Deep Thoughts On Trump's Tariff Tiff And The AI Revolution

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First of all, let’s remind ourselves to step back from watching every tick up or down, every tanking or spiking of the markets, and every headline from the White House and business TV news. Let’s remind ourselves of all the other times the markets have panicked over geopolitical tensions, trade wars, sovereign financial crises and the other times that people have declared a complete change in the world order (you might recall the headlines like this from COVID, from Trump's 2018 Trade War, from the Great Financial Crisis and so on:)

COVID era

The World Order Is Dead (Politico)

The Coronavirus Pandemic Will Forever Alter the World Order (WSJ)

The End of World Order and American Foreign Policy (CFR)

Coronavirus: who will be winners and losers in new world order? (The Guardian)

Are We Ready To Embrace A New World Order? (Forbes)

The End Of The New World Order (NYT)

Trump 2018 Tariffs

Trump threatens to blow up global trading order with tariffs (Politico)

G20 will be about Donald Trump and his tariffs – but China will dominate the new world order (The Conversation)

Trump’s New Tariffs Are Causing America’s Closest Friends to View Him as a Hostile Threat (The New Yorker)

Global Financial Crisis (GFC) 2008

President Obama and a New World Order

Is the G-20 Summit a Step Toward a New Global Economic Order? (Brookings Institute)

Henry Kissinger: The world must forge a new order or retreat to chaos (The Independent)

Globalisation and the new nationalism collide (FT)

To be clear, the "world order" is probably changing, but that's not something that necessarily started last week on "Liberation Day." And importantly, its not all bad for the USA and her allies. Perhaps more importantly, the best pitches in the stock markets are often thrown at us when everybody’s bear case is actually a bull case.

Here's why this isn't all bad for the US: (1) the US and the rest of the western world are overwhelmingly service-based economies (around 80% of GDP), and AI is supercharging the productivity and profitability of service-based businesses right now; and (2) the Trump Tariff Trade wars primarily serve to further drive investment in more AI and robotics in order to be competitive with the developing world in manufacturing.

Everyone knows that the US is a services-based economy. And people also recognize that we need to bring manufacturing back to the US soon, and AI/robotics will help with that down the road (it's not here quite yet). But most people view AI as bearish for the service industry because they think it is going to replace humans in these jobs.

But perhaps people are also forgetting that services are the our largest export, and contrary to the goods we buy from the developing world, those services generate high-margin, recurring revenue. Critically, the United States' services-based economy is going to be supercharged by AI in the near term!

People seem to be forgetting that AI's impact on the service economy is happening much quicker than its impact on the goods economy. What’s different with AI is that it is impacting knowledge workers first, unlike prior technological revolutions, which primarily impacted blue-collar workers. But this will actually be a good thing as American knowledge workers using AI sell more of their services here and also export more and more services at higher margins!

This is a fundamental difference between the US and Chinese economies right now. The US is spending massive capex to improve AI, and that AI improves our service-based businesses (although physical AI is coming too, but it’s further down the road), while the Chinese spending on AI (even though it's much less than the US currently) will mostly benefit low-margin goods production.

So here’s the short of it: AI plays more to the strengths of the US in the near term than it does to the strengths of China. The US specializes in services: software, social media, internet, legal, accounting, customer, healthcare, entertainment, music, gaming, creators (Instagram, etc.), and AI helps all of these most critical sectors right now, and it's getting better every day. A lot of people have written off AI because it's not that helpful in the physical world yet, and “only” helps us with these services, but somehow, we forgot that it is the most important piece of the American economy.

Importantly, because the AI capex is supporting America’s high-margin services sector, a pullback in the goods economy caused by tariffs will have much less of an impact. AI helps law firms more than it helps factories right now. Software companies and law firms can use AI to scale even more immediately. Software companies and law firms can use AI to make themselves more profitable right now. The US can produce even more services that the rest of the world will want, regardless of what happens in the physical goods world. 

Think of it this way: Meta is our Foxconn (that's an oversimplification, but it works). And right now, AI helps Meta a lot more than it helps Foxconn. For the next 6-18 months, expect to see rapid improvements in Meta's products (like we have been seeing in the last 18 months or so) in terms of scale, efficiency, usefulness, entertainment value, and productivity. 

Second, think about what the most likely outcome of all this geopolitical/tariff/re-domestication of the global supply chains is going to do to The AI Revolution and The Robotics Revolution. Put simply, corporations, enterprises, small businesses and individual people now have more incentive than ever before to embrace, utilize and create new services and applications using AI. Any producer of physical goods now has much more incentive than ever before to invest heavily into using AI and specifically robots built with AI to build their products in their factories.

In the same way that The Coronavirus Crisis pulled forward five or ten years worth of delivery and app and remote work and spending on innovation and technologies, so too will Trump’s Tariff Tiff will pull forward five or ten years worth of AI and Robotics applications and services and products and spending on innovation and technology. Isn’t it more likely than not that AI and Robotics is going to have a bigger impact if Trump’s Tariff Tiff has now created an even greater economic incentive to do so?

Whether Trump ends up making deals with China et al that finds a “reasonable” level for tariffs and trade deficits, the cat has been let out of the bag. C Suite executives around the US were already trying to figure out if they could truly re-domesticate their supply chains and factories after The Coronavirus Crisis revealed just how fragile and risky their supply chains and distribution networks have been, they are now sitting in board rooms figuring how much to spend on actually doing so this time.

The keyword in that prior sentence is “spend” because it certainly is going to require these companies to crank up spending on cap ex and R&D, specifically on AI and robotics. And while that spending might impact profitability and cash flow for Levi’s, Coca-Cola and probably even Apple, that spend is going to have lots of trickle down effects and directly benefit the AI infrastructure companies (ie, hyper scalers) like Meta, Amazon and Google, (and CoreWeave) all of which will likely continue to buy as many Nvidia chips as they can.

It won’t be easy and it won’t be overnight, but the fact is that it probably is much more efficient and effective to localize supply chains in just about every industry, including chips, servers, smartphones, cars, sodas, food, etc. Think about how much time and actual energy/pollution it takes to send the chips, wires, connectors, screws, etc that comprise AI server farms or smartphones back and forth from Taiwan to South Korea to China to South Korea and then to the US. I mean, I often think to myself as I peel off the stickers that the Republican Democrat Regime has legislated have to be put on my fruit telling me what country it was imported from, that there’s simply no way that shipping apples from Argentina to the locally-owned grocery store in Ruidoso, NM is more cost effective and efficient than shipping them from the thousands of apple trees in Hondo, NM, 30 miles away. We already have working apple-tree-shaking machines that make apple picking an order of magnitude more efficient than having the lowest-paid humans pick apples. You can expect to see that kind of impact from humanoid and other robots in coming years. All accelerated because of Trump’s Tariff Tiff.

So maybe I should be clear that we are indeed changing the entire world order, but that it’s not all doom and gloom. In fact, in many ways, the NWO (new world order) will directly benefit AI and robotics companies. I should also be clear, that I have no idea when the markets will stop freaking out about Trump’s Tariff Tiff. I have no idea about how the best AI and robotics stocks will trade over the next 3-5 days or even the next 3-5 weeks. But I would certainly expect the markets to start recognizing the accelerating demand for AI and robotics products, services and applications over the next, say, six months and that year from now, the ideas in this article will be broadly accepted by investors and analysts.

The playbook then? Easy does it, first of all. But beyond being cool and steady about it, I plan to continue to scale into the best positioned AI and robotics companies in coming days and weeks whenever the markets panic. I plan to trim a little bit here and there when the panic subsides and stocks rally like they did yesterday and today (at least earlier today).

As I see it, the markets are giving us some incredible opportunities to build up our favorite AI and robotics names just as their markets are about to accelerate. Onward and upward then!