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

And if you and I want to win championships and build a championship basketball team, we should not care where in the world the basketball player comes from. We just need to get the best players on our team to win the championship. And we ought to take the same approach to AI and technology. Hey, Bill, great to see you. Brad, how are you doing, man? I'm doing great. I'm doing great. You know, I'm heading back to Boston this weekend for my 25th HBS reunion.

25. It's crazy. I mean, you're way older than me, but, you know.

I can't believe it's 25 years, and I'm doing this talk on what's happening in AI these days, and there's a lot of questions and comparisons. Because remember, we were there during the '99-2000 kind of boom and bust. And so a lot of my classmates are wondering whether or not AI is kind of like that again. And so I was going back and pulling together these slides, and I have to say a few things just shocked me, frankly. Like, I, I forgot how much has changed. Um, one was I was doing, I was looking and doing some analysis on Amazon. You know, I was day trading Amazon out of the back of the classroom back then, and you were out here working on the IPO, so I know you were paying attention, uh, to what the share price was in '98, '99, and 2000. And a couple interesting points.

Right. Amazon, if you recall, Bill, and I know you do, it peaked at two hundred and forty three bucks a share in 1998. But at the start of 2000 is at one hundred and fifty bucks a share. OK. And Henry Blodgett famously makes the call. He calls four hundred dollars a share and he literally kind of top ticks it from the year 2000. And the thing plummets and goes down to about twenty six bucks a share. He gets ridiculed and all this stuff. But I wanted that.

It went public at 17 and broke issue. Yes. Wow. So it traded under issue for about two months.

Right. And I'm sure you didn't get any calls from the company about what the F was going on. But here's the crazy thing, right? Remember, he gets ridiculed for making that call. So I wanted to know, and I went and asked our ChatGPT friend to help me with some split-adjusted math on this. So split-adjusted, from the high in 2000, which was this 150, that's equivalent to about 47 cents split-adjusted today. So it's up about 440x from where it was in 2000. And on a split-adjusted basis from the low in 2000, it's up about 1,800x. I mean, those are shocking numbers. And so that was one of the things that dawned. So I said, "Well, what's happened to the NASDAQ since we graduated?" Well, from the peak in 2000, the NASDAQ is still up 5x.

And from the trough in 2000, it's up 10x. And so I said, "You know, what's the punchline?" The punchline is, you know, we were a bunch of dreamy-eyed, big, you know, big thinkers. We thought we knew everything about the internet. We knew it was going to change the world forever. And it turns out we overestimated what it was going to do in the short term, right? Over the next two to three years, adoption was slower. We had the terrorist attacks in 2001. We had an economic recession. So things definitely grew slower. But the biggest problem was there just weren't that many people connected to a high-speed internet. So all the things we dreamed of occurring were just inefficient to happen at that time.

But what's probably even more surprising, Bill, is how dramatically we underestimated the long-term. Over the next 20 to 25 years, it blew away all of our estimates and forecasts in terms of how big these companies would be. And so now we sit here at, you know, kind of the dawn of the age of AI. And I think people are asking a lot of these same questions. But, you know, that was probably the biggest punchline on my 25-year reflection.

All right. Well, if they listen to the podcast, they're going to miss your talk, maybe. Yeah.

Maybe talking about this pace of AI, you and I were sending some things back and forth just about some strategic shifts going on in the world. Talk us through that.

Well, obviously, I mean, the pace continues like crazy. Every time, you know, between just the podcast episodes we do, which are about two to three weeks, there's new news always and constantly. And it's hard to keep up with it. But I do try and pay attention to the stuff that spikes in my brain as being strategic and something you should really pay attention to. And one thing that... I've seen in the past week, so this is very recent, is what I might call data walls. And so everyone's recognizing the value of AI. Everybody wants to have AI work against their data, against, you know, the... And, and everybody wants to wow the consumer or the customer of their product. And so all of a sudden, though, we're seeing things pop up where people are trying to wall off data.

And one example would be Reddit just sued Anthropic this morning despite having a deal. So it'd be interesting to unpack what's in there. I think there's a tiff between Windsurf and Anthropic where Anthropic cut them off to all their models, you know, when Windsurf was bought by OpenAI. Not that surprising, but just seeing these walls pop up, I think a more interesting one in the enterprise case is Salesforce changed their terms of service and in a way that includes not only the CRM data, but Slack data, which, you know, is a company they bought. And they're putting an MCP connector on top of it, which allows AI to query it. But they're saying that you can't train on the data that's in there. Hold on a second.

So Altimeter's Slack data, I can't train on my own data?

That's what the change in the terms of service say. You can query the MCP. Yeah, I think maybe we'll start to talk about enterprise applications as either being open data or closed data. And people are going to need to declare that. But my guess is that if you're a competitor to Salesforce, you're immediately going to declare yourself open data and try and steal as many customers as possible. I can't fathom in my own brain how upset I would be if I were paying seven-, eight-figure license to Salesforce and they told me I couldn't train on my own data, which is basically everything about my customers and everything that I would want to analyze. Now, I'm sure they're going to train on it and give you their AI agentic view of it, which is why they're doing this.

But battle lines are being drawn, you know, going back to the old song.

You know, and one of the things you didn't mention, Bill, I just saw Kevin Weil, our friend, tweeted from OpenAI that Deep Research is now searching across GitHub, Google Docs, Gmail, Outlook, HubSpot, Dropbox. Now, I think a lot of that's using MCP. But, you know, I do agree with you that this all seems to be happening faster rather than slower. It reminds me, you and I back in the day, sitting in a Zillow board meeting and talking about people building dependencies on Google. And you were very much aligned with, 'You can't build a brand in the underbelly of Google because over time they will have to take that territory back,' right? And I remember TripAdvisor peaked at $20 billion in value, building a search engine, a recommendation engine in the underbelly of Google.

And then when Google decided it was time to do recommendations on its own, TripAdvisor's value went from $20 billion to $1 billion. But that happened over a period of many, many years, Bill. And what I see happening here is kind of, in part because AI is going so much faster than the internet did, right? I saw some analysis from my team this week, we'll post, that OpenAI reached 400 billion annual searches eight years faster than Google. So they're doing over a billion searches a day now. So all of this is happening in a hyperspeed. And so the strategic plays by all of these companies to vertically integrate, to shut down access to data, because they all know that they need to monetize by kind of offering that full stack.

And so, you know, that to me is something for these companies. When you look at Windsurf, they're going to have to build their own models. When you look at Cursor, they're building their own models, right? The dependencies on, you know, kind of all of these different open models, I think, is changing very rapidly.

You know, woke up on the Windsurf announcement and said, 'Oh, wait, you know, OpenAI is going into verticals like, and, and we're good at coding. So how do we think about this?' And yeah, I mean, it's a reordering. I think people really need to pay attention to this data thing. If you look at where OpenAI wants to go on the consumer side, you know, access to your contacts, your, your calendar, your mail, like, all that's going to matter, and you're going to want your personal assistant to be able to do that. And whoever owns those systems, whether or not they try to block access to it or not, will be interesting. You know, Google has an advantage in that they own—they own their own phone platform, and they own their own Gmail platform, and they own their own alternative to the Office stack.

And so they should be able to make that a competitive advantage. But whether or not they'll be willing to put up a wall and say, 'OpenAI can't scrub this,' it'll all be very interesting. It's something that's super important to watch.

I mean, listen, I think it would be a bad development. I think you and I both agree that MCP is a good development in allowing more open access. At the end of the day, it should be my data. It's my Gmail that I'm paying for. It's my Google Docs that I'm creating and I'm paying for. And so if you tell me that I'm not going to be able to use my AI of choice, accessing this information to make my life better to answer questions, that will lead to a lot of disruption. So, but that is the question, right? Because here we have Deep Research announcing today that they're gonna access all those things using MCP on my behalf, which I'm excited about, right? Because I am using all of those Google services.

But I do like the idea of using ChatGPT that has a lot of built-up memory about me to access those services. So I think you and I will certainly be loud and proud on the side of keeping this all open. But we definitely see some early warning signs here of people closing down the ecosystem, you know, in order to try to protect some of those advantages. Another topic, Bill, you know, we've talked a lot about China. And one of the interesting parts of our dialogue, from my perspective, over the course of the last few months is just how well China is doing in robots, in autos, in batteries, in precision manufacturing, BYD coming out of nowhere, Huawei building, you know, chips that are catching up very quickly.

But you sent me this piece of research this week. And it's really enlightening because, you know, it talks about 'let a thousand flowers bloom,' like how they've, in fact, seeded these industries. And there's probably some stuff we could learn here. So unpack it for me, Bill. Why has this been so successful?

Yeah, and for the record, I had ChatGPT do the analysis. It was version 4.5, the $200 a month version. It's an amazing piece of research. I guess it could have some errors in it, but we're going to post it so everybody can see it. But yes, I think it's imperative that we understand exactly why China is so competitive in so many industries and what led them to be successful. And what I uncovered, and I had heard this from a few other people in the past, but what I really uncovered the detail on is that in these industries where they want to succeed, they actually make sure that there are 500 competitors or 1,000 competitors—wow—whittled down to what the best one is. So rather than, I think we have a perception that communist or authoritarian governments have a single state-sponsored company that's not very competitive.

That's not what they're doing. They're doing something very different. They're letting entrepreneurism and kind of a Darwinian competition and survival of the fittest, you know, create the five companies that survive all of that as winners. And we all know, because we believe in capitalism, that that kind of system will lead to the very best shining at the end of the day.

Well, it's interesting, Bill, because you and I grew up kind of with this model in Soviet Russia, where they picked a state actor. And part of the reason we won the Cold War is they bankrupted themselves. All those state actors were terrible. They were inefficient. They were full of grift. They couldn't compete. Their products weren't any good. But we see the exact opposite out of China. We see products that are globally competitive, you know, and many that are, in these different industries, better than the US. So there has to be something systematic and structurally different that they're doing, even though we refer to them as—both of them as—communist systems. Correct.

And I, you know, I've studied these types of systems my whole life. And, you know, I've mentioned before that I'm on the board of the Santa Fe Institute. And this kind of Darwinian competition is exactly the kind of thing that I would, if you told me they were doing this before they did it, I'd say, 'Well, that might actually work.' Right? Like, that's... This is sensible to me that this works. One thing that came out of it, in addition to just helping to identify winners, there's a couple of other benefits you get from this. One, you're exposed to way more optionality because 500 startups will try a bunch of different approaches. One thing I've uncovered in the past few weeks is Chinese LiDAR is solid-state and designed very differently than the LiDAR that Waymo is using.

And it's actually, in China right now, is, I think, being priced at like $130 a car, this solid-state MEMS LiDAR. Whereas the Waymo LiDAR is like $5,000 a car. So you end up in completely different places because of this type of competition. And you have this many people trying different things. And then the other big thing that happens is your supply chain develops in a lot more robust way. Because if I'm a supplier, you know, to, you know, a part that's important to a solar panel or to an EV, I now have, you know, 50 or a hundred competitors. So you end up, and that births more and more competitors in, in for that part as well. And so you end up with a much more robust supply chain, more players at each, each step along the way.

And, and I think the data suggests, and this piece of research would suggest, that's why they've been so successful in EVs, where there were over 500 EV startups. 500! In the US, what has there been? Four legitimate ones?

So here's my question. Right? In Silicon Valley, we have this dynamic ecosystem of risk capital. We're probably on a fourth, fifth generation of risk capital and risk takers. They find each other. There's not a lot of government interaction or coordination with regard to that. You know, it just kind of happens. What are we saying? How is this ecosystem developed? There's definitely venture capital in China, but it seems to me, as a fraction of the venture capital that exists in the US, or certainly the tightness of the ecosystem over the course of the last four or five years, has been reduced dramatically because a lot of the US players backed off from China. So is it the different states and provinces that are seeding or subsidizing to get these 500 startups rolling?

How are they getting going?

Yeah. So, so the government involvement, you know, is at a provincial level. And that's part of why there's such a high number, like a high number of startups in the area. I mean, it's interesting if you take this as a conclusion: 'Oh, this, this worked, this was very successful for them.' And then you turn and say, 'What should, you know, the West do?' I think it's hard because, you know, when our governments tried to get involved in startups, it's never been about helping to ensure there were a thousand of them. It's usually, you know, you create some program. The one that's stuck in my brain was solar because I actually had a company in the space, you know, where there were probably 10, you know,

solar startups that had raised over $500 million. And then three of them were able to court the players in D.C. long enough to get money, Solyndra being the one that people remember the most because they eventually went bankrupt. But that doesn't feel like this thing, right? That feels more like regulatory capture and who can win at the highest level. And it's more at the end of the game. This is at the beginning of the game. So, I don't know. I don't know if there's a U.S. equivalent of this. I'll need to think about that. I think my first step was just to take a fresh look at why they've been successful. And when I saw that the approach was so novel from what I had imagined it was, it was very eye-opening.

Well, one of the things you pointed out to me was that they deprioritize market caps, or I might even say over the last five years that they've kind of attacked the largest market cap companies in favor, perhaps, of diversifying competition. And so, you know, it seems like the one thing I think we can definitively say, there's a hell of a lot more national coordination about what industries are important. Like, their industrial policy identifies an industry, then what it seems like they do from the, you know, kind of central governing authority is they encourage all of the provinces to seed these companies within, you know, their different areas, allow that competition to occur. I guess the question is, when you look at the U.S. where it's much more just unfettered competition, is the point here just be aware of this, or are you suggesting that there are things that the U.S. needs to do?

It seems, in some ways, like the coordinated industrial policy that's now coming out of Washington, the stuff that the president is talking about, where we have to re-onshore critical national industries—precision manufacturing, some medical supplies, some chips, some aluminum and steel—that would seem to me to be fairly aligned with the industrial policy that you're discussing here.

Well, there's so much. You just asked a question that might take four hours to answer, but let me just try and be... as terse as possible in responding to it. So, I had ChatGPT do two more pieces of research. The first one, or this would be part two. Part two is worth mentioning. So, I think most people believe and talk about China's subsidization. Once winners are identified, there are situations where the government has helped subsidize. BYD was in a situation where I think they were given $2 billion. So, that second part walks through cases of that. I don't want to shy away from that part because that is the criticism that a lot of people bring to the table. And so, this will give a dump of that.

But the third thing, which you hinted at, which I think is very important to think about, and before I get to any type of response, I want to make sure I fully understand what's happening. And there does seem to be in China, and part three of this research walks through this, a deprioritization of market cap of successful companies. And this is something that I think should be important for policymakers to understand, but also investors. If you're buying stocks of Chinese companies, you know, hoping that they will, you know, like the Mag 7, turn into these $3 trillion entities, the Chinese government may not consider that priority part of the objective function of what a win is. And in the past three weeks, we saw BYD take prices down 30%.

That may have had encouragement from the government. I don't have proof of that. But it looks... it looks synonymous with the kinds of things that matter to them. And so if your government cared mostly about high employment and cared mostly about the durability of the competitiveness of your companies globally, you might take what I would call the Amazon approach and say, 'Your margin is my opportunity.' I'm going to be the low-cost producer, and that's going to make my competitive position relative to other countries around the world the best it can be. And if I don't have a government that's dependent upon whether or not those market caps are high or not, then I might encourage price competition in an industry that we're already winning at.

Well, and that's consistent. Like, if you look at, as winners begin to emerge, right, China definitely plays a heavier hand, right? You have golden shares and veto rights by the government. Correct. You have preferential procurement by the government. You have regulatory approvals that are required. And, you know, in this post-Didi era where they, you know, went public, I mean, we've seen the government literally, I mean, they disappeared, Jack Ma disappeared. With respect to Alibaba, they've stepped in, right? We have ByteDance that still is not public. So clearly, they exert way more control once the winners emerge. We know that they're doing this at some level with Huawei as well.

And all those topics that you just mentioned, they're all covered in these three pieces. So if people have more interest, I would encourage them to read it. But I think in the U.S., we have a mindset that, oh, having $3 trillion winners is a positive sign. And I think it's important to understand that that may not be the attitude over there. And that can lead to different decision-making.

You're making me think about some of the relative valuation comparisons between Chinese internet companies and U.S. companies. If you really think that there's going to be an obstacle to allowing them to grow bigger, that's something U.S. investors have to take into account. Well, I think the number one thing for me, Bill, the 'so what' on all of this, is that we're in this competition with China, and I think we would be very naive to think that they're going to do anything but be extraordinarily competitive. You and I have argued they're on the frontier of AI already. They're gaining ground quickly on chips and right on our heels. And so I appreciated unpacking a little bit the why, like why have they been so successful there?

So that was my takeaway. Bill, are there any other takeaways from the research that you have?

Well, there are two. I think a lot of people kind of quip quickly that, oh, China is successful because of IP theft. I think if you narrow it down to one derogatory term, action or comment, you're ignoring this system. And that's why I would encourage people to read that part one, at least, and just see the breadth of the work that went into place. Because you could make a bad policy decision because you think, oh, well, if we just protect IP, then this won't keep happening. But there's more happening than that. And so that'd be part one. And then second, on the AI front, one thing we talked about last time is, all of a sudden you open your eyes and there's four deep-pocketed open-source players in China.

And if you think about promoting competitiveness as part of what's gonna lead to global success, I wouldn't be shocked to learn or find out that the government favored an approach like that and having four open-source competitors for all the reasons that the systems they put in place for EVs and solar panels, to me, those are very similar.

Right, right. So it just makes it cheaper and easier for the ecosystems to benefit from one another, even though the economics and the margins on those products may be lower.

Yes. And one other thing that I should have mentioned that might be an objective function of the CCP is just the affordability to their entire citizenry. So, you know, BYD selling a car for 10 grand is better for the consumer in China, as might be, you know, for open-source AI models.

Interesting. Well, staying on the theme of China, Bill, you and I have talked a ton over the past two years about the need to stop illegal immigration, but to dramatically ramp up recruiting and retaining the best and the brightest to the United States. Totally. We've done former pods on this. And we've talked about the age of AI is all about talent. I remember how excited we were after we saw the president on the All-In pod talking about how it's going to become way easier to get an H-1B visa, literally like stapling a green card to these diplomas.

But what I want to do and what I will do is you graduate from a college, I think you should get automatically as part of your diploma a green card to be able to stay in this country. And that includes junior colleges too. Anybody graduates from a college, you go in there for two years or four years, if you graduate or you get a doctorate degree from a college, you should be able to stay in this country. And you know more stories than I do, but I know of stories where people graduated from a top college or from a college and they desperately wanted to stay here. They had a plan for a company, a concept, and they can't. They go back to India, they go back to China, they do the same basic company in those places, and they become multi-billionaires employing thousands and thousands of people, and it could have been done here.

And a bigger example is you need a pool of people to work for your companies. You have great companies and they have to be smart people. Not everybody can be less than smart. You need brilliant people. And we force the brilliant people, the people that graduate from college, the people that are number one in their class from the best colleges, you have to be able to recruit these people and keep the people. It was such a big deal. Somebody graduates at the top of the class. They can't even make a deal with the company because they don't think they're going to be able to stay in the country. That is going to end on day one.

But this week we got a very different message, right? Marco Rubio tweeted the U.S. will begin revoking visas of Chinese students, including those with connections to the CCP, which seemed reasonable. But the conjunction was, 'or studying in critical fields.' Yep. Right. And that seemed, out of the gates, like—we all know AI is a critical field. It seemed really broad and concerning, and—and really a 180-degree turn from what the president had previously said on the All-In Pod. I saw that you tweeted something about this. What was your reaction to this? And how are you feeling about where we stand today on it?

Yeah, I mean, and I think in one of our very first episodes, we posted a video of Reagan, which I think it was like his last speech leaving office where he talked about America, you know, being successful precisely because our doors are open and inviting to the best and brightest from around the world. And all of that makes sense to me. And this particular action, I think, has the potential to run counter to all those positive things. I, you know... I wish there had been more follow-up on—on the Trump promise. I would be hugely supportive of that. We've all seen the list of all the immigrants that have been so successful and critical to—to Silicon Valley's own success. And, you know, you and I have also talked about the fact that some people say 50% of AI researchers are of Chinese origin.

And I believe now the patent count in AI coming out of China is larger than the US. And so, yeah, one interesting takeaway from what we just talked about is maybe the Chinese government isn't as interested in entrepreneurs being as successful economically, you know, from an equity standpoint. So if we're that land of opportunity, they would want to be here. They would want to be a citizen here. They would want to build their companies here. And so I really think, you know, and look, I'm all for, you know, not—not having spies. Right. That makes sense. But when you take these kind of broad statements, and, you know, and they have—they have the potential to be slippery slopes, right? Where the next step is what you start, you know, driving...

Studying LinkedIn for every single AI company, for anyone of Chinese origin. I think that has the potential to take on kind of a McCarthy-like perspective that could be very dangerous to our long-term competitiveness.

Well, I think part of it, too, is just about Brand USA. Like, what is the brand we want to project into the world, right? Like, it's not just about the students who are already here. It's about the generation of students who are still in China or still in Southeast Asia or anywhere else in the world—in South Africa, like Elon and Sacks and others. Is this a place that they feel like is capricious and can just change on a dime and all of a sudden throw them out after they've invested time and energy here? Or is this truly the land of opportunity, the place they want to go build their dreams? And I think that the cost to the US brand on a global basis—we have been the place for the last three, four decades, or much, much longer, but certainly in the age of technology,

Everybody's wanted to come and do these things. It's inured to our great national benefit. Trillions and trillions of dollars' worth of U.S. enterprise, our economic growth, our economic productivity, our standard of living is higher. We've stayed ahead in all of these critical national security areas precisely because we've been so inviting to people around the world. And we were making the argument when we had Aaron Levie on that we need to dramatically increase the number of H-1B visas and make it a lot easier for people to get them. And so when I hear this, I mean, I have to say, out of everything that's occurred in the administration, in some respects, I could not have been more thrilled by the president's promise on the All-In Pod.

I thought that was a big turning point. Yeah. I think for folks in Silicon Valley. And so to see this, what felt like a 180 on this, I certainly hope that it was misinterpreted, that it's very narrow, that we are going to project an inviting and welcoming Brand America. Certainly, man, right now it is so critical in the age of AI to get the world's best researchers here. Like you said—I saw a study that suggested that 40 to 50% of the AI researchers in the United States, our best researchers, are Chinese. So if you're going to go after Chinese students studying AI at Stanford, by definition, the slippery slope is not that far to say, I got to go after these researchers. They're a lot more risk to our national security theoretically than a student studying at Stanford.

Again, I'm with you. I'm all about being tough. You got to be here legally. I don't want anybody spying on us. But I think it's a very dangerous place and really destructive to our national brand if we do this. And so—you know, when I saw your tweet about this, the best way to stay ahead of China is to poach their talent. You know, just a few weeks ago, we were talking about an AI visa, right? That if you were an AI researcher from China in the United States, we had to give your family an AI visa to come over here so that you don't have so much pressure on you to go back to China. Totally agree. So we need to find out where—we need to bottom this out, but I certainly want to weigh in that we need to focus on recruiting.

I find just merely trying to understand China, why it's successful, and all those things. Some people label you as a Sinophile just because you're not a China hawk. And I worry more—in general, that the China hawk mindset leads you to policy that's really bad, especially people that jump to that place. And a lot of people are these days, right? And so I just think that policy is one of those things where you can have an intent and you can implement a policy and you can get the exact opposite outcome. Which was one of the things I talked about back in my speech at All-In.

The export controls on China probably is what caused Huawei to catch up so quickly. The Biden-era diffusion rule was going to allow the Chinese AI stack to win the global race in AI. And now we see, and I think Sacks has appropriately called this out, we see this conflating between people who are just AI decelerationists and want to stop AI and capture it for themselves. Right. Right now, they're kind of positioning themselves as China hawks so that they can gather a bigger alliance in order to slow this down. I think it's all bad policy. From my perspective, we need to focus on our own race, look at the lane ahead, run as fast as we can. And if you and I want to win championships and build a championship basketball team,

We should not care where in the world the basketball player comes from. We just need to get the best players on our team to win the championship. And we ought to take the same approach to AI and technology.

And I, you know... Other people have said this, so I don't want to belabor it too much, but the entire Manhattan Project was heavily impacted by immigrants. Many of the great things that have been accomplished in this nation are because it attracts people from around the world and we get to cherry-pick the best and the brightest. And so, yeah, we did. The fact that the skilled immigration number has been stuck, I think, at 250,000 a year for 20 years is insanity. We should be doing the opposite of this. We should be figuring out exactly how to increase that number. Brad, staying on the topic of China, the rare earth issue has come back to the top of the headlines. And the relationship between the two countries still is at an impasse.

What are you hearing? What's the latest here? How could it broadly affect companies in the U.S.?

There was this Wall Street Journal headline that you and I shared. I think it said, "China plays tough on rare earth exports and imparts powerful lessons on the pains of dependence." And it pointed to car companies risk factory shutdowns over this rare earth magnet shortage. And we had been hearing about this, remember, earlier in the year. I think I called it a kill shot. By China can really cause massive disruption because they really are a global monopolist in the production of key magnets in almost every electric motor and electric parts. And so the real question is, is there a way out of this? How do we see this playing out? And I see a real parallel, Bill, here between rare earths and AI chips, okay?

In both instances, each country views them as existential. China views AI chips as existential because they know AGI is critical to national security, national economic security, etc. We view these magnets as existential because we got to keep our critical industries going. We use this to not only build electric motors that go in our Teslas, but we use them in electric motors that go into parts that are critical to our military industry. So I was thinking about this, right? President Trump is talking to Xi on Friday, a couple of days from now. And if I were the president, what would I do? I think I would trade rare earths for access to U.S. AI chips, specifically this now deprecated Blackwell B30 chip.

And let me explain why. Let me maybe make four or five points as to why I think this would be a great trade for the U.S. at this point in time. Number one, this B30 is this deprecated chip. So one of the concerns we had about the H20 was that there was too much high bandwidth memory on it. And that, if you cluster enough of them together, could be used for training. So what they did on the B30 is it took HBM off it altogether. And it also doesn't use this CoWoS from TSMC. So it gives them a chip that's competitive in the market, but it actually deprecates it from a training perspective. It still provides a big gap to where the U.S. frontier chips are, the Blackwell B200 and B300, but it is competitive in the Chinese market.

And so what does that do? We've talked about this the last few weeks. That keeps—half of the world's researchers and the developers in the AI ecosystem are in China—it keeps them in that CUDA ecosystem, allows NVIDIA to compete, and I think slows down their ability to run the table around the rest of the world. I think when we ban chips to China, it's going to accelerate Huawei, like we just talked about, unintended consequences. Yeah. It's going to bring everybody into their developer ecosystem, and it's going to reduce the amount of developers in the NVIDIA ecosystem. So I think that's a bad thing. Number two, selling them these chips, which I don't think materially advances their cause on AI, generates billions and billions of dollars of taxes to the U.S. government.

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

There's no doubt what this moment has revealed to both China and to the United States is that we have to get back to our critical industries, precision manufacturing, rare earths, etc., but that's going to take years to do. And China, I'm sure, is saying to themselves, "We've got to wean our dependency off of NVIDIA," but it also takes them years to do. So it allows us to continue to build that out without the disruption. If we don't do this, then we're going to have a massively disrupted economy over the next six quarters, slowing down economic growth and causing problems and critical shortages in parts to the military, in parts to our U.S. auto industry, et cetera.

So... I would say the next point, I'll call this the final one, and then I want to get your reaction, right? If we keep the chip ban in place, here's my biggest concern. I think it dramatically increases the chances that China is forced to move on Taiwan. We're out there telling everybody in the world that AI is totally existential. We have lots of our leaders who are saying AGI is going to be eclipsed within the next two to three years. But yet we're telling one of the largest economic powers on the planet, "But we're going to prevent you from having it." And so there's a way they can say, "Well, if that is so existential as a risk to our country, we just have to go take Taiwan," which I think would be horrible for the United States.

By the way, I think it'd be terrible for China as well. But it would be a hugely risky event in the world, particularly because the U.S. needs another three to four years to diversify our supply chain away from China.

Yeah. So three reactions to this. First, you know, and they're all in agreement, but yeah, it'd be tough to balance trade if we don't let them have the stuff we're really good at.

Like the stuff you trade.

I mean, this is like Economics 101. Like the country, you know, you sell the stuff you're best at. So if you take that off the table, they're not going to buy our crap. And so there's no way to get to a trade balance if you're taking our best stuff off the table. I totally agree on Taiwan. I've made this point for a while. I think Jeffrey Sachs makes the same point. You need to be careful that the actions you're taking aren't the exact ones that encourage that to happen the most quickly. And then thirdly, part of why we're in this battle over these rare earth components is that we did these export controls, and it wasn't just about the NVIDIA chips. I think recently we are trying to tell the world they can't buy the Huawei chips.

So this is outside of America trying to enforce an export ban on China's products selling into Europe, selling into South America. I think that is, you know, something that is... beyond the scope of what our government should be capable of doing, and I've talked about this in the past, like I expect, you know, ASML to just ignore us telling them they can or can't do something. And I worry, and I've mentioned this before, but I worry that rather than build a wall around China, we're going to build a wall around America.

Yep. Well, it's well said. And listen, I think huge credit goes to David Sachs and Howard Lutnick so far for repealing the Biden diffusion rule by reopening up the global markets, making sure America is running as fast as we can. The American AI stack can win around the world. I think it's a closer call for them on U.S. chips to China. But this deprecated chip, I hope they take a close look at it. I think it would be a great win-win trade for both countries. We need those rare earths. And by the way, I'm not saying that this is a permanent state of nature. Think about this, Bill. Today, we have about 0% of leading edge chips fabbed outside of Taiwan, right? Almost nothing in the United States.

And by 2020 or by 2030, so in four or five years from now, people think that we'll have upwards of 15% to 20% leading-edge capacity in the United States, which is a huge step forward. I saw a presentation this week involving the United Arab Emirates, where if they were to build an advanced fab with TSMC and give the U.S. some sovereign influence over this fab, right? So if it was a joint deal that we could increase the market share of the United States' advanced nodes to almost 40% or 50% in four years, that would be an extraordinary rebalancing of the global supply chain when it comes to advanced chips. But we're not going to do that if we're in a war over Taiwan. And so it would seem to me that now would be the time that you would find this reasonable middle ground.

We would run like hell to build out capability in Arizona and in other countries like the UAE that are friendly to us. You know, we're building out this leading-edge capability. It would seem to me a much smarter policy than pursuing the one that we're on now, where we have global embargoes, the Chinese on rare earths and the U.S. on chips. Enough said on that. I want to jump. I know that we're time-short. Let's talk a little bit about just what's going on in the market. You had some thoughts. Yeah.

Well, I mean, I'm more interested in hearing your thoughts. So you were cautious at the beginning of the year. You got less cautious as the market has rebounded. Yet many of the biggest issues that I think people care about, whether or not we can get some agreement with China, what's going to happen with the tariffs, and there's new information on that, judges blocking and not blocking the tariff talk. And then the debt issue, which now—there's a whole bunch of noise being stirred up by Elon now saying he doesn't support the big, beautiful bills. So there seems to me to be as much uncertainty as there's ever been this year. But I'm very curious on your take.

Well, the market's clearly not agreeing with you at the moment, Bill. We've had this incredible bounce. The Nasdaq's up 20% from its intraday lows. Now it's just above flat for the year, maybe up 1%. The S&P also has had a huge bounce, now up like 2% for the year. Yes, I think it was on May 2nd or early in May where we talked about us changing the flight path because I saw this approach to getting to the other side of tariffs, the Bessent consensus winning, signing the reconciliation bill that would extend the tax cuts and have new tax stimulus. And so as I sit here today, like the bounce makes a lot of sense to me. But where we go from here matters a lot. And so what are the key things that I'm looking at?

Well, first on tariffs, China is the big enchilada. The president's talking with President Xi on Friday. And you have to believe that the Bessent consensus or accord that was negotiated in Geneva that we are going to get to a status where global tariffs are gonna land in that territory on a blended basis around the world of 10% to 15%, right? So we talked about, are they gonna be trillions or are they going to be hundreds of billions? It's got to lay under that lower quadrant or I think the market moves lower. And I think that's still where we're headed. But they're definitely the topic we just talked about. There's some binary outcomes, I think, as it relates to the U.S. and China. It looks like Europe is making good progress now on the reconciliation bill.

It looked like that was making incredible progress. I still think it will. Listen, I think that Elon has appropriately pointed out that the challenge is with the debt, but I would really encourage people to look at this Ray Dalio piece and also what Bessent has now been saying. They call it 3-3-3, but it's how to get us to 3% GDP growth, right, and how to get us to a debt-to-GDP ratio of three percent. You can't just cut two trillion dollars in a single year. That would be an 800 basis point headwind to GDP. It would throw us into a recession, if not depression-like, like state, because you have—so remember, government spending is a component of GDP. Mm-hmm. And so it's about what is the flight path?

And I would like to see Bessent lay out this four-, five-, six-year plan to this 3% debt-to-GDP ratio. It's not gonna happen in the reconciliation bill because again, as many people have discussed, the reconciliation bill does not touch discretionary spending. That will come by way of the Rescission Act that was just sent to Congress and the Speaker of the House has said that he's gonna vote on, and I expect that they will pass. So there's, you know, I think it's a confusing set of issues, but to be clear, I think that we need to see the reconciliation bill pass because that's what extends the tax cuts, which I think are critical. In the absence of that, you get a $4 trillion tax increase and markets go a lot lower.

In addition to that, the no tax on tips, the no tax on overtime, the ability to have a deduction against your Social Security taxes, that's probably three- or $400 billion of new stimulus to the economy. That's what's gonna give you the growth, Bill, to get you back to 3%. So I think if you're a market participant, I believe that we're going to land the plane on both of those. And if you believe that we're going to land the plane, then I see accelerating economic growth in the back half of the year and into next year. But this is, you know, be optimistic, right? But the proof is in the pudding. We've got to see those things land there. And if they don't, I expect the market will be back down 10% to 15%, which is where we were just a few weeks ago.

So there's still a lot of volatility out there. There's been a lot of talk about the 10-year rates, Bill. And one thing I just want to point out, because the 10-year rates have gone from 4.2 to bounce back up to 4.4, 4.5. And a lot of people are hand-wringing about this and saying, this just goes to prove that we're in this national debt spiral and nobody wants to buy our debt.

But I just want to point out—and I think they compare them to Spain and other countries that were in liquidity crisis not too long ago.

Yeah, but I just want to point out, like several other people have, yields, the 10-year has been in a 4% to 5% range, Bill, for the last two years. And, you know, this is far, like there were people, remember Larry Summers at the end of 2022 saying that the 10-year's going to 7%, right? That's what caused a—'hyper, we're going to have hyperinflation.' What have we seen? Core PCE just came out lower than people expected, right? We're now on a core PCE run rate that causes me to believe that the Fed will now reduce rates. The market's saying they're going to cut rates twice in the back half of the year. Why? Because we're still in restrictive territory. The Fed has said we're in restrictive territory.

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

So don't take yourself out of the game. But I think it is a wait-and-see approach.

And what do you put the probability on the deal with China coming together?

I put it as pretty high probability. And, you know, remember, I was asked about this on CNBC in the heat of the crisis. And I said, you know, because Trump was putting Navarro on the Sunday talk shows and Mnuchin, and they had two very different points of view. And I said, 'You have door one, door two, and the president's got to choose,' right? And I said at the time, I think at the end of the day, he wrote a book called The Art of the Deal. He is a negotiator. He is a fair trader. He wants a fair deal for the United States. He wants to re-shore critical national industries. But I do not think he wants to slam the brakes on the global economy and put the global economy into a recession, which he knows it would.

And so I expect we'll get a deal done with China. But that means that China's got to step up and be willing to deal as well. I think the tea leaves read pretty good on that, but we'll know a lot more over the course of the next few weeks. Okay. Okay, I have a couple of things for our lightning round, Bill. Okay. We had a great discussion last week on this Delaware situation. I think you've been out in front on this, telling companies that if you sat on their board, they got to consider exiting Delaware. Otherwise, they may be breaching their fiduciary duties. I saw Fortune magazine actually quoted you, wrote—their headline was, 'Something's awry in Delaware.' New study reveals lawyers in tiny U.S. state are winning fee multipliers from major companies up to 66

times their normal hourly rate. You got two and a half million views on this Delaware clip after you got a little promo from Sacks and Elon. But was there any feedback you got this week? Did you hear from companies? Are they reconsidering whether or not they want to be in Delaware?

I think a lot of companies are reconsidering. And there are two things that I would add that they've become clear to me, you know, since then. But one, people talk about, 'Well, who is at risk here?' I think it's actually the highest-profile companies that are at risk because they're the ones that, you know, an activist judge is going to want to make an example out of. And so maybe if you're a smaller market-cap company, maybe it's not something you need to think about with urgency. And we discussed this. The reason people were in Delaware is because it was predictable. When you're a young entrepreneur and they say, 'Oh, incorporate in Delaware,' you're like, 'What? Why would I do that?' And someone says, 'Oh, well, they've had corporate law for a long time.'

It's very predictable. And oh, okay. And so everybody does it. Well, that's no longer true. And so I think everyone has to consider it. The other thing that I verified that I think is really important, we live in an age where companies are staying private longer. I think many entrepreneurs, many board members think that litigation around shareholder events are tied solely to public companies. That is not true. If you're incorporated in Delaware, you can be sued. You, you know, if your shares are trading more freely in the secondary market, you're at risk as well. And so I would just say just because you're not public doesn't mean this shouldn't matter to you. And in fact, I can imagine someone who has an activist bent being particularly excited about bringing a case against a private large unicorn.

You're certainly influencing it there. I can tell you this. I've had a couple of companies ask me in the wake of that whether or not they should be reincorporating. So I think there is a movement afoot. Something else we talked about in relation to corporate governance, Bill, on a prior pod, and this is these proxy advisors, ISS and Glass Lewis. They have a monopoly on giving advice, particularly to passive shareholders, about how they should vote their shares in the annual vote. We've come to discover that they're probably not the best and most objective when it comes to doing it, or they may have political agendas that are misaligned with your own. Senator Hagerty had a tweet yesterday that caught my eye.

He said, 'The two largest proxy advisors have 97% market share. They wield control over millions and millions of votes. They've hijacked corporate governance, and an investigation into their anti-competitive and abusive practices is long overdue.' I hadn't heard about this in a few months, but any reactions to that?

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

And we clearly crept away from that in the past 10 or 20 years. The senator that you're talking about said when he was giving this talk that these two companies are now both over 80% owned outside the US. Oh, wow. And that they both have corporate philosophies that extend beyond what we just talked about, which I grew up in the school that fiduciary duty is the number one responsibility of all board members. And that means looking after the shareholders. And so I think two things should happen. First, I do wonder, and this would be a question for the senator, why are so many companies paying attention to what these people say? Are they just loyal? I mean, are they just lazy? Do they not want to do the work themselves?

And admittedly, if you're running an index fund, you're on thin margins, so maybe you don't have time. But they should wake up and realize that that they're not solely looking after the interests of shareholders and they have other interests in mind. And ironically, and this gets back to policy, one of the key reasons so many companies have super voting is so that these two companies can't tell them what to do. And so, you know, it's ironic because most people think of super voting shares as being less important, good governance—a lesser form of good governance. But if these companies that are measuring you and telling index investors how to vote aren't looking after shareholder interests, then you may need to take that step precisely to get away from them.

And so I would encourage the BlackRocks and all the ETF people to not just simply vote with what these people say. And maybe what we need, maybe we need an alternative to these two things. You and I have talked about SBC. I mean, I think there's a number of things you could use AI that you would put into a model to say, what is the type of good governance that aligns shareholder interests? And maybe it'd be good to see something like that pop up. I love it. I love it. Let's incubate that, Bill.

Let's incubate that. Anybody out there, let's find some of the guys who are playing, the AI founders and engineers who were playing in the Altimeter poker game last night. They were looking for ideas. This is a great one.

Okay. Well, I would encourage any of our listeners—there may be someone already doing it that's already working on an alternative to these two companies. And if you are, reach out to us. We could help fund it, help promote it, and it'd be exciting to see.

Yeah, no, that'd be great. Well, it's been another good one, buddy. Great seeing you. Until next time.

As a reminder to everybody, just our opinions, not investment advice.