#252 - Mexican Leverage

Jacob: 00:00:02

Hello, listeners.

Jacob: 00:00:02

Welcome to another episode of the Jacob Shapiro Podcast.

Jacob: 00:00:05

Rob and I are back at it for our weekly chat.

Jacob: 00:00:07

I did that dangerous thing where I recorded first thing in the morning before I got my cup of coffee.

Jacob: 00:00:10

So hopefully I am still intelligible and not too irascible.

Jacob: 00:00:14

Listeners, if you want to talk about anything you heard on this podcast, please feel free to reach out to me.

Jacob: 00:00:18

Jacob jacobshapiro.com Otherwise, take care of the people that you love.

Jacob: 00:00:22

Cheers.

Jacob: 00:00:22

And see you out there.

Rob: 00:00:27

All right?

Jacob: 00:00:27

Good morning from Cape Coral, Florida, where I'm wearing.

Jacob: 00:00:30

You can't see me, most of you maybe check us out on YouTube.

Jacob: 00:00:32

You'll be able to see that I'm wearing my flamingo shirt to be a good Floridian.

Jacob: 00:00:36

Rob, how's it going there in Paris?

Jacob: 00:00:38

Are you wearing your shirt?

Jacob: 00:00:39

Does not have baguettes or croissants or anything else on it.

Rob: 00:00:42

I don't look nearly as cool as you today.

Rob: 00:00:44

It's dressed for drab weather here.

Jacob: 00:00:48

They gave me a really nice room.

Jacob: 00:00:50

You're going to get to see the sun rise up over.

Jacob: 00:00:52

I don't know what this is.

Jacob: 00:00:53

This the Cape Coral.

Jacob: 00:00:54

Maybe that's because I'm in Cape Coral.

Jacob: 00:00:56

I don't know.

Jacob: 00:00:56

I didn't actually do the research yet about where I actually am because I was so busy.

Jacob: 00:01:01

Anyway, so we have a lot to talk about.

Jacob: 00:01:02

It's not like anything is happening in geopolitics and markets at all.

Jacob: 00:01:06

We thought we'd start off in talking about the news that at least I've been fielding so many inbound questions about, which is this news about Deep Seek, this Chinese AI company over the past week.

Jacob: 00:01:17

I think I'll start with the proviso that neither Rob nor I are AI experts and that I've actually been soliciting both some AI experts and some China experts to come on the podcast who talk about deepsea and some more nitty gritty granular detail.

Jacob: 00:01:30

So this will not be the deep sea granular detail piece, but there's also a lot of geopolitics and the US China relationship and what deep Seq means for that.

Jacob: 00:01:38

There was a massive market reaction with Nvidia dropping, what, 17% or something like that at one point, and everything from other chip stocks to nuclear stocks that might be tied to the future of data centers also sort of dropping precipitously, things like that.

Jacob: 00:01:53

I was amused by Bloomberg had an article quoting Nassim Talib yesterday talking about how this is just the beginning, the beginning of an adjustment to reality.

Jacob: 00:02:03

Now the whole edifice is going to collapse in on itself.

Jacob: 00:02:06

That was like one of the best takes, I thought, out there.

Jacob: 00:02:10

But a lot of, or at least a lot of the attention was on this idea that the Chinese were able to do something far cheaper than OpenAI was able to.

Jacob: 00:02:22

I think a lot of that is sort of nonsense that, you know, there was a lot of attention on this reasoning model that was very similar to open eyes reasoning model, sort of the ChatGPT thing.

Jacob: 00:02:33

But a lot of this information was available in December.

Jacob: 00:02:36

The 5 million number that people have been throwing around, yes, that was for sort of the last part of the training of the model.

Jacob: 00:02:43

But it didn't go into all the costs, that went into actually getting to the point where you were building the model itself.

Jacob: 00:02:48

So it was kind of not really showing all the cost that went into it.

Jacob: 00:02:51

And then you had people saying, oh, they're trying to obfuscate it so that they can show that they did this cheaper than anyone else.

Jacob: 00:02:56

Not if you read what they said, they didn't obfuscate it at all.

Jacob: 00:02:58

They literally called out, no, this 5 million is only for this specific thing that we did.

Jacob: 00:03:02

Yeah, so there's just a lot of, of nonsense, a lot of noise, I think, covering up the signal here.

Jacob: 00:03:08

So maybe we go straight to the objective thing, which is markets moved, Rob.

Jacob: 00:03:12

So why do you think markets moved?

Jacob: 00:03:14

And what does that say about this development itself?

Rob: 00:03:18

Yeah, we should talk about the market aspect and then even more importantly the fundamental aspect.

Rob: 00:03:24

Because what I'm ultimately going to get at is this confirms a lot of what we've talked about previously and I'll speak about why.

Rob: 00:03:32

But first, on the market side, over the last two conversations we have had, I think I mentioned that the market sort of internals have shaky foundations.

Rob: 00:03:45

You know, talking about breadth and sort of the AI theme being very long in the tooth.

Rob: 00:03:51

Sometimes the market's just looking for a reason to freak out because it's sort of standing on this rickety ladder and one little breath of wind can topple it over.

Rob: 00:04:03

And I think that's clearly what you saw in Nvidia.

Rob: 00:04:05

We've been talking about this for a while.

Rob: 00:04:07

We actually recommended at Off Wall street that our clients short Nvidia in our, in our July 7th note, which is looking pretty prescient now given that it's underperformed.

Rob: 00:04:22

But this is not an overnight thing, as you point out.

Rob: 00:04:28

This has been long in coming.

Rob: 00:04:29

The sort of underpinnings for this AI driven hardware rally have been running on fumes for really Six months or so.

Rob: 00:04:41

And this was sort of a major catalyst.

Rob: 00:04:44

And it's funny how sometimes markets almost act.

Rob: 00:04:49

You have these memes that emerge like this.

Rob: 00:04:51

As you point out, all the information was here in mid December on what this company was doing and what this meant.

Rob: 00:04:59

But the market didn't really connect the dots and the media didn't start freaking out until just now.

Rob: 00:05:05

And in fact, if you look at some really well informed tech observers, like Ben Thompson for instance, who writes Stratecheri, who's very, very good, you know, he was like, well, I wrote about this six weeks ago.

Rob: 00:05:17

I'm not sure, you know, people are bugging me.

Rob: 00:05:19

Why didn't you talk about this?

Rob: 00:05:20

I said, well, I did.

Rob: 00:05:21

I just didn't realize everyone was going to freak out in such a way.

Rob: 00:05:25

So I think there's an element of just sort of the media whirlwind picking up on this story and running with it, especially given the China US competition aspects, which I think are really not important at all.

Rob: 00:05:41

And you know, we can, we can talk about why.

Rob: 00:05:45

But yeah, so much for the market response.

Rob: 00:05:47

So everything hardware related, all of the names that are tied to electricity generation, all of the equipment suppliers that go into H vac and cooling and electrical components for data centers, that whole group had been running, running, running and running on fumes by the end and just got really whacked.

Rob: 00:06:09

What you have seen, interestingly enough, is you've seen some rotation into and you can see how the market's just looking like, okay, well what's the next AI play?

Rob: 00:06:18

What's the next AI play?

Rob: 00:06:19

And now it's rotating into some more software oriented names and companies like IBM and Accenture are both up pretty good in the last week or two because people are assuming cheaper AI means more rapid adoption of AI.

Rob: 00:06:35

And those companies, their bread and butter is basically doing consulting work to help big corporations use this stuff.

Rob: 00:06:43

So you're seeing churn in the narrative overall.

Rob: 00:06:48

Like the hardware element is starting to fall apart.

Rob: 00:06:51

One specific name that I think is really interesting that we've been short at off Wall street, which really got whacked and I think has a long way to go, is a company called Fabrinet fn.

Rob: 00:07:02

And they basically, you know, there's a lot of reasons which we won't get into, but that one is I think seen, seen its knockout blow and is pretty poised to go down lower.

Rob: 00:07:15

So yeah, so much for markets.

Rob: 00:07:17

I mean, there's a lot to say about the fundamentals, but was there anything on the market side you want to get into before we dive into other aspects of this.

Jacob: 00:07:24

No, just that, I mean.

Jacob: 00:07:26

Well, first of all, I remember chatting with you about Nvidia, what, over a year ago, and I was hot to trot to short Nvidia and I got called off, which.

Jacob: 00:07:34

Which good, because my timing would have been completely and totally disastrous.

Jacob: 00:07:37

So glad you finally came around on that.

Jacob: 00:07:39

I was, I always seem to be early on that stuff.

Jacob: 00:07:42

But yeah, I also just, I had an interview with Maggie Lake earlier this week and she asked me about it.

Jacob: 00:07:46

And I also just made the point that I don't understand where all the angst is coming from.

Jacob: 00:07:50

Like, unless you bought Nvidia in the last month, or unless you bought these stocks in the last month, you're still like, up a considerable amount no matter when you bought them.

Jacob: 00:07:59

t, we're down to the December: 2024

Jacob: 00:08:03

Like, can we have a little bit of patience?

Jacob: 00:08:05

And I even, you know, it sort of feels like that thing of financial does where something happens in the news and they have a market development.

Jacob: 00:08:13

And instead of like actually doing the work to figure out what's going on, it's like, okay, let's slap this headline onto this development and say, oh, my God, market crash.

Jacob: 00:08:20

It must be this Chinese AI tool that came out of nowhere.

Jacob: 00:08:24

So it just seemed to reek of that to me, which it happens all the time.

Jacob: 00:08:27

Like, if you look at most financial media, not to throw too much shade to them, because I appreciate the role of journalists in the ecosystem, but, like, look at the, look at how the headlines update themselves over the course of the day.

Jacob: 00:08:38

Like, if the Dow is up.

Jacob: 00:08:39

Oh, the Dow is up.

Jacob: 00:08:40

And President Trump rescinded his thing on government spending.

Jacob: 00:08:43

Nope, the Dow is down.

Jacob: 00:08:44

It's because the US Columbia trade spat is shocking investors.

Jacob: 00:08:48

It's like none of that is actually true anyway.

Rob: 00:08:51

Yeah, I mean, there's two elements of what you just said.

Rob: 00:08:55

The first is financial media's need to put a face on all the noise all the time.

Rob: 00:09:01

Most things are just noise, but no one wants to read that on the newspaper had, you know, front page.

Rob: 00:09:07

So there's a lot of kind of bogus elements of that going on.

Rob: 00:09:11

The other thing on Nvidia specifically, I think that's a different phenomenon because people are obsessed with this company because it is the figurehead of this bull run.

Rob: 00:09:22

And that's something that you see during periods like this where the public gets really caught up around one specific stock.

Rob: 00:09:31

In the 90s bubble, it was Qualcomm.

Rob: 00:09:33

People were obsessed with Qualcomm, what's it doing, where's it going?

Rob: 00:09:36

That was sort of the poster child for that era technology boom.

Rob: 00:09:42

And it is really important because a lot of people have a lot of money riding on this.

Rob: 00:09:48

And even though, as you point out, which is totally correct, Nvidia stock price is only down to where it was like a few weeks ago.

Rob: 00:09:57

But regardless, the sentiment and the fear factor is so it's like turned up to 11 because you have a lot of what we call weak holders.

Rob: 00:10:10

You have people who are cynically holding this in anticipation that it's just going to keep going up.

Rob: 00:10:15

And that as I like to talk about this guy, Didier Sorenette a lot who wrote about bubbles, that's the definition of a bubble.

Rob: 00:10:24

And not a market bubble per se, but a bubble in this one stock where you have a lot of people who are owning it cynically, but the basis for that falls apart if it doesn't keep going up.

Rob: 00:10:36

And that even though in absolute terms we're not down that much, that's a pretty big change in terms of sentiment and where things could unravel from here.

Jacob: 00:10:46

Yeah, well, maybe let's back into the fundamentals then.

Jacob: 00:10:48

You already mentioned Ben Thompson.

Jacob: 00:10:49

He was one of the ones that I was going to recommend.

Jacob: 00:10:51

I also thought Karen Howe had a really good take on this.

Jacob: 00:10:56

I saw it on X, but she publishes things all over the place.

Jacob: 00:10:59

And she talked about how the Deep Seq story, besides all the news that people were freaking out about, one thing that it did show was that the paradigm that OpenAI and its sort of associated companies and entrepreneurs have insisted on is the only way to build, you know, general AI.

Jacob: 00:11:14

And to do this is to scale up relentlessly.

Jacob: 00:11:16

And so you need more data centers and you need power plants just to power the data centers.

Jacob: 00:11:20

And more and more and more.

Jacob: 00:11:22

And she sort of talked about how the one thing that this really does show is that that isn't the only way to do it, that they were making an argument to try and justify these ballooning costs that they were having.

Jacob: 00:11:31

And maybe that is the best way to do it.

Jacob: 00:11:33

But that what Deep Seek really did show is that actually there might be another way to develop AI.

Jacob: 00:11:38

And that to quote her, you don't have to blanket the earth with data centers and coal and gas plants to imagine or to arrive at a future where we can wave our magical, you know, AGI wand and make all of these consequences go away.

Jacob: 00:11:51

So I thought that was an interesting sort of take.

Jacob: 00:11:53

I wanted to get your reaction to that take.

Jacob: 00:11:55

And then I'd love to hear about what you're thinking about the fundamentals could also.

Jacob: 00:11:57

I think that ties into that.

Rob: 00:11:59

Yeah, it does tie into it.

Rob: 00:12:01

And that's, that's ultimately the story here.

Rob: 00:12:06

And I want to draw people's attention back to the conversation we had.

Rob: 00:12:09

I think it was on June 14th and we did a whole episode about we have to talk about AI or I forget what it was called, but something like that.

Rob: 00:12:17

I really encourage people to go back and look at that because that was six months ago, seven months ago now.

Rob: 00:12:22

And a lot of what I said in that I'm just going to repeat today.

Rob: 00:12:29

And I think this is a very strong confirmatory data point in favor of that thesis.

Rob: 00:12:34

And what I said was that the future of AI is cheaper and decentralized, not expensive and centralized.

Rob: 00:12:43

And that the notion that the same companies that dominated web 2.0 and web 1.0 are going to have the same dominance is just not right.

Rob: 00:12:54

And let me step back and just put that in context of technology.

Rob: 00:12:57

And you know, we do a lot of research on technology revolutions and how they play out over time and how do you position for that for your clients?

Rob: 00:13:06

And I'll talk about how we're positioned short and long, you know, for bespoke clients and for off Wall street clients on this theme.

Rob: 00:13:14

But the number one takeaway from a technology revolution, which is, is is that technology wants to be cheap.

Rob: 00:13:23

And you've seen this pattern before.

Rob: 00:13:25

This is the same mistake that companies like IBM and other computer makers made in the 60s and 70s, because at that point, this was prior to the emergence of the PC, the view was, okay, computers are going to be these extremely complicated, extremely centralized, very expensive to make, like Lamborghinis.

Rob: 00:13:48

And there's not going to be very many of them and access to them is going to be very special.

Rob: 00:13:52

And you have to have all this expertise.

Rob: 00:13:55

And that whole paradigm just broke down in the 80s with the introduction of the PC and sort of standardized software that made vertically integrated software stacks with the hardware unnecessary.

Rob: 00:14:08

Just this whole idea of centralized, expensive, difficult technology like that always is what emerges when something first happens, because that's what you need to get things started.

Rob: 00:14:22

But if you're making the technology revolution right, it gets cheaper and cheaper and cheaper.

Rob: 00:14:28

So this shouldn't be a surprise to anyone that, oh my God, all of this super expensive hardware that's required to make this thing that everyone wants, wow, we found a more efficient way to do it cheaper and to not use as much hardware and resources like, have you been paying attention to any technology and its progress over the last 500 years?

Rob: 00:14:50

Like that is what was inevitably going to happen.

Rob: 00:14:53

I think the thing that shocked people was that it happened so quick.

Rob: 00:14:56

And I think the Chinese geopolitical angle around tariffs and the fact that they were truly constrained, like they couldn't get access for the most part to the highest end ships and the highest end hardware to do this if they wanted to, that accelerated this and made it happen a little sooner than it would have otherwise.

Rob: 00:15:14

But all the economic incentives are there and all of the history of how these things play out was there.

Rob: 00:15:20

This was inevitable.

Rob: 00:15:21

So if you weren't positioning for this and this surprises you, then you're not being thoughtful enough.

Jacob: 00:15:27

Well, and this is where the geopolitical blinders really come in for people.

Jacob: 00:15:31

Because I forget who said this on social media, but somebody mentioned if this had come out of some university lab in the US Midwest, nobody would have paid any attention to it.

Jacob: 00:15:41

The reason that people paid attention to this was that it was, it was that it came out of China.

Jacob: 00:15:46

And there are a couple different narratives about China.

Jacob: 00:15:48

There's simultaneously, you have the oh my God, China's going to collapse narrative demographics are terrible, Chinese Communist Party, blah, blah, blah, blah.

Jacob: 00:15:55

And yet China's also going to take over the world.

Jacob: 00:15:57

You also have the China's at the cutting edge, they're going to steal all the intellectual property, they're the ones that are making change.

Jacob: 00:16:02

And also, oh, it's a sclerotic authoritarian state.

Jacob: 00:16:05

They can't actually innovate.

Jacob: 00:16:06

The United States is the center of innovation, blah, blah, blah.

Jacob: 00:16:09

And these narratives both coexist sort of at the same time.

Jacob: 00:16:13

Another friend of the podcast, Ray Ma, who I'm hoping will come on the podcast, I need to, I need to reach out to her.

Jacob: 00:16:18

She actually posted an entire thread about why Chinese tech companies like Deep Seek and ByteDance are so special.

Jacob: 00:16:24

And I thought that was a really interesting sort of thought because she talked about how Deep Seek favored young, smart problem solvers with little AI experience, that they were leveraging open source as much as possible to attract top talent, but that it also prioritizes research over marketing and savings scales, it avoids rigid KPIs, it deliberately ignored monetization, it was just trying to get to a break even pricing model.

Jacob: 00:16:48

And she also Talked about how ByteDance, the company that is behind TikTok, did a lot of this and preserved this agility and this sort of feeling even as they became a huge company and had tens of thousands of people.

Jacob: 00:17:00

And this is one sort of interesting way where like China's tech overlords, if you want, or they're big tech CEOs, not only are they not the ones calling the shot in the Chinese government, Xi Jinping cut the heels out from underneath them.

Jacob: 00:17:13

started podcasting, was that: 2021

Jacob: 00:17:19

Xi Jinping made an example of Jack Ma, who is the CEO leader of Alibaba.

Jacob: 00:17:24

And you had all of these different tech CEOs, Tencent, all of them, they had to fall in line, they had to kiss the ring.

Jacob: 00:17:29

And they did all kiss the ring.

Jacob: 00:17:31

And I actually think that's very different than what's happened in the United States where you have Elon Musk is in the government, you have Jeff Bezos and all these gu, as in Mark Zuckerberg making changes, trying to engra all, you know, kissing the ring in sort of a different way, but absolutely a part of the coalition that has taken over the White House and that has taken over the government where.

Jacob: 00:17:50

So you have tech sort of playing this role in a way that it's not really playing it in China, which is interesting and sort of counterintuitive.

Jacob: 00:17:59

And a lot of these companies, like, if you are an OpenAI, maybe you are scared of this sort of development and at the same sort of, at the same level that, you know, China is probably afraid of getting its access to cutting edge Nvidia chips cut off, why they've been stockpiling them so much.

Jacob: 00:18:13

If you're the United States, you're also worried about, well, you know, China's also really good at this stuff and they have a billion people and they don't have the same type of rules and regulations that we do.

Jacob: 00:18:22

So if they really wanted to push forward on some of the things, they probably could push forward on these things in ways that we can.

Jacob: 00:18:28

So all of which goes back to this China boogeyman syndrome.

Jacob: 00:18:32

And you can really date where this syndrome begins during the sort of latter half of the Obama administration, if you go to Pew polls about what do you, what do Chinese people and what do American people think about each other?

Jacob: 00:18:44

The older generations were always suspicious of each other because they never forgot the Cold War.

Jacob: 00:18:48

But the younger generations were actually very interested in each other, actually liked each other, didn't have any of the geopolitical baggage that the older generations did.

Jacob: 00:18:57

And it was a really powerful point of hope for me in the future that young Chinese people and young Americans might be able to find common cause and not fall into sort of the geopolitical competition trap.

Jacob: 00:19:08

That those numbers have completely flipped since the latter half of the.

Jacob: 00:19:12

The second Obama term, going into the first Trump term and the Biden term.

Jacob: 00:19:16

Now, young Chinese people and young American people have like the same levels of distress that the older generations do and think of each other potentially as a threat to each other's interests going on.

Jacob: 00:19:26

And I think that's a big part of this, where anything that comes out of China becomes this threat.

Jacob: 00:19:31

And that's where I can't remember if we said this before we started hitting recording or whether we need to repeat it for the listeners, Rob, but, you know, people have been invoking Sputnik and the Soviet satellite that got sent up before the US Sent it up, and they invoke that all the time.

Jacob: 00:19:44

Like, it's been invoked so many different times in the course of this relationship.

Jacob: 00:19:47

And it's being invoked again.

Jacob: 00:19:48

And from a fundamental standpoint, from a capacity standpoint, from a technical standpoint, it's not even close.

Jacob: 00:19:53

Like, it has nothing to do with that.

Jacob: 00:19:55

But Sputnik was a psychological moment.

Jacob: 00:19:57

It was about sort of the population getting inflamed with the idea that the Soviets were beating the United States.

Jacob: 00:20:03

And you can feel the US Government like, maybe this will be the one.

Jacob: 00:20:06

We're just going to throw the dart at the wall and eventually one of these things will stick and we'll be able to spend however many trillions of dollars because the US population will be behind us.

Jacob: 00:20:13

So I don't think this is going to be the moment, but there has been this shift in the US electorate, or one of the only things Americans agree about is that China is a problem.

Jacob: 00:20:22

And if you want things, whether you're the media and you want clicks or you're an AI company and you want subsidies, or you're Elon Musk and you want help with your EVs, like down the road, if you want something, all you have to do is say, hey, China's doing it too.

Jacob: 00:20:35

And probably the US Government is going to perk up its ears.

Rob: 00:20:39

Yeah, I mean, a few thoughts that come to me from what you said.

Rob: 00:20:44

The first one is very similar to Huawei in that whole story, where you have the innovative kind of breakthrough company on the edge of things in China is not necessarily the favored son of the ccp and the one that got the government subsidies and the government support, which I think tells you something really important about how China is able to have companies almost in spite of itself at that cutting edge.

Rob: 00:21:15

And that was always the case going back to the 80s.

Rob: 00:21:19

The companies that were raising productivity and innovating the most were the ones that for the most part were sort of out of sight or out of the clutches of interference because government is really good as we talk about ad nauseam at directing assets into catch up growth.

Rob: 00:21:38

But that's not, we're talking about something on, on the technological frontier.

Rob: 00:21:42

So whether China can continue to sort of foster companies like that, I think probably they will, but it's, it's not necessarily by design as you point out, so it's a little tenuous.

Rob: 00:22:00

The other thing I just want to go into is I think the Sputnik comparison is completely wrong and for a very specific reason.

Rob: 00:22:11

Because, and I think it's worth really talking about this because it misrepresents the importance of this whole thing.

Rob: 00:22:20

Sputnik was a case where you had two really technologies truly on the technological frontier, like literally the frontier of where humans have ever gone.

Rob: 00:22:33

And you have these two bipolar superpowers plowing massive amounts of dollars into trying to make progress here.

Rob: 00:22:46

And that's a very different scenario from what we see here.

Rob: 00:22:50

Because the takeaway from this is not US, China, it's that, that US and even China and the small number of powers that were capable of building AI earlier in the development of the technology that they're not going to have a monopoly on that technology.

Rob: 00:23:10

This is going to go the direction of the PC.

Rob: 00:23:14

And now Iran and Russia and Turkey and African states and the UAE and the EU and everyone who wants to is going to be able to build and customize and deploy their own AI because that's just in the same way that you can cheap compute.

Rob: 00:23:34

So the right analogy for this is not nuclear weapons, it's not space which is still like super.

Rob: 00:23:43

That's still in the high capex phase where only really two or three organizations in the world can do it.

Rob: 00:23:51

This is way more advanced and this is the starting gun for mass deployment and diffusion of this technology because it's a technology revolution and revolutionary technologies want to be cheap and diffuse.

Rob: 00:24:04

Otherwise they're not revolutionary just by definition.

Rob: 00:24:08

So forget about Sputnik and think more of like you know, computers on your desktop.

Jacob: 00:24:15

Yeah, and the last thing I think we'll say on this is just, I think the Huawei thing is also really important because what happened with Huawei, you know, Huawei was the really was the company that had the best 5G telecoms gear out there.

Jacob: 00:24:27

Like you had companies like Nokia and Ericsson that also made it.

Jacob: 00:24:30

But there was no real US Champion.

Jacob: 00:24:32

And any country that was just making a simple do I want the best product for the cheapest cost?

Jacob: 00:24:37

Was going to go with Huawei.

Jacob: 00:24:38

And the United States saw that and was afraid of that and, you know, developed all of these different things about ho.

Jacob: 00:24:43

They can listen into our conversations if they have all the gear in our network.

Jacob: 00:24:47

So we got to make sure that they don't get in there and pay people to rip out their gear if they have it in there already.

Jacob: 00:24:51

And restrictions other countries from getting this gear.

Jacob: 00:24:54

And they really significantly hurt Huawei.

Jacob: 00:24:56

Huawei basically had to go underground for a couple of years where it just really wasn't the company that it was before.

Jacob: 00:25:02

And what happened last year, they emerged with a phone that had chips that everybody said it wasn't possible they could possibly develop.

Jacob: 00:25:08

And suddenly now they're back from going strength to strength.

Jacob: 00:25:12

So if the United States decides to react to this news the way that it reacted to Huawei, the United States can do some serious damage to Chinese companies that are in the AI ecosystem if it decides to.

Jacob: 00:25:23

But by doing it will just exacerbate and accelerate their push to try and out innovate the United States.

Jacob: 00:25:29

And this is one part where the thing also gets geopolitical.

Jacob: 00:25:32

Where China is, is ironically the one that favors openness here.

Jacob: 00:25:36

It's favoring, you know, open source, it's favoring open trade.

Jacob: 00:25:39

It's not the protectionist power.

Jacob: 00:25:41

It wants trade to continue unimpeded.

Jacob: 00:25:43

Where it's the US Is the one that is clutching its pearls.

Jacob: 00:25:46

And the US can do things in the short term to affect China in a really, really negative way.

Jacob: 00:25:52

But the more that it does, the more that it just accelerates China sort of going beyond it, which is maybe a nice way to back into.

Jacob: 00:25:58

We'll talk about this briefly before we spend the rest of the podcast on Mexico and Canada and some of those developments.

Jacob: 00:26:04

But something that Scott Besant said on an interview, I guess two weeks ago now, I will quote him here.

Jacob: 00:26:10

Tariffs can't be inflationary because if the price of one thing goes up unless you give people more money, then they have less money to spend on the other thing.

Jacob: 00:26:19

So there is no inflation.

Jacob: 00:26:20

Inflation comes through either increasing the money supply or increasing the government spending.

Jacob: 00:26:26

And that's what happened under Biden, end quote.

Jacob: 00:26:30

I'll let you go first, Rob.

Jacob: 00:26:31

Can you tell me about this idea that tariffs can't be inflationary?

Rob: 00:26:39

It's a tricky statement because it's so wrong and yet it's Fundamentally is not saying falsehoods.

Rob: 00:26:47

And I'll sort of explain what I mean.

Rob: 00:26:51

So what he's describing, tariffs don't cause inflation.

Rob: 00:26:58

Cetera's paribus.

Rob: 00:26:59

Right.

Rob: 00:27:00

And we talked about this.

Rob: 00:27:02

We did a whole episode on tariffs.

Rob: 00:27:03

So I'll try not to repeat all that.

Rob: 00:27:05

But very briefly, what they do is they take money out of the pockets of households and they give it, in theory, to businesses.

Rob: 00:27:15

If the businesses are there and they have a need for it, that's the dumb version of what tariffs are and what they do.

Rob: 00:27:23

So, yes, what he's describing is a backdoor, sort of convoluted way of saying American households have less money to spend because they have to take money out of paying for eggs, for instance, which everyone knows are skyrocketing.

Rob: 00:27:39

And take that money.

Rob: 00:27:41

This is a bad example.

Rob: 00:27:43

You're taking money out of budget item A and putting it into budget item B, because budget item B just got more expensive, but now you're buying less of budget item A, so your total consumption goes down.

Rob: 00:27:56

And that's what they're pitching as a great outcome.

Rob: 00:28:00

The key hinge in the model, which is what we talked about last time, is is what do businesses do?

Rob: 00:28:07

Because you're effectively putting the money into their pockets in some form, but only if they can actually spend it.

Rob: 00:28:17

Like if they're going to go out and invest in building production capacity because you put tariffs on whatever furniture, and now they're confident that if they build a big furniture plant in North Carolina that they're going to be able to sell you, you know, end tables or whatever, then that could be a, you know, a net positive outcome.

Rob: 00:28:38

It could be a neutral outcome.

Rob: 00:28:40

The problem is, like, I don't think that's a.

Rob: 00:28:45

There's a fortuitous background for that in the U.S.

Rob: 00:28:47

like, companies are not going to be confident enough to build out production capacity for the sorts of things that we import.

Rob: 00:28:57

And I think once you hollow out the human capital and the expertise enough, like, just to take one stupid example, think of like some dumbass trinket that you get at Christmas tree shops that obviously is made in China, like a little keychains, you know, those ones with the little light and you put the button so you can see your key.

Rob: 00:29:17

So in theory, we could put big tariffs on those and say, oh, we're going to reshore.

Rob: 00:29:21

Like, is any US Manufacturing company going to build production capacity to build those things in the U.S.

Rob: 00:29:29

like, do you really think that's going to happen?

Rob: 00:29:31

Because if you don't, then in the end, we're shooting ourselves in the foot.

Rob: 00:29:34

Like, that's how I would.

Rob: 00:29:36

That's how I would try to frame that.

Jacob: 00:29:39

So, yeah, you're being a little more diplomatic than I will be on this.

Jacob: 00:29:43

It's strange to watch all of these different figures change the way that they think about things or modify the way that they're talking about things in order to get to the appointment stage.

Jacob: 00:29:53

Like, we're watching this in real time with RFK Jr which this will be up.

Jacob: 00:29:57

You know, we're recording on Thursday, I guess.

Jacob: 00:29:59

I'm not sure when they're making the decision on his confirmation or not.

Jacob: 00:30:01

I'm really interested to see if he gets confirmed because I think that would have a lot of big implications in the food space and the health space in general.

Jacob: 00:30:07

But, like, watching him squirm as they're literally reading back to him the stuff that he said and him having to be like, well, I'm actually just pro vaccine.

Jacob: 00:30:14

Like, you're seeing this sort of happen all over the place.

Jacob: 00:30:17

But with the Scott Bessant thing, like, I literally just put up.

Jacob: 00:30:20

I'll just put up a chart when I speak about this in front of audiences.

Jacob: 00:30:23

I just put up a chart of U.S.

Jacob: 00:30:25

deficit spending going back to the Eisenhower administration and say, okay, let's grant that tariffs can't be inflationary.

Jacob: 00:30:31

You're telling me that this is going to be the first administration since the Eisenhower administration, save the exception of the second Clinton administration.

Jacob: 00:30:38

The second Clinton administration, the only fiscally conservative administration we've had since Eisenhower.

Jacob: 00:30:43

So, except for them, you're telling me that Trump is not going to blow out the deficit?

Jacob: 00:30:47

And by the way, he blew out the deficit more than any other president during his first term.

Jacob: 00:30:51

And you're going to tell me he's not going to go after the tax cuts, too, and put more money back into the US Consumer's pocket that way.

Jacob: 00:30:56

So it's just this, like, I don't want to call it intellectually dishonest, but I just, I don't know what he's on about.

Jacob: 00:31:01

Like, does he really believe that, or is he just trying to say the thing that allows him to get into his confirmation hearing?

Jacob: 00:31:07

Is there some kind of internal struggle already within the Trump camp where you've got the, hey, we're going to use Trump to push through fiscal conservatism versus the, hey, the China hawks who want the tariffs because they want to kneecap China versus the, you know, there's sort of all these different groups and things like that.

Jacob: 00:31:22

So I'm I'm sort of, I don't really understand, like, why he's saying that and what he's out there saying it for, because it seems on its face like that he would know that the argument that he's making doesn't really say anything.

Jacob: 00:31:35

The point that it does say anything, it implies something that is not true.

Rob: 00:31:40

If I could just add briefly a more a charitable interpretation of the whole project, because I don't support these guys, like, just to be, just to be out there and honest, like, okay, I mean, you know, I don't, you know, just to qualify what I'm going to say, because what I do recognize in what they're proposing, even though it's muddled and even though it's so torn to pieces by all these conflicting narratives and areas of focus, it's China and it's trade and, and it's cultural conservative, like, whatever, there's a big group of various people with different views who are all kind of banding together here.

Rob: 00:32:29

The one thing that I think is very valuable in what they're doing is a recognition that the status quo of the US and its role in the world strictly from a balance of payments standpoint and an economic standpoint was not sustainable.

Rob: 00:32:43

And I think for all his faults, and we don't have to even go into what they are, when Trump talks about something's fundamentally unfair here, there's something fundamentally wrong and I'm going to try to fix it.

Rob: 00:32:58

I think he's barking up the right tree, even if oftentimes it's with terrible methods and terrible solutions.

Rob: 00:33:09

So the problem.

Rob: 00:33:11

And Bessant understands this too, because as we talked about at length a few months ago, Besant is a super smart guy.

Rob: 00:33:18

Like, this guy is smarter than anyone who's questioning him in that room in the committee hearing.

Rob: 00:33:24

So I think he recognizes those issues and he's trying to do what's best or possible under the circumstances to try to improve it.

Rob: 00:33:34

The problem is, and what people don't recognize is that things are so far gone that the tariff solution is going to cause lots of short term pain.

Rob: 00:33:45

Americans are used to consuming lots of stuff that's sort of ingrained in a lot of people's habits and a lot of business models and everything.

Rob: 00:33:54

And the notion that you're just going to flip up tariff rates and you're going to fix these imbalances through that tool without incurring significant social pain and political backlash is just an illusion.

Rob: 00:34:10

And whether he ends up going with it, whether he backs down, I don't know, but that much is pretty clear.

Rob: 00:34:17

Although I do support the notion that something is going to either get done deliberately or it's going to get done because something just breaks over time.

Rob: 00:34:27

And we don't want the second scenario.

Jacob: 00:34:30

Well, that's a good way of leading into.

Jacob: 00:34:32

So we didn't get immediate tariffs on Mexico and Canada and China when Trump first came into office.

Jacob: 00:34:37

But now February 1st is looming as this deadline here.

Jacob: 00:34:41

And I thought this might be a good way to talk about Mexico.

Jacob: 00:34:44

Mexico, which has been doing some interesting things in recent weeks, they're sort of taking the opposite of the Canadian approach.

Jacob: 00:34:50

So he, you know, lame duck Prime Minister Justin Trudeau, he responded to Trump's things about annexation and about tariffs by basically pointing fun at Trump, like making fun of him in interviews, which is part of what got him into the position that he was in in the first place.

Jacob: 00:35:04

Apparently he just couldn't learn there.

Jacob: 00:35:06

He couldn't help poking the bear.

Jacob: 00:35:08

But then also talking about how we've got plans for dollar for dollar tariff retaliations.

Jacob: 00:35:12

We're not going to do this surgical nonsense anymore.

Jacob: 00:35:15

We're going to go straight at you and we'll see what happens.

Jacob: 00:35:18

Whereas Mexico has done this very differently.

Jacob: 00:35:22

Claudia Schenbaum has sort of punted on questions about what the Mexican response would be.

Jacob: 00:35:26

She's like, oh, yes, we have a plan, but have you seen all the fentanyl that we've seized in the last month?

Jacob: 00:35:30

And have you seen all the counterfeit goods that we've cracked down in the last month and all the migration things that we're doing?

Jacob: 00:35:36

Add to that her plan, Mexico is this bigger overarching concept that she's going to be announcing different components of throughout the course of the rest of this year.

Jacob: 00:35:45

For instance, she's got the electricity part of this plan coming out, I believe, next week.

Jacob: 00:35:49

I think she's got oil and the energy aspect of the plan coming out the week after that.

Jacob: 00:35:54

But this week she announced a $1.4 billion or 30 billion peso near shoring incentive package.

Jacob: 00:36:01

And the idea is to award money to companies that would invest in new fixed assets in the country.

Jacob: 00:36:10

I thought this was interesting because it replaces or modifies what her predecessor, amlo did.

Jacob: 00:36:15

So instead of subsidizing industries with limitless money, it sets aside a specific amount of money and maybe a little bit less money than you might think was necessary for an initiative of this scope.

Jacob: 00:36:28

And it opens the doors to companies outside the United States, if they want to, to invest as long as they meet the program's goals.

Jacob: 00:36:36

So I think it was very clear that, you know, on the one hand, Mexico is trying to not poke the bear.

Jacob: 00:36:42

It's trying to be friendly, it's trying to point on all the places that it has leverage over the United States and all the ways it can helpful to the United States and say, really think about tariffs before you do this because we can help in all these ways.

Jacob: 00:36:54

But also, if you, if you read through sort of the, you know, the read between the lines of the nearshore incentive package they put out just this past week, it is also saying, okay, but like there is space here for people besides the United States.

Jacob: 00:37:07

So if the United States really wants to get tough with us, like they're not the only game in town, maybe other countries might want to invest in fixed assets inside of Mexico.

Jacob: 00:37:15

So why don't we talk a little bit about Mexico in general?

Jacob: 00:37:17

Because as I'm talking not just to Agon audiences, but audiences across the spectrum, like we have to talk about China, we have to talk about some of the other things in the world.

Jacob: 00:37:25

But I think what the US Is going to do with Mexico and Canada, honestly is more important geopolitically for the US Than any, than just about anything else that's going to happen here over the first couple months of the Trump administration.

Jacob: 00:37:37

So talk to me about where you're at here, Rob.

Rob: 00:37:41

Yeah, I think Mexico is in a tricky position that so far they seem to be navigating fairly well.

Rob: 00:37:48

And I'm speaking just from an economic standpoint because Mexico doesn't have a great history of industrial policy.

Rob: 00:37:58

No one in Latin America does, really.

Rob: 00:38:00

And they're sort of being forced into it because they need to respond to the political pressure that's being put on them now.

Rob: 00:38:08

30 billion pesos sounds like a lot.

Rob: 00:38:11

It's chump change.

Rob: 00:38:13

It's like a billion and a half US Dollars.

Rob: 00:38:17

So my reading is that this is sort of a test balloon of sorts to see how this works.

Rob: 00:38:23

You know, quasi, symbolic, quasi pilot program.

Rob: 00:38:30

I think, you know, really the thing to watch is what do they do as a follow up to this?

Rob: 00:38:36

How does this program actually perform itself?

Rob: 00:38:39

Does it invite follow on programs or renewals or expansions?

Rob: 00:38:44

Because if so, that would be a pretty significant tack or change of tack for the, for the Mexican government in terms of industrial policy and trade policy because they've not been super hands on in the past.

Rob: 00:39:02

And this does represent a change in that direction.

Rob: 00:39:05

So, yeah, I think watchful waiting is how I would describe my stance toward this one right now.

Jacob: 00:39:14

Well, And I just want to underscore the extent to which Mexico does have some leverage with the United States.

Jacob: 00:39:19

And to use your example about the silly keychain with the flashlight, no, you can't imagine that being made in the United States and the American consumer paying $15 for it, but you absolutely can imagine that being made in Mexico.

Jacob: 00:39:29

So if you're engaging in this trade war with China, and if Deep Seek and China's the enemy, and if all those things are true, you can't really afford to also sort of unleash the trade war against Mexico as well.

Jacob: 00:39:42

Now, you can also sort of go to, you can understand, like, as you were sort of talking about, where Trump was talking about something that's fundamentally unfair.

Jacob: 00:39:50

Yes.

Jacob: 00:39:51

Like parts of the US Mexico, Canada, Free Trade Agreement and NAFTA in general are unfair to the United States.

Jacob: 00:39:56

And that's sort of the point.

Jacob: 00:39:58

The United States is supposed to use the size of its market and its position in order to bring other countries along and to make them richer and to tie them in to US Prosperity.

Jacob: 00:40:07

So the United States is giving something up, maybe on the front end, but on the back end it is saying, oh, Mexico, like, we need you now in this broader struggle with China.

Jacob: 00:40:17

And 80% of your trade is based on the United States.

Jacob: 00:40:20

So why don't you, like, be quiet and stop with the attracting other money and come to us.

Jacob: 00:40:24

Ditto with Canada.

Jacob: 00:40:25

Oh, you want to mess around.

Jacob: 00:40:26

You want to consider Huawei a little bit more carefully.

Jacob: 00:40:29

Well, don't forget that, by the way, like, 70% of your trade or whatever it is is with the United States.

Jacob: 00:40:34

That's not going anywhere.

Jacob: 00:40:36

I do think one interesting thing as you're looking at the relations between Canada in the US And Mexico in the US Is that Canada's top export to the US Is oil, whereas that's not Mexico's top export to the US Is oil.

Jacob: 00:40:50

That's not Mexico's top export to the United States.

Jacob: 00:40:52

And you, you do see that the Trump administration seems more willing to be muscular about oil.

Jacob: 00:40:57

I think you see this with the, the U.S.

Jacob: 00:40:58

columbia spat just in the lack in the last week as well.

Jacob: 00:41:02

But you start just ticking down the list like, Mexico's a source of cheap labor.

Jacob: 00:41:06

If you're gonna do near shoring, Mexico is the place that makes the most sense.

Jacob: 00:41:11

Mexico is a major export market for the United States, and a lot of these different markets are interconnected.

Jacob: 00:41:17

Mexico also is dealing with the same migration problem that the United States is.

Jacob: 00:41:22

r it's not like it was in the: 1990

Jacob: 00:41:30

And that caused an immigration crisis around then.

Jacob: 00:41:33

Yes, there are some Mexicans at the border, but it's mostly Venezuelans and Ecuadorians and know, in search of, you know, Hondurans in search your country there.

Jacob: 00:41:43

And so Mexico is actually dealing with these themselves.

Jacob: 00:41:45

Like, they're arriving at Mexico's southern border and making their way through Mexico or getting to the US Border and other ways.

Jacob: 00:41:51

So if you want help here, Mexico actually can meaningfully play a role in stopping the flow, especially if you have Mexico willing to work with you on this.

Jacob: 00:41:59

The fentanyl thing, I thought was actually interesting.

Jacob: 00:42:02

I was looking at this Mexican fentanyl bus actually declined markedly last year.

Jacob: 00:42:08

Like, they basically just, I don't want to say stopped enforcing these things, but they really, on sort of a historical time basis, didn't seize that much and seized far less than the United States.

Jacob: 00:42:17

And then, lo and behold, last month, they seized a record amount of shipment, which is, which is disturbing on some level because it's like, well, if you could do the record shipment, like, you really just chose to line it up after Trump was elected, with tariffs sort of looming in the background.

Jacob: 00:42:33

So, like, there's something a little bit suspicious there, but that is another big issue.

Jacob: 00:42:37

And then there's the China issue itself, which is, you know, everybody has talked about how, oh, Mexico has surpassed China as the US Biggest trade partner.

Jacob: 00:42:46

Isn't this great?

Jacob: 00:42:47

The whole trade war is working.

Jacob: 00:42:49

But then you look at Mexican imports from China and they've skyrocketed.

Jacob: 00:42:53

And that's only the stuff that's getting officially reported.

Jacob: 00:42:55

So Chinese goods are getting into the United States.

Jacob: 00:42:57

They're just getting there through Mexico.

Jacob: 00:42:59

And if you want to actually crack down on that, if you want some of these tariffs, tariffs to actually bite and you want to prevent the US Consumer from just getting the cheap knickknack or whatever at the Christmas tree store, like you said, you're going to need Mexico's help.

Jacob: 00:43:11

So you sort of just go down the list here.

Jacob: 00:43:13

Like, the United States, I won't say needs Mexico, because if the United States decided to make a deal with China and it wanted to support global trade, more like it wouldn't have to need Mexico as much as it does right now.

Jacob: 00:43:24

But if it's going to go after China and if it's going to insist on renegotiation of the US Mexico, Canada Free Trade Agreement, you're going to have to be nicer to Mexico than just 10% tariffs across all your goods.

Jacob: 00:43:36

And this to me gets to what I think has become, at least for me, like the biggest geopolitical question of the first quarter and maybe of the first two years of the Trump administration is going to be, is Trump bluffing?

Jacob: 00:43:48

Is this all he wants, to make a new deal and slap the Trump banner on it and say, oh, now it's a Trump branded deal, even though the current U.S.

Jacob: 00:43:55

mexico, Canada free Trade Agreement he helped negotiate because he didn't know where all the levers were.

Jacob: 00:44:00

So he didn't have good negotiators.

Jacob: 00:44:01

But we'll leave that point aside.

Jacob: 00:44:02

Is he trying to bluff and put on sort of the Trump deal, or does he really believe this stuff?

Jacob: 00:44:08

Because if he, if he, if it's just a bluff, like, okay, maybe there'll be some tariffs here and there, but he'll rescind them or maybe he'll threaten more terrorists, but ultimately it'll be a negotiation and things won't change that much.

Jacob: 00:44:18

Like, maybe particular industries will be really impacted depending on whether they're prioritized by the Mexican government, the U.S.

Jacob: 00:44:25

government.

Jacob: 00:44:25

But overall we're like not in a fundamentally different world world.

Jacob: 00:44:28

If he really believes this stuff, if he comes out February 1st and says it's 10% tariffs across the board on Mexico and there is nothing you can possibly do to make me change my mind, like you said, it's not just short term pain.

Jacob: 00:44:40

It's going to be a fundamentally different world and the US Economy is going to face a lot of different challenges.

Jacob: 00:44:45

And I cannot for the life of me think that Trump believes it because I see all of the data and I see all the leverage in front of me and it just doesn't like, he's not holding the pocket aces, he's not holding the trump card.

Jacob: 00:45:00

If you, if you will, he's got some leverage here, but I can't imagine that he actually believes some of the things that he's talking about.

Rob: 00:45:09

Yeah, deep side, I mean, where, where, where to even begin.

Jacob: 00:45:19

Why don't you begin with what the PESA is telling us about the, about what the Mexican market reaction is to these things, because I don't know if Mexicans themselves know what the Trump administration is going to do.

Rob: 00:45:29

Yeah, I think it's, I think that's really a nice doorway into it because it opens the narrative into the bigger picture, which is really what's important.

Rob: 00:45:40

But if you, you know, it's always good to look at Mr.

Rob: 00:45:43

Market for for answers when you're at a loss.

Rob: 00:45:47

And the thing that's really striking about Mr.

Rob: 00:45:50

Market when it comes to the peso is.

Rob: 00:45:54

So the peso has been just for background, for those who don't know, probably the best performing currency in the last five or six years.

Rob: 00:46:04

Up until late last year, it was up about 10% against the dollar over a five year period, which no currency in the world is up against the dollar.

Rob: 00:46:15

I mean, unless you're talking about really hard currencies like Swiss franc or Singapore dollar, but those are fundamentally kind of different places.

Rob: 00:46:24

So Mexico is outperforming everybody.

Rob: 00:46:26

ly in the, in July or June of: 2024

Rob: 00:46:49

It was up to like 18 or something.

Rob: 00:46:50

So by comparison, when Trump was elected, which the market took as a surprise, like it clearly wasn't priced in before it happened because you could look at how other assets performed.

Rob: 00:47:02

And we talked about this, almost every currency got whacked after the election.

Rob: 00:47:09

The Mexican peso kind of just shrugged it off.

Rob: 00:47:13

So a lot of people have looked at the peso and said, oh, the peso's down a lot.

Rob: 00:47:16

Everyone's worried about Trump.

Rob: 00:47:17

Trump.

Rob: 00:47:18

Clearly that doesn't match the timeline.

Rob: 00:47:20

The peso is outperformed except for the Brazilian real, which is doing weird things for its own reasons which aren't really relevant to this conversation.

Rob: 00:47:28

The peso has outperformed every currency on earth or every major currency.

Rob: 00:47:33

It's outperformed the renminbi, the euro, all of these, the Canadian dollar.

Rob: 00:47:39

So there's some fundamental strength there.

Rob: 00:47:43

And I think Mr.

Rob: 00:47:46

Market just doesn't care and it realizes that like we talked about last week, the supply chains between Mexico and the US are so intertwined.

Rob: 00:47:56

How do you even begin to try to put tariffs on that or pick them apart?

Rob: 00:48:02

And I think Mr.

Rob: 00:48:03

Market realizes that.

Rob: 00:48:04

And the conclusion that I take away from that is that the thing that matters for the peso is what Morena does domestically.

Rob: 00:48:14

It has nothing to do with Trump because those fundamentals are sort of understood, I think, and what those fundamentals are, just to complete the thought and get to what the big picture that I alluded to was, was just this notion.

Rob: 00:48:27

It's like Germany in the eu.

Rob: 00:48:28

Yeah, they're going to hem and haw and bitch, but oh, we're in here with Poland and Czech Republic and all these losers, right?

Rob: 00:48:38

But at the end of the day, Their supply chains are deeply, deeply intertwined with those losers independent on them.

Rob: 00:48:46

And that's the whole idea.

Rob: 00:48:47

It's a customs union, essentially.

Rob: 00:48:49

You have poorer countries that become, you know, inputs to the supply chains of the richer companies countries and move up, you know, the value chain and learn and essentially get a leg up in that way.

Rob: 00:49:04

And ultimately that's deeply in Germany's interests to do that.

Rob: 00:49:08

And I think the U.S.

Rob: 00:49:11

canada is a trickier beast, but certainly the U.S.

Rob: 00:49:15

mexico is exactly the same situation where Mexico realizes that they need to attach themselves like a Barnacle to the U.S.

Rob: 00:49:25

giant.

Rob: 00:49:26

And the U.S.

Rob: 00:49:27

ultimately, its interests are so deeply entwined in extending its quote unquote empire or its customs union or its integration with Mexico that it's almost impossible to think that they're going to shoot themselves in the foot in such a self defeating way by doing some of the things that they've mooted.

Rob: 00:49:51

And I think the peso knows it.

Jacob: 00:49:54

Yeah.

Jacob: 00:49:55

And the reason I say this is going to be so important in the first couple months of the year is because I've sort of given you the framework for how I think that works with US Mexico.

Jacob: 00:50:02

And I'm thinking that more broadly I'm thinking in terms of interpreting what the Trump administration is doing as negotiating positions towards deals rather than taking them at face value.

Jacob: 00:50:11

And we have data points for this that are starting to amass.

Jacob: 00:50:14

The most important signal I thought from the last couple of weeks was Trump coming into office and not immediately announcing tariffs on China.

Jacob: 00:50:20

That's a tell right there.

Jacob: 00:50:21

That, okay, I'm buying time, I'm trying to open up negotiating space, blah, blah, blah.

Jacob: 00:50:26

And I think we already mentioned this, but this is why the US Columbia Trade Special at was so concerning, at least from my perspective, because that's a sort of data point in the opposite camp where it's not about tariffs to fix some structural economic problem.

Jacob: 00:50:41

And even if tariff is the wrong tool, they're barking up the right tree.

Jacob: 00:50:44

That is just US Empire.

Jacob: 00:50:46

We wanted this thing, you didn't give it to us.

Jacob: 00:50:49

Take your medicine and if you don't do it, we're going to have, we're going to give you more medicine.

Jacob: 00:50:53

And it goes back to the, oh, Greenland has resources.

Jacob: 00:50:55

We want, want, we want Greenland.

Jacob: 00:50:58

The Panama Canal might be at risk.

Jacob: 00:51:00

Okay, great.

Jacob: 00:51:01

We'd like to take the Panama Canal back.

Jacob: 00:51:03

And this I'll just share with the listeners before we get out of here.

Jacob: 00:51:06

In the six to eight months leading up to the election, when I would talk about the election in front of audiences, I would talk about Trump in the context of isolationism, and I would put him in conversation with George Washington and other isolationist figures in the United States foreign policy and say, look like isolation is.

Jacob: 00:51:22

It's actually not that radical an idea.

Jacob: 00:51:24

It's been around in US Foreign policy for a long time.

Jacob: 00:51:26

Trump is taking it out for a spin.

Jacob: 00:51:28

So there'll be these differences versus the Harris administration.

Jacob: 00:51:30

But fundamentally, like, these are some of the things you should be watching for.

Jacob: 00:51:34

And I've thrown that out the window.

Jacob: 00:51:36

The United States is obviously, to me, at least in these first early innings of Trump, is pursuing a more imperialist policy.

Jacob: 00:51:43

And that word is going to be loaded.

Jacob: 00:51:44

So maybe let me take away the loaded nature of it and just say that.

Jacob: 00:51:48

The United States is clearly defining maintaining and extending its primacy in the global international system as its top priority.

Jacob: 00:51:57

And the difficult thing here for the United States is going to be the United States is not going to be able to maintain primacy.

Jacob: 00:52:03

It can try and clutch onto it for as long as it possibly can, but I don't think it's going to be able to maintain primacy against a world where China is doing what it's doing and Brazil is doing what it's doing and Turkey is doing what it's doing.

Jacob: 00:52:14

There's just, just, just not enough U.S.

Jacob: 00:52:16

power there.

Jacob: 00:52:17

And this move towards the United States needing primacy, it's a fairly recent move in U.S.

Jacob: 00:52:22

foreign policy.

Jacob: 00:52:23

We've got a generation of officials and leaders who think of the United States as unquestionably the top power in the world.

Jacob: 00:52:31

But Richard Nixon was talking about multipolarity when he was president.

Jacob: 00:52:35

And if you go Back to the 60s and 70s, the United States was preparing for this world where it was not just going to be the United States and the Soviet Union, but it was going to be a host of other different countries, whether it was Japan or China or whatever the flavor of the day was.

Jacob: 00:52:48

And I do think one of the problems for the United States is going to be if it uses things like tariffs, which are tools that can affect good economic policy, if you know what you're doing to try and maintain primacy in the world when you don't even really have the capacity to maintain that primacy anyway.

Jacob: 00:53:05

And it's not clear to me that it's in U.S.

Jacob: 00:53:07

interests to maintain primacy.

Jacob: 00:53:08

It's like the primacy is creating its own interest in and of itself.

Jacob: 00:53:11

So I think that's one thing that we've learned, learned very early on here.

Jacob: 00:53:14

And for countries like Mexico and Canada, there's going to be no real choice.

Jacob: 00:53:18

Like they're going to have to probably make some concessions in order to make the imperial Metropole happy because they're just too, as you said, too deeply intertwined.

Jacob: 00:53:30

And I think the United States needs them too.

Jacob: 00:53:31

Like, I think that's a two way street.

Jacob: 00:53:33

The United States really can't afford to cut them loose like that if things really went to hell.

Jacob: 00:53:38

But that's not going to be true for other countries in the world.

Jacob: 00:53:40

And eventually the United States is going to come against the a in a Colombia type situation where the country says, no, we're not doing that, we're not going to concede.

Jacob: 00:53:49

We will go see what the rest of the world has for us and Germany is the country.

Jacob: 00:53:52

It's funny you mentioned them that I'm looking to for that.

Jacob: 00:53:55

Like they've got elections coming up in March.

Jacob: 00:53:57

I'm really curious how US German relations are going to go, but maybe it'll be some other country.

Jacob: 00:54:00

But I do feel like if you're thinking about, okay, how do we make sense of what's going on?

Jacob: 00:54:05

I think that's the framework that we're dealing with.

Jacob: 00:54:07

We're dealing with a U.S.

Jacob: 00:54:08

government and a U.S.

Jacob: 00:54:10

foreign policy class that wants to maintain primacy in a world world that it's over.

Jacob: 00:54:14

Primacy is over.

Jacob: 00:54:15

You got to let that go and pursue US interests rather than this sort of Don Quixote vainglorious attempt to maintain that we are the most powerful and we are the best and we are the most innovative.

Jacob: 00:54:27

Everything from deep sea to what we're talking about with Mexico, I think tells us that.

Rob: 00:54:30

Yeah, well, unless you're within the US's sort of regional orbit like the Latin American countries are, and to some extent dependent on it in that way way, it's hard to see how much leverage the US has over India or the European Union.

Rob: 00:54:49

China is a unique case because they are the massive current account surplus nation.

Rob: 00:54:55

They are by default sort of leaning on the demand of other nations and are vulnerable in that way.

Rob: 00:55:02

But they're kind of the only one, except for maybe Japan.

Rob: 00:55:06

We talked about how that relationship is going, but it'll be interesting to see how people react as you point out, if the US tries to flex its muscles.

Jacob: 00:55:15

All right, well, I think that that's plenty and I've got to go get ready to give a presentation here.

Jacob: 00:55:19

So anything else you want to say to the listeners, Rob, before we get out of here?

Rob: 00:55:22

No.

Rob: 00:55:22

Enjoy the sunny day over there.

Jacob: 00:55:24

Yeah, I'll enjoy sitting in a ballroom in a in a suit.

Jacob: 00:55:27

That'll be a real nice way to enjoy.

Jacob: 00:55:29

Coral thank you so much for listening to the Jacob Shapiro Podcast.

Jacob: 00:55:35

The show is produced and edited by Jacob Smulian and it's in in many ways the Jacob Show.

Jacob: 00:55:41

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Jacob: 00:55:45

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Jacob: 00:55:48

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Jacob: 00:55:49

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Jacob: 00:56:10

That's Jacob S H A P.

Jacob: 00:56:11

No dats, dashes or anything else, but I'm not hard to find.

Jacob: 00:56:16

See you out there.