Investment Implications of the AI CapEx Boom | Chase Taylor

24:04Demetri Kofinas:Lawnmowers mostly used to be gas powered and probably still are. Yeah. And all those things were so different to design and manufacture. Now, if you're really good at building one of these things, you look over at the other one, you're like, oh, we can do that. And a good illustration of this is you have phone companies in China like Xiaomi, like going from making phones to making really good cars. and they did that quickly. And I don't think people have made it click in their head that, well, yeah, that's because they understand this electric stack so well. And it's really just reconfiguring the same parts in a new way to make a car.

24:39It's not that complicated. So as we sit here today, we are not particularly good at doing any of this, even though most of this stuff was our idea 20, 30 years ago, 40 years ago. And because these things work together so well like the article and i expound on this in my piece but thinking of each of these different parts of the stack and even in my opinion up the supply chain is like legos that snap together like every time two of these legos snap together they create value like it's two plus two equals ten every time so that's why like you look at a byd and they're making ipads and drones and cars and buses and forklifts and trains and they make all this stuff and they make it really well and they make it at a really really good price and i did a q a for the genius community with you and i i think the word i used probably 50 times is competitive because my big concern with the tariff wall it's like that makes you uncompetitive so i have competitiveness like on my mind as we navigate the whole manufacturing thing because clearly this shows to me that we need to do more manufacturing at home, but the right kind of manufacturing and doing it in a way that keeps us competitive, I think is crucial.

25:53Demetri Kofinas:So I feel like this conversation, to the extent that it's happened in the US in recent years, let's say post COVID especially, has been, besides the fact that it's been heavily politicized, it's also focused a lot on the electrification of cars and whether electric motors are better than internal combustion engines, whether there's enough range, et cetera. So much of the critique has really been a critique of electric vehicles and intermittent sources of energy like wind and solar. And what it sounds like you're saying is that the downstream consequences of becoming really good at electrification, at harnessing new renewable sources of energy in battery technology and in magnets and electric motors that turn electricity into motion and generate force, create positive flywheel effects that begin to encompass and influence more and more areas of the economy, and the creation, manufacturing, and design of products that would not have been thought possible otherwise.

26:59Demetri Kofinas:And that's not really how we've been having this conversation in America. We've been having this conversation in much more isolated terms, and our support of these industries has largely been seen as a concession to people concerned with climate change, or as necessary, but economically inefficient responses to an exogenous problem, namely carbon emissions. Whereas in China, their perspective seems to be very different. This is not only good for reducing carbon emissions long-term, but it's also economically savvy. And they've taken a mission critical approach to owning this space and as much of the supply chain as possible and as many of the downstream innovations that come out of it.

27:40Yeah, exactly. So you think of this as like energy, intelligence and action. They're kind of all in on energy and action. Obviously, we're sort of all in on the intelligence side. We both do AI, they just do it different. And I think they're doing it with that applied focus on how it can touch all these things. And to that point, the reason this is important is because more and more things make economic sense to be electrified or have a battery in it than some form of combustion. You mentioned a lawnmower. It's a perfect example. The best electric lawnmower now is pretty incredible. It's so much easier to deal with.

28:12I think one of the hard things for us in the U S is like, we, we just politicized electricity and means of, you know, powering a vehicle. Like that became like everything. It seems like two camps, two tribes that had to take sides. Like, and I think a lot of people took the side of like, Oh, okay. Well, all this renewable stuff's bad and EVs are dumb. And they just left it there. And I, and I don't think that was a crazy position 10 years ago, but because of the cost curves rapidly declining now all of a sudden okay well let's take another look it's like well this stuff's cheap this stuff is effective and now the batteries are as cheap as they are like even storing grid power has become a big deal and i think that's going to even even like you look at a home generator like still to this day a lot of people have a diesel one or one that runs on gas or whatever i think 30 years from now no one will have that you'll just have a home battery like and those are already starting to get big and they sell power back to the grid there's a whole business model around that.

29:10Demetri Kofinas:And the efficiency on those is improving at a faster rate than solar, for example. Yeah, big time. And even talking about the range anxiety, which all those kinds of things, you look at the most cutting edge batteries coming out of China right now, the range is pretty great. And you can also repurpose those when they're plugged into your house, you can repurpose those and turn those into generators, right? So the thing that's really interesting about this suite of technologies is that it's more malleable. In some sense, it's almost kind of like the revolution that's happening with screens and software, where we used to have purpose-built analog things, and then increasingly everything became software.

29:47Demetri Kofinas:There's something, I think, similar here, where there's much more commonality and interconnectivity between parts of the stack on the electric side than there is in the traditional internal combustion world. 100%. And going back to the phone car thing, the first Tesla batteries for their car was basically just a bunch of cell phone batteries like truly like it like that's where a lot of this stuff came from like the early batteries were i mean they were bad but here we are like now you have the byd blade battery and and if you look to go back to weak signals if you look through a lot of scientific journals and so things people are playing with on the cutting edge it looks like that you have a reasonable promise of these batteries being significantly better 20 years from now when some of this stuff gets applied.

30:34I just did a research piece on aluminum and there's like an aluminum battery that is completely outperforming lithium. Now it's super early. You're talking like basic research level stuff. It's not going to get commercialized tomorrow, but all this stuff we're talking about was in somebody's head in the 80s and 90s. It got, it just that China just really commercialized it in the last decade.

30:56Demetri Kofinas:Where do you feel like we went wrong or have gone wrong here? Yeah. So I credit that piece for what I'm about to say, because I hadn't thought of it in this way well enough until I read it. And that's the electric slide. But essentially, profits at the end of the day have driven us to go all the way up the perceived value chain to just like, let's do software and let's design things like chips. Like we'll let them build it. We don't need to build it. That's like, you know, a low value added thing. We'll design it. That's where all the profit margins are. And on the surface, that makes perfect sense.

31:31But I think over the long run, it makes no sense because at the end of the day, you cannot separate design and manufacturing. That's, I think that is the core mistake we made was we can separate it. We can have an engineer in Palo Alto tell the factory floor and Shenzhen or whatever, like here's how to do it. because as you iterate manufacturing things, you come up with ideas that impact design and designers come up with ideas that impact manufacturing. The reality is you need them working literally together. That's something I think Elon Musk is one of the few people in America that he gets that he has his design and engineering people basically right at each other at all times, because so often someone designed something stupid from an engineering perspective or, you know, the engineering team wants to do something that negates the whole point of the design, right?

32:16I think we missed out on the fact that a lot of innovation can come from manufacturing. And if you go back to Apple in China, the interview you did on that, this really exploded to me because if you remember, he highlighted the point where Foxconn turned around with a iPod that they made themselves and presented that to Apple. And Apple was blown away at how good it was. And that was like a perfect example of like, here's your manufacturer that they're not allowed to design stuff, but here they've come up with a product that's actually really good. And it's because they've learned so much doing that manufacturing work.

32:50That kind of stuff should have triggered people to be like, wait a second, are we missing out on some of the future of design because we're not doing the manufacturing? And I think that answer is just yes. Yeah.

33:01Demetri Kofinas:What was also amazing about that interview and the book is that you realize even China's leaders didn't understand that. That in fact, Apple was instrumental in explaining to them how valuable their participation within the Chinese economy had been to sparking this flywheel of innovation driven by hands-on iterative manufacturing. And the fact that you're doing that thing makes you better at the other thing or lots of other things. Yeah. And if you're the manufacturer for this whole stack and you're talking to each other, talking going to be that flywheel. Again, 2 plus 2 equals 10. The more you combine these things...

33:41Another point I'll make is if you study the greatest business leaders, the industrial titans of history, almost all of them used pretty intense vertical integration. You think of Rockefeller. He did not just make oil and kerosene or whatever. He was doing the barrels and the transportation. He wanted all of it. That made him very, very efficient, but really drives down costs. It gives them, you know, more control over the whole process. And I think, you know, globalization in the modern world, like we undid a lot of that. And for not all bad reasons, that makes plenty of sense. Like, but now I think we see the reemergence of that kind of work for like the BYDs of the world where they're controlling the whole thing and that's helping them drive down costs.

34:22Again, it goes back to competitiveness. Like you're more competitive, you do that. You have more leverage over your suppliers. Oh, big time. Right. Yeah. And, you know there's that horizontal integration too of like the multidisciplinary thing like taking innovation and all these different adjacent fields and applying it to yours like you know a lego you know in this other industry hasn't fit in in your lego ever but now all of a sudden it snaps in and it's like oh well we can do that okay think about drones like drones wouldn't exist if we hadn't had some of the innovation we've had with with electric motors and making them more lightweight and batteries more lightweight.

34:58Demetri Kofinas:Now, going back to the conversation we had at the beginning about foresight, doesn't it also make you better at predicting where things are going? Yes. Because you can see so many of the different applications for the products that you're creating. Exactly. And that system thinking approach of realizing that things are not just the sum of their parts, the way they interact with each other, the feedback loops makes it much more. Like there's a compounding effect just inherently built into some of this stuff. We're talking about the future. Like we're talking about where the world is in 20 years, who gets to build that world.

35:32And at the moment, the way we have this structure, like it's not us. Like we are, the US will be like an emerging market being like, you guys want some soybeans and some natural gas. And like, I don't know, that's what we have, you know?

35:42Demetri Kofinas:So it feels like we, you know, I sent you a clip yesterday from that movie, The Counselor. there's this scene where this guy is speaking to someone else and the conversation is essentially around acceptance. And one of the people, the counselor, hasn't really accepted the predicament he's in. He's still in a state of denial and wanting to be able to go back in time and change things in the past and that not being possible. And I feel like we remain in a state of denial here in America today, and we haven't even entered the race yet. That's what it feels like. And I'm curious if you agree with that.

36:16Demetri Kofinas:And if you do, I don't necessarily want to try to understand why that's the case, but I am curious to know what you think needs to happen. And maybe if you've identified people or companies or actors within or departments within the government that are actually trying or making progress or putting forward positive visions for what we need to do in order to become competitive again in these areas as a country. Yeah. That clip really nails it it is an acceptance problem and i don't even think people like even realize this yet because again like we tend to see the individual legos and think about what got us here more than like where we need to be in 20 30 years it's just like a giant blind spot like obviously we we have gotten around to realizing rare earth right in the last year that's been kind of obvious for 25 years something like that i don't know like that you need to be careful with that at least but we didn't really grasp it until like the mousetrap like snapped on us this year and it's like oh like maybe we should do something about it so the odds of us doing something about the rest of this especially because a lot of these things are politicized in america it makes it tough but to me as far as like okay what do you do about it first of all you accept it you realize where exactly where you're at you know you have to figure out what's important and like electricity and i feel like we're in that just quickly to interrupt you and then please continue it feels like we are in that process right now.

37:38Demetri Kofinas:When people like Patrick McGee or Dan Wang publish their books or Kyle Chan publishes his letters on Substack and more and more people read them and share them, it feels like that is part of a process of, let's say, the top 1 % or 10 % of intellects in the United States who are beginning to realize where things are. And then that message will eventually sort of resonate throughout the economy and then we get acceptance. But it feels like that's where we are. we're still in the process of reaching acceptance. Yeah, exactly. I think those people, it's kind of like the weak signal that like, okay, some people are actually starting to figure this stuff out.

38:12It's just the road to get there becomes the hard part. And one thing I've noticed, maybe it's just my opinion, but we keep trying to slap band-aids on everything and look for really easy fixes.

38:22Demetri Kofinas:And easy sources to blame. That's another quick one that we are still in a blame mindset in America, which is also very amenable to what's in the incentives of politicians. And we need to move past the sort of who's to blame, pointing fingers to actually what are we going to do about it. Exactly. Let's work on solving the problems instead of sharing the blame. And whenever it comes to China, everything is so defensive from our perspective, even the language, decouple, de-risk, contain. It's all so back-footed. Instead of being like, they're doing a really good job of competing with us now. And we can debate how much of it was fair or whatever.

38:58But at the end of the day, they're out competing us in a lot of really important areas. And it just gets worse in the future, in my opinion, based on what we're doing now. So the whole like, how do you fix it thing? To me, it absolutely fundamentally starts with education. That is where the biggest erosion has happened, in my opinion. That's what has to be the number one priority. Like as I write in that letter, like all this stuff's about human capital. And I don't care how good your policy is if you don't have a human capital, if you don't have the engineers that can build the things, think up the things.

39:28If you don't have robust, well-funded university labs, government labs, corporate R &D, like most corporates, they don't love doing R &D these days because, well, that hurts the bottom line. Like that's where everything has to come from is these institutions. And when I was a program manager in the government, I got to spend time at like with MIT rocket scientists and I worked at the Air Force's rocket laboratory. So you're just, you know, huge nerds thinking about what a satellite thruster needs to look like in 25 years. Like, so seeing like the yield that stuff generates when people are just given money and time to tinker and think about hard problems.

40:06And, and that's what gave us that giant lead. That's why we are the ones that thought up most of these, these actual things that are, you know, being commercialized in China. So for me, it all comes down to that, but a hardware focus over just software is huge. I think we've had a very myopic focus on software that needs to make a dramatic shift to hardware. And when I think of the Palmer Luckeys out there, that we need more Palmer Luckeys is the first thing I would say. A non-bloated, entrenched defense contractor that's trying to build physical hardware at a decent price. And I give Elon credit, same thing for SpaceX, right?

40:45Like taking things in this space a lot more competitive because of some innovation.

40:52Demetri Kofinas:I really do wonder what the opinion perspective view is from Beijing when they look at us today going through this government shutdown period where we haven't even entered the race yet. And I just, I wonder what they think. What are they thinking is happening here? Because I can't even really fully understand. I do think part of, I think you really nailed it when you talk about decoupling, de-risking, containing. That speaks to a scarcity mindset, a mindset of like, we accomplished X, Y, Z. That's as good as it gets. We got to hold onto what we have because if we lose it, that's it. That's kind of the mentality of inheritors of wealth.

41:35Demetri Kofinas:It's like, this is all I'm going to get. I don't know how to make any more of it, so I got to try to protect And I think that this also is reflective of a state of privilege and comfort that's not consistent with what made us a great power and a great country and a global leader to begin with. And it's why a lot of the conversations, in my opinion, around reshoring iPhone manufacturing in Texas feel like fantasy talk at the moment. Because doing that requires sacrifice. and we just haven't gotten to a place in America yet where the incentives are there to do that. Yeah. I hadn't thought of it from an individual family's wealth perspective, but it's a perfect analogy, honestly.

42:19I say in that letter that China takes serious education way more seriously. And I think that shows that there's a work ethic gap for sure. To go back to Apple in China when it talks about they needed a factory floor cleared out or whatever. And they thought like, oh yeah, I'm sure they'll have it done in two weeks. And they came back the next morning and it was just like all done and like those the executives were like mind blown i think there's just like a there's a hunger gap and yeah yeah 100 and you know the average macro investor the one thing you can guarantee they'll smash china for is that they're they don't let consumption grow significantly and i'm not saying this is all good by any means but there is this like forced hunger that comes top down like they don't let people get very comfortable They don't let people stop working hard.

43:06They don't want rampant consumerism and, you know, things that probably do have, you know, contribute to us getting a little bit lazy. But at the end of the day, like, this is just human nature. Like, you get a bunch of stuff, you don't keep the same edge you had. It's like, it's why coaches and sports struggle really hard to keep their teams up against bad opponents and stuff. So I think that's just part of it. The question is, you know, how to get back out of it.

43:30Demetri Kofinas:And they're very explicit about it. Xi Jinping talks about this when he uses the phrase eating bitterness. And I encourage people to read Joseph Terygian's book, which is a history of the Chinese Communist Party told through the life and times of Xi Jinping's father, to really see what is the environment that produced these people? What is their history? And the other thing I think about is that in some sense, we're kind of following the Europeans. Europe was the dominant continent until the end of World War II. It was the source of the first industrial revolution. It produced so much literature and culture.

44:08Demetri Kofinas:And eventually America took over. But because of the Cold War and the threat of the Soviet Union, the United States was incentivized to help bring Europe along for the ride. And so at the end of the day, Europe lost its empire or the Brits lost their empire and other countries in Europe lost their influence, their political influence globally. But they gained in terms of lifestyle because they were able to benefit from alliance with the United States. We're not in a similar position today, so we can't afford to just kind of go quietly into that good night. And again, I find it concerning that we're still in this place of culture wars and fighting between ourselves and shutting down the government and looting the government and all this stuff.

44:54Demetri Kofinas:It's an absolutely terrifying place. And I haven't seen a movement on either side, really. I mean, there are elements of people both on the left and right, but the politicians on both sides still seem to be playing that game. And the people that have money and have done well in the United States, again, to speak to incentives, they may want to see positive change for the country, but they're only willing to risk so much, right? Because they don't want to expose themselves to losing what they have. And you can even see this in when it comes to housing developments. In wealthy areas, people don't want you housing because they don't want to affect the value of their own homes, even if other people need houses and they can't afford them.

45:34Demetri Kofinas:And all that is undermining the political consensus in the country. Chase, you write quite a bit about AI. I want to talk about that too, because one of the sort of operative questions that is in people's heads these days is whether we're in an AI bubble or an AI CapEx bubble. And that's something you've written about, I want to talk about. I also want to talk about the dollar because there are some indicators that we might be heading into a growth slowdown. And the question that I have in my mind is, are the same dynamics going to hold this time around that have held in previous recessions because of the role of the US as the primary consumer of the world surplus and because of the dollar's role and the role of US government debt internationally as a place of refuge for investors and businesses looking for safe havens to park their cash?

46:21Demetri Kofinas:Or are we going to see a post-liberation day dynamic where the dollar behaves more like an emerging market currency and sells off in the face of economic weakness? And to the extent that we have time, Chase, I'd love to talk about Venezuela and what US policy is there and how it fits into some of this talk about bolstering the Monroe Doctrine and America's own retrenchment into the Western Hemisphere. There's something that we've talked about in the comment section of some of our posts in the Genius Community, and it's something that I know you've thought quite a bit about. For anyone new to the program, Hidden Forces is listener supported.

46:59Demetri Kofinas:We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Chase, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Chase, stick around. We're going to move the rest of our conversation onto the premium feed.

47:33Sounds good.

47:35Demetri Kofinas:If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time.