But if if what Thomas said is correct They're actually using this kind of competitive market force to hone the better players in these industry Let's talk a little bit about you know I think a lot of things get conflated when we talk about terror So one of the most important is export controls You know, so an export control is effectively a license requirement The acts almost as is embargo on all trade in a particular good So on April 5th China implemented this rare earth ban And then we reciprocated last week of the ban on all and video H20 chips Going to China so speak When you when you look at the rare earth ban And I have a list here of the materials that were banned on April 5th And you have things you know that go in critical elements into magnets Samaritan Turbium And so these are about 60 % of these materials are mined in China Okay, so you do have other places on the planet that are that are Mining these rare earths the problem is 90 % of them are refined in China When they banned those rare earth These are the magnets that go into EVs phones Computers machines of all sorts This was called by some in and around the White House as a kill shot a kill shot against the US economy That causes massive problems in industrial production You know when I think about Again the destabilization that comes from over dependency On something like if every magnet that goes into every machine in the United States is coming from From China and now we've effectively banned it even though the ban was in response to the tariffs by the United States Right What is the off ramp to this you know Now see just this afternoon while we started recording the pod Trump has said that you know, he doesn't expect The tariffs to stay anywhere close to where they are in China He doesn't think they're going to be zero, but they won't be anywhere close to where they are You know, he's and we see kind of a unilateral walking down of these tariffs But these export bands are really dangerous bill so to what are your thoughts about an export ban perhaps just compared to The tariff itself.

24:44Well, I mean I go back to the Reagan video right he says this will eventually lead to retaliation and escalation and and The fact that this video was recorded whatever 80s what has that 45 years ago. Yeah, like like this isn't a new perspective So you could argue. Oh my god. I can't believe this happened or you could say well if you studied history You should have expected this time right in fact There's his Milton Friedman video going around and he talks about retaliatory tariffs And he says okay, let's say there's somebody shoot a hole in the bottom of your boat, right? And so you know it's taking on water A retaliatory tariff would be like you shooting another hole in the bottom of the boat And then they shoot a hole in the bottom boat just sinks faster Right and he say you know, but in fact what we did last week is the US did ban H20s Going to China and this was a pretty controversial move and in fact, I was you know looking at some of the analysis that was done this week And the newly launched Huawei cluster matrix 384 is China's competitor to the GB200 So semi -analysis is out with you know an assessment of this and many others and basically what they concluded Is that Huawei is already on the frontier or near the frontier with respect to chips in fact One of the analysts on CNBC this week said to be honest We basically just handed the China AR market to Huawei anyway Right and what is Bernstein analysts because they said what it effectively does is clears the decks for Huawei to have monopoly profits in China They no longer have to compete with kuda And and Nvidia in China even though we were sending them the H20 was a nerfed chip right it was a chip that was two or three generations Behind what we have in this country But it was you know some people think of retaliation to the rare earths other people think it's just part of You know the AI strategy to try to win the AI war against China one and let let's just take the the argument that it was a retaliatory move How good must it feel to be in video and Jensen and the executive team there that you become upon in these games that you had nothing to do with Right, you know, and in fact you designed this product specifically to meet the expert control rule that was in place before this one Which is very similar to this Vietnam thing that we're just talking about so you can't be happy with that I reposted when this all happened a great video the the dear Dreda did over at CNBC About how this will be good for Huawei and I think if you ask Jensen He would say yeah, this is great for Huawei and it's not just that you get an isolated market where everyone but but every participant in the AI market in China May have been working with Nvidia now they start working with this and they all collectively help improve it over time and You know, they're I read one article that said that China's you know getting some of their very first commercial planes off the ground One of the reasons is they became reliant on Boeing and Airbus And so by by denying your exports to a market you increase the incentive they have to develop their own technology Well particularly when they have the capability of China.

28:12I mean the fact of the matter is if they had no capability to develop it It would be one thing right? I think more like the the race around nuclear arsenals if you will There's some countries that will never have the capacity to build said nuclear arsenal But the fact of the matter is China is so close in this regard with respect to the H20s from my perspective It's a very close call. I don't think we should be sending GB200s or cutting edge chips to China I think that there's a legitimate national interest in you know, quote -unquote staying out in front on AI I think there's a debate to be had about that.

28:46That's where I come down on that side of the issue But the H20s that seemed to me was a very self -defeating way I think that the competition with kuda in China distracted The competition denied the monopoly profits within China for these Chinese internet companies There was some insinuation last week that Jensen was intentionally Right scurrying all of this you know these rules around China and that there was you know Maybe 30 or 40 % of all their sales were going into China You know, you know as I look at this. I think we have to be really careful You know I think that you these tariffs all the sudden Right Can find us in a place where we're demonizing.

29:33I think Nvidia and Jensen are national heroes for the work that they've done and the leadership they've given us in global AI Right American success stories totally great and this idea that somehow They comply with the exact attributes of the H20 prescribed by the US government I want to go back and then they sell those in China and then after the fact we go back and somehow start demonizing them I think is a very dangerous thing. So so when I gave that speech a while back on regulatory capture I made the argument that when In America inside of America when we want to accomplish something through policy We gather a bunch of people and we get a bunch of ideas and then we write some complex piece of legislation and What I highlighted is that in many cases it fails and in in some cases it spectacularly fails So when I what does that mean you get the exact opposite outcome from which the policy intended to create now The fact that this happens all the time Inside of America is an interesting fact because in some ways expert control is external regulations So we're trying to implement a policy now not just in a place where we control most of the pieces But in a world where we don't control Many of the pieces and then we expect that policy to work perfectly and the problem is you know Borders are porous money finds a home right you know I always tell people that trying build internet businesses Internet arbitrage is undefeated and global markets kind of have the same thing like work just coming off of A remark I would use the word spectacular again spectacular failure of Russian Sanctions economics actions right so why do we think oh that didn't work right But I'm gonna go do this and make it work.

31:33I heard people who said we have to ban age 20 saying oh well the Biden rules didn't work They failed right so oh so you You mean global expert controls didn't work so we're gonna redouble them and see if they work again And I just you know I think if there were a piece of technology like say a fighter jet that you're giving to Maybe one other country or two that's a super deep ally that's one thing If you're gonna sell something in 120 countries around the world and try and tell one country they can't have it right there's no There's no way that's gonna work like and especially these goods have digital attributes I mean, you know, it's just it's gonna it's gonna work around and you know I think it's gonna get worse before it gets better.

32:19I Have seen hints that the same people that push the age 20 want to You know put even more restrictions on a sml which is a Dutch company or fine TSMC for building Y -Way chips. That's a company that's headquarter in Taiwan. Right. So I'm sure Jensen's myth that his companies become upon in this game How do you how do you think these companies we talked about ASMR? In the past where the management there's already expressed some Reloxance to to be our you know whipping whipping poster whatever But like I don't know that we just are allowed to start grabbing Pieces of the chessboard that we don't even own and bringing them into this competition And you said earlier the way we implement it tariffs we've we've alienated many of our allies and partners You know, I won't be surprised at all if we wake up one day and one of these companies tells us no Right, yeah, you know again, it comes back to defining the objectives narrowly enough That you don't end up in this big retaliatory and escalatory Posture again, I think it's a reasonably close call around H20s My sense is that Nvidia understands and is on board with not selling leading edge chips to China Right like they didn't fight the fact that they weren't selling GB200s to China And the age 20 is if you just look at the facts on the table the Huawei SN920s the number of these that they're now Producing the way that they're interconnecting these things together.

33:56Yes, they may be slightly less efficient It may take two or three times the number of chips and amount of power in order to end up at the exact same place But we just talked about there are 100 nuclear power plants under construction in China power is not there women They produce those plants at one fourth the price we do so if it comes down to power and many people in the I world like say it's gonna come down to power I guess they're gonna win. I mean So there's an interesting question here if you think about the off ramp on these for president Trump Again, there's a lot of suggestions over the weekend that you know If you think we're gonna land the plane in three to four weeks build the only way you do that is basically through Unilateral concessions right that you define as victory So are you know all of these countries are calling us they want to do deals and so we're gonna walk the Chinese tariffs back to 30 or 34 percent And we're gonna suspend maybe for 90 days The H20 ban in the hopes that they will reciprocate by suspending the rare earth ban or something like that So I don't think we've seen the end of this when it comes to This Nvidia ban, but you know the flip side of this is Nvidia just had a big announcement right with the White House about a 500 billion to hover investment Right in combination with a bunch of other companies Foxconn TSMC etc Building fabs in the United States.

35:19I know the first GB 200 is rolled off the assembly line out of those fabs in Arizona To me again, we need to rebalance and focus on accelerating Right and re -enshoring these critical industries in the United States I think the distraction that we can keep China away from frontier level AI That will be a losing strategy in my mind I don't think we need to go out of our way to make it easy on them But I think the obsession and the time spent and the distraction for USC EOS to try to how to how they comply with all of this I think is not particularly great and I'll just give you where you know Maybe the next frontier where this is going.

35:59I've heard you know increasing chatter That somehow we're going to try to ban deep seek models. Yeah, right and and somehow prevent US hyper scalers or cloud companies from integrating deep seek models into their stuff So so talk to me about about that the slippery slope associated with that Before before I go deep in on deep seek which I want to do I want to mention a couple things from a very broad level You know one is Back to this Friedman post he mentions a quote from a book How why how we do anything means everything and the quote is Interdependence is no longer our choice. It's our condition our only choice is whether we forge healthy interdependencies and rise together Our maintain healthy interdependencies and fall together and You know There's a there's a book that I've been rereading that the callisans talked about once called finite and infinite games You know by James cars and there's a reality that that a lot of our strategy that we think about and how we compete in the world Comes from finite games.

37:07So finite game is a game that has a beginning and end and a winner So football game a base basketball game that kind of thing infinite games are different They just go on forever. Stock market, you know most large companies. They're infinite games like they're not There's no clock that ends. There's no one that declares a winner I fear that a lot of the attitude the vitriol the the language the tone that's used between us in China is borrowed from From finite game thinking like that were some you know when the a i war what does that mean like is it? Is there someone that's because the clock going in Like the warriors versus the rockets and they say oh we want like that there's no chance of that And and most of the people that are even the biggest China hawks I said I say to him.

37:55Do you think you're going to prohibit China's long -term AI development and they said no You know and I just think we there's a lot of zero some thinking going on win lose right? I totally believe in this interdependence I think there's zero chance that you're going to stop China Or somehow like I even I use the phrase increase the gap. There's a lot of Arguments that the AI gap has been shrinking not right not rising Eric Schmidt had a big interview today Where he said it was shrinking or this week right? We'll put show notes on that um and a lot of people are saying they're catching up that semi -analysis thing says why was getting there And so this argument that oh we've got to do everything we can we have to act now to win the AI war That's like to almost this belief that we're going to increase the gap and that it's a finite game It's just going to end one day and I don't believe in either of those things right, and so I think the tones wrong I think you got to get out of this enemy threat like all those words allow you to hate You know, there's a great great quote from the godfather, which is don't hate your enemies that clouds your judgment One of my favorite quotes ever the the whole piece of this freedman article I think everyone has to read he just went over there and spent time It's not what you think like they are way ahead in a lot of different areas.

39:21They're super smart They're not you know, I think a lot of people thought oh, we have a democracy and capitalism and people get confused between those two And they think we've got the perfect American exceptionalism where the only place where you can Have innovation and and because we talk about oh, they steal they steal we don't ever spend the time to go see if Innovation's happening over there. It is happening over there Right, you know, and and these people are educated in the same schools and universities like right the thought that they couldn't You know be educator or can't innovate is gonna lead you to a lot of really bad policy and we're shit and we're shit Right if you believe they're on the frontier And they're gonna have a frontier compute stack With frontier models whether we help them or not which I think even those people who are more China hawkish agree with that statement Right, and if you wanted the rest of the world to run on US compute and US models What's the the number one thing you would not do?

40:26You would not anger the rest of the world by launching a tariff assault on them simultaneous With your tariff assault on on on China And so it is a mysterious policy and when you look at all of these headlines that are coming out the EU now negotiating directly with China Right, we now have Japan in South Korea and Vietnam Negotiating with China you have the Middle East, you know entering into you know deals with China I'm not sure again that we're advancing our cause Right by making it harder on everybody else on in the world and telling them they are the cause for the demise of the US middle class What and you are going further like the tone they're adopting is more statesman like then us If you read the tone in those in those discussions and they highlight that they haven't invaded anybody in a very long time US has been involved in a lot more wars around the globe.

41:24So our ability and and I brought this up a few podcasts to go I you know, I think you're you you mentioned deep seek so so we all Believe that there's a imminent deep seek ban the level of which I don't think we fully know right now But you know my immediate reaction is oh, I guess Europe and South America will run on deep sea like because the minute we Start vilifying even that, you know, it it is I believe right now the best performing most open You know if you had a quadrant the one that's it's on the upper right on performance and openness, you know And if we ban it Boy, it's just kind of it's one you know, even more people working with Huawei chips and deep seek trying to optimize it But to you know in this world we've created where there's so much animosity I think people be glad to use it in each other right right well the first thing it dawns on me is I ultimately don't think you know Somebody asked me on CNBC, you know, they I said your decision as to whether be in the market Comes down to whether you think the president is more, you know kind of tactical free trader in the spirit of bet the best Consensus fully loaded gun rarely discharge or whether you really think he wants to reorient the world in the way Navarro discusses it Um, I still believe the president is fundamentally a free trader that this really is about making the US more resilient And he has to he has to bring us back there right because if we if we head in the direction of Navarro It's quite clear to me that we're going to so anger the rest of the world That uh the chance that the rest of the world is going to run on US compute I think I think what we do in that instance is you move everybody in the direction of China it backfires We don't widen the gap with China with respect to AI or global trade or anything else in fact We shrink the gap by the way by the way there's one I think hilarious irony with the with the Navarro point of view and combined with the um With with the export control which is if we're gonna if we're upset that there is this trade imbalance You know the worst thing the last thing you'd want to do is start penalizing our best creators our best man you factors are best companies right how are you going to solve the trade imbalance if we tell people They can't buy right our best stuff right gonna make them buy our I think I think Nvidia sold you know 12 or 15 billion dollars worth of H20s So if you ban those then your trade deficit with China goes up by 50 billion dollars my very point and let's not Let's not wash over the I think Nvidia's such a perform high -performance Worth so much money such a large market cap so much cash no liquidity issues That this five billion dollar right off.

44:18They're gonna take this kind of NBD move on it You know like getting effects to stop that much but a five billion dollar right off There's gonna throw a bunch of inventory in the trash can well I mean that's that's that's remarkable think about that bill right some of the people who are arguing Right including some USAI companies that they shouldn't be able to sell the H20s to China right if Jensen or the team at Nvidia turned around and said great you buy them nobody would buy them because they're so Perform yet right and yeah, it makes the point for them But think about this 15 billion in sales of H20s right that probably results in you know eight nine billion dollars of of earnings you know back to Nvidia you tax that at the corporate rate That's two or three billion dollars to the US treasury right we are effectively taxing the Chinese on a nerfed product to Provide profits to Nvidia to further distance the lead You know against Huawei and to put money in the US treasury and we just unilaterally disarmed around that in a way That doesn't even advantage us against Huawei because their chips are already surpassing the H20 And that leaves out and I agree with a hundred percent of that and there's even more because of escalation so So you know, it's I once again I go back to this finite game mindset I think people are evaluating a decision on an expert can export control or a tariff or a ban um without It's totally in isolation as that one decision and what will its impact be but Any one of these decisions and certainly the combination of them could lead to escalation It could go as far as leading to a hot war and so you have to accept responsibility Of making any one of these decisions that there are You know butterfly effects and escalatory effects sure that you may wait into right by doing That right.

46:20I mean you can think about it this way We define some people define artificial intelligence as existential Right like that is absolutely essential to your national security. It's essential to your national economic security Now if you are firing a shot at somebody it says I'm going to deprive you of being able to build your national security or your national economic security Right like it's it's a serious. It's a serious thing. I am I want to go on record is saying like almost everyone in the AI space that I see with a microphone and for a Front of them says the US has to win the AI war. Yeah, I don't know what that means And if I guess this to what it means.

47:02I don't think it's possible right and so because it's an infinite game It's an infinite game and no one that I talked to would argue we're gonna Somehow prohibit them right from moving forward in AI. Let's not forget It wasn't that long ago that open AI They'll say borrowed or copied the innovation that happened at Google and deep seek like this is how innovation works Ideas spread like to win they move fast people study what other people do it happens all the time And when only when we apply these labels of theft or copy or steal do we start vilifying but but it happens all the time in our own Ecosis right right it's how these things evolve and so yeah, I don't I don't think there's a finite game to win You know, it's funny.

47:49I was I did some research on something because I was very curious I went back and studied and it's so easy with AI and went back and studied the space race and When when the space race was underway if you go back and look at the quotes from all the senators and and President JFK and everything one of the reasons maybe the primary reason they said we got To win the space race is they all believed that the entire globe would be covered in this mesh of right of rockets and satellites It would be used to control the military right of the globe and whoever got to space first was gonna have this control Now that never played out But I see a very similar vein in AI where people especially people that believe in a GI and ASI and magical AI Think that it's just gonna explode and then whoever controls this uncontrollable force will control the globe in a zero some way And I I just I don't buy like I don't think that's gonna happen If if that does happen we're gonna have much bigger problems I think you and I would maybe find a point of agreement here Like what is the North Star that should guide us and I think the the point of agreement if we were giving advice Would be that the re -enchoring of critical national industries through You know some tactical means is an important objective Okay, but I I think you and I would also agree that we need to shift the focus radically on Accelerating our own race right and and refocus from spending all of our time trying to slow down everybody else And the objective should be the KPI should be do we widen the gap right do American companies are they as successful In AI as they were in the internet like I think anybody who looks back at the last 20 years would say that the United States has one Both in terms of of of free trade and in terms of the global internet competition One as defined by Improved the standard of living driven the grow the the economy in the United States In a way that was successful for the United States You know, I in one argument with someone I use the the simple A metaphor that comes from swimming any anyone that becomes a competitor swimmer within a year to you know A coach tells them don't look to the side You know because that's wasted energy and someone might pass you just swim as fast as you can Just look ahead and I feel like you know It's he's so much worse than just looking to the side.

50:32We're trying to intentionally Right inhibit the other right player now going back to fight since since I'm trying to deflate the football Yeah, yeah, it's exactly imagine if you were just watching a finite game And one team insisted that the other team have a technical disadvantage What would your reaction be? How would you think about that player? Right? You would probably assume they're scared that they're unsure right of themselves right like like what and also if you told your team at the start of the season Don't worry. You don't have to train very hard because I've a handy cap the other team They don't even know what I've done to them But I you know I've tainted their system so they're not going to be very good as opposed to just focusing on your own training and winning the game But I might I might end by going back to You know this argument from the Friedman police that it's an interconnected world and There are a lot of very smart successful capable innovative Engineers researchers founders in China and if you think you're gonna like keep them down or permanently You know prohibit them from playing in AI.

51:44I think that Mindset is going to lead to some spectacularly problematic policy. Yeah I agree well maybe talk about we can wrap Tesla reported tonight Um, and and the markets are clearly struggling down one day four percent up the next day four percent Clearly struggling trying to get their hands around yeah, you know where we are So since we were here last time, you know the S &P's down 10 % Nasdeck I think as of yesterday was down 20 % peak to trough And the question people ask me all the time is this all priced in how many units have risked you have in the market We have bested doing a talk tomorrow morning on the financial system The vix is still over 30 There are fears and rumors out there about is our 10 year you know, do we have demand for it on a global basis the dollar is under assault here So many of these conversations weren't happening right five months ago, right exactly we were just talking about AI and Nvidia I mean, I go back to the stand truck center right the stand truck and Miller quote Where you know after You know the president's election he said this is the mo this is the biggest ship from an anti -business administration to a pro -business Administration in my 50 years of being in the business right that is how CEOs generally felt at the beginning of January moving in To this new presidency and it's really mind -boggling to think in nine you know in a few short weeks How quickly we went from that level of optimism to this level of concern now is just looking at a chart You know apples down 21 % and videos down 25 % Google's down 20 % Tesla's down 40 % right we have major moves in the market Well and look I mean in both Tesla and and Apple have a huge amount of revenue in China and right and when you sense that this thing may be escalating or that there are Ripple effects going back and forth what one one plausible thing that could happen is either one of them get kicked out of the country right right That could happen.

53:50Yes, and so of course you have to discount this cost yes, and the question now of course is is enough discounted Given where we are and so you know I said at the end of January or early February when you and I did the pot I said we've taken down our units of risk Because there's just more uncertainty in the world discount rates need to come up multiples are coming down And we did and I would say over the course of the past several weeks We've had very little risk on directional risk long the market You can like Nvidia But if you wake up one morning and 12 billion of their sales are gone because they can no longer sell You know chips in China that's something again that that is the macro that is You know going to Nvidia.

54:31I've heard rumors that they want that the government us cover us government And I but not to sound like a victory lap But I said a few episodes ago the biggest risk on Nvidia was the government right that turned out to be true here And they may not be done I've heard arguments that they want to do a customer audit. I don't know what that is or involves well They were suggesting it last week. I think even on even even on our friends pod where you know Maybe you should look into all these shipments or all these sales that are that are going to sing a poor whatever And again, I welcome all of that like I think all companies should have to comply with US rules and regulations.

55:12I suspect that they do but again if I just step back here golds outperforming The S &P so far this year by about 40 % right what does that tell you people are moving into safe havens They don't know where this is all going to land here's one of the things that really concerns me Bill If we look at consensus earnings expectations for the S &P so far this year We started the year we expected 15 % growth we expected the S &P to do $273 a share Now the consensus is 12 % growth so $265 a share So consensus earnings expectations for the S &P have barely moved down And when I think about the chaos of the last eight weeks Every CEO that I talk to says we're on hold we're tightening our belts We're taking a more cautious approach to the year We can't make decisions.