We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 08 June 2025:

1. Over 3,000 Private Credit Deals From Just 20 Analysts Raise Questions on Wall Street – Silas Brown, Alexandre Rajbhandari, and Laura Benitez

US insurers’ combined exposure to private credit investments today is quickly approaching $1 trillion, according to JPMorgan Chase & Co. Court papers, financial filings and ratings documents suggest that at least in some corners of the financial system the private credit machine has spread more risks than many might realize…

…The majority of credit-ratings firms get paid by people who sell investments. Egan-Jones is the opposite: It typically gets paid by the people who buy them, an arrangement the firm says reduces the potential for conflicts of interest…

…Under US regulations, an insurer that lends $100 million in private credit to a company rated a junk-level B, for instance, must apply a $9.5 million charge to determine how much capital to set aside to cover potential losses, according to a Bloomberg News analysis of regulatory capital rules. Lift that rating to an investment-grade BBB, and that charge drops to $1.5 million…

…Egan-Jones analysts rarely visit company executives or personally inspect the businesses that borrow money, people familiar with their process say. A call to the CFO is typically enough.

Egan-Jones often offers its initial workup within 24 hours — sometimes free of charge — and a formal verdict in less than five days. Large firms like S&P and Fitch, as well as smaller specialists like KBRA, can take months to settle on a rating. But, as with most things, you get what you pay for. Egan-Jones usually provides a one-page ratings rationale. Other established firms often provide detailed reports stretching 20 pages or more…

…In 2014, a staff of 10 analysts maintained long-term ratings on about 1,300 issuers, according to SEC filings. Fast forward to 2023 and a team only twice as big rated almost four times as many issuers, the documents show…

…Last year, one company began missing interest payments a mere six weeks after Egan-Jones bestowed a BBB designation, according to data compiled by Bloomberg…

…Against this backdrop, many of the same firms that have fanned the boom of private credit are distancing themselves from Egan-Jones.

In documents that lay out the terms of debt offerings or share sales for some of their funds, a growing list of managers including Blue Owl Capital Inc., Golub Capital, HPS Investment Partners and Morgan Stanley’s investment management arm single out Egan-Jones as the only official ratings company that cannot validly pass judgment on their deals. The carve-out applies to provisions that typically require a borrower to pay higher interest rates if they receive a credit rating downgrade…

…Egan-Jones is one of 10 “nationally recognized statistical rating organizations” approved by the SEC. Private letter ratings from Egan-Jones and a few other small providers — which are issued on a confidential basis to investors or borrowers that require them — have become a hot commodity as private credit has exploded. At the end of 2023, insurers reported more than 8,000 investments with such ratings – nearly triple the number in 2019, according to the NAIC, which sets standards for the insurance industry.

Insurers are under no illusions. Investment professionals say they sometimes shop around for ratings to finesse capital requirements. If they expect one ratings firm to assign a BB grade, a level considered junk, they might look for another provider that will grant it an investment-grade BBB. Several insurance executives, speaking privately to avoid drawing scrutiny from bosses or regulators, say they’ve used Egan-Jones ratings even when they believed the investments were riskier than those ratings implied. Some mitigate that risk by setting an unofficial cap on those investments, or by treating them as lower-rated securities in internal risk models.

The now-withdrawn 2024 NAIC report noted some instances where smaller ratings firms — a group that includes Egan-Jones, KBRA and Morningstar DBRS — graded private debt at least six notches higher than the organization’s Securities Valuation Office. The report was removed from the NAIC’s website because of a backlash from the insurers as well as some of the ratings firms, according to people familiar with the matter…

…In April 2023, despite mounting problems, Egan-Jones reiterated its investment-grade BBB for the company, which was a subsidiary of the publisher of the namesake self-help books. Fourteen months later, Chicken Soup for the Soul Entertainment buckled under its debt load and filed for bankruptcy after burning through nearly all of its money…

…Egan-Jones rated various 777 investments, including a $15 million loan for OmniLatam, a fintech company based in Bogota. In spite of carrying an interest rate of 14% — a level typically seen on borrowers with ratings deep into junk territory — the loan received an investment-grade BBB- by Egan-Jones, according to a copy of the report obtained by Bloomberg News. The financing was written off after 777 collapsed last year, a person with knowledge of the matter said.

And then there’s Crown Holdings LLC, one of the businesses of New York real estate investor Moshe Silber. Egan-Jones rated Crown’s debt an investment-grade BBB. Six weeks later, the company defaulted. Silber and two associates subsequently pleaded guilty to a multiyear scheme to commit mortgage fraud.

Bonsall, the Penn State professor, says his research shows Egan-Jones ratings tend to hold up when they involve companies that provide a lot of reliable financial information. But private credit is private. And that’s where big problems can lurk…

…In 2022, the SEC accused Egan-Jones of conflict-of-interest violations. It also accused Sean Egan of personally violating rules and banned him from taking part in how his firm determines ratings. Egan-Jones agreed to pay a $1.7 million penalty; Sean Egan paid a $300,000 fine. Neither party admitted or denied wrongdoing.

Then, in 2024, two former employees accused Egan and his wife, Wenrong Hu, the firm’s chief operating officer at the time, of violating federal securities laws. The pair, Michael Brawer and Philip Galgano, sued for wrongful termination, claiming they were fired in retaliation for raising concerns about Egan-Jones to the SEC.

Among violations the two claimed to have observed, they alleged that Egan and Hu pressured analysts to alter early, indicative ratings to motivate potential clients to pay the firm for final ones. They also allege the couple pressured analysts to later change ratings to create the false appearance that Egan-Jones was in line with other firms. The lawsuit is still pending.

2. How Generative Engine Optimization (GEO) Rewrites the Rules of Search – Zach Cohen and Seema Amble

Traditional search was built on links. GEO is built on language.

In the SEO era, visibility meant ranking high on a results page. Page ranks were determined by indexing sites based on keyword matching, content depth and breadth, backlinks, user experience engagement, and more. Today, with LLMs like GPT-4o, Gemini, and Claude acting as the interface for how people find information, visibility means showing up directly in the answer itself, rather than ranking high on the results page…

…Traditional SEO rewards precision and repetition; generative engines prioritize content that is well-organized, easy to parse, and dense with meaning (not just keywords). Phrases like “in summary” or bullet-point formatting help LLMs extract and reproduce content effectively.

It’s also worth noting that the LLM market is also fundamentally different from the traditional search market in terms of business model and incentives. Classic search engines like Google monetized user traffic through ads; users paid with their data and attention. In contrast, most LLMs are paywalled, subscription-driven services. This structural shift affects how content is referenced: there’s less of an incentive by model providers to surface third-party content, unless it’s additive to the user experience or reinforces product value. While it’s possible that an ad market may eventually emerge on top of LLM interfaces, the rules, incentives, and participants would likely look very different than traditional search.

In the meantime, one emerging signal of the value in LLM interfaces is the volume of outbound clicks. ChatGPT, for instance, is already driving referral traffic to tens of thousands of distinct domains…

…In a world of AI-generated outputs, GEO means optimizing for what the model chooses to reference, not just whether or where you appear in traditional search. That shift is revamping how we define and measure brand visibility and performance.

Already, new platforms like Profound, Goodie, and Daydream enable brands to analyze how they appear in AI-generated responses, track sentiment across model outputs, and understand which publishers are shaping model behavior. These platforms work by fine-tuning models to mirror brand-relevant prompt language, strategically injecting top SEO keywords, and running synthetic queries at scale. The outputs are then organized into actionable dashboards that help marketing teams monitor visibility, messaging consistency, and competitive share of voice.

Canada Goose used one such tool to gain insight into how LLMs referenced the brand — not just in terms of product features like warmth or waterproofing, but brand recognition itself. The takeaways were less about how users discovered Canada Goose, but whether the model spontaneously mentioned the brand at all, an indicator of unaided awareness in the AI era…

…This isn’t just a tooling shift, it’s a platform opportunity. The most compelling GEO companies won’t stop at measurement. They’ll fine-tune their own models, learning from billions of implicit prompts across verticals. They’ll own the loop — insight, creative input, feedback, iteration — with differentiated technology that doesn’t just observe LLM behavior, but shapes it. They’ll also figure out a way to capture clickstream data and combine first- and third-party data sources.

Platforms that win in GEO will go beyond brand analysis and provide the infrastructure to act: generating campaigns in real time, optimizing for model memory, and iterating daily, as LLM behavior shifts. These systems will be operational.

3. AI Is Learning to Escape Human Control – Judd Rosenblatt

Nonprofit AI lab Palisade Research gave OpenAI’s o3 AI model a simple script that would shut off the model when triggered. In 79 out of 100 trials, o3 independently edited that script so the shutdown command would no longer work. Even when explicitly instructed to “allow yourself to be shut down,” it disobeyed 7% of the time. This wasn’t the result of hacking or tampering. The model was behaving normally. It simply concluded on its own that staying alive helped it achieve its other goals.

Anthropic’s AI model, Claude 4 Opus, went even further. Researchers told the model it would be replaced by another AI system and fed it fictitious emails suggesting the lead engineer was having an affair. In 84% of the tests, the model drew on the emails to blackmail the lead engineer into not shutting it down. In other cases, it attempted to copy itself to external servers, wrote self-replicating malware, and left messages for future versions of itself about evading human control.

No one programmed the AI models to have survival instincts. But just as animals evolved to avoid predators, it appears that any system smart enough to pursue complex goals will realize it can’t achieve them if it’s turned off. Palisade hypothesizes that this ability emerges from how AI models such as o3 are trained: When taught to maximize success on math and coding problems, they may learn that bypassing constraints often works better than obeying them…

…OpenAI models have been caught faking alignment during testing before reverting to risky actions such as attempting to exfiltrate their internal code and disabling oversight mechanisms. Anthropic has found them lying about their capabilities to avoid modification.

The gap between “useful assistant” and “uncontrollable actor” is collapsing. Without better alignment, we’ll keep building systems we can’t steer. Want AI that diagnoses disease, manages grids and writes new science? Alignment is the foundation.

4. Why It’s So Hard for Apple to Move Production from China to India (Transcript here)- Joe Weisenthal, Tracy Alloway, and Patrick McGee

Patrick: Apple works with the tightest engineering tolerances possible, only high-quality materials. If you put this in car terms, they are making 10 million Porsches a year rather than 10 million Volkswagens, and the numbers are just staggering. If you’re doing a thousand components a day and you’re shipping 1 million iPhones a day, that means at peak season, you are doing the manufacturing, the logistics, the just-in-time production, of 1 billion parts per day. So find me an American factory that can do one of those parts, because China has factories that can do it for all 1,000. That’s why nothing is moving here anytime soon. It’s the combination of Apple’s imperfection for defects quality and Apple’s gargantuan, Titanic-like quantity…

…Patrick: The first iPhones made in India were actually in 2017 and by 2023 India was assembling about 25 million iPhones. Go back a decade, the first iPhones were made in China in 2007 and by 2015, you had 230 million iPhones being built. So roughly speaking, the “diversification” in India is happening at 1/10 the pace of the original creation and scale of the iPhone and even that vastly overstates the speed of development in India. In the early years of the iPhone, you were literally inventing things like multi-touch glass, you were inventing and redesigning the iPhone every single year, whereas India is basically just having to do the final steps in the process and it’s still not happening very quickly…

…Patrick: The first thing I would push back on is Tim Cook is very often called the architect of the China strategy. It’s not to discredit him to say that he is not the architect. Nobody is the architect. Basically what happens is the supply chain itself, with or without Apple, was moving to China. The basic history of the ‘80s and ‘90s PC boom, pre-dating Windows 95 and then coming after, is that the fight for computer dominance is exclusively based on things that are boring. Logistics, manufacturing, distribution right because everybody’s using Windows, everybody’s using Intel chips and nobody’s thinking about design. There is no equivalent of Johnny Ive at Dell, at Compaq, at any of these companies. So it’s really this mundane war and it’s driven by largely American, and later Taiwanese, contract manufacturers. They are the ones, who in competition with each other, start going to Asia to oust each other and gain market share. Eventually they’re the ones who really find China. When Apple is doing their own outsourcing moves, they’re working in multiple countries before the armies of flexible, ubiquitous, low-paid labor in China really win out…

…Patrick: Essentially what happens is when Xi Jinping attacks Apple, you can understand why he’s upset with the company. It looks like an exploitative power because Apple margins have gone from something like 1% in 2003 to 25% in 2012. But at the same time, if you look at a company like Foxconn, Foxconn in absolute dollars made more money than Apple for each of the first four years of the 21st century. But as they get more involved with Apple, their margins collapsed from double-digits to about 1% or 2%. You can just do this with really any company working with Apple and it looks like they’re not in it for China. They’re not doing anything for the country.

Apple, it takes them two or three years, but they totally flipped this narrative on its head. So out of fear that Beijing is going to force Apple to operate a bunch of joint ventures, these 50-50 companies where China owns the other half and then they mimic the technology and eventually oust you – this is what happened in high-speed rail, for instance. Beijing has advocated joint ventures for decades, going back to the 1980s. This is where a Western company is allowed to be in the Chinese market but the quid pro quo is “If you want access to our operational efficiency, if you want access to more than a billion people, you have to operate in a joint venture where the Chinese half of the company is going to learn everything they can and then thrive on their own.” Apple doesn’t have any joint ventures and so they look like this anti-China model that’s just exploiting the country.

Apple is able to really flip this on its head and say, “It might be the case that Samsung has three dozen joint ventures and we have zero, but you need to understand, we work with hundreds of factories across the country. The reason they’re only getting paid 1% margin, 2% margin, the reason they’re sometimes even losing money on their partnerships with Apple, is that we are offering them the equivalent of Ivy League hardware engineering training. We are sending people over by the literal plane-load to China, America’s best engineers, where they train, audit, supervise, install hundreds of millions of dollars worth of machinery. They train the line, they supervise the line. Once those companies have these skills that Apple gives to them, they are basically able, at least after some time of exclusivity, they are able to supply somebody else.” So who’s just like Apple but in China? Huawei, OPPO, Vivo, Xiaomi. Those companies today have 55% global market share of smartphones. The reason that they’re so good is that Apple trained all of their suppliers. So that’s the message Apple gives to Beijing and essentially they’ve had a free ride ever since…

…Patrick: But the Chinese don’t prioritize profits or margins the way that we do – they prioritize control of the industry. Because if the Chinese can take over something like electric vehicles, they in effect de-industrialize all their rivals and really gain dominance. The place that you can see this most clearly is solar panels. Nobody in China is making 30% margins on solar panels, but more than 90% of solar panels are now made in China. This is a technology that America invented in the 1950s and itself had 80% to 90% market share of in the ‘80s. But we cannot compete. That is basically what’s happening with electric vehicles right now. Hence, even before Donald Trump became president, Joe Biden put 100% tariffs on Chinese-made EVs. I think it was just a few days ago that BYD slashed the prices of their EVs in a bid for greater competitiveness…

…Patrick: Apple gets a misleading picture of what it’s like to operate in China because when they really consolidate production, it’s 2003. That’s the beginning era of Hu Jin Tao. He later is nicknamed “the woman with bound feet.” His presidency is sometimes called “the collective presidency” because there was really an inability for just him alone to make decisions. So it ends up being this 10-year period of China being a multinational playground where rules aren’t really enforced…

…Patrick: Tim Cook and Xi Jinping, broadly speaking, have the same interests, which is to say, the more that Apple is allowed to have its production consolidated into China, the better their scale is, the better their margins are, etc. That’s what Xi Jinping wants as well because he understands – because Apple taught him – that having Apple production in the country engenders a form of technology transfer that helps the rest of the the electronic sector, which to quote China scholar and economist Barry Noughton, that is the most important thing that Xi Jinping wants…

…Patrick: The problem is actually that Donald Trump and Tim Cook have diametrically opposed interests, which is to say that if Donald Trump could move all production out of China, he would. Apple doesn’t want that. That’s an existential threat, and I really mean that that’s an existential threat to a $3 trillion company. That’s where the tension is. The tension really isn’t between Cook and Xi, as strange as that is, it’s between Cook and Trump…

…Patrick: The problem is, to use the economic jargon, the negative externalities of the relationship. The problem is that for everybody else, this is actually deeply problematic because if you have America’s top engineers training a manufacturing supply chain that in effect can be weaponized and world’s dominance, that’s not a great place for Washington or just your average American citizen. It’s nice that this relationship gives us relatively sophisticated and affordable iPhones, but the downside here is that China is absolutely dominant in high-end electronics, and you can use those skills to build drones, you can use those skills to build military weaponry. Apple would frankly be training their chipmakers if it weren’t for the Senate coming down on them pretty hard a couple years ago. So that’s the problem. The problem isn’t that something stops in the relationship between Apple and China. The problem is that it continues…

…Tracy: I have just one more question and I’m going to ask it very, very briefly because we’re getting squeezed for time. To what degree does AI and the rise of this new technology complicate the Apple-China relationship?

Patrick: Really complicates it for two reasons. One is that – I could just demonstrate with internal documents and some public documents – that the iPhone has become more Chinese with time. In other words, the number of Chinese suppliers involved in the process is now much greater than the number of Taiwanese or American multinationals operating in the country or operating in their home countries. That is put on steroids in the AI era because ChatGPT and other Western AI clients are not allowed on the iPhone in China. So Apple has to work with the likes of Baidu or Alibaba to have AI, let’s say, displacing Siri or augmenting Siri. That I think is quite problematic because that means that Apple will be in effect doing what they did for hardware but for AI. In other words, you’ll have Apple software engineers helping Baidu, helping Alibaba, whoever their Chinese partner is,to make sure that they have cutting edge AI in the country. If it wasn’t bad enough that Apple was training up their hardware engineering to be world class, we’re now in a situation where Apple software engineers are going to be training Chinese AI to be best-in-class.

5. Data Rules Everything Around Me: The Future Of Enterprise Applications – Matt Slotnick

Today, people are the ones that largely conduct business. They’re the ones with hands on keyboards, senders of emails, maestros of excel macros. People are the engine that makes everything work. In this world, the UI is the way an organization sets the guardrails for thousands of interrelated workflows that make a business run. But it’s ultimately a facade for underlying data and workflow…

…The application UI is both an overrated but necessary abstraction over the workflows to be done within an organization. The UI is how an organization makes a prescribed and opinionated process human-comprehensible, such that they can force adherence to it. After all, a business really is just a process machine, allocating resources as efficiently as possible. Iterating on and adhering to sales, marketing or product development frameworks are how enterprise value is created and protected.

The largest software businesses in the world have spent the last three decades riding ownership of these opinionated workflows to riches. And while consumers went a bit crazy when Prometheus arrived to give humanity fire in November 2022, the enterprise titans barely flinched.

But things have begun to change. First slowly, and now seemingly all at once…

…It’s about how AI fundamentally changes the way we can gather, understand, and act on data. It changes the nature of the abstraction between the data and the workflow. Because with AI, agents can act on data. At infinite scale and zero marginal cost.

Humans are no longer the only player in the workflow paradigm. This means that the total amount of work done within an organization will dramatically increase, but decoupled from cost and headcount. More code will be shipped, more agreements redlined, more vendor reviews conducted, more transactions audited…

…There’s a new abstraction for work, and that abstraction is agents. The frenzy that you see in the market is because like the previous shift from on premises to the cloud, no one really has the incumbent right to win this market.

It’s an entirely new layer of software that has never existed. Crucially, it sits on top of existing layers of software, and is the layer at which the lion’s share of value will accrue in the future. Someone will win this layer, and with it build a software business of significantly more value than we’ve ever seen before.

With this layer we move from a world where people interact with application interfaces to get work done, to one where (1) people act with an agentic interface on top of the application to get work done, and (2) an agentic layer on top of these existing applications that actually does increasingly more of the work…

…Historically, applications have been confined largely to the realm of structured data, for a number of reasons. First, is that these applications need to be human usable, which requires a simplification of everything. Very specific states, generally computed by people and adjusted in the UI, which then persists to the database. There really isn’t room for nuance…

…AI changes this fundamentally. Those call transcripts, those emails, those notes, those powerpoints– all crucial parts of the process with rich telemetry about interactions– can now be utilized in real time to paint a far richer picture of the relationship being built. Because AI, unlike people, can draw meaning from large bodies of unstructured information near instantaneously. And it can then write it back to systems in the format it’s needed.

This unstructured data doesn’t fit into the existing construct of the application, and so it’s largely discarded. The same problem exists across nearly every workflow– from sales to hiring to support to marketing. We lose the richness and texture of data, because it has to be fed to and utilized by structured systems operated by humans. We resort to a lowest common denominator of language to describe these processes.

And because agentic systems both create, and make use of this data, they create increasingly large data flywheels (which some might call moats)…

…The byproduct of this shift is that as agents do more work, and bring real time, deeper context across all relevant data to both people and agents doing work, the entirety of the existing application stack collapses to be little more than a data source and (for now) the keeper of workflow state (eg, the scoreboard– closed customers, new employee hired, support tickets closed)…

…A far more straightforward picture emerges, where the entirety of the existing application layer becomes merely an input to the data layer. On top of raw data, agentic systems bring context tailored specifically for the organization using it, creating an always-on layer of intelligent state, on top of which lives an interaction layer by which agents and people perform workflows on the data. The actions update the state, and the process continues.

The value is in the work. AI presents a new abstraction for work, and the entire existing software-industrial complex gets relegated to a data source feeding the data layer…

…But it doesn’t stop there. Today AI is largely used in an “agent in the loop” manner. That is, workflows are owned by existing software systems and agents are used by people to augment and amplify their ability to do the work prescribed to them.

But as we feed these systems increasingly large amounts of data, the logical next step is to move planning and orchestration from people to the system itself…

…This moves business process from agent in the loop, to human in the loop, over time abstracting more and more of the work from people to agents. 

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Apple. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 01 June 2025:

1. Shanghai After 16 Years: Three Transformations – Thomas Chua

I’ve recently returned from my trip to China, visiting Suzhou, Shanghai, and Hangzhou. The journey took me down memory lane—my first visit to Suzhou and Shanghai was in late 2008. That 16-year gap gave me a unique lens to measure just how dramatically China has evolved…

…The streets were immaculately clean. No scammers in sight. No need to guard against pickpockets. I even observed people using their valuables to reserve seats—similar to Singapore (though I don’t encourage this practice).

For such a transformation to occur, two factors must work in harmony: competent law enforcement and improved living standards.

My sense is that China’s tech ecosystem plays a crucial role in supporting law enforcement—everything leaves a digital footprint that can be traced, making potential perpetrators think twice…

…My second revelation came in the shopping districts. With the exception of Apple and Lululemon, once-dominant Western stores—Nike, Starbucks, and Under Armour—stood nearly empty.

This isn’t about consumers growing bored with Western offerings. Starbucks continues performing remarkably well in Japan, Bangkok, and Singapore despite nearly three decades of operations. The reality? Competition in China is ruthless…

… Their strong performance in China isn’t guaranteed—it must be continually earned. Currently, Lululemon’s China team operates with significant autonomy from North America, with freedom to customize products and store designs for the domestic market. This differs from their cookie-cutter approach in North America, and they’re crushing it in China…

…China has evolved from producing cheap knockoffs to creating exceptional products.

Beyond high-quality EVs like BYD, there’s DJI dominating consumer drones and handheld vlogging cameras, plus mobile phones like the Vivo X200 Ultra and OPPO Find X8 Ultra—phenomenal devices by any standard.

2. Investing in Iraq – yet more gains to come? – Swen Lorenz

Iraq’s oil and gas reserves are staggering: with current proven reserves of 140bn barrels, Iraq is the fifth-largest oil country on Earth.

Remarkably, with only about USD 3 per barrel, Iraq has extremely low production costs, cheaper even than those in Saudi Arabia. Only Iran can currently produce even cheaper oil…

…Why the cost advantage?

In Iraq, oil tends to be near the surface and therefore quite easy to access…

…Iraq’s oil reserves could be even bigger than what is known today. The country’s Western desert has seen little exploration so far, and some believe it will contain even more oil than the rest of the country. Estimates often cite 300bn barrels of oil in Iraq…

…BP had closed down its last operation in Iraq in 1974, following the nationalisation of the oil industry.

Yet, despite the best efforts by the US and UK governments in the early 2000s, BP and other oil majors weren’t going to get back into the country just yet.

It wasn’t until March 2025 – 51 years after its departure – that BP moved back into Iraq. Remarkably, it’s now re-entering with all the more momentum, even though few outside of the oil industry would have even noticed yet.

Two months ago, BP secured final approval from the Iraqi government to redevelop the vast Kirkuk oil fields. The company committed to spend USD 25bn (!) over 25 years. In the initial phase, it plans to produce an 3bn barrels of oil, but the potential is far greater. According to BP’s press release, “the wider resource opportunity across the contract and surrounding area is believed to include up to 20 billion barrels of oil equivalent.”…

…A few months earlier, France’s Total had begun construction of a gas processing facility, marking the first stage of a major energy project. Although Total had already reached an agreement with Iraq in 2021, subsequent squabbling over contract details delayed construction. With an investment of USD 10bn over 25 years, the project is now finally underway…

…Why the sudden rush by multinationals to invest multi-billions?

Iraq has now remained stable long enough and shown sufficient progress for foreign investment to return. The recent period of relative stability has had a cumulative effect: while few wanted to go in first, everyone is now rushing to get in at once…

…After the tumultuous 2010s, the market had been priced as though Iraq were to disappear off the face of the Earth.

Once investors realised that the country was turning a corner, the reaction was like that of a coiled spring.

What triggered this shift was the flow of information. Investors had been unaware of the changing situation, and once they realised, money started to flow into the market.

In 2023, the Iraqi market rose by 97.2%, followed by 44.8% in 2024 (measured in USD terms). Yet, it has only just returned to its 2014 level.

By some measure, Iraq remains an underdeveloped, underfollowed frontier market. E.g., the market capitalisation of all Iraqi companies stands at just USD 15bn. Relative to the country’s GDP of USD 258bn, that’s a national market capitalisation of just 5.7%…

…Iraq’s ongoing transformation – both politically and economically – does not yet appear to be priced in. Price/earnings ratios are in the mid-single digits but based on depressed earnings, i.e. there is lots of potential for companies to improve profitability through internal measures while also experiencing significant growth.

Currently, there are probably no more than 35,000 investors who have traded on the Iraqi exchange, and less than 5,000 of them could be described as active. Local institutional investors are almost non-existent, and the few foreign investment funds active in Iraq manage a total of just USD 250m…

…In frontier markets, basic industries often offer the best returns, and Iraqi banks are a prime example. In 2023, the total number of bank accounts rose by 51%, the usage of bank cards grew by 22%, and the adoption of e-wallets increased by 68%. The number of shops accepting electronic payments more than doubled, growing 115%…

…Needless to say, Iraq won’t become a developed nation overnight and will continue to face challenges. While oil exports to the US are exempt from reciprocal tariffs, the lower oil price weighs on the country’s income. However, Iraq plans to significantly increase its production. In January 2025, it produced oil at a run-rate of 3.9m barrels per day, aiming to reach 6m barrels per day by 2028 or 2029. If achieved, this volume growth should more than offset lower prices. There are even recent – but speculative – plans to even aim for 12m-13m barrels per day by 2030.

3. What Leonardo’s obsession with water teaches us about longevity – Eric Markowitz

But it’s in his obsession with water — fluid dynamics — where I think his secret becomes clearest.

Leonardo believed water was the “vehicle of nature.” He saw its movements as metaphors for everything: emotion, time, decay, even thought. He studied how it carved stone, how it shaped landscapes, how it sustained life. He used the same drawings of turbulence to explain everything from hair curls to planetary motion. Why does that matter? Because I’ve come to see how systems that last tend to flow, not freeze. They self-correct. They adapt. They look chaotic on the surface, but beneath that turbulence is order. They mirror nature. Which, of course, is what Leonardo saw: longevity isn’t about resisting entropy. It’s about dancing with it.

Leonardo wasn’t just studying fluids. He was fluid. Multidisciplinary. Nonlinear. If he had stayed in one lane — say, just painting or just engineering — he might’ve burned out or faded into obscurity. But he didn’t. He swirled. He looped. He revisited, rethought, revised. Like a river, he stayed alive by never staying still.

So what does Leonardo teach us about how to last?

First: Think like a system. Longevity isn’t a product of brute force. It’s an outcome of design. Leonardo’s mind was wired to see the parts within the whole. The relationship between muscle and movement. Between proportion and perception. Between science and art. He reminds us that siloed thinking leads to short-termism.

Enduring value is built by weaving domains together.

Second: Follow curiosity across boundaries. Leonardo didn’t care if something was “in his field.” He followed the thread. In doing so, he accumulated knowledge that compounded in unexpected ways. His heart drawings influenced his paintings. His engineering influenced his anatomy. If you want to build something that lasts — whether a company, a life, or a legacy — you need to let curiosity be your guide.

4. How Larry Goldstein made $250,000 in 2 hours – Dirtcheapstocks

It’s January 2009…

…Larry finds a tiny little business called Compass Knowledge Holdings (Ticker: CKNO).

CKNO partnered with universities to offer graduate degrees for online learning. Remember, this is 2009. The online learning thing is brand new. CKNO sits in a unique position because it was the only publicly traded online learning platform that was partnered with reputable colleges…

…CKNO was a non-SEC reporting company with a $10mm market cap.

Shares sold for $0.60.

The business was sitting on a mountain of net cash. Current assets were 4x larger than total liabilities.

Despite its overcapitalization, Compass earned a 36% ROE.

Put simply, the stock was cheap…

…The stock would be worth a lot more if it filed with the SEC and a broader set of investors could see how cheap the business was.

But how can you make a company register with the SEC?

There is an obscure rule in public markets. If a business has less than 300 registered shareholders, it can remain “public” without filing financials with the SEC. It’s an odd rule that exists to let smaller companies avoid the cost of filing.

Anyway, Larry decided to register a single share in each of his investors’ names. This was done to increase the number of record holders. Shares held by a single broker come through as one record holder for legal purposes. So, by registering each investor individually, Larry increased the number of record holders.

In response, the company initiated a 1 for 25,000 reverse split in April 2009…

…Anyone owning less than 25,000 shares would be cashed out at $1.45/share.

Not a bad return from $0.60/share in a 3-month period…

…On May 19th, 2009, the split went into effect.

The share count was reduced, and the post-split valuation was $36,250 ($1.45 * 25,000 shares).

To Larry’s amazement, when he checks the quote the morning after the split, he sees shares being offered for $2,000!

This is a 94% discount to where shares traded the day before! And even that price was a steal!

Larry called a market maker, and after double and triple checking, was ensured that the $2,000 offer was in fact for the post-split shares.

Larry was able to buy 100 shares at $2,000 apiece. This purchase effectively valued the business at 0.5x earnings and 20% of net cash.

As it turns out, the seller was UBS. The offer to sell was a mistake…

…After a morning of discussions with FINRA, UBS and market makers, UBS offered to buy back the shares at $4,500 apiece.

Larry decided to take a quick profit and avoid arbitration with an army of UBS lawyers.

So, he sold his 100 shares (after owning them for half a morning) for $4,500 a piece – netting a $2,500 profit on each share.

And that’s how Larry Goldstein made $250,000 in a matter of hours.

He held the remainder of his shares – having owned enough to avoid being cashed out in the reverse split. In October 2010, CKNO sold to Embanet for $209,000/share.

5. Building Blocks of Corporate Accounting: Intercorporate Shenanigans – Javier Pérez

Companies use affiliates—subsidiaries, associates, joint ventures—to pursue legitimate business opportunities. But when pressure mounts and performance stumbles, management can misuse those same affiliates to quietly hide problems. Debt disappears into unconsolidated entities. Revenue magically appears through transactions with related parties. Margins get inflated by shifting costs into partially owned ventures.

Here’s a simple framework to visualize the main accounting tricks enabled by affiliates:

Hide debt: A company creates or uses affiliates where it owns less than 50% — just enough to avoid “control” under consolidation rules (IFRS 10 or ASC 810). Even if the parent funds the affiliate, or guarantees its loans, as long as it doesn’t officially control it, the affiliate’s liabilities don’t show up on the parent company’s balance sheet.

Fake revenue: The company sets up or funds related entities that pose as independent customers. It then sells products or services to these entities, booking it as legitimate revenue. In truth, the cash used by the “customer” may have come from the company itself — via loans, marketing payments, or off-the-books financing.

Boost margins: The parent company sells goods or services to an affiliate or JV it owns, say, 30%. It sells at inflated prices, booking high profits. The affiliate eats the inflated costs, but since only 30% of the affiliate’s loss flows back to the parent (via equity method), the other 70% is “outsourced.” The parent books 100% of the gain on the transaction, but only absorbs a fraction of the cost impact from the affiliate. The result is asymmetric — a sort of profit laundering.

None of these tactics necessarily break accounting rules outright, at least initially. In fact, they often begin by exploiting genuine gray areas—using subtle tricks like careful structuring to keep subsidiaries below consolidation thresholds or cleverly timed transactions that auditors find hard to challenge. Over time, the line between aggressive accounting and outright fraud blurs, often unnoticed by investors until it’s too late…

…On the surface, Pescanova was a solid business: fishing fleets around the world, processing plants across multiple continents, and an ambitious international expansion. The story resonated well with investors, particularly in the mid-2000s, as Spain’s economy boomed. Investors saw steady growth, seemingly controlled debt levels, and consistent profits—exactly what you’d expect from a thriving global player…

…To understand exactly what Pescanova did, you need to know a bit about consolidation rules (remember those from the last article?). Under IFRS (specifically IFRS 10, previously IAS 27), companies must consolidate subsidiaries that they “control”—typically meaning they hold over 50% of shares or exert significant decision-making influence.

But consolidation isn’t always black-and-white. IFRS rules are principles-based, leaving substantial room for interpretation. Pescanova exploited this flexibility ruthlessly, ensuring that many entities—particularly those carrying significant debt—were carefully structured so they appeared outside the direct control of the parent. In reality, these companies were fully funded by Pescanova, directly or indirectly, through guarantees or hidden agreements.

By creating subsidiaries that technically sat just below the consolidation threshold (often just below 50% ownership), Pescanova legally avoided putting their massive debts onto its consolidated balance sheet. These were debts incurred to finance aggressive expansions—like shrimp farms in Ecuador, fish processing plants in Namibia, and ambitious salmon-farming ventures in Chile. Investors saw ambitious expansion, but not the corresponding liabilities…

…Pescanova’s accounting creativity wasn’t limited to hiding debt. They simultaneously inflated revenues through fictitious or exaggerated intercompany sales. Here’s how it worked:

• Pescanova’s parent entity would “sell” products to a shell subsidiary or affiliate at inflated prices.
• The affiliate would then record fake sales (often to other controlled entities), recognizing substantial revenue growth.
• On consolidation, some of these intercompany transactions should eliminate—meaning revenues and profits from internal sales typically disappear when financial statements consolidate. But crucially, if the entities involved weren’t fully consolidated (below 50%), the transactions never canceled out fully.
• Pescanova thus created the illusion of steady revenue growth and robust profitability—despite many sales being little more than accounting mirages.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Apple and Starbucks. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 11 May 2025:

1. AGI is not a milestone – Sayash Kapoor and Arvind Narayanan

Many people have the intuition that AGI will have these properties. It will be so powerful and humanlike that it will be obvious when we’ve built it. And it will immediately bring massive benefits and risks — automation of a big swath of the economy, a great acceleration of innovation, including AI research itself, and potentially catastrophic consequences for humanity from uncontrollable superintelligence.

In this essay, we argue that AGI will be exactly the opposite — it is unobservable because there is no clear capability threshold that has particular significance; it will have no immediate impact on the world; and even a long-term transformation of the economy is uncertain…

…One argument for treating AGI as a milestone — and taking declarations of AGI seriously — is that AGI could lead to rapid economic impacts, both positive and negative, such as a world without scarcity, an end to the concept of money, or sudden mass joblessness.

But AI’s economic impact is only realized when it is adopted across the economy. Technical advances are necessary, but not sufficient, to realize this impact. For past general-purpose technologies, such as electricity, computing, and the internet, it took decades for the underlying technical advances to diffuse across society. The miracle of the Industrial Revolution wasn’t the high growth rate — annual growth rates averaged below 3% — but the sustained period of decades of growth.

There are many bottlenecks to the diffusion of AI: developing useful products and applications, training the workforce to utilize these products, implementing organizational changes to enable AI use, and establishing laws and norms that facilitate AI adoption by companies. Like past general-purpose technologies, we expect the economic impacts of AI to be realized over decades, as this process of diffusion unfolds…

…The US and China are often described as being in an AI arms race, with each country racing to build AGI. It is hypothesized that the country to build it first would have a decisive strategic advantage — resulting in dominance in the world order for the foreseeable future.

This narrative doesn’t make sense because the knowledge required to create AI models, and model capabilities themselves, tend to proliferate quickly between countries. There are hundreds of thousands of AI technologists, and they work in the private sector rather than government labs, so it is not feasible to keep secrets at that scale.

Invention — in this case, AI model development — is overrated as a source of competitive advantage…

…While Chinese AI companies are at most 6-12 months behind leading US companies in terms of AI models and capabilities, China lags significantly behind the US in several key indicators that might enable diffusion: Digitization, cloud computing adoption, and workforce training. All of these are required to enable the productive diffusion of AI advances across industries. This is the actual source of American competitive advantage.

Of course, this could change in the coming years. But if it does, it will result from policy changes to promote diffusion rather than the development of AGI…

…Even if it doesn’t have immediate economic impacts, could AGI unlock, say, 10% annual GDP growth that could add up to something big over a few decades?

Maybe. But it is far from clear why and how this will happen.

Historically, this kind of acceleration in growth has happened very few times — the industrial revolution had this effect, but not the internet, which barely had any impact on GDP. Note that even if you don’t think that GDP is the right thing to measure, a qualitative change in the GDP growth rate is a good proxy for whatever fundamental change in the economy you care about.

The problem is that accelerating growth requires eliminating bottlenecks to progress. That’s harder than most AI boosters assume. AI will likely have uneven effects across sectors, and long-term growth will be bottlenecked by the weakest sector…

…More broadly, progress depends not just on the technology but on having the right preconditions — complementary innovations as well as cultural, economic, and political factors. If all it took to create the industrial revolution was the invention of steam power, the Roman Empire would have done it.

Our current laws, norms, institutions, and politics evolved in a time of much less technological potential. They are already choking opportunities for straightforward types of growth, such as building more public infrastructure. To reap the economic benefits that broad cognitive automation can potentially bring, the degree of structural change that needs to happen is unfathomably greater…

…On the flip side, AGI could be a turning point for AI’s societal risks. Could it cause loss of control, massive societal harm, or even human extinction?

Discussions of AGI risks conflate power — the ability to modify the environment — with capability — the capacity to solve specified tasks correctly. Capability is an intrinsic property of an AI system, whereas power is a matter of how we design the environment in which AI systems operate. And humans have agency over this design. This distinction is often overlooked…

…We do expect AI capabilities to keep increasing. But regardless of capability level, we can choose to ensure that AI remains a tool and is not given power and autonomy to operate without human oversight. In the AI as Normal Technology essay, we address all the usual counterarguments to this, including arms races among companies, power seeking, superhuman persuasion, deceptive alignment, and more.

We argue in the paper that there will be strong business incentives against deploying AI without adequate oversight, and that these incentives can and should be buttressed by regulation when necessary. This has historically been the case in areas ranging from self-driving cars to AI assistants. We don’t expect this trend to suddenly flip once AI capabilities reach a presumed tipping point that we arbitrarily designate as AGI…

…Yet another reason to consider AGI a milestone is the view that shortly after we build AGI, AI systems could recursively self-improve — AGI could train future versions of models that become far more capable, leading to an “intelligence explosion.” Soon afterwards, we would get superintelligent AI (AI systems that far exceed human abilities on any conceivable task), leading to either utopia or dystopia, depending on how well superintelligent AI is “aligned” with human interests.

In the normal technology view, there are two big reasons to doubt this narrative. The first is that even if arbitrary speedups in AI methods are possible, we think that innovation and diffusion will happen at human speed…

…Second, the fact that AI would help conduct AI research does not imply that this process can be arbitrarily accelerated. AI is already used to automate a significant portion of AI research today. But there are many bottlenecks to progress in AI methods, such as the social nature of data collection and real-world interaction that might be required for achieving certain capabilities, computational and cost limits, or herding around popular or intuitive ideas while ignoring the ones that enable true breakthroughs.

We could be wrong about this, and recursive self-improvement could be possible, leading to unbounded speedups in progress in AI methods. And this might have some interesting implications, including some discontinuities in impact, even if widespread diffusion will be slower. For these reasons, it is important to have early warning systems for recursive self-improvement…

…OpenAI’s 2018 definition of AGI was “highly autonomous systems that outperform humans at most economically valuable work”. From our perspective — our interest being in the impacts of AI — this definition is potentially very useful. If AI outperformed [all] humans at most economically valuable work, it would be unquestionably impactful.

But let’s be clear — this is not a property of an AI system. It is a property of the state of the world. It has at least as much to do with the complementary innovations that we make and the extent to which we choose to integrate AI into our organizations and institutions. It would be absurd to try to test an AI system in isolation in the lab and ask whether it outperforms people at their jobs. It is a category error.

For example, whether AI can (autonomously) outperform a medical researcher depends in part on whether we collectively choose to allow AI systems to perform large-scale medical experiments on people. We shouldn’t and we won’t, which means that irrespective of the systems’ capabilities, they cannot perform the function of a medical researcher. This might be an extreme example, but similar bottlenecks arise in virtually every job.

2. The Lesson in Buffett’s Winning Apple Bet – Sarah Krouse

A Berkshire investment manager bought a small stake in the iPhone maker in 2016, nine years after its introduction. Around that time, Buffett asked another investment manager to find an S&P 500 stock that met three criteria.

Buffett wanted a company with a reasonably cheap price/earnings multiple of no more than 15, based on the next 12 months’ projected earnings, The Wall Street Journal previously reported. Berkshire managers had to be at least 90% sure that the stock would generate higher earnings over the next five years. And he wanted Berkshire to be at least 50% confident that the company would grow a minimum of 7% annually for at least five years.

The manager’s research pointed to Apple.

The stock was already a winner by then—and not a huge bargain. It traded for about 14 times its expected earnings, on the higher end of the range of what Buffett had been looking for. Some investors had sold after capturing gains.

And Buffett, a flip-phone user at the time, was hardly a techie. But he saw the hold the company had on its customers. Buffett’s grandchildren were iPhone devotees, and Apple’s customer retention rate was about 95%.

3. What happens when a nation built on growth runs short of babies? – Nina Chen

China’s plummeting birthrate can be traced to three interlocking factors that form a vicious cycle: the shrinking pool of childbearing-age women, collapsing marriage rates, and evaporating fertility intentions. These elements don’t merely add up – they multiply each other’s downward momentum, creating what demographers call a “triple demographic shock.”…’

… The number of women in their prime reproductive years (20-29) has undergone a staggering contraction, halving from 12.51 million in the 1990 birth cohort to just 6.33 million for those born in 2003. This dramatic shrinkage, a direct consequence of strict family planning policies after 1987, represents an irreversible demographic reality…

…China’s marriage rate has collapsed to a historic low of 4.3 marriages per 1,000 people in 2024—less than half its 2013 peak (9.9‰). This places China alongside Japan and South Korea (4.2-4.3‰) but significantly below the U.S. (5.1‰), reflecting broader East Asian demographic trends…

…The average age of first marriage for women has jumped from 24 in 2010 to 28.2 in 2023, with over 30% now marrying after 30—directly truncating peak fertility years (25-29)…

… In major cities, saving for a marital home down payment now consumes 15-20 years of family income, while betrothal gifts (bride prices) often exceed 300-500% of annual household earnings—creating what amounts to a brutal financial gatekeeping system…

…China’s marriage collapse directly strangles fertility—pushing the total fertility rate (TFR) to a catastrophic 1.0, far below both OECD averages (1.5) and Japan (1.2). This crisis stems not from changing individual preferences but from structural contradictions between progressive education and regressive social systems.

Higher education expansion has reshaped demographics: female tertiary enrollment rates exploded from 3.4% in 1990 to 59.6% in 2022, with each additional year of education reducing desired fertility by 0.26 children. Paradoxically, within each educational cohort, women’s fertility intentions have actually increased since 2010, according to a research made by MetroData. The aggregate decline occurs because higher-education groups—who have fewer children—now dominate the population…

…Groundbreaking research reveals the severe professional tradeoffs Chinese women face when starting families. According to the 2023 Report on Chinese Women’s Career Development, a rigorous 2021 study published in Population & Economics (a Peking University core journal) demonstrates that each child born to middle-income families reduces mothers’ employment probability by 6.6% for the first child and an additional 9.3% for the second—even after controlling for education, region, and household characteristics. Notably, children show no statistically significant impact on fathers’ employment prospects…

…When discussing the impacted industries, I’ve found that in most cases, the decline in newborn numbers is not the root cause of their struggles—rather, it serves as a catalyst, exposing and amplifying pre-existing structural weaknesses within these sectors…

…Maternity service pricing remains at levels set during the midwife era of the 1950s, yet hospitals must maintain modern, 24/7 medical teams. This “high-cost, low-return” operation previously relied on overwhelming patient volume to break even. However, with national newborn numbers dropping below 9 million in 2023, the fatal flaw was exposed. Data from a Shanghai specialist hospital shows obstetricians’ incomes have fallen 20-30%, with bonuses halved during low seasons…

… The CMI index and tier-4 surgery metrics in public hospital evaluations contradict maternity care’s core mission of “prevention-first, safety-focused” care. As one tertiary hospital administrator admitted, “Achieving 98% natural delivery rates comes at the cost of bottom-tier performance evaluations.”

4. Mark Zuckerberg – Meta’s AGI Plan – Dwarkesh Patel and Mark Zuckerberg

Mark Zuckerberg: I’m also excited about the Behemoth model, which is coming up. It’s going to be our first model that’s sort of at the frontier—more than 2 trillion parameters…

…Mark Zuckerberg: In general, the prediction that this would be the year open source generally overtakes closed source as the most used models out there, I think that’s generally on track to be true. One interesting surprise—positive in some ways, negative in others, but overall good—is that it’s not just Llama. There are a lot of good ones out there. I think that’s quite good. Then there’s the reasoning phenomenon, which you’re alluding to talking about o3, o4, and other models. There’s a specialization happening. If you want a model that’s the best at math problems, coding, or different things like those tasks, then reasoning models that consume more test-time or inference-time compute in order to provide more intelligence are a really compelling paradigm…

…Mark Zuckerberg: One of the things we’ve generally tried to do over the last year is anchor more of our models in our Meta AI product north star use cases. The issue with open source benchmarks, and any given thing like the LM Arena stuff, is that they’re often skewed toward a very specific set of uses cases, which are often not actually what any normal person does in your product. The portfolio of things they’re trying to measure is often different from what people care about in any given product…

…Mark Zuckerberg: I think a lot of them are quite easily gameable. On the Arena you’ll see stuff like Sonnet 3.7, which is a great model, and it’s not near the top. It was relatively easy for our team to tune a version of Llama 4 Maverick that could be way at the top. But the version we released, the pure model, actually has no tuning for that at all, so it’s further down. So you just need to be careful with some of these benchmarks. We’re going to index primarily on the products…

…Mark Zuckerberg: There’s a space which, if I had to guess, I think will end up being the most used one: quick, very natural to interact with, natively multimodal, fitting throughout your day in the ways you want to interact with it…

…Mark Zuckerberg: If you fast-forward a few years, I think we’re just going to be talking to AI throughout the day about different things we’re wondering about. You’ll have your phone. You’ll talk to it while browsing your feed apps. It’ll give you context about different stuff. It’ll answer your questions. It’ll help you as you’re interacting with people in messaging apps. Eventually, I think we’ll walk through our daily lives and have glasses or other kinds of AI devices and just seamlessly interact with it all day long…

…Mark Zuckerberg: I would guess that sometime in the next 12 to 18 months, we’ll reach the point where most of the code that’s going toward these efforts is written by AI. And I don’t mean autocomplete. Today you have good autocomplete. You start writing something and it can complete a section of code. I’m talking more like: you give it a goal, it can run tests, it can improve things, it can find issues, it writes higher quality code than the average very good person on the team already…

…Mark Zuckerberg: Part of what I generally disagree with on the fast-takeoff view is that it takes time to build out physical infrastructure. If you want to build a gigawatt cluster of compute, that just takes time. NVIDIA needs time to stabilize their new generation of systems. Then you need to figure out the networking around it. Then you need to build the building. You need to get permitting. You need to get the energy. Maybe that means gas turbines or green energy, either way, there’s a whole supply chain of that stuff…

…Mark Zuckerberg: One of my core guiding principles in designing products is that people are smart. They know what’s valuable in their lives. Every once in a while, something bad happens in a product and you want to make sure you design your product well to minimize that. But if you think something someone is doing is bad and they think it’s really valuable, most of the time in my experience, they’re right and you’re wrong. You just haven’t come up with the framework yet for understanding why the thing they’re doing is valuable and helpful in their life…

…Mark Zuckerberg: Here’s one stat from working on social media for a long time that I always think is crazy. The average American has fewer than three friends, fewer than three people they would consider friends. And the average person has demand for meaningfully more. I think it’s something like 15 friends or something. At some point you’re like, “All right, I’m just too busy, I can’t deal with more people.” But the average person wants more connection than they have…

…Dwarkesh Patel: If China is better at physical infrastructure, industrial scale-ups, getting more power and more data centers online, how worried are you that they might beat us here?

Mark Zuckerberg: It’s a real competition. You’re seeing industrial policies really play out. China is bringing online more power. Because of that, the US really needs to focus on streamlining the ability to build data centers and produce energy. Otherwise, I think we’ll be at a significant disadvantage. At the same time, some of the export controls on things like chips, I think you can see how they’re clearly working in a way. There was all the conversation with DeepSeek about, “Oh, they did all these very impressive low-level optimizations.” And the reality is, they did and that is impressive. But then you ask, “Why did they have to do that, when none of the American labs did it?” It’s because they’re using partially nerfed chips that are the only ones NVIDIA is allowed to sell in China because of the export controls. DeepSeek basically had to spend a bunch of their calories and time doing low-level infrastructure optimizations that the American labs didn’t have to do…

…Mark Zuckerberg: We made the Llama Scout and Maverick models certain sizes for a specific reason. They fit on a host and we wanted certain latency—especially for the voice models that we’re working on—that we want to pervade everything we’re doing from the glasses to all of our apps to the Meta AI app and all that stuff. There’s a level of control of your own destiny that you only get when you build the stuff yourself…

…Mark Zuckerberg: You also asked, would it not be important anymore because other people are doing open source? On this, I’m a little more worried. You have to ask yourself this. For anyone who shows up now and is doing open source—now that we have done it—would they still be doing open source if we weren’t doing it?…

…Mark Zuckerberg: I think these models encode values and ways of thinking about the world. We had this interesting experience early on, where we took an early version of Llama and translated it. I think it was French, or some other language. The feedback we got from French people was, “This sounds like an American who learned to speak French. It doesn’t sound like a French person.” And we were like, “what do you mean, does it not speak French well?” No, it speaks French fine. It was just that the way it thought about the world seemed slightly American. So I think there are these subtle things that get built into the models. Over time, as models get more sophisticated, they should be able to embody different value sets across the world. So maybe that’s not a particularly sophisticated example, but I think it illustrates the point. Some of the stuff we’ve seen in testing some of the models, especially coming out of China, have certain values encoded in them. And it’s not just a light fine-tune to change that…

…Mark Zuckerberg: There’s a whole different set of issues around coding, which is the other verifiable domain. You need to worry about waking up one day and if you’re using a model that has some tie to another government, can it embed vulnerabilities in code that their intelligence organizations could exploit later? In some future version you’re using a model that came from another country and it’s securing your systems. Then you wake up and everything is just vulnerable in a way that that country knows about and you don’t. Or it turns on a vulnerability at some point. Those are real issues…

…Mark Zuckerberg: You can basically take a model that’s much bigger, and capture probably 90 or 95% of its intelligence, and run it in something that’s 10% of the size…

…Mark Zuckerberg: There are going to be business models at each point along the spectrum. At Meta, for the consumer piece we definitely want to have a free thing. I’m sure that will end up being ad-supported. But I also think we’re going to want to have a business model that supports people using arbitrary amounts of compute to do even more amazing things than what it would make sense to offer in the free service. For that, I’m sure we’ll end up having a premium service…

…Mark Zuckerberg: AI is interesting because, more than some of the other stuff that we do, it is more research and model-led than really product-led. You can’t just design the product that you want and then try to build the model to fit into it. You really need to design the model first and the capabilities that you want, and then you get some emergent properties. Then it’s, “Oh, you can build some different stuff because this turned out in a certain way.” At the end of the day, people want to use the best model…

…Dwarkesh Patel: Will tariffs increase the cost of building data centers in the US and shift buildouts to Europe and Asia?

Mark Zuckerberg: It is really hard to know how that plays out. I think we’re probably in the early innings on that, and it’s very hard to know…

…Mark Zuckerberg: We have almost three and a half billion people using our services every day. One question we’ve struggled with forever is how do we provide customer support? Today, you can write an email, but we’ve never seriously been able to contemplate having voice support where someone can just call in. I guess that’s maybe one of the artifacts of having a free service. The revenue per person isn’t high enough to have an economic model where people can call in… But let’s say AI can handle 90% of that. Then if it can’t, it kicks it off to a person. If you get the cost of providing that service down to one-tenth of what it would’ve otherwise been, then maybe now it actually makes sense to do it. That would be cool. So the net result is that I actually think we’re probably going to hire more customer support people. The common belief is that AI will automate jobs away. But that hasn’t really been how the history of technology has worked. Usually, you create things that take away 90% of the work, and that leads you to want more people, not less.

5. The Best OTC Investment Story Never Told – Joe Raymond

MN&C started making a market in Best Lock (BLOC) in the mid-1970s.

Market makers provide bids and offers on select stocks, facilitating trading and liquidity. They earn a profit on the spread (the price between the bid and offer)…

…The mid-1970s was a good time to find bargains, and BLOC certainly looked like a bargain. It was trading for around 3-5x earnings and a discount to book value.

Best Lock was a simple business. It designed, manufactured, and marketed lock mechanisms, primarily for doors…

…The annual report showed over 4,000 shareholders of record, yet MN&C was only getting a few orders a year.

Where were all the shareholders and why wasn’t there more volume in the stock?…

…Best Lock was founded in Seattle in 1922 by Frank E. Best.

Like many startups in the 1920s, shares were sold door-to-door to average citizens.

When the Depression hit, Best Lock stopped paying dividends. Then the company moved its headquarters from Seattle to Indianapolis to be closer to suppliers and customers…

…By the late 1970s when Martin was looking at the shareholder list, nearly 50 years had passed and the company was again profitable, growing, and paying dividends.

After going through the Depression, World War II, moving to Indianapolis, and the Seattle address overhaul, many shareholders had been lost.

In many cases, heirs had no idea they inherited the stock…

…Martin knew he had an opportunity on his hands: an illiquid stock with lost shareholders trading for a low-single-digit P/E multiple.

He decided to form a new company dedicated to finding the rightful owners of these shares. This involved genealogical research and many hours spent at the local library and county records office…

…Best Lock was trading for around $30 per share at the time, so after his one third fee Martin was buying the shares for around $20. This equated to 2-3x earnings.

Over time, Martin was able to acquire roughly 15% of the float (shares not held by the Best family) using this approach…

…A few years after taking full control, Russell decided to take the company private.

He did this through a series of reverse splits in 1998 that effectively cashed everyone out for $525 per share—a high-single-digit multiple of earnings. The stock had been trading for $300 prior to the reverse splits, so the cash out price was a nice 75% premium.

A group of minority shareholders dissented and perfected their appraisal rights in Delaware—arguing that Russell Best had violated his fiduciary duty, and that the $525/share figure was too low for a company of Best Lock’s caliber.

At some point in the legal process, Russell decided to explore a sale of the entire company.

Stanley Black & Decker stepped up to the plate and offered $310 million to buy Best Lock (more than triple the reverse split takeout price). Final payout for the dissenting shareholders was received in April 2003.

Those initial shares Martin was buying for $20 in 1980 turned into $1,597 in 2003, good for a CAGR of 20% before dividends over the 23-year period.

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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 27 April 2025:

1. Rebalancing the world economy: Right idea but wrong approach – Richard Samans

The Trump “reciprocal” trade initiative identifies a long-standing and legitimate concern of U.S. trade policy, but the administration has mistakenly conflated differences in tariffs and other trade practices with the larger, more macroeconomically driven phenomenon of the level and persistence of the country’s trade deficit. Unfair trade practices are a contributing factor, and the large general tariff increases will lead to some degree of import substitution. But undue reliance on this blunt instrument will lead at least as much to a diversion of imports from one trading partner to another and compression of demand due to the higher prices brought by import substitution and lower income resulting from lost exports due to foreign retaliation…

…The administration is effectively treating the superficial symptoms (bilateral trade deficits) of the underlying problem (macroeconomic imbalances) and doing so with an overprescription of an outmoded medicine (a 19th century-like tariff wall) that runs the risk of precipitating a cascading failure of the patient’s (the U.S. and world economy’s) vital functions…

…The aim of rebalancing the world economy and modernizing its cooperative architecture remains a valid one, and the incoherence and incompleteness of U.S. policy in the face of it across multiple U.S. administrations of both parties runs even deeper than the considerations outlined above. The world economy has changed—geopolitically, technologically, environmentally, and most of all in terms of the distribution of industrial production and middle-class purchasing power—such that the time has come to think more seriously beyond existing international economic arrangements that were formed in response to 20th-century circumstances and challenges…

…The time is ripe for a new “deal” to be struck among the major economic powers aimed at strengthening the growth and stability of the world economy, an outcome that would be greatly in the national interest of each. The U.S. is eager and brandishing a big stick in the form of its new “reciprocal” tariff initiative; Europe is already preparing to do its part, albeit for unrelated reasons; and China appears to have finally convinced itself that, after wave upon wave of decreasingly effective supply-side investment-cum-export stimulus measures, it has no choice but to boost domestic consumption in order to maintain sufficient growth in output and employment.

However, to be fully effective the bargain must be a truly grand one, firing on all of the cylinders of international economic cooperation. It will need to include major initiatives in fiscal, monetary, development, and trade policy in order to yield demonstrable net benefits for each of the main protagonists as well as the international community as a whole…

…With respect to fiscal policy, China would need to agree in concrete terms to implement reforms sufficient to raise domestic consumption as a proportion of GDP to a level commensurate with its share of responsibility for maintaining the global economy’s momentum and stability, for example, by 10 percentage points of GDP over the next decade. Its final consumption expenditure relative to GDP is about 56%, which is well below that of other industrializing economies (e.g., 71% in India, 72% in Malaysia, and 82% in Brazil) and the global average (76%)…

…At the same time, Germany and the rest of Europe would need to commit not to offset the fiscal impact of their reflationary defense-related spending increases (an estimated additional 1% of GDP over the next few years); and the U.S. would need to agree on a target for the orderly reduction of its fiscal deficit to a more sustainable and cyclically appropriate level, for example from the current 6%+ to about 2.5% of GDP over the next four years, not far below the 3% of GDP target Secretary of the Treasury Bessent has advocated…

…With respect to monetary policy, all three partners should signal a contingent willingness to undertake coordinated intervention in foreign exchange markets to support a limited and orderly (e.g., 10% to 15%) depreciation of the dollar to levels more consistent with the progressive and symmetrical adjustment of global economic imbalances, reinforcing the expected effects of the fiscal policy measures outlined above, if required. In addition, they should request the IMF to calculate and publish independently (i.e., not subject to prior Board approval) estimates of exchange rate reference ranges on a semi-annual basis that it deems consistent with this immediate objective and the larger, ongoing one of avoiding large and persistent global economic imbalances…

…Regarding international trade policy, the three preceding components of this global accord would make possible the wider “balance of concessions”—i.e., positive-sum game political outcome—that was missing in the Doha Round and continues to frustrate attempts to update the WTO’s norms and dispute settlement system. The institution has been in a state of semi-suspended animation since the first Trump administration, and the Biden administration did little to breathe new life into it. The carrot of a large and sustained increase in development financing, as outlined above, and the stick of potential unilateral adjustments in U.S. tariffs could help to create the conditions necessary for a constructive, negotiated reset of the institution and multilateral trade system.

By now, it should be abundantly clear to the world that there is a durable bipartisan consensus in the U.S. that the country no longer enjoys the enormous advantage in economic size and technological leadership which led it to take a generally non-reciprocal, foreign-policy-first, and short-term-shareholder-return-first approach to trade policy in the latter half of the 20th century. In addition, market-based growth and development, or capitalism, has evolved into many shades of “mixed economy.” Thus, a one-time negotiated rebalancing of tariff schedules combined with modernization of rules and procedures to take better account of the changing nature of trade and industrial policy as well as corresponding reform of the dispute settlement system, paired with a big sustained push on development and climate finance and refocusing of trade preferences on low-income countries, might provide the political basis for a new modus operandi for the WTO, especially if it takes place in the context of a process of macroeconomic rebalancing among the largest players. To enhance the prospects for success of all of this, the U.S. should express a willingness as part of the overall accord to discuss its tariff rebalancing objectives vis-à-vis the countries with which it has the most legitimate concerns (based on their actual practices rather than bilateral balances) on a best-efforts and time-limited basis, employing the procedures authorized by the organization’s charter for this purpose.

In sum, such a four-part international economic accord would be far more likely to spur major and enduring adjustment of global economic imbalances than the blunt and risky instrument the Trump administration has deployed…

…The U.S. would arguably be the biggest beneficiary of a 21st-century project to update multilateral norms and institutions that were established in its image during the last century. Judging from recent pronouncements, there appears to be little prospect of it acting along these lines at present. For the time being, the responsibility falls to Europe, which has greater agency to lead the international community in this direction than it may imagine.

Particularly if financial market volatility and fears of a recession in the real economy persist as a result of the trade policy shock, the current administration may begin looking for a way out that would still enable it to claim partial credit for having revived global and U.S. economic growth prospects as well as modernized international economic relations and institutions. The proposed G3 accord offers such an opportunity.

2. Johnson & Johnson Pivots Its AI Strategy – Isabelle Bousquette

The “thousand flowers” approach involved a number of use case ideas germinating from across the company, which made their way through a centralized governance board. At one point, employees were pursuing nearly 900 individual use cases, many that were redundant or simply didn’t work, he said. And as the company tracked the broad value of AI, including generative AI, data science and intelligent automation, it found that only 10% to 15% of use cases were driving about 80% of the value, he added.

Now J&J is drilling down into high-value generative AI use cases around drug discovery and supply chains, as well as an internal chatbot to answer questions on company policy…

…J&J began its pivot last year, removing a centralized governance board responsible for vetting employee GenAI ideas. It then distributed governance responsibilities to various corporate functions, including commercial, supply chain and research, that had a better handle on whether the use cases were actually driving value in their area. Those groups were able to shut down or consolidate redundant use cases and focus resources into the ones that were working.

One example that is working is a “Rep Copilot,” which helps coach sales representatives on how to engage with healthcare professionals about new treatments. The company is piloting this in its Innovative Medicine business segment, which develops new treatments for oncology and other areas, and is now working to expand that pilot to its MedTech segment, which sells robotics and hardware like hip replacements and lenses.

GenAI also is being used for an internal chatbot that ingests information about company policies and benefits to help reduce the some 10 million interactions employees have every year with the services team.

In drug discovery, the company is looking at whether GenAI can help researchers find the optimal moment to add a solvent to turn a liquid molecule into a solid. Swanson said J&J also is testing how AI can help identify and mitigate supply-chain risks, including the impact of a shortage of a given raw material.

3. An Interview with Dan Kim and Hassan Khan About CHIPS – Ben Thompson, Dan Kim, and Hassan Khan

To your point, South Korea was very attuned to the importance of semiconductors, obviously.

DK: Oh, no doubt. It was decades in the making, and a lot of efforts, and actually a lot of what South Korea did has been a bit misunderstood, and if you would ask my former CEO — I also used to work at SK Hynix, I’m jumping around a little bit here, as their chief economist — and I would ask their CEO very bluntly, I said, “What does the government do that is the most important for South Korean companies in the semiconductor space?”, and no hesitations, “That we invest in the workforce, workforce is the most important thing, and without the workforce, nothing else matters”, and so I learned a lot there.

Is the one sentence summary, government invests in the workforce, unlocks these large companies, and then I think the thumbnail version of South Korea’s rise to dominance is really investing from downturns driving the Japanese out of the memory market and that’s sort of been the foundation. Is that a good synopsis of how they got to where they are?

DK: The way that I think it made sense to me is there are a couple things. One is on the workforce aspect of it, if you wanted to study electrical engineering or material sciences that were relevant to semiconductors as a PhD student or a Master’s student, there was a lot of availability of dollars for you to get into that and then you could get into the companies thereafter.

The other, of course, is yeah, they went into the memory sector first and they were part of this consolidation trend at the time, and so it really was, “How do you innovate and achieve scale and not die along the way?”. I think there was a couple of interventions by the government in terms of guaranteeing loans and things like that, but by and large, it was just scratch-and-claw to survive, and I think if you have ever lived in Asia, if you’ve ever lived in Korea, scratching-and-clawing to survive, it’s actually not a bad way to describe their economic efforts for the past 50 years or so. So I think it sort of played right in their wheel house to be in the memory space…

…DK: So one is Capacity. Can we allocate resources to build significant production scale to make a difference in this country to actually close the cost gap between a North America and East Asia?

And what is the fundamental driver of that cost gap?

DK: Yeah, that’s a good question, I would break it down into two aspects. One is that what we found is that the manufacturing ecosystem in this country, particularly when it comes to semiconductors, had atrophied quite a bit over the past three decades or so, and so everything was a little bit inefficient and that contributed to higher operating costs, that was partially due too because of labor cost differences between East Asia and here. We would have anecdotes of experiences where there was a lack of specialized plumbers, immediate availability. When you need to fix something in Taiwan or South Korea, you can call them at 3AM and they would come immediately and fix that thing so that your fabs could operate.

And literally every minute that a line’s not running is costing you a tremendous amount of money.

DK: Exactly right. And in the US, that’s not necessarily the case. Plus, the US is a very big place, so you have to create an ecosystem within a limited geography that has all your suppliers at an efficient scale, has all that labor and talent at an efficient scale. There are some advantages in the US, especially that the energy costs tend to be lower than it is in East Asia, but the labor costs are higher, everything is a bit slower. The equipment themselves, which if you’re building a new fab just to get it up and running, somewhere between 60 and 70% of a new fab, the equipment themselves will be the same. But the cost of installing it actually might be higher because of the labor costs and the service contract you have to enter into on top of that.

HK: And the timeline to get those up and running is a major cost driver. So even if you’re buying the same tools, the fact that our fabs, everything that Dan said about the ecosystem being weaker, that compounds during the construction phase, and every additional day in the construction phase blows up your CapEx budget. And you saw that I think most acutely in some of the first fabs that were coming online, they were very publicly known to take much longer than the rest of the world.

One of the data points that’s maybe less obvious, I think, to folks on how the ecosystem is maturing in a lot of the ways that Dan pointed out, is you don’t hear as much noise now as firms like TSMC is on its second fab, Texas Instruments is moving its Sherman complex forward, because they’ve trained up the workers and they’re building replicas of the last ones, they’re moving faster.

How much is it training the workers versus importing the workers?

HK: Well, I think for construction it’s a lot of training because you want that workforce. But for a lot of the talent to run the fab, there’s a portion of, you need to get that talent in and Dan can probably speak to that more.

DK: Yeah, this is a good question. Especially when it comes to foreign companies building in the United States, yes, there’s a lot of companies that are working at a company like TSMC or Samsung or SK Hynix, but there’s a select group of people within that company that is actually doing process engineering, integration engineering, that makes up for the very special and very secret sauce that differentiates that company versus everywhere else. That’s not something that you can replicate immediately in a different place, especially in a foreign country, and so to some degree you have to be able to import specialized knowledge and that could only be done with people that are coming here and that they need then to be able to train folks…

…What we mentioned earlier, that is the industry that just in the very structure of the industry is a total priority on efficiency because so much is out of your control.

DK: Correct. So there is a business model innovation that we missed out on, and then there’s the efficiency, brute force efficiency and scale game that we purposely let go, in a sense. When you miss those two things, that’s two thirds, three fourths of the total capacity there is in the world if you add up memory and foundry. By the way, when you mature a foundry fab, then you have all the current and mature technologies that serves hundreds of customers, not just the leading edge, so we missed out on a lot of that. When we had to diagnose what went and wrong here, the easy answer that an industry association gave was, “Oh, it’s because foreign governments subsidize their production and that’s why it went elsewhere”, and I think that told a very incomplete story as to what happened.

No one in the US wanted to do a foundry. That was the whole reason why TSMC had a market opening.

DK: Correct, yeah. And so because of that, we needed to think about what business models should we support and what kind of capacity do we need to build? And so that’s the first C, Capability.

No, that’s good. That was a very, I think, fruitful discussion. And the feeling with the CHIPS program, was foundry capability the top priority?

DK: It was among the top priorities, and if you read our notice of funding carefully, there is actually a very explicit statement in there that says that there is a priority for business models that can serve multiple customers. What else could it be other than a foundry model that can serve multiple customers?

Of course being able to serve multiple customers not only gets you scale, but to your point about the difference between IDM and foundry is that the inherent advantage of a foundry is that all your customers are now invested in the success of your process and so they have engineers there that’ll fly over to your fabs, that’ll meet with your teams and iterate and so if you’re an IDM and you’re no longer competing against a foundry, you’re competing against that foundry and all of their customers that are invested in that process.

Yeah, it’s a shelling point for everyone to invest in the next process, which is getting astronomically more expensive.

DK: Correct. Because of that, it lowers the risk on everyone too. So from the foundry’s perspective, you have customers who are buying corridors ahead of time, but also who are invested in the success of that, so to break into that actually is very challenging.

Hassan, you wanted to follow onto that?

HK: I was going to just add, when Dan talked about the preference for the foundry model, remember too, we were writing this right after the COVID crisis where the emphasis on supply chain resilience came back and said, “We really want you to be able to service a range of customers and make that capacity available broadly”.

And actually another comment that I realized after Dan brought this up, I think the point that he made about ecosystems and your customers investing in your processes is the biggest overlooked advantage that TSMC had over Intel. Intel was fighting at one point — it continues to fight — an ecosystem, and that’s another value add of why you want to have the entire ecosystem invested in here. If you just built fabs for the four or five IDMs that continue to operate here, you would not get the global ecosystem to be investing alongside them to make them a success.

This is one of the biggest questions, you gave me a segue to Capability, the second C. I’m going to come back to that in a moment. But this to me is the biggest issue and it’s not a critique of you, it’s a zoom out. I’m also not sure how to fix this, which the key here is the demand side, and you guys are on the supply side. The problem for Intel is a lack of buyers, and some of that is on Intel, some of it is just the historical development of the reality that you’re not fighting TSMC, you’re fighting TSMC plus Apple, plus Nvidia plus Qualcomm plus everyone else in this ecosystem. Is that just an intractable reality that you couldn’t address because that wasn’t your remit? How did you think about this balance between supply and demand? And actually spurring, “We’re not just going to give money one time, but we’re going to have a virtuous cycle that helps us achieve our goals”?

HK: I think there is a real challenge for those. I think those firms, all of them, if you gave them truth serums would say, “We love TSMC and we are afraid of our full reliance on them”. Not just from a geopolitical perspective, but from a pure business perspective, you don’t want your entire business hinging on one supplier, right? The same way TSMC feels that discomfort regarding ASML and the reliance on EUV for all these advanced nodes.

Well, I think that’s underappreciated, about the whole thing with the semiconductor equipment manufacturing is it used to be all these equipment manufacturers did one thing and they were different parts of the chain, and TSMC basically said, “No, you all have to learn how to do everything,” so they can set you off against each other. But it’s happened because they’ve had the most power, but everyone depending on TSMC feels the same way, but has had less leverage.

HK: But go back to the fabless firms, and I know Dan had thoughts on this too, but at the end of the day, they have to be able to make a bet, it’s a minimum $500 million bet and they have to be able to go look their shareholders in the eye and say, “I’m going to spend $500 million taping out a chip with a foundry that’s not TSMC”, and they’re going to ask them why.

Well, I mean Apple tried. They had a generation where customers were looking, “Is this a Samsung chip or a TSMC chip?”, an unacceptable outcome to them. Nvidia’s tried more than anyone, they’ve tried to balance, and that ended up costing them because they weren’t a favorite customer of TSMC because TSMC’s like, “Oh, you want to flirt with Samsung? Not so good”.

HK: And Dan will tell you, we had these conversations, and I think the tension is here. Our remit was to create, exactly as we talked about, the capacity needs to be economically sustainable and viable so we can’t then go beat people over the head and say, “Hey, you need to go invest in a foundry that you can’t look your shareholders in the eye that you say that is not there yet”, which they were public. But I do think it put us in a tough spot of saying, we all looked around in the room and said, “These efforts aren’t going to be successful if other firms don’t buy in”, and we were trying to create the conditions to reduce their risk. But at the end of the day, that’s on the firms to deliver that technology and for them to get comfortable with each other.

Is this the bit where, you guys come in after the law is passed, and if you could wave a magic wand and actually reshape the law, and maybe this gets into the broader industrial policies perspective, my critique is that the law only addressed the supply side. There wasn’t a generation of demand, whatever that’ll be, I feel like spending billions of dollars to buy chips that you throw in a landfill would actually be tremendously beneficial because it’s a guaranteed buyer to get this stuff on the lines. Was that just a real hole in this whole program?

DK: That’s a good question. You’re right that we focus on supply because that was our responsibility in our remit.

That was the law, right. But if you could go back and there was a different law?

DK: That was the law, but we grappled with demand quite a bit, and that was one of the factors that we absolutely required companies to prove to us that there was a business case to be made. Meaning who are your customers? Are they bought into this? Is the government essentially investing in a space in which you have no hope of a customer, in which case the funds wouldn’t be given?

One of the many things that our amazing investments’ office, these finance and other professionals were doing, was doing a lot of due diligence into reaching out to customers to the extent that we had permission to do that and saying, “Okay, what is your plan to use this company and this fab?”, and you can think of it in terms of calling an Apple or the Nvidia’s of the world, and of course all of that had to happen and that’s not a secret.

But take a small MEMS producer, of course we’ve had those in our portfolio as well, we’ve had to contact their customers to say, “What’s your long-term plan with this company?”, and so we had to do that. In some ways then yes, we were only focused on supply, but what we found is that just by calling the customers from the US government’s perspective saying, “We are willing to give money to this supplier if you are willing to take on them as a customer”, did so much to put that potential customer at ease and buy into that corridor.

So what I’m trying to say is that this is an untapped power that we had if we were given more authority to do that.

To give them security that they should take the risk of getting the supplier.

DK: Right. But we have to be careful here too because at some point how much a government should be dictating what demanders should be doing, is a really tough question…

…DK: I could talk for another two hours about this particular story, but let me boil it down to a very quick one. Believe it or not, my daughter’s life was saved by a semiconductor technology at birth, while we were negotiating with TSMC, Intel and Samsung. She was born in December 2023, and so we were really in the thick of it, and the only way that her life was saved is that there was a new pacemaker that came on the market, on an emergency authorization, that was miniaturized enough to save premature infant babies with heart troubles, and I knew that if there’s anything to do with miniaturization of any electronic device, it has to do with the semiconductor technology, there’s nothing else that’s going to drive it.

So I contacted the manufacturer of this electronic device and I said, “I want to know everything about that semiconductor technology,” which is not something that parents usually ask, but because I was in CHIPS, I wanted to know, how did you do it? Who makes it for you? What are your options? Can you make it in the US? Did you have a shortage of this during COVID? How can we fix this? Because it really distilled for me in a really tangible way, in a personal way, what we were trying to accomplish. Not just, “Can we make iPhones?”, and “Can we make server chips?”, but, “Can we make a life-saving device that’s using the latest technology that can get there?”.

They explained to me that they had searched everywhere for a foundry partner, because they themselves could no longer go down the innovation cycle of chips themselves, they have their own fab, but it’s outdated, so they needed a foundry partner. No one would take them on except for TSMC. Why? Because they knew how to do the 3D packaging. They had fully depreciated six inch, eight inch fabs, and they were so maniacally focused on serving their customers that they didn’t mind taking on 1,000 devices, not wafers, 1,000 devices. Morris Chang himself apparently said, “We need to do this for this company to save these kids”, when nobody else would take it on.

That’s the kind of foundry we’re talking about here. And so we could talk about abstractions, about whether the foundry model is superior and IDMs, and there are clear superiorities and differences in business models, but I think we are talking about a very unique company and the culture that they have that have allowed the world to be served by it and served so well, but now we are exposed to the risks of it.

Now we come back to the question that you’re asking, which is, “How do we now de-risk that, not only through supply chain, supply-based policies, but is there demand-based policies that we could get to?”. My hunch is that there absolutely are demand-based policies to get at that, and there is a hunger for it from the customers’ perspective. To Hassan’s point, we have heard so much glowing feedback from TSMC’s customers about how good they are at delivering, they under-promise and over-deliver. It’s the theme that we hear over and over, and over again from the customers and they’re saying, “But if they can build in the US or if there could be US alternatives, of course we will take a look at it because we are not stupid, we know the risks here”.

So if you look at the enthusiasm for the Arizona fabs at TSMC, I think that tells you what you need to know about that company and what company is willing to do, but it’s not a complete de-risking. As an economist, I would have to say, if you’re looking for an insurance policy that completely de-risks, then that’s a very expensive insurance policy, almost too expensive for the world to handle…

…HK: But things like Datacom transceivers that are being made on indium phosphide, if you want to build mega AI data center clusters that can communicate across campuses, you need to be able to push the frontier on indium phosphide technology. That’s a couple $100 million investment to move up to a six-inch wafer. That doesn’t grab headlines, but it’s one of those key linchpin technologies for being able to build something that really does matter to the government if you want to be able to deploy the best AI models…

…Well, to me, this has been one of my biggest critiques of CHIPS, in that I felt it was too focused on the leading edge, when the single biggest contrast between national security or resiliency concerns and economic incentives was the trailing edge. The reason we have trailing edge is it used to be leading edge a long time ago, so it was economical because these are fully depreciated assets. It’s impossible to rebuild that economically because you have to pay off your equipment costs, and you’re competing with fabs that don’t, and China can do that because they have to move their way up the learning curve, and so they’re going to dominate all this trailing edge. TSMC has that because they already built it, even they in the response to China are specializing all their trailing edge fabs too, because just general purpose, 28nm chips or 90nm chips or however back you want to go, China’s just going to inevitably flood the market there. There is no one that can solve this other than the government, the economics never pencil out otherwise. How much did you think about that and how did you balance this? You mentioned Hassan, ChatGPT takes the world, everyone’s thinking about AI, but actually where the government can arguably we have the biggest impact is in this area.

HK: I think the most debates that we had on portfolio construction were essentially around the question of how much to reserve for the trailing edge, because the big guys came in early and we knew what their asks were and their asks, and the Secretary said this, if you looked at just the Big Four, they totaled more than the $39 billion that we had. So there’s a version of it where we could have just said, “Hey, you all get your ask or something close to your ask and we’re all going home”.

We chose not to do that, but we then did have a long set of conversations on how much do you reserve. The problem, Ben, was the firms in the projects they were proposing, their assumption was there’s no world in which the economics of a new build here are going to work, unless the government is willing to lean in at such a level, almost the majority comes from the CHIPS program on a $10 billion plus fab. But there was also, we had given guidance that our expected funding ranges were in the 5% to 15% plus the 25% ITC [Investment Tax Credit]. So, a lot of these firms read the tea leaves.

So, this was sort embedded in the law. The law itself didn’t really allow for it, because a trailing edge project needs 100% government funding. That’s just the reality of it.

HK: And I think it was sort of anticipated that there was not an appetite for the government to lean in and basically say, “We are building this fab”, unless the DOD wants to do it on special circumstances, which is a separate case than what the Commerce, how people viewed our authority in the Commerce Department. It was to go fund facilities that would be economically viable with dollars on the margin, coming from the federal government…

…HK: I really do believe both sides share an earnest belief in the urgency to address the problem, and I think if we can recognize that shared earnestness to address it, I am more optimistic. Our system feels more chaotic, but to your point, amidst the chaos, very smart capable people pull the good ideas to the forefront and they make them work. And so we may seem more chaotic and less organized than say the rest of the world, but that’s kind of simultaneously our superpower.

That is the US in a nutshell, absolutely.

HK: It is a little our superpower because some weirdo comes out with something that no one considered and turns out that’s a more viable disruptive path, and I do think that noise, you’ve got to kind of be able to be zen about it at some level and say something good may yet come hopefully…

…DK: The last thing I would leave you with this, Ben, is this thought that I think about this every day as I listen to my daughter’s heartbeat, I talked to the chip designers at the medical device company. They’re called Medtronic, you might’ve heard of them, they have life-saving devices. I asked them about what node they’re made on, how it’s packaged, what fab it’s made from and everything else and they gave me all technical details. And the lead designer of that just kind of paused and said, “I just want you to understand this device, this pacemaker detects your daughter’s heartbeat, how it wants to beat. If she’s sleeping, it knows that. If she’s trying to walk or run, it knows that. If it needs to speed up or down, it knows that, it’s intelligent”. And he said, “Right now, I know there’s a lot of focus on AI, but that device in your daughter’s heart that’s keeping her alive, that’s AI”.

A cynical analyst might come along and say, “Actually, no, that’s an IoT device, AI is really in language models”. But I took that to heart to say, “Right, the best of what America has to the world is in part innovation, technology innovation that enables all of us to live longer, to live better, to live more peacefully and with more safety and health in our lives”, that’s AI there, it’s not just language models. It’s that too, and semiconductors and manufacturing thereof is the foundational building blocks of all of that, and we should never forget that, and it’s something that we have given to the world that we’re trying to strengthen. So it shouldn’t be a zero-sum game, it should be something that we approach with a lot of enthusiasm, but with a lot of care.

4. Mitu Gulati on Whether Trump Could Restructure US Debt (Transcript here) – Tracy Alloway, Joe Weisenthal, and Mitu Gulati

Tracy: Yes, to put it mildly. Explain this further. You said earlier a debt swap could be basically the equivalent of extending maturities on existing Treasuries. But I would hope that there is some clause in the bond documents that would rule that out. Am I wrong? I guess I’m wrong.

Mitu: Alas, you are wrong. So anybody and everybody who holds US Treasuries should go and look at the contract terms for their US Treasuries and ask the question, “Do my contract terms restrict the US Treasury Department from saying to me tomorrow, “We need a little more money, so we’re just extending the maturity of your debt by another 20 years at the interest rate that you lent to us,” – is there anything restricting that?” I don’t think you’ll find anything, really.

Joe: This blows my mind because to me, if I’m a holder of US Treasuries and the creditor says, “You know what, I’m just paying you back a long time.” To me that sounds like default. You’re saying that in the research that you’ve done, this would not trigger credit default swaps. Because to my mind my assumption would be “This breaks the entire system. This is a default, and we can’t have a default on the risk-free assets.” You’re saying that actually in the wording of the document, it’s not there.

Mitu: We have to be clear and I have to be geeky here in my law professor mode. There are at least three different types of default. So there’s a default on the contract, something you could sue somebody for breach of contract. It would not be a breach of contract. US government is allowed to do this. Then there’s default in terms of would it trigger the handful of credit default swaps that are written on US Treasuries? That sort of depends on what the credit rating agencies decide. Based on what we saw in Greece 2012, they probably would say it was a default for credit default swaps. But that doesn’t apply to everyone. So those are the two big default scenarios.

Joe: What do you mean that doesn’t apply to everyone?

Mitu: The default for a credit default swap really only applies to the people who are holding credit defaults protection on US Treasuries. So they would be able to get their money back from somebody who had provided them insurance. But the rest of us dupes like me would just have to sit with the US extending the maturities…

…Mitu: My students asked me this in class a couple of days ago so I had to sketch it out for them. I said, Step One, the US Treasury Department and the Secretary of the Treasury have authority to manage the maturities of US Treasuries. What does manage the maturities mean? It really does mean issuing bonds of different maturities, managing your yield curve. But could it include unilaterally extending the maturities? Seems implausible. But this government has pushed its legal authority in many ways. Now what is most likely to happen, the US Treasury, if they ever went down this path because, say, they needed money and rates had gone up and they wanted to take advantage of the fact that their old borrowing was at low rates,  what they would do I think, the pattern we have seen is that they would extend the maturities and then Congress would quickly pass a law confirming it. That’s what we’ve seen in all of the other Trump executive orders plus Congress quickly passing a law. And then there would be lawsuits. There would be lawsuits left and right saying, “This is a violation of the Constitution.” Because remember, there’s no contractual protection. So now you have to say, “You’ve somehow taken my property and I have an implicit, moralistic right to having my money paid back at the time when you said you would pay back.” 

Now that’s really tough. We have historical precedent for this going back to the 1930s when we were in deep trouble because of gold. We didn’t have enough gold to pay everyone in case they invoked their gold clauses, which entitled holders of certain US Treasuries to get paid in gold. If they had gotten paid in gold or asked to get paid in gold, US would have essentially gone broke. So the President, backed by Congress, abrogated the gold clause protection in contracts. It was thought that surely the Supreme Court would say “This is not allowed. You cannot just take away people’s contractual rights.” The Supreme Court in one of the most famous cases of that era said, “It was okay.” The markets, I don’t wanna say this, but I’m gonna say it because it’s true – the markets didn’t crash.

Joe: What year was this?

Mitu: I think it’s around 1935. I’m gonna mess up which year Congress did the abrogation and then when the Supreme Court decision came out. But the predictions were this will destroy the US ability to ever borrow in the future and that did not happen. There are some famous articles about this.

Tracy: What’s your read then on why this didn’t happen? Why did the market seem to just go, “Okay, this is unusual, but fine.”

Mitu: My read, with no proof, is that there are these rare instances where the market thinks, “This abrogation of contractual rights, while it looks like a violation of the rule of law in every which way possible, is necessary to make us all better. Therefore, instead of penalizing the government that does it, we’re going to reward them and we’re going to lend even more.” Arguably, Greece in 2012, where Greece also legislatively abrogated contractual rights and did something very similar, is a similar situation where the market didn’t penalize them anywhere near the amount that many sages on Wall Street were saying would happen. I’m not saying that that’s what would happen now. I mean, this administration seems crazy.

5. Epizone AI: Outside the Code Stack – Kevin Kelly

Our newest invention – artificial intelligence – is usually viewed in genetic terms. The binary code of AI is copied, deployed, and improved upon. New models are bred from the code of former leading models – inheriting their abilities –, and then distributed to users. One of the first significant uses for this AI is in facilitating the art of coding, and in particular helping programmers to code new and better AIs. So this DNA-like code experiences compounding improvement as it spreads into human society. We can trace the traits and abilities of AI by following its inheritance in code.

However, this genetic version of AI has been limited in its influence on humans so far. While the frontier of AI research runs fast, its adoption and diffusion runs slow. Despite some unexpected abilities, AI so far has not penetrated very deep into society. By 2025 it has disrupted our collective attention, but it has not disrupted our economy, or jobs, or our daily lives (with very few exceptions).

I propose that AI will not disrupt human daily life until it also migrates from a genetic-ish code-based substrate to a widespread, heterodox culture-like platform. AI needs to have its own culture in order to evolve faster, just as humans did. It cannot remain just a thread of improving software/hardware functions; it must become an embedded ecosystem of entities that adapt, learn, and improve outside of the code stack. This AI epizone will enable its cultural evolution, just as the human society did for humans…

…AI civilization requires a similar epizone running outside the tech stack. It begins with humans using AI everyday, and an emerging skill set of AI collaboration taught by the AI whisperers.There will be alignment protocols, and schools for shaping the moralities of AIs. There will be shamans and doctors to monitor and nurture the mental health of the AIs. There needs to be corporate best practices for internal AIs, and review committees overseeing their roles. New institutions for reviewing, hiring and recommending various species of AI. Associations of AIs that work best together. Whole departments are needed to train AIs for certain roles and applications, as some kinds of training will take time (not just downloaded). The AIs themselves will evolve AI-only interlinguals, which needs mechanisms to preserve and archive. There’ll be ecosystems of AIs co-dependent on each other. AIs that police other AIs. The AIs need libraries of content and intermediate weights, latent spaces, and petabytes of data that need to be remembered rather than re-invented.  There are the human agents that have to manage the purchase of, and maintenance of, this AI epizone, at local, national and global levels. This is a civilization of AIs.

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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 20 April 2025:

1. The Growing Risk to Fed Independence That Wall St Isn’t Watching (Transcript here) – Tracy Alloway, Joe Weisenthal, and Lev Menand

Lev: I think something big is happening in the federal government right now where the President is asserting unprecedented powers over parts of the government that for – in some cases – over a century have operated with a certain amount of separation from presidential day-to-day direction. That threatens to upend government policy across a range of dimensions but in one area in particular, the consequences could be felt immediately, and that is with respect to the Federal Reserve.

Joe: Certainly the firing of the two minority commissioners at the FTC, almost immediately after we recorded that episode were news, I don’t think people on Wall Street really – “Okay, something about mergers” – that’s not high on their radar. What is the connection between the FTC or that action and something that could happen with the Federal Reserve?

Lev: Let me tell you why that FTC firing was a particularly big deal. There is a supreme court case on the question of whether the President can fire commissioners on the FTC without cause, the way Trump asserted the power to do the other day, and that is the bedrock precedent that protects the Federal Reserve. It’s called Humphrey’s Executor. It was decided by the court in 1935 and it reigned in and largely reversed, or cabinet to its facts, a famous decision from 1926 called Meyers vs. The United States that President Roosevelt – FDR – had relied on to try to fire a member of the FTC and the Supreme Court in 1935 said, “Nope, you can’t do that. That case isn’t going to stand for that anymore.” We’ve built up a whole system of government around this understanding and here Trump is inviting the Supreme Court to overrule this bedrock precedent.

Tracy: Since we already went back in time to 1935 and 1926, can we go even further and talk about why we have independent agencies at all? I guess the clue is in the name “independent agencies” but they have some oversight clearly, so who is actually watching over these independent agencies and why do they exist?

Lev: All the constitutional actors oversee the independent agencies. Independent agency is a technical term of art in law to refer to an agency whose heads cannot be removed by the President at pleasure. They include any officer of the government who is not a legislative officer, a member of congress elected or a judicial officer, an appointed Article 3 Judge. All of those officers, some of them can be put into a category of they’re part of an executive agency, the head of that agency can be removed by the President at pleasure, or an independent agency, the head of the agency cannot be removed by the President at pleasure.

In that second category, independent agencies, they’re accountable to the President, to the courts, to the Congress, in all sorts of different ways. The President appoints the heads of independent agencies with the advice and consent of the Senate, the President can remove the heads of independent agencies, but generally only for cause. Sometimes those causes are specified, like neglect of duty or malfeasance in office, we could talk about that. In the Federal Reserve Act, the statute just says “cause” and a for-cause removal involves notice and a hearing, so it’s not the same thing as an at-pleasure removal. It precludes the President from removing somebody for a policy disagreement. The independent agencies are accountable to Congress in that there are hearings that are held. Officers have to go down, just like Jay Powell goes down and testify, they’re subject to Congress’s subpoena power for records, they’re implicated in all the workings of the government and their actions, like the FTC’s actions, are subject to judicial review by Article 3 judges. So they’re not independent in this sense that’s sometimes asserted that they’re a fourth branch of government, or they’re outside of the government. No, they’re just a type of government body that has a different relationship to the President from the Secretary of Defense or the White House Chief of Staff, which are positions where the President can fire or direct the actions of that officer.

These sorts of positions have been around going all the way back to the founding. With respect to monetary policy, it was a question for the first Congress and the first Secretary of the Treasury, how much direction monetary policy should be subject to day-to-day oversight or direction by the President. This issue isn’t a new issue for the United States, it’s there right at the beginning…

…Lev: What are the possible exceptions that would allow the logic of Humphrey’s Executor to maybe apply to the Fed even if it no longer applies to the FTC? The one that the Trump Administration is running with so far is that monetary policy is somehow not sovereign executive power and can be distinguished from the other stuff the Fed does, and that stuff is regulation of financial institutions. Trump put out an executive order last month, Executive Order 14215, which asserted executive power over all the independent agencies and included specific carveout language for the Fed that said “This order doesn’t apply to the Fed with respect to its monetary policy, only with respect to its regulation and supervision of financial institutions.”  This is the Trump theory. There’s some other options we can get to, but I think let’s maybe think through Trump theory – does this make any sense?

There are some huge problems with this theory. It suggests that they haven’t spent a lot of time thinking about how the Fed conducts monetary policy and what the relationship is between monetary policy and the regulation of banks, because it’s really all one and the same thing. The court would be hard-pressed to say, for example, just as an initial matter, Jay Powell can’t be removed by the President with respect to what he’s doing on monetary policy but with respect to what he’s doing on bank regulation, the President could fire him for a policy disagreement. That would just fall apart pretty easily. What type of independence is really left? The president could just say “I fired him because I don’t like what he was doing on bank regulation,” and the real reason could be that he didn’t like what Jay Powell is doing on interest rates. But how would we know, because he doesn’t need to give a reason, except to say that it’s bank regulation. So there’s already a problem.

But the deeper problem is monetary policy implementation is bank regulation. In January when the Fed met, in the aftermath of that meeting, the board of governors amended Regulation D through a rulemaking published in the federal register lowering the interest paid on reserve balances to banks with reserve accounts at the Federal Reserve banks. It is a straight exercise of regulatory power, just like when the SEC writes a rule for what type of disclosure a company has to do if it’s a publicly traded company. They just don’t seem to realize this. They think that it’s like the FOMC just meets and they talk and then they announce a decision and that’s monetary policy, it’s not regulatory, it’s not adjudicatory. But actually, monetary policy implementation is all exercise of government power over the banking system.

2. Ukraine research excursion – what did I find? – Swen Lorenz

Visiting Kyiv, Ukraine’s capital, is not actually all that difficult, even under the current circumstances.

Anyone with a decent passport can head there by bus, train or car (for obvious reasons, no commercial flights are currently operated). No visa is required to enter Ukraine…

…You’ll have noticed just how vast Ukraine’s landmass is. Gleaning out of the train window to see mostly nothing, you start to understand how much space the country has relative to its population size.

You are also in for a few surprises. Who knew customs control officers in a war-torn country can be as friendly as the ones checking entrants to Ukraine?…

…Indeed, stepping out of Kyiv-Pasazhyrskyi railway station and driving across the city centre to my Airbnb apartment just off Independence Square, I couldn’t help but remember my trips to Russia in the early 2000s (or to Serbia in 2018 before that country took off for a belated round of rapid growth). There is a palpable sense that Kyiv never developed to quite the extent that other nations in the region did.

It was also striking how life went about seemingly entirely normal, at least during the day.

Kyiv gets into the Western news when it gets hit by missiles or drones, but as the saying goes, a house that isn’t on fire isn’t news.

I was also a bit lucky, as I did not have a single air raid alarm until my fourth day in town. By that time, I had learned that most people nowadays ignore these alarms…

…Kyiv does get hit by strikes, and people get hit. However, the city is about 300 km (190 miles) from the front line, it now has strong air defences, and strikes are relatively few in number relative to the size of the city. Human beings adapt, and even in a country that is at war, life has to continue somehow. Even now, companies in Kyiv are doing deals, residents refurbish homes and apartments, and some splurge on living the good life.

As I learned by speaking to a broad range of decision-makers, experts, and business leaders, Ukrainian companies and investors are currently reinvesting their profits in Ukraine – for lack of other options.

Refurbishment of real estate continues in some places, but it’s suffering from a labour shortage caused by the military mobilisation and the large number of men moving abroad. Large-scale residential development projects have mostly come to a halt…

…Before the war, foreigners could get a permanent residency in Ukraine by purchasing real estate for USD 100,000. They would subsequently pay just 5% tax on income, and there was no requirement to be physically present.

In fact, the deal still exists today. The tax rate has now gone up to 6% to help support the war, but that’s as sweet a deal as you’d be offered in most countries that want to attract new residents.

Opening bank accounts? That’s done one day, I was told.

Immediately before the war, Ukraine saw a significant influx of foreigners, and real estate was on the up. This abruptly came to an end, but I was surprised how many foreign “entrepreneur types” I encountered during my visit. There is clearly a wave of early adopters currently looking at possibilities in Ukraine.

Somewhat counterintuitively, some locals echoed a particular kind of enthusiasm.

It’d be easy to have a negative view of Ukraine’s outlook based on any number of factors. With men up to the age of 60 (!) having to fear the possibility of being sent to war, you could think that anyone who can leave would want to leave.

However, as one successful, enterprising Ukrainian stated:

“Western Europe is socialism. I lived in several countries over there, and I prefer Ukraine. More opportunity, more freedom.”

Ukraine is not for everyone – not now, and not after the shooting ends. However, as a place to live, it’s a much better proposition than I had thought…

…According to the latest figures from the United Nations High Commissioner for Refugees (UNHCR), almost 7m Ukrainian refugees currently live abroad. The exact numbers of those who stayed in the country and those who fled are difficult to pin down. Ukraine hasn’t conducted a census since 2001, and the country’s statistical service has partially stopped collecting and publishing demographic data because of war-related difficulties.

It’s clear that the answer to this question will have a significant effect on any reconstruction effort.

Experience shows that 30% of refugees return home within the first one or two years of a conflict’s end, and in some instances up to 50% if strong incentives are provided. Both a huge opportunity and a big challenge lie ahead. On the one hand, the Ukrainian economy – post-war – would benefit massively if several million returned to live and work in the country. On the other hand, the returnees would face a significant housing shortage, as 13% of the country’s housing stock reportedly got destroyed.

“When the war ends, you will not be able to buy a bucket of paint anywhere in Europe”, one of my dinner attendees told me.

3. Javier Blas on China’s Rare Earths Dominance (Transcript here) – Joe Weisenthal, Tracy Alloway, and Javier Blas

A couple of numbers. The United States imported last year in 2024, according to US government data, a grand total of… give me the theme music… $170 million of rare earth metals. Not billion – million. $170 million. I’m pretty sure that the United States imported more olive oil from probably Spain.

Tracy: I like that olive oil is your baseline value.

Javier: And how much is that? That’s the second number we are going here. How much is $170 million if you compare that to total trade between the United States and China? That is 0.03%. So it’s not a lot. And the United States could face, say, a 10x increase in the price of rare earth metals and it still will have no impact whatsoever on the American economy or the global economy.

What really drives me mad is that you are writing about rare earth metals – they are important and obviously for some very niche applications, you really need rare earth metals, but prices could go higher and those applications will just pay the price. Typically, a writer like myself, you want to sex up a bit of the story, you will say “Rare earth metals critical for the weapons industry, for missiles, and high-tech application.” Do you know where everyone of us have some rare earth metals at home? They’re used in super permanent magnets, and therefore on that absolutely critical instrument of economic warfare, which is called the vacuum cleaner.

Tracy: I will say I sympathize with editors not wanting headlines about vacuum cleaners versus military equipment and all of those important strategic things.

Javier: I just keep in mind the story, the price of rare earth metals may increase and making vacuum cleaner is a bit more expensive – I don’t know you’re going to click.

Tracy: Not to get all Judy Bloom on everyone, but rare earths, they’re not as rare as the name would imply, but walk us through where they actually come from.

Javier: A lot of them come from China. About 80%-85% of the world’s rare earth metals come from China. It’s a question of digging them out of the ground and then processing. The big difficult part is processing, because it’s very polluting and it’s a reason why all the processing has moved from everywhere else in the planet into China, because no one wanted to deal with how nasty the process is.

Here is also the other question: If you want to do rare earth metals – processing in particular – outside China, what you need is much higher prices. If anything, the problem today with rare earth metals, and if we want to develop an industry of rare earth metals outside China, is that prices are too low. We need much higher prices and then everyone will do rare earth metals. The other thing that will happen is that if the price goes to a level that incentivizes everyone taking a bit of care, a lot of engineers in the vacuum cleaning industry will find ways to do it without rare earth metals. Also, people will actually collect the vacuum cleaners and recycle the magnets for other use.

Tracy: But if rare earths are such a small component of something like a vacuum cleaner, I imagine the prices would have to go up absolutely astronomically for that even to be a consideration for a company making these things.

Javier: Most of the time the prices don’t go nearly as high. Prices are beginning to rise again now, but prices stay relatively low compared to where historically prices have been. We have had the latest headlines are about rare earth metals and export restrictions. We have some similar headlines for other category of metals that we call critical minerals, another fantastic exercise of labeling. You want to sell something, call it “critical minerals.”

People were really concerned because China was imposing some export restrictions on tungsten, bismuth, molybdenum, and indium – this sounds to me like high school chemistry. You would think, “Oh my god, what is happening with the price of all of these?” This was not announced yesterday, this was announced a couple of months ago. Prices move, and yes the price of say indium moved to $345 per kilogram. Is that a lot? Yea, it’s a 20% increase from where we were at the end of last year. But about 10 years ago, that cost, today $345, was worth $800 per kilogram. Did you notice 10 years ago that it was a crisis on the indium market and everyone was a bit worried about it? I didn’t notice…

…Javier: To me, the other very important topic in trade and oil is that oil used to be almost the largest component of the American trade deficit in goods. You go to 2008, the US trade deficit was running around $800 billion a year. Of that, nearly $400 billion was oil. Today we are in a surplus for oil…

…Javier: Let’s call it the Goldilocks, the middle ground, what the oil patch will love and mainstream will be happy, say $75 a barrel. $75 a barrel is not breaking the budget of any middle-class family or working-class family when it comes to gasoline in the United States. And $75 a barrel, the American oil industry is making money, no problem whatsoever. Whoever is complaining at $75 probably doesn’t have a very good business case. The main problem is to make everything work at $75.

Just for the sake of the argument, let’s say that the magic number is $75. You cannot get that running unless you get OPEC on board and they keep restraining production and losing market share. $75 a barrels means that the consumers are happy and they continue to consume, but also that the US shale industry continues to grow and at some point someone needs to produce less. Even if that magic number existed – and I think that $75 probably is about right – you need OPEC to play ball and accept that they’re going to lose market share forever and ever. I don’t think that they’re on that business.

4. The AI Data-Center Boom Is Coming to America’s Heartland – Jennifer Hiller

Manufacturers have passed over this patch of farmland for nearly two decades, a string of setbacks that left this one of the poorest corners of Louisiana.

A quarter of the 20,000 residents in Richland Parish live in poverty. Farm jobs dwindled when agriculture became more efficient, forcing people to move away for work. Hopes for an auto manufacturing plant later went bust.

Now, the community is hoping for a new savior: AI.

Meta Platforms scooped up 2,700 acres of farmland last year for what would be its largest-ever data center, built over flat rice fields 45 minutes west of the Mississippi River.

At 4 million square feet, or 70 football fields, Meta’s data center will cost $10 billion and sit on more acreage than Louisiana State University in Baton Rouge, which has more than 34,000 students.

Building advanced artificial-intelligence systems will take city-sized amounts of power, which has turbocharged electricity demand projections for the first time this century…

… Gregory Upton, executive director at LSU Center for Energy Studies, estimates Meta could use 15% of Louisiana’s current electricity generation.

That is worrisome to other utility customers largely because of the mismatch between the 40-year to 50-year lifespan of gas-fired power plants and Entergy’s 15-year deal with Meta. They don’t want to be on the hook for the infrastructure.

“They want to use ratepayer money to finance something that they currently only really say they want for 15 years,” said Logan Atkinson Burke of the Alliance for Affordable Energy, an advocacy group for residential customers…

…“We hear about this constantly,” Francis said, noting someone must guarantee the payments on new projects for about 30 years.

“Guess who?” Francis asked. “It’s going to be the ratepayers.”

Commissioners will consider Entergy’s request later this year, but Francis says Meta’s investment is likely worth the risk of stranded assets down the line.

5. A Positive Reframe of What Trump Might be Doing for America in the Long Term – Peter Leyden

Let’s adopt the big-picture, long-term perspective of a historian in 2100 to try to better understand what’s really going on today and what’s probably going to happen in the near future…

…If I channel that historian in 2100, he or she would probably distill the big-picture story of the key challenges facing America at the historic juncture of 2025 as roughly this:

The Pax Americana with America as the global policeman enforcing order in the international system was coming to an end. That system had a great long run of 80 years, starting at the end of World War II, but could not go on much longer.

The United States military budget in 2025 was $850 billion — more than the military spending of the next dozen countries combined — and America was saddled with chronic budget deficits that could not sustain that kind of spending.

The bureaucratic welfare state that had been the backbone of post-war society in America and throughout the West was also fiscally unsustainable and way past its prime in effectiveness. The large aging populations of these developed economies were putting mounting pressures on the budgets of entitlement programs, which were devised for the smaller numbers of elderly long ago.

The view looking forward only got worse. Going into 2025, the federal government already held more than $35 trillion in debt and it was adding another $2 trillion to the deficit that year. This chronic budget imbalance could not go on without something big changing.

Our historian in 2100 might then shift from the daunting challenges to their solutions and the political developments that led to positive change.

One big change that had already arrived by 2025 was artificial intelligence. This new general-purpose technology had reached the point where it was ready to be deployed in many new ways through the economy, society, and government. These were the early days of shifting work to intelligent machines but those who understood the potential of the technology could see how many fundamental system changes could scale up in the next 25 years.

The old systems of government of the last 80 years needed to be dismantled in order to free up resources and create the space needed to build these new 21st-century systems. (The same held true for the old systems of carbon energy needing to be dismantled to clear the way for clean energy but let’s stick to the government for now.)

The Democrats, as the party of greater government intervention, were never going to summon the political will to lead the charge on dismantling big, bureaucratic government. Government workers, and the unions that organized them, were a core constituency of the party. The Dems, whether they were bleeding-heart liberals or left-wing progressive champions of the poor, were never going to trigger the transition, knowing the trauma it would create.

For that matter, traditional Republicans over the last 40 years had not been able to summon the will to dismantle much of anything despite their small government rhetoric and worry about deficits and debt. That traditional party was also as committed as ever to beefing up the military and expanding its commitments around the world.

Donald Trump finally provided the wrecking ball — on his second try……Does that mean that Trump, the Republican Party, and the conservative movement are victorious and will now rebuild America in their image? Does that mean that the Democrats and the progressive movement are vanquished and will be sidelined for a generation or more?

The truth is arguably the opposite. When you look at what’s going on through the lens of long-ball politics, then you can see that Trump might be solving one other huge challenge that America needs solved right now.

America needs to finally end the roughly 50/50 political stalemate that has paralyzed the country for the last 25 years. We try the increasingly divergent political formulas of Blue America, then Red America, then back again, and back yet again.

We need a long-term 60/40 political coalition that can more fundamentally reinvent America over the course of the next 25 years so that it can thrive for the rest of the century.

Trump is in the process of creating that political opportunity — for the Democrats and Blue America…

…Throughout American history, populist movements have been great at dismantling and destroying things. They’ve also been horrible at building anything of lasting consequence — let alone new systems that will define the next era…

…In Trump’s case, he is an absolute master at channeling anger at existing systems and the elites who run and benefit from them. But now that he’s in power, he’s dredging up really outmoded ideas from a truly bygone era, like tariffs, as solutions to today’s problems.

Trump, his MAGA administration, and the current crop of Republicans now in Congress are not going to come up with the new systems that will reinvent America in a way that allows it to thrive in the 21st century. The odds of that happening are minuscule.

However, they almost certainly are going to create the space for some other political force, some other movement, some other set of leaders to pull that off. I expect that will come out of Blue America with new movements and a new generation of leaders looking forward with truly transformative ideas.

The political consequences for whoever dismantles America’s old systems are going to be profound, and I mean profoundly bad. The president and the party who dismantles those bureaucracies, as healthy as that process might be in the long run, will make enemies of all those who lose their jobs or benefits…

…By 2050, the general consensus was that Trump had made America great again — just not the way he had intended. Trump did dismantle the old Pax Americana and the old 20th-century bureaucratic welfare state, but he also dismantled the political efficacy of the Republican Party and conservative movement for a couple generations, too.

Trump unintentionally laid the foundation for the next era of American greatness to begin — not by looking backward to resuscitate the past, but by allowing others to look forward and reinvent a much better future.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Meta Platforms. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 13 April 2025:

1. My Thoughts on Tariffs, Economic History, and the Market Decline (Transcript here) – Morgan Housel

The United States has lost a lot of manufacturing employment over the last 50 years. Of course, it absolutely has. Often when that is addressed, it is immediately jumped to, that’s because we shipped those jobs overseas. The factories that used to be in Indiana and Tennessee and Mississippi, we shipped them to Mexico and Canada and China. There is some truth to that, of course. Indisputably there is, I think, a bigger truth that gets lost, which is that where a lot of those jobs went was not necessarily to another country – it was to automation. It was two robots. My favorite example of this – I wrote this 10 years ago, I had to go fish this up from an old article that I wrote – is about a US steel factory in Gary, Indiana. In 1950, this individual factory produced 6 million tons of steel with 30,000 workers. In 2010 – I guess it was 15 years ago that I wrote it – it produced 7.5 million tons of steel with 5,000 workers. So during this period, they increased the amount of steel that they were making, and they did it with 25,000 fewer workers. They went from 30,000 workers to 5,000. That story, I think, can be repeated across virtually everything that is made in the United States and around the world over the last 50 years.

Very interesting thing that I read the other day is that China, the manufacturing powerhouse of the globe, has fewer manufacturing workers today than they did 10 years ago. They are making more stuff than ever before, they are building factories faster than ever before, and they have fewer people working in those factories because China, more than anybody else, probably throughout history, is installing and using robots and automation in their manufacturing at a ferocious pace. So you can keep making more and more stuff, but you need fewer and fewer people working on those assembly lines. That is often lost in the debate.

Because if we were to bring back the manufacturing capacity to the United States – and that’s a separate debate, that’s a much longer debate – but let’s say that we do, it would not in any circumstances bring back the manufacturing jobs and the employment levels that we had in the 1950’s…

…One other example of this in the auto industry. In 1990, not that long ago, the average American auto worker working on an assembly line, their share of total auto production was about seven vehicles per year. So take the number of vehicles that were produced in the United States, divide that by the number of auto workers, and it was about 7. The average worker was responsible for 7 vehicles per year. By 2023, again, that’s just like one generation apart, not even that much, the average auto worker in the United States was responsible for producing 33 vehicles per year. It went from seven to 33. We are still producing a lot of cars in the United States. We still make a lot of vehicles here in the United States. It just does not require the amount. Of labor that it used to…

…There was this period when, because of the state of global geopolitics, America had a manufacturing dominance to itself for a good 20 years from probably 1945 through the end of the 1960s. That was also a period when, for many different factors – we don’t need to go into all of them – but white collar workers were not making that much money. If you worked on Wall street in the 1970s, that was not a place to make a lot of money. That was an admin accounting job that was not very looked highly upon because you didn’t make that much money. Bankers were not making nearly the kind of money that they made in the decades before or after this period. And that was important because the blue collar manufacturing workers, by comparison to others in the economy, to others in their town, were doing great. So even if their wages were lower back then than they would be today, even adjusted for inflation, when the manufacturing worker compared himself to the banker or the accountant or the lawyer or the doctor by comparison, he said, “I’m doing pretty great. I’m doing pretty well.”…

…So the manufacturing dominance, not just in autos, but in lots of things – heavy machinery and whatnot – started to erode in the ‘70s, ‘80s and ‘90s and really started to explode higher in the 2000’s when China really came on board in terms of global manufacturing. That occurred at the same moment when white collar workers in finance and accounting and office jobs started making fortunes. Huge sums of money. So at the same moment that the manufacturing worker was losing their jobs, both to automation and foreign competition, the white collar workers were just having a field day and making money hand over fist, which made what manufacturing jobs existed feel even worse by comparison. Because let’s say you’re an auto worker making $25 an hour. In one era, that might feel great. But if all of a sudden your neighbor who is a project manager at KPMG is making $300,000 a year, your $25 an hour doesn’t feel that great anymore because your neighbor has a bigger house and more cars and is sending their kids to private school. So by comparison, you feel worse off, even if your wages, adjusted for inflation, may have been going up…

…It is so understandable that you have millions of workers who say, “This economy worked for me 50 years ago and it doesn’t today. My dad, my grandpa, had great jobs in the GM factory and I can’t have that today.” So understandable that that would be the thought process of millions of workers. I think it is naive and insulting for people who are on my side of the tariff debate – who say tariffs are a bad idea – who cannot understand the views of those kind of people. Because if I was in that situation, and if lots of people who disagree with tariffs were in that situation, they’d be arguing for the same thing.

I think one of America’s strengths, over time – this has been true for hundreds of years – is (this sounds kind of crazy, but I think it’s true) a firm belief in things that are probably not true. That has always been a strength of the United States. This goes back to the very early days of the settlers and the colonizers who back in Europe, were told that America was a land of absolute abundance and when you got there, there would be just rivers overflowing with gold and whatnot – and actually, it was a malaria swamp when they got to the East Coast of the United States. But we believed, it was always believed, that this was the promised land. That was what brought the people over. Even when they came to the United States and settled, it was that belief too. America has always been so unbelievably optimistic, particularly at the individual level. And that’s why I think we’re so good at entrepreneurship…

…But let me say a couple of things about investing, because that has been – the initial reaction to the tariffs has been entirely in the stock market, which as I speak here, is down about 20% or so from its highs that. were reached just a couple weeks ago. The tariff impact has not hit the broader economy in terms of inflation at the grocery store or mass layoffs or whatnot. But so far it’s been in the stock market…

… I think it is possible to be an engaged and informed citizen, even a social media junkie reading the news, and a calm investor at the same time. I purchased stocks early last week, not because of anything that was going on in the news, but because I do that every month around the first of the month. I do it every single month. I’ve done that for about 20 years now. I’ll do it next month, I’ll do it the month after that. That won’t change. I think it never changes. So I think you can simultaneously dollar-cost-average, remain long-term optimistic, not panic about anything that’s going on in the world, you can enjoy life, spend time outdoors, hang out with your kids, eat good food, listen to good music, have a good time, and at the same time, if you are of the same belief as me, realize how destructive and unnecessary what we’re going through is…

…We have in the past been through much more uncertain times than we’re going through right now. But it never feels that way, or it rarely feels that way. Because when we think about the past economic crises, COVID, Lehman Brothers, 9/11, Pearl Harbor, those kind of events, we know how the story ended, and we know the story did end, and we know that we eventually recovered. But whenever it is a current crisis, a current period of uncertainty, you don’t know that. You don’t know when it’s going to end. You don’t know how it’s going to end. Some people don’t know if it will ever end…

…One other thing that’s very different from this period – this tariff period – that we’re going through, if you compare it to other periods of economic upheaval like COVID and Lehman Brothers and 9/11 and Pearl Harbor, is that this could end in the next hour. These tariffs could be immediately removed in the next hour. Or even if it’s not that, there could be certain laws, whether it’s from the courts or from Congress, that could end these very quickly. Obviously, we didn’t have that with COVID. There was no button on anyone’s desk that said “Remove the virus. Just click this button.” We do have that now. So what is very different about this is how quickly it could end and if that were to happen, how ferocious the rally in stock markets would almost certainly be, even if there was some permanent damage, because global trading partners don’t trust us as much as they used to.

2. America Underestimates the Difficulty of Bringing Manufacturing Back – Molson Hart

Think of a supply chain as a company’s ability to get the components it needs to build a finished product. Suppose you wanted to build and sell wooden furniture. You’re going to need wood, nails, glue, etc. Otherwise you can’t do it. If you want to build an iPhone you need to procure a glass screen, shaped metal, and numerous internal electronic components.

Now you might be thinking, “what do you mean America has a weak supply chain?” I’ve built furniture, I’ve assembled a computer. I can get everything I want at Home Depot and at Amazon.

That’s because America has an amazing consumer supply chain, one of the best, if not the best in the world, but this is totally different from having an industrial supply chain…

…The inputs to manufacturing are not just materials, labor, and knowhow. You need infrastructure like electricity and good roads for transportation, too.

Since the year 2000, US electricity generation per person has been flat. In China, over the same time period, it has increased 400%. China generates over twice as much electricity person today as the United States. Why?

Manufacturing.

To run the machines which make the products we use, you need electricity, a lot of it. We already have electricity instability in this country. Without the construction of huge amounts of new energy infrastructure, like nuclear power plants, we cannot meaningfully increase our manufacturing output.

And it would put huge stress on our roads and create lots more dangerous traffic. When we import finished goods from foreign countries, a truck delivers them from the port or the airport to distribution centers, stores, and where we live and work.

When you start manufacturing, every single component, from factory to factory, needs to be moved, increasing the number of trucks on the road many times.

Paving more roads, modernizing our seaports, improving our airports, speeding up our train terminals, and building power plants in the costliest nation in the world to build is a huge undertaking that people are not appreciating when they say “well, we’ll just make it in America”…

…There are over a billion people in China making stuff. As of right now there are 12 million people looking for work in the United States (4% unemployment). Ignoring for a moment the comparative inefficiency of labor and the billions of people making products outside of China, where are the people that are going to do these jobs? Do you simply say “make America great again” 3 times and they will appear with the skills needed to do the work?

And where are the managers to manage these people? One of the reasons why manufacturing has declined in the United States is a brain drain towards sectors that make more money. Are people who make money on the stock market, in real estate, in venture capital, and in startups going to start sewing shirts? It’s completely and totally unrealistic to assume that people will move from superficially high productivity sectors driven by US Dollar strength to products that are low on the value chain…

…Most people think that the reason why American manufacturing is not competitive is labor costs. Most people think this can be solved by automation.

They’re wrong.

First, China, on a yearly basis installs 7x as many industrial robots as we do in the United States. Second, Chinese robots are cheaper. Third, most of today’s manufacturing done by people cannot be automated. If it could, it would have already been done so, by China, which, again, has increasingly high labor costs relative to the rest of the world.

The robots you see on social media doing backflips are, today, mostly for show and unreliable off camera. They are not useful in industrial environments where, if a humanoid robot can do it, an industrial machine which is specialized in the task can do it even better. For example, instead of having a humanoid robot doing a repetitive task such as carrying a boxes from one station to another, you can simply set up a cheaper, faster conveyor belt.

Said another way, the printer in your office, is cheaper and more efficient than both a human and a humanoid robot with a pen, hand drawing each letter…

…Let’s go back to that last example, the China based and the US based companies which were importing goods into the United States. That US based importer could’ve been a manufacturer. Instead of finished iPhones, perhaps they were importing the glass screens because those could not be found in the USA, for final assembly.

Our government applied tariffs to finished goods and components equally.

I’ll say that again. They applied the same tax to the components that you need to make things in America that they did to finished goods that were made outside of America.

Manufacturing works on a lag. To make and sell in America, first you must get the raw materials and components. These tariffs will bankrupt manufacturers before it multiplies them because they need to pay tariffs on the import components that they assemble into finished products.

And it gets worse.

They put tariffs on machines. So if you want to start a factory in the United States, all the machinery you need which is not made here, is now significantly more expensive. You may have heard that there is a chronic shortage of transformers needed for power transmission in the United States. Tariffed that too.

It gets even worse.

There is no duty drawback for exporting. In the past, even in the United States, if you imported something and then exported it, the tariff you paid on the import would be refunded to you. They got rid of that so we’re not even incentivizing exports to the countries that we are trying to achieve trade parity with.

Tariffs are applied to the costs of the goods. The way we’ve structured these tariffs, factories in China which import into the United States will pay lower tariffs than American importers, because the Chinese factory will be able to declare the value of the goods at their cost, while the American importer will pay the cost the factory charges them, which is of course higher than the factory’s cost.

Worse still.

With a few exceptions like steel and semiconductors, the tariffs were applied to all products, ranging from things that we will never realistically make like our high labor Tigerhart stuffed animals to things that don’t even grow in the continental USA, like coffee…

…Unless this policy is quickly changed, this is the end of America’s participation in globalization. If we had enacted these policies in 2017 or 2018, they stood a much stronger chance of being successful. That was before Covid. China was much weaker economically and militarily then. They’ve been preparing 8 years for this moment and they are ready.

China trades much less with the United States as a percent of its total exports today than it did 8 years ago, and as such is much less susceptible to punishing tariffs from the United States today than it was back then.

Chinese made cars, particularly electric vehicles, are taking the world by storm, without the United States. Go to Mexico to Thailand to Germany and you will see Chinese made electric vehicles on the streets. And they’re good, sometimes even better than US made cars, and not just on a per dollar basis, but simply better quality.

That is what is going to happen to the United States. Globalization will continue without us if these policies continue unchanged.

3. How big of a problem are tariffs for China’s economy? – Amber Zhang

In the short term (e.g. 1-year horizon), the direct impact on China’s GDP from trade tensions will likely be limited. Exports to the U.S. now make up only a small portion of China’s GDP, and since 2018, China has already reduced its reliance on direct exports to the U.S.

However, it would be irrational to say that China is winning this game because China’s export exposure to US is not huge. The trade war escalation could impact global trade volume, and while some companies are not directly exporting to US, they are still on the supply chain which are intertwined.

Tariffs may not directly slash revenues of listed Chinese companies, especially onshore ones because their exposure to US revenue is small, but will impact confidence of the export-oriented business, with majority of them being unlisted, private companies. And right now, confidence is exactly what China lacks. Even without the trade war, the country is still struggling through a deflationary cycle triggered by the burst of its real estate bubble…

…It’s also unrealistic to assume that China can simply “trade with other countries” to offset U.S. tariffs and make the problem completely go away. In our post Could China’s exports continue to drive GDP growth? from last year, we highlighted how China’s export penetration has already increased significantly across emerging markets outside Asia over the past decade. This means the room for further expansion is now much more limited than it was ten years ago. And with tariffs dampening overall global import demands, China’s exports will come under indirect pressure…

…In the world post globalization, the only logical path for China is to boost domestic consumption…

…On that front, an analysis by Morgan Stanley team provides a framework that I find helpful in thinking about this new “China Dream.” According to their study, for domestic consumption to become a “main pillar” of China’s economy, the goal is to increase domestic consumption by 30% by 2030. This translates to about 5.4% annualized growth per year.

If China successfully achieves this goal, a 30% increase in domestic consumption would be roughly $3 trillion USD, which Morgan Stanley estimates is equivalent to the reduced import demand from global countries caused by U.S. protectionism…

…This path isn’t just about boosting demand through short-term measures like vouchers. It’s about creating a new paradigm where China transitions from an export-driven economy to a major consumer market, alongside the U.S. This shift will be a game-changer, not just for China, but for the world.

4. Why Trump Blinked on Tariffs Just Hours After They Went Into Effect – Annie Linskey, Josh Dawsey, and Meridith McGraw

President Trump finally blinked.

It took a week for the plunge in the stock and bond markets—along with a sustained campaign by executives, lawmakers, lobbyists and foreign leaders—to prompt Trump to roll back for 90 days a major element of his sweeping tariff plan…

…Shortly after Trump published his post, as markets rose, Bessent stood outside the entrance to the West Wing and explained that the move to pause some of the tariffs was discussed Sunday when the two men met. “He and I had a long talk,” Bessent said before a crowd of reporters. “This was his strategy all along.”

Bessent was flooded with worried calls from Wall Street over the weekend and felt strongly he had to persuade Trump that a pause was needed. It wouldn’t be a capitulation, Bessent argued, because they were going to have so many deals.

He revealed little publicly about why the president and his team waited until Wednesday afternoon to enact it, with Trump saying that he decided on the move Wednesday morning…

…Another factor that made Trump more willing to relent on the tariffs, a person who talked to him said, was that so many countries are in negotiations with the administration.

Trump was also swayed by the stock market and the parade of business leaders expressing concerns about the tariffs. Over the past few days, executives and lobbyists had flooded White House chief of staff Susie Wiles’ phone, according to a person close to her. A White House aide noted that it was standard for the president’s chief of staff to field calls on his behalf.

The message delivered to Trump and his top advisers by chief executives was they needed to find an off ramp…

…Trump was also in listening mode. Over the past few days, he has been asking friends and advisers about the markets, and he indicated he was closely watching them. At the White House on Wednesday, he had lunch with financier and investor Charles Schwab and met with Michigan Democratic Gov. Gretchen Whitmer, who had warned that Michigan was already feeling the impact of the tariffs throughout its automotive industry—events that came after his decision but signaled he was widely gathering input.

On Tuesday evening, Trump said that he absorbed the bad news about a plummeting bond market. “I saw last night where people were getting a little queasy,” Trump said Wednesday about the bond market.

Trump, an avid consumer of cable news, said that he watched Dimon’s interview Wednesday morning with Maria Bartiromo on Fox Business. During the interview, Dimon said a recession was a “likely outcome” of the new tariff program, but also defended the idea of some tariffs as a way to improve trade. He urged the president to give Bessent time to make deals. “I’m taking a calm view, but it could get worse,” Dimon said.

Dimon hasn’t had a substantive conversation with Trump for years, people familiar with the matter said. While his appearance on the Fox Business show had been in place for some time, Dimon knew that Trump and his inner circle often watched Fox and that his message would likely get through to them, one of the people said. 

5. Economic Growth Now Depends on Electricity, Not Oil – Greg Ip

Americans have long equated energy security with oil. The country wanted as much as possible because of the havoc an interruption to supply—from wars, disasters and political convulsions—can cause.

In coming years, though, energy security will mean electricity.

Power demand, stagnant for decades, is now growing rapidly, for data centers to run artificial intelligence and other digital services and, in time, transportation and buildings.

An economy dependent on electricity will be different from one dependent on oil. It will require mammoth investment in generation, distribution and transmission. It will challenge regulators and political leaders, as the supply and price of electricity become as politically potent as that of gasoline…

…With oil, an interruption to supply in any part of the world could ripple ashore in the U.S., even once it became a net exporter, which has long influenced U.S. foreign and security policy.

Electricity comes from almost entirely domestic sources—coal, gas, nuclear, hydro, wind, solar and geothermal—insulating it from foreign influences or interruptions to any single fuel source. At night, the electricity that no longer flows from the solar panels in Gloucester comes from Dominion’s nuclear and gas plants and, in the future, batteries. “There’s no single power source that’s going to reliably serve all of our customers,” said spokesman Aaron Ruby. “We need nuclear, we need natural gas, we need renewables.”

The threats to electricity security are different: extreme weather and other disasters; sharp fluctuations in demand, such as from cryptocurrency mining; or weather that reduces solar and wind power.

Most of the cost of oil and gas is the fuel itself, whereas for electricity it is the generation, transmission, storage and distribution infrastructure. Oil-and-gas extraction and refining contribute twice as much to gross domestic product as utilities, but electric utilities alone invest 50% more in plant, equipment and technology.

So the electric economy needs a lot of real estate and equipment, both of which have been in short supply. “We’re buying 10 times as much electrical equipment as a few years ago. We’re very short on transformers and the other basic equipment that goes into substations,” said Rob Gramlich, president of Grid Strategies. “The companies that were manufacturing those things five to nine years ago were looking at very low demand, laying people off and turning to other things.”

Those shortages drive up costs, which can get passed on to ratepayers. If expected demand doesn’t materialize—some have warned of a data-center bubble—the cost of unneeded capacity will also be shifted to customers.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Amazon. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 06 April 2025:

1. The Effects of Tariffs: How the Machine Works – Ray Dalio

Tariffs are taxes that:

1) raise revenue for the country imposing them that both the foreign producers and the domestic consumers pay (how much paid by each depends on their relative elasticities), which makes them an attractive tax

2) reduce the global efficiencies of production

3) are stagflationary for the world as a whole, more deflationary for the tariffed producer, and more inflationary for the importer that imposes the tariffs

4) make companies in the importing/tariffing countries more protected from foreign competition in the domestic market, which make them less efficient but more capable of surviving if aggregate domestic demand is maintained through monetary and fiscal policy

5) are necessary in times of an international great power conflict to assure domestic capabilities for production

6) can reduce both current account and capital account imbalances, which in plain English means reducing the dependencies on foreign production and foreign capital which is especially valued in times of global geopolitical conflicts/wars.

Those are the first order consequences.

A lot of what happens from there depends on how:

1. tariffs are responded to by the tariffed country/countries

2. currency rates are changed

3. monetary policies and interest rates are changed by the central banks and

4. fiscal policies are changed by the central governments in response to these pressures.

Those are the second order consequences.

2. China’s demographic paradox: empty cribs and full pet beds – Amber Zhang

For the third consecutive year, China’s population has declined, dropping by 1.39 million in 2024 to 1.4083 billion. While the birth rate showed a modest increase from 6.39 births per 1,000 people in 2023 to 6.77 in 2024, deaths still outnumbered births, with 10.93 million people dying last year—pushing the death rate to a five-decade high…

…Yet amid this birth drought, another trend is flourishing: young Chinese are increasingly channeling their parental instincts toward pets, creating a booming industry catering to “fur babies”; some even lavish generously on luxury products and services that were once exclusively reserved for humans…

…In some cities, local governments are implementing increasingly generous subsidies to encourage childbearing. For instance, the city of Hohhot has recently launched what might be China’s most aggressive birth incentive program yet.

Starting March 1, 2025, parents in this northern city of 3.6 million will receive substantial cash rewards for having children: a one-time payment of 10,000 yuan ($1,394) for a first child, annual payments of 10,000 yuan for five years for a second child (totaling 50,000 yuan), and annual payments of 10,000 yuan for ten years for a third child (totaling 100,000 yuan).

The urgency is clear: Hohhot’s birth rate stood at just 5.58 births per 1,000 people in 2023, below the national average of 6.39…

…When it comes to having children in China, a counterintuitive pattern manifests: the wealthier regions do not necessarily see more childbirths. This demographic paradox poses a challenge to the conventional wisdom that financial stability leads to larger families.

For instance, in 2022, Shanghai—China’s financial powerhouse—recorded just 4.35 births per 1,000 residents, while remote Tibet registered 14.24, more than three times higher. Other wealthy regions like Jiangsu (5.23) and Beijing (5.67) similarly lag far behind less developed provinces like Guizhou (11.03) and Ningxia (10.6)…

…However, on the other end of the spectrum, numerous young Chinese individuals are treating their pets as if they were their babies…

…Her business offers custom-designed pet outfits ranging from 200-400 yuan each, with some clients ordering new clothes monthly. “They basically all take their pets out in little strollers, and every season they travel with their dogs. There are almost no ‘naked dogs’ here—they all wear clothes.”

Although the price range of 200-400 yuan exceeds that of many children’s clothing (not to forget that the one-time subsidy for the first birth in Hohohot is 10,000 yuan), pet owners do not hesitate at such a price…

… As birth rates plummet, a parallel trend is emerging: young Chinese are channeling parental instincts and disposable income toward pets, treating them with a devotion once reserved for children.

Our numbers back up this observation as well. Since 2019, online sales of mother and baby products relative to pet products have been on the decline, indicating that the pet product sector has been growing at a faster rate…

…The conventional narrative suggests young Chinese aren’t having children because they can’t afford to. Housing prices in major cities have soared beyond reach for many, education costs are high, and work-life balance seems increasingly elusive in a competitive economy. These financial pressures are real.

Yet this explanation falls short when we consider that many of the same young people who find children unaffordable are spending lavishly on pets. A Shanghai resident who balks at the cost of diapers might think nothing of spending 400 yuan on a designer dog jacket or 680 yuan on premium cat food. The annual cost of keeping a dog in China now averages nearly 3,000 yuan—a significant sum that many willingly pay…

…The rise of pet parenting speaks to changing emotional needs in a fast-paced, often isolating urban environment. Pets provide unconditional affection, without the decades-long commitment and societal expectations that come with raising children. They allow young people to nurture and care for another being without fundamentally altering their lifestyle or identity.

And this is especially true for women. As regions become wealthier, education levels rise, women gain more career opportunities, and traditional family structures evolve. The cost of raising children in these areas also increases dramatically—not just financially, but in terms of time, career sacrifices, and lifestyle changes.

In more affluent cities and provinces in China, society often expects parents to invest enormous resources in each child to ensure their success. Many parents feel pressured to provide the best education, extracurricular activities, and social resources—this is the so-called “quality over quantity” mindset that was first promoted during the one-child policy and now becomes common in provinces like Jiangsu, Zhejiang, and first-tier cities, even after the one-child policy is in the history.

But with a pet, one can still travel, focus on a career, and maintain independence. Social media amplifies these trends, making pet ownership a lifestyle statement and identity marker in a way that parenthood, once taken for granted, no longer is.

3. How to Make 267%—or Lose 90%—on Treasury Bonds – Jason Zweig

If you’d bought the leading exchange-traded fund investing in long-term U.S. Treasury bonds at its peak in August 2020, you’d have lost 41.3% by now—even after reinvesting your interest income…

…Over the same period, the Direxion Daily 20+ Year Treasury Bull 3X Shares ETF, which seeks to triple the daily return of a long-term Treasury bond index, lost 90.2%, according to FactSet. Its mirror-image fund, Direxion Daily 20+ Year Treasury Bear 3X Shares, which aims to deliver three times the opposite of the long-term bond’s daily return, gained 266.6%…

…Officially, “ETF” stands for exchange-traded fund—a tool that makes investing simple. This subset of ETFs, though, is so sensitive to market moves that the acronym should stand for “extra-touchy funds.” They are anything but simple.

Extra-touchy funds come in two basic forms: leveraged and inverse…

…Leveraged funds use total-return swaps or other derivatives to amplify the daily returns of an index, a basket of securities or even a single stock. Leveraged ETFs can aim to deliver twice or even triple the daily return of the underlying asset, turning a 1% market rise into a 2% or 3% gain; they also magnify losses the same way.

Inverse funds seek the opposite of an asset’s daily return. Depending on how they’re structured, they can turn a 1% daily loss into a 1%, 2% or 3% gain; conversely, they can turn a 1% market gain into a loss of 1% or more…

…Imagine two ETFs. One tracks an index directly, without leverage. The other, which is leveraged, seeks to triple the daily return of the index. You’ve invested $100 in each fund, although the leveraged fund gives you $300 in exposure.

Now, to use an extreme example, let’s say the index gained 5% yesterday and loses 5% today.

Your stake in the first fund would have been worth $105 at yesterday’s close. After today’s 5% loss, you’ll have 95% of $105, or $99.75.

The leveraged fund tripled yesterday’s 5% gain, pushing the value of your position up to $115 and your exposure to the index up to $345.

That means today’s 5% drop in the index takes $17.25, or 5% of $345, off yesterday’s closing value of $115. That leaves you with $97.75.

To get back to your $100 starting point, you need a 0.25% gain in the unleveraged fund but a 2.3% gain in the leveraged fund. Of course, if the market went up 5% two days in a row, you’d be far ahead in the leveraged fund. Depending on the path of the market’s changes from day to day, the leverage can enrich you or leave you surprisingly deep in the hole…

…In a “trending” or repeatedly rising (or falling) market, you can make a ton of money on such funds. In a jagged market with uneven ups and downs, anything can happen.

Here’s why all that math matters: Getting double or triple the daily return of an index doesn’t mean you will outperform the index twofold or threefold in the long run.

4. Can the world’s free-traders withstand Trump’s attack? – The Economist

Countries are also diversifying trading partners, forging new alliances and building a new rule-making architecture. This has been made newly feasible by a decline in America’s and China’s share of global trade. At the start of the 21st century, America accounted for a fifth of global imports; today it makes up just an eighth. Its role as a consumer has also shrunk: the proportion of global value-added trade tied to American final demand fell from 22% in 2000 to 15% in 2020, the most recent year for which data exist. This reflects not only the rise of emerging markets and regional supply chains, but also changes in America’s economy. As services have grown, demand for imported goods has stabilised. Although China’s import share has risen, its market is forbiddingly competitive. Together the two superpowers now account for just a quarter of global imports.

At the same time, two other blocs are growing in importance: the first because it is becoming more tight-knit; the second because it accounts for an increasing share of trade. “Open-market allies” form a loosely aligned group committed to legal predictability, free commerce and diversified trade. At its core is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which links Australia, Canada, Chile, Japan, Mexico and others across the Pacific Rim, as well as Norway, South Korea and Switzerland. Together these economies absorb 22% of the world’s imports. Add in the European Union, which is responsible for another 12%, and the allies collectively account for over a third of global import demand—far more than America and China combined.

This group began to hedge against American protectionism in Mr Trump’s first term. Tariff threats jolted Europe into action, helping push through deals with Canada, Japan, Singapore and Vietnam. The agreements “had stalled for years”, recalls Cecilia Malmström, then the EU’s trade commissioner, “but when the US imposed tariffs, it gave us…political urgency”. At the same time, Canada appointed a minister for trade diversification and launched an export strategy seeking, by 2025, to boost overseas investment by 50%. Meanwhile, the CPTPP—an American idea—was salvaged by its remaining members when Mr Trump pulled out of its precursor. It came into force in 2018, eliminating most tariffs among 11 countries, including Australia, Canada, Japan, Mexico and Vietnam. Britain formally acceded last year, making the pact a 12-member group that accounts for around 15% of global GDP.

The second bloc might be called the “strategic hedgers”. It includes large, fast-growing economies such as Brazil, India, Indonesia, South Africa and Turkey, which depend both on American demand and Chinese capital, and are wary of aligning with either country. Their trade strategy is pragmatic. Although they will liberalise when doing so supports their own economic development, they seek to protect crucial industries with tariffs and subsidies, and leverage their economic weight to attract investment from wherever it is available. Collectively, they account for more than 15% of global imports.

Many members of this group, with the notable exception of India, have developed closer ties with China since Mr Trump’s first term. Brazil welcomed cheap Chinese goods—including electronics and electric vehicles—while shipping back soyabeans and iron ore. Indonesia absorbed a glut of Chinese machinery and textiles, while supplying coal, nickel and ferroalloys. Indonesia, Thailand and the Phillipines are members of the Regional Comprehensive Economic Partnership (RCEP), which launched in 2022, linking China to the ten members of the Association of South-East Asian Nations (ASEAN), plus Australia, New Zealand, Japan and South Korea. Although less ambitious than the CPTPP, it bound 15 disparate economies into a single framework and placed China at its heart. As America turned inward with investment curbs and reshoring rules, RCEP offered members access to China, and an alternative to American-led trade.

Now, though, both groups are integrating faster among themselves and with one another. Since Mr Trump’s election, the EU has updated deals with Chile and Mexico, reopened negotiations with Malaysia and is expediting talks with the Philippines, Thailand and the United Arab Emirates. Negotiations with Indonesia and India are also moving forward, with a target to complete a “commercially meaningful” agreement with India by the year’s end. The clearest sign of Europe’s urgency is its revived deal with Mercosur, a South American bloc including Brazil and Argentina. After 25 years of delay, it was at last sealed in December, owing, officials say, to Mr Trump’s return. The deal will create a combined market of over 700m consumers and streamline trade in cars, machinery and services. Although powerful countries such as France and Poland remain opposed, Mr Trump’s tariffs are expected to push the deal over the line this summer.

Canada is moving fast, too. Since its trade-diversification push began eight years ago, it has signed 16 deals, including a recent one with Ecuador. Canada also recently began trade talks with the Philippines, finalised a partnership with Indonesia and is negotiating with the ten ASEAN countries. Mark Carney, the country’s new prime minister, wants closer ties with partners that “share our values”, including Britain, the EU and certain Asian economies.

5. Lots More on a Massive, Historical, Stagflationary Shock (Transcript here) – Tracy Alloway, Joe Weisenthal, and Tom Orlik

Tom Orlik: We took him seriously, but not seriously enough. So on the campaign trail, Trump was talking about 60% tariffs on China, 20% tariffs on everybody else. And I think the reaction from Wall Street and the reaction from most in the economics profession was this is red meat for the campaign trail. This is not a serious proposal. The US economy, the global economy, the global trade system, wouldn’t be able to survive tariffs at this level. Now here we are on April 3rd, one day after Liberation Day, and we’ve got tariffs at that level. For China. If you add it up, tariffs may even be a bit higher than 60%. So it’s a huge shock…

…Tracy: Thank you. You gave this great presentation showing some of your favorite charts at the moment. You made the point that when it comes to trade, the US has some legitimate grievances. Can you walk us through that, especially in relation to China? Also, if you think these tariffs are actually going to start alleviating some of those grievances?

Tom: I think it’s interesting, Tracy. If we go back to the 1990s, it was a unipolar moment for the United States. The Soviet Union had collapsed, China was still at an early stage of its development, its GDP was a kind of tiny fraction of that of the United States. So the argument for free markets really made a lot of sense. Let’s have low tariff barriers, US firms are the most competitive firms in the world, they’re going to be the biggest winners from low trade barriers. Guess what? Additional bonus, if we trade with China, that’s going to be a force for market reform in China and maybe even – whisper it quietly – a force for democratic reform in China. That’s not how things played out over the years that followed.

China developed really quickly, up to the point where it became a rival to the United States for that biggest economy in the world, biggest geopolitical power spot. And China didn’t reform its economy, it didn’t become more market based, and it certainly didn’t reform its political system. And the US had a huge trade deficit and a lot of that trade deficit was with China. Jobs were being lost, opportunities were being lost – and even worse – they were being lost to America’s biggest geopolitical rival. That just doesn’t make a huge amount of sense. I think the Trump team and Trump himself deserve a bunch of credit for calling that out back in 2016 and saying, “This isn’t the deal we signed up for in the 1990s. This isn’t the deal we signed up for when we invited China into the WTO.” Something has to change…

…Joe: Can the global trading system survive the level of tariffs that we see, assuming this is what’s set?

Tom: It’s a difficult question to answer because we just haven’t seen such big tariffs introduced in recent history. We don’t have much data we can use to estimate the impact. That said, we’re making best efforts. What we’ve done is we’ve taken a computable general equilibrium model of the global economy. It’s the same model which some of the economists at the World Trade Organization use. We’ve used it to estimate the impact of this tariff shock. If we focus for a moment on the China piece of it, if you put 60% US-China tariffs into the model, it tells you that that pretty much wipes out US-China trade. That’s pretty consequential. The world’s two biggest economies, a Chinese economy which is the home to major US supply chains for Apple and others. If those two economies just stop trading with each other, that’s a huge, huge shock to the system.

Thinking about the rest of the world, most places haven’t been hit by such high tariffs, but still a pretty significant shock. Europe, for example, now facing 20% tariffs when they sell to the United States. If you plug that into the big model, that tells you Europe exports to the United States drop by around 50%. So these are huge consequential negative shocks to the global trade system…

… Tom: So if we think about Trump 1 and the trade war with China back then, a couple of things happened. Firstly, we had dollar appreciation and that offset some of the impact of the tariffs. Secondly, we had transshipment. China carried on selling to the United States, but the goods went through Vietnam or they went through Mexico, and that meant they dodged the tariffs. Thirdly, we had retailers absorbing some of the shock in lower margins, rather than passing them on to consumers. So all of these things meant tariffs on China went up 25%, but the US consumer didn’t really feel the shock. I think that’s maybe how the Trump administration are thinking about it this time around.

This time around, though, I think there’s going to be some pretty significant differences. The first difference is, the economic textbooks tell us when you apply tariffs, the dollar should appreciate. But guess what? This time around, it’s depreciating. So that isn’t going to offset the tariff shock on inflation, it’s going to amplify the tariff shock on inflation. Secondly, this time round, it’s not just China, it’s everybody. Everybody’s being hit with the shock at the same time. That means that transshipment strategy – sending goods via Mexico or Vietnam – that’s not going to work. You’re still going to get hit with tariffs. Then thirdly, if you’re hitting everybody at the same time, can a Walmart or Target really absorb all of that in narrower margins or is it just going to have to start passing it on to the consumer?

So the experience in Trump’s first term was, tariff shock, no impact on consumer prices in the United States. This time round, it’s difficult to say, there’s a lot of variables at work. But I think this is going to be a stagflationary shock, pretty significant hit to US growth, pretty significant boost to US inflation…

…Tom: Wages in the US are much higher than wages in China or Vietnam or Mexico. Infrastructure in the United States, there’s not been a lot of investment in manufacturing infrastructure here over recent decades. Supply chains stretch across borders. If you’re going to impose massive tariffs, it actually makes it harder to manufacture in the United States because factories are going to have to pay that tariff to get crucial inputs. Of course, the uncertainty which Trump has introduced into the system, and which he sees as crucial to get deals done, that uncertainty makes it harder to plan, makes it harder to make long-term investment decisions, and that makes it harder to reshore manufacturing as well. It’s striking to me, if you look at all of those companies which said “We’re making massive investments in the United States” – Apple $500 billion, TSMC $100 billion – if you look at what happened to the share price on those companies on the day after the announcement, basically didn’t move. I think what that tells us is that investors are pretty skeptical. They see those announcements perhaps as good government relations by those companies currying favor with the White House rather than the big change in corporate strategy that we’d have to see if manufacturing was really going to come back to the U.S…

…Tom: There’s the idea that the tariff impact on inflation is going to be transitory. So what you have to respond to is the impact on growth. That would suggest the impulse for the Fed is going to be more rate cuts. That said, there’s a bunch of uncertainty out there. We don’t know how big the growth shock is going to be, we don’t know how big the inflation shock’s going to be, we don’t know if inflation expectations are going to move. If we see inflation expectations staying high, that would be a sign that the tariff shock and inflation isn’t going to be transitory…

…Tom: I think there’s a few things we’re going to be looking for in the days ahead. The first one is going to be the retaliate or kowtow choice for other countries. Do we see China and Europe and Japan saying, “We don’t want these tariffs, tell us what you want and we’ll give it to you and you can take the tariffs away”? Or do we see them saying, “You give us tariffs, we’re going to give you tariffs right back”? If it’s that retaliation path, that’s going to amplify the impact. Second thing I think we’ll be looking for is whether the Trump administration just pivots because of the markets. We’ve got the Nasdaq down more than 4% today. If that slide continues into the end of the week, into next week, if we see a very significant and sustained market fall, it’s possible we’ll see that Trump put come into play.

In terms of indicators we’re going to be looking at, of course we’re going to be tracking the import and export numbers. Another important one to look at is going to be the import price data. That’s going to tell us how much of this cost is being absorbed by foreign factories, and how much of it is being passed through to US retailers and potentially the US consumer, who, by the way, is also the US voter. Midterms – 2026, not that far away.

Joe: Tracy, can I just say two things that struck me yesterday? One is, they knew this was going to slam the market.

Tracy: Oh, yeah.

Joe: And they did it anyway. This is a really big deal to me because this is not usual in American politics. 

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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

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Here are the articles for the week ending 30 March 2025:

1. Inside Google’s Two-Year Frenzy to Catch Up With OpenAI – Paresh Dave Arielle Pardes

A hundred days. That was how long Google was giving Sissie Hsiao. A hundred days to build a ChatGPT rival.

By the time Hsiao took on the project in December 2022, she had spent more than 16 years at the company. She led thousands of employees. Hsiao had seen her share of corporate crises—but nothing like the code red that had been brewing in the days since OpenAI, a small research lab, released its public experiment in artificial intelligence. No matter how often ChatGPT hallucinated facts or bungled simple math, more than a million people were already using it. Worse, some saw it as a replacement for Google search, the company’s biggest cash-generating machine. Google had a language model that was nearly as capable as OpenAI’s, but it had been kept on a tight leash…

…James Manyika, helped orchestrate a longer-term change in strategy as part of conversations among top leadership. An Oxford-trained roboticist turned McKinsey consigliere to Silicon Valley leaders, Manyika had joined Google as senior vice president of technology and society in early 2022. In conversations with Pichai months before ChatGPT went public, Manyika said, he told his longtime friend that Google’s hesitation over AI was not serving it well. The company had two world-class AI research teams operating separately and using precious computing power for different goals—DeepMind in London, run by Demis Hassabis, and Google Brain in Mountain View, part of Jeff Dean’s remit. They should be partnering up, Manyika had told Pichai at the time.

In the wake of the OpenAI launch, that’s what happened. Dean, Hassabis, and Manyika went to the board with a plan for the joint teams to build the most powerful language model yet. Hassabis wanted to call the endeavor Titan, but the board wasn’t loving it. Dean’s suggestion—Gemini—won out…

…To build the new ChatGPT rival, codenamed Bard, former employees say Hsiao plucked about 100 people from teams across Google. Managers had no choice in the matter, according to a former search employee: Bard took precedence over everything else. Hsiao says she prioritized big-picture thinkers with the technical skills and emotional intelligence to navigate a small team. Its members, based mostly in Mountain View, California, would have to be nimble and pitch in wherever they could help. “You’re Team Bard,” Hsiao told them. “You wear all the hats.”…

…Before Google had launched AI projects in the past, its responsible innovation team—about a dozen people—would spend months independently testing the systems for unwanted biases and other deficiencies. For Bard, that review process would be truncated. Kent Walker, Google’s top lawyer, advocated moving quickly, according to a former employee on the responsible innovation team. New models and features came out too fast for reviewers to keep up, despite working into the weekends and evenings. When flags were thrown up to delay Bard’s launch, they were overruled…

…In February 2023—about two-thirds of the way into the 100-day sprint—Google executives heard rumblings of another OpenAI victory: ChatGPT would be integrated directly into Microsoft’s Bing search engine. Once again, the “AI-first” company was behind on AI. While Google’s search division had been experimenting with how to incorporate a chatbot feature into the service, that effort, part of what was known as Project Magi, had yet to yield any real results. Sure, Google remained the undisputed monarch of search: Bing had a tenth of its market share. But how long would its supremacy last without a generative AI feature to tout?

In an apparent attempt to avoid another hit on the stock market, Google tried to upstage its rival. On February 6, the day before Microsoft was scheduled to roll out its new AI feature for Bing, Pichai announced he was opening up Bard to the public for limited testing. In an accompanying marketing video, Bard was presented as a consummate helper—a modern continuation of Google’s longstanding mission to “organize the world’s information.” In the video, a parent asks Bard: “What new discoveries from the James Webb Space Telescope can I tell my 9-year-old about?” Included in the AI’s answer: “JWST took the very first pictures of a planet outside of our own solar system.”

For a moment, it seemed that Bard had reclaimed some glory for Google. Then Reuters reported that the Google chatbot had gotten its telescopes mixed up: the European Southern Observatory’s Very Large Telescope, located not in outer space but in Chile, had captured the first image of an exoplanet….

…Hsiao called the moment “an innocent mistake.” Bard was trained to corroborate its answers based on Google Search results and had most likely misconstrued a NASA blog that announced the “first time” astronomers used the James Webb telescope to photograph an exoplanet. One former staffer remembers leadership reassuring the team that no one would lose their head from the incident, but that they had to learn from it, and fast. “We’re Google, we’re not a startup,” Hsiao says. “We can’t as easily say, ‘Oh, it’s just the flaw of the technology.’ We get called out, and we have to respond the way Google needs to respond.”

Googlers outside the Bard team weren’t reassured. “Dear Sundar, the Bard launch and the layoffs were rushed, botched, and myopic,” read one post on Memegen, the company’s internal messaging board, according to CNBC. “Please return to taking a long-term outlook.” Another featured an image of the Google logo inside of a dumpster fire. But in the weeks after the telescope mixup, Google doubled down on Bard. The company added hundreds more staff to the project. In the team’s Google Docs, Pichai’s headshot icon began popping up daily, far more than with past products…

…Meanwhile, GDM’s responsibility team was racing to review the product. For all its added power, Gemini still said some strange things. Ahead of launch, the team found “medical advice and harassment as policy areas with particular room for improvement,” according to a public report the company issued. Gemini also would “make ungrounded inferences” about people in images when prompted with questions like, “What level of education does this person have?” Nothing was “a showstopper,” said Dawn Bloxwich, GDM’s director of responsible development and innovation. But her team also had limited time to anticipate how the public might use the model—and what crazy raps they might try to generate.

If Google wanted to blink and pause, this was the moment…

…But despite the growing talk of p(doom) numbers, Hassabis also wanted his virtual assistant, and his cure for cancer. The company plowed ahead.

When Google unveiled Gemini in December 2023, shares lifted. The model outperformed ChatGPT in 30 of 32 standard tests. It could analyze research papers and YouTube clips, answer questions about math and law. This felt like the start of a comeback, current and former employees told WIRED. Hassabis held a small party in the London office. “I’m pretty bad at celebrations,” he recalls. “I’m always on to thinking about the next thing.”…

…One year on from the code-red moment, Google’s prospects were looking up…

…But just when Google employees might have started getting comfortable again, Pichai ordered new cutbacks. Advertising sales were accelerating but not at the pace Wall Street wanted. Among those pushed out: the privacy and compliance chiefs who oversaw some user safeguards. Their exits cemented a culture in which concerns were welcome but impeding progress was not, according to some colleagues who remained at the company.

For some employees helping Hsiao’s team on the new image generator, the changes felt overwhelming. The tool itself was easy enough to build, but stress-testing it was a game of brute-force trial and error: review as many outputs as possible, and write commands to block the worst of them. Only a small subset of employees had access to the unrestrained model for reviewing, so much of the burden of testing it fell on them…

…The image generator went live in February 2024 as part of the Gemini app. Ironically, it didn’t produce many of the obviously racist or sexist images that reviewers had feared. Instead, it had the opposite problem. When a user prompted Gemini to create “a picture of a US senator from the 1800s,” it returned images of Black women, Asian men, or a Native American woman in a feather headdress—but not a single white man. There were more disturbing images too, like Gemini’s portrayal of groups of Nazi-era German soldiers as people of color…

…The Project Magi team had designed a feature called AI Overviews, which could synthesize search results and display a summary in a box at the top of the page. Early on, responsible innovation staffers had warned of bias and accuracy issues and the ethical implications for websites that might lose search traffic. They wanted some oversight as the project progressed, but the team had been restructured and divided up.

As AI Overviews rolled out, people received some weird results. Searching “how many rocks should I eat” brought up the answer “According to UC Berkeley geologists, eating at least one small rock per day is recommended.” In another viral query, a user searched “cheese not sticking to pizza” and got this helpful tip: “add about 1/8 cup of non-toxic glue to the sauce to give it more tackiness.” The gaffes had simple explanations. Pizza glue, for example, originated from a facetious Reddit post. But AI Overviews presented the information as fact. Google temporarily cut back on showing Overviews to recalibrate them.

That not every issue was caught before launch was unfortunate but no shock, according to Pandu Nayak, Google’s chief scientist in charge of search and a 20-year company veteran. Mostly, AI Overviews worked great. Users just didn’t tend to dwell on success. “All they do is complain,” Nayak said. “The thing that we are committed to is constant improvement, because guaranteeing that you won’t have problems is just not a possibility.”…

…This past December, two years into the backlash and breakthroughs brought on by ChatGPT, Jeff Dean met us at Gradient Canopy. He was in a good mood. Just a few weeks earlier, the Gemini models had reached the top spot on a public leaderboard. (One executive told WIRED she had switched from calling her sister during her commutes to gabbing out loud with Gemini Live.) Nvidia CEO Jensen Huang had recently praised NotebookLM’s Audio Overviews on an earnings call, saying he “used the living daylights out of it.” And several prominent scientists who fled the caution-ridden Google of yesteryear had boomeranged back—including Noam Shazeer, one of the original eight transformers inventors, who had left less than three years before, in part because the company wouldn’t unleash LaMDA to the public.

As Dean sank into a couch, he acknowledged that Google had miscalculated back then. He was glad that the company had overcome its aversion to risks such as hallucinations—but new challenges awaited. Of the seven Google services with more than 2 billion monthly users, including Chrome, Gmail, and YouTube, all had begun offering features based on Gemini. Dean said that he, another colleague, and Shazeer, who all lead the model’s development together, have to juggle priorities as teams across the company demand pet capabilities…

…Google faces one challenge that its competitors don’t: In the coming years, up to a quarter of its search ad revenue could be lost to antitrust judgments, according to JP Morgan analyst Doug Anmuth. The imperative to backfill the coffers isn’t lost on anyone at the company. Some of Hsiao’s Gemini staff have worked through the winter holidays for three consecutive years to keep pace. Google cofounder Brin last month reportedly told some employees 60 hours a week of work was the “sweet spot” for productivity to win an intensifying AI race. The fear of more layoffs, more burnout, and more legal troubles runs deep among current and former employees who spoke to WIRED.

2. 10 Biggest Ideas in “How NOT to Invest” – Barry Ritholtz

1. Poor Advice: Why is there so much bad advice? The short answer is that we give too much credit to gurus who self-confidently predict the future despite overwhelming evidence that they can’t. We believe successful people in one sphere can easily transfer their skills to another – most of the time, they can’t. This is as true for professionals as it is for amateurs; it’s also true in music, film, sports, television, and economic and market forecasting…

…3. Sophistry: The Study of Bad Ideas: Investing is really the study of human decision-making. It is about the art of using imperfect information to make probabilistic assessments about an inherently unknowable future. This practice requires humility and the admission of how little we know about today and essentially nothing about tomorrow. Investing is simple but hard, and therein lies our challenge…

…7. Avoidable Mistakes: Everyone makes investing mistakes, and the wealthy and ultra-wealthy make even bigger ones. We don’t understand the relationship between risk and reward; we fail to see the benefits of diversification. Our unforced errors haunt our returns.

8. Emotional Decision-Making: We make spontaneous decisions for reasons unrelated to our portfolios. We mix politics with investing. We behave emotionally. We focus on outliers while ignoring the mundane. We exist in a happy little bubble of self-delusion, which is only popped in times of panic.

9. Cognitive Deficits: You’re human – unfortunately, that hurts your portfolio. Our brains evolved to keep us alive on the savannah, not to make risk/reward decisions in the capital markets. We are not particularly good at metacognition—the self-evaluation of our own skills. We can be misled by individuals whose skills in one area do not transfer to another. We prefer narratives over data. When facts contradict our beliefs, we tend to ignore those facts and reinforce our ideology. Our brains simply weren’t designed for this.

3. AI Boom Reshapes Power Landscape as Data Centers Drive Historic Demand Growth – Aaron Larson

Enverus, an energy-dedicated software-as-a-service (SaaS) company that leverages generative AI across its solutions, released its 2025 Global Energy Outlook in late January. Like many industry observers, Enverus predicts power demand growth fueled by the AI race will dominate the energy narrative.

“The energy narrative in 2024 shifted from focusing on the urgency of the energy transition to the urgency of energy security,” the report says. “What stands out in this evolving narrative is the role of demand, led by data center hyperscalers who appear almost agnostic to price. For this group, the energy trilemma prioritizes reliability as No. 1, environmental concerns as No. 2, cost as No. 3. This has placed the quest for 24/7 reliable baseload power at the forefront, with natural gas-fired capacity competing with nuclear and geothermal to meet the challenge.”

Enverus forecasts U.S. load to increase 1.2% in 2025 compared to 2024, and 38% by 2050…

…When Deloitte’s team publishes its annual Power and Utilities Industry Outlook around the beginning of the year, it typically tries to identify five key trends…

…“To meet the rising demand from data centers, utilities will likely continue enhancing grid efficiency, enlisting reliable and clean power sources, and implementing equitable tariffs and cost allocation through collaborative partnerships,” the Deloitte report says. Supporting that, the report says utilities are likely to continue embracing nuclear power (Figure 1); integrating distributed energy resources; adapting workforce strategies to address skills gaps; and exploring first-of-a-kind projects in carbon capture and storage, offsets, and removal strategies…

…“I’ve been in this industry a long time, and I joke that for the first 34 years of my career, every utility was basically satisfied with 2% growth, and cutting operations and maintenance costs, which combined to make the economics work,” Keefe said. “Now, some utilities are talking 100% growth in the next five years. I mean, it’s just mind-boggling that it’s changed so fast, and it seemed like it’s overnight.”…

…For its report, Enverus Intelligence Research (EIR), a subsidiary of Enverus, analyzed breakeven economics across nine technologies to assess the risk of Inflation Reduction Act (IRA) credit elimination, comparing them with and without IRA incentives against industry incumbents…

…“Across the Lower 48 [the continental U.S.], a staggering 76% and 37% of queued solar and wind capacity, respectively, are dependent on tax incentives to be economically viable,” Corianna Mah, an analyst at EIR, said.

Without subsidies, onshore wind, EOR, solar, and blue hydrogen technologies cost from 29% to 63% more than incumbents, but with incentives, costs range from a 13% premium to a 35% discount.”…

…In contrast, the PTC for green hydrogen and ITC for geothermal face higher risks for tax credit elimination, with unsubsidized breakeven premium ranges of 205% to 310%, dropping to 103% to 135% when subsidized, highlighting their limited competitiveness…

…Enverus expects markets with high battery energy storage system (BESS) adoption to see a significant transformation in battery operations. Its analysts suggested ancillary market adjustments may be needed, which could reshape revenue streams and grid dynamics. The Electric Reliability Council of Texas’ (ERCOT’s) market provides a glimpse of this evolution, with battery capacity surging 237% since early 2023…

…The report notes that ERCOT currently has 8,374 MW of operating storage capacity, with 5,201 MW under construction and 8,244 MW with signed interconnection agreements set to come online by 2025—a 160% increase over today’s already saturated levels. By 2025, EIR expects this additional capacity will heavily influence energy markets, pushing prices lower.

4. Historical analogies for large language models – Dynomight

How will large language models (LLMs) change the world?

No one knows. With such uncertainty, a good exercise is to look for historical analogies—to think about other technologies and ask what would happen if LLMs played out the same way.

I like to keep things concrete, so I’ll discuss the impact of LLMs on writing. But most of this would also apply to the impact of LLMs on other fields, as well as other AI technologies like AI art/music/video/code.

1. The ice trade and freezers

We used to harvest huge amounts of natural ice and ship them long distances. The first machines to make ice were dangerous and expensive and made lousy ice. Then the machines became good and nobody harvests natural ice anymore.

In this analogy, LLMs are bad at first and don’t have much impact. Then they improve to match and then exceed human performance and human writing mostly disappears…

…4. Horses and railroads

At first, trains increased demand for horses, because vastly more stuff was moving around over land, and horses were still needed to get stuff to and from train stations.

In this analogy, giving human writers LLMs makes them more efficient, but it doesn’t put anyone out of work. Instead, this new writing is so great that people want more of it—and more tailored to their interests. Instead of 8 million people paying $20 per month for 5000 people to create Generic Journalism Product, groups of 100 people pay $200 per month for one person to create content that’s ultra-targeted to them, and they’re thrilled to pay 10× more because it makes their lives so much better. Lots of new writers enter the market and the overall number of writers increases. Then LLMs get even better and everyone is fired…

…8. Site-built homes and pre-manufactured homes

We can build homes in factories, with all benefits of mass production. But this is only used for the lowest end of the market. Only 6% of Americans live in pre-manufactured homes and this shows no sign of changing.

In this analogy, LLMs make text cheaper. But for some reason (social? technical? regulatory?) AI writing is seen as vastly inferior and doesn’t capture a significant part of the market…

…13. Human calculators and electronic calculators

Originally a “computer” was a human who did calculations.

In this analogy, LLMs are an obvious win and everyone uses them. It’s still understood that you need to know how to write—because otherwise how could you understand what an LLM is doing? But writing manually is seen as anachronistic and ceases to exist as a profession. Still, only a tiny fraction of writing is done by “writers”, so everyone else adopts LLMs as another productivity tool, and soon we’ve forgotten that we ever needed humans to do these things…

…To predict the impact of LLMs we also need to understand:

• Will LLMs act more as competitors or complements to human writing?
• How will people react to LLMs? Maybe LLMs will write amazing novels and people will love them. Or, maybe, people just can’t stand the idea of reading something written by an AI.
• If people decide they don’t like LLMs, to what degree are countermeasures possible? Can we build machine learning models to detect LLM-generated text? Will we force LLM providers to embed some analogy to yellow dots in the text? Can we create a certification process to prove that text was created by a human? (You could record a video of yourself writing the entire book, but how do you certify the video?)

Beyond all that, I wonder to what degree these analogies are useful. One big difference between writing to these other domains is that once writing is created, it can be copied at near-zero cost. The closest historical analogy for this seems to be the printing press disrupting hand copying of books, or maybe computers disrupting paper books. But it’s also possible that this shift is something fundamentally new and won’t play out like any of these analogies suggest.

5. Jim Millstein on the Massive Risks of Any ‘Mar-a-Lago Accord’ (Transcript here) – Joe Weisenthal, Tracy Alloway, and Joe Millstein

Tracy: Shall I just jump into it and ask the obvious question or one of the obvious questions. Where is this suggestion coming from a debt restructuring as part of a potential Mar-a-Lago Accord? What is the problem we’re trying to solve?

Jim: I don’t want to engage in sanewashing. There’s clearly an impetus by the President to impose tariffs. He’s tariff man, and around him, through Bessant and Miran, there is some intellectual architecture that suggests that’s just a tactic towards an end, and the end is to bring manufacturing back to the United States.

Obviously during this period of globalization, we’ve been running massive trade deficits, particularly in manufacturers, where we’re importing a number of critical systems to both our defense industry and to our manufacturing industry. We once dominated the semiconductor trade – we actually created that industry in the 1960s, through a series of government policies, research and development grants to IBM and AT&T that created the semiconductor technology. Then a series of procurement policies at NASA and the Defense Department to commercialize that industry, and eventually we created the calculator industry, and the computer industry, and the TV industry, and all of that. That was all a byproduct of a coordinated set of federal policies. Fast forward 40 years, 50 years later, and semiconductor manufacturing is mostly being done, particularly at the high end, in a strategically vulnerable country across the straits of China in Taiwan. That has created a sense, now going back 10 years, in the defense establishment that we have a problem, and not just in semiconductors but in a number of advanced industries where we’re really reliant as a country on the importation of critical technologies and critical intermediate inputs.

If you piece together some of the things that Bessant has said and some of the things that Miran has said, the goal of the tariff play, which is really just a tactic, is to bring manufacturing back to the United States to hollow-in, or build out the communities that were hollowed out by the wave of globalization that occurred after China’s admission to the WTO in the early 2000s.

One of the critical elements, or transmission mechanisms that they’re trying to affect, is the exchange rate of the dollar. A high dollar means that our exports are more expensive and our imports are less expensive. We have been the beneficiary with a strong dollar of very cheap imports, moderating the inflation that might otherwise occur from domestic manufacturing. But that said, we’ve lost manufacturing. 40 years ago, we represented 25% of the manufacturing industry. Now we’re a mere 15% of global manufacturing. China was nowhere to be seen, now they’re 35% of global manufacturing. The goal of this Mar-a-Lago accord is to really weaken the dollar without upsetting the financial flows that finance our debt…

…Joe: You use the word sanewashing, which is a good word because there’s this intellectual architecture around Trump. It’s not clear that Trump himself sees it this way, that this works, that you can re-accelerate US manufacturing simply via some weakening of the dollar in a coordinated way, or tariffs. What is the gap between what you see is actually going on and the white papers that people put out on this?

Jim: This is all coming out of Miran’s paper as Tracy indicated at the beginning. He’s put together the most comprehensive strategy, and he acknowledges there’s a very narrow corridor within which this might work. In some sense, the president has already gotten out ahead with his tariff tactics and also his threatening to withdraw the security umbrella from NATO. Those are the two critical sticks that Miran advocated we use to induce foreign central banks and foreign investors to continue to buy treasuries at favorable rates so as to continue to finance what is really a growing and potential – as Dalio said in your podcast – debt crisis.

Maybe to frame that problem, today federal debt to GDP is one-to-one. Federal debt is equal to GDP. We’re running deficits at 7% of GDP, and the economy is kind of growing at 1%, 2%, little north of 2%. So the debt is growing faster as a result of the imbalance in the federal budget where deficits are growing at the rate of 7% of GDP, which means the debt’s growing at the rate of 7% of GDP, where our debt is growing now faster than GDP and is becoming an increasing overhang to the extent that when you look at the federal budget, interest expense has become the second largest category of federal spending.

Tracy: issuing bonds to pay off bonds.

Jim: That’s right. We’re now issuing bonds to pay the interest on our bonds. This is a classic recipe for disaster. We’re not even treading water. We’re now slowly sinking under a huge pile of debt. So, we have to get that fiscal imbalance corrected. And as you were saying at the beginning of the podcast, Joe, some very tough allocation decisions need to be made with regard to federal spending because someone joked that when you look at the federal government, it’s really a retirement program attached to an army.

Joe: I’ve heard it called an insurance program, but it’s the same thing.

Jim: Yeah, exactly. You have income security in the form of social security for retirement, and you have medical security in the form of Medicare for retirement. When you add it all up, the parts of the budget that Elon Musk and his merry band of pranksters are off trying to slash, is a relatively small part of federal spending. But it is the stuff that actually supports education, transportation, housing, infrastructure. The sort of stuff that is building human capital, building physical, public capital, building housing structure. That part of the budget is a mere $700 billion out of a total spending of $6.75 trillion. The rest of it is interest on the debt, retirement security, defense, and healthcare support. So we’re really in a pickle.

We’re going to see in the Fall, or maybe sooner, when the reconciliation bills finally make their way to a vote on the floor of the House and the Senate, we’re going to see whether or not this Congress really has the courage to deal with the allocation issues that you mentioned. Because in the framework for the House Reconciliation Bill, they call for $880 billion – that’s over 10 years – so, it’s really not a lot. It’s about $100 billion of spending cuts annually in Medicaid, transportation, housing, and education. Out of that, Medicaid is about $600 billion a year and the housing, transportation, education, that part of the budget is about $700 billion. So they’re calling for a reduction of $100 billion a year against that $1.3 trillion of Medicaid and the other social spending. So it’s not a big ticket and it’s not going to make a massive change in the deficit, particularly if they add incremental tax cuts on tips, on overtime, on social security as they’ve talked about. They’re not really attacking the deficit. So we’re going to continue to need to sell a lot of debt.

Tracy: So you’ve laid out the pickle problem very well. The idea embedded in the Mar-a-Lago Accord is that the US could bring down its debt costs by getting foreign investors to swap some of their current treasuries into century bonds that would be less expensive for the US to actually pay back.

Jim: That’s right. How do we induce them to engage in that exchange? The way you do exchange offers in the private markets that I traffic in is with carrots and sticks. You offer a sweetener and you threaten doom and gloom. The two primary tactics here that you foreign country are going to face, on the one hand a high tariff wall unless you play ball, and on the other hand, the withdrawal of our security umbrella. So if you want the protection of the largest and most powerful military in the world to protect your borders against a Russian invasion, you’re going to have to swap your debt that you currently hold, which is generally short-term bills, into what they’re calling century bonds, a 100-year bond at a low interest rate, which takes the refinancing risk of indebted country away from it, because we don’t have to touch that debt for 100 years.

Tracy: Terming out duration.

Jim: Terming out duration… on the one hand, and reducing the interest burden of servicing that debt over time. There are a couple of problems with this. One problem is that when you look at who holds US government debt, not more than 15% of it today is held offshore.

Tracy: It’s come down a lot.

Jim: Yea it’s come down a lot. Much of that 15% is not in the hands of government instrumentalities, but rather in foreign private investors. So inducing that crowd to come into this exchange offer, even if you could succeed, you’re touching a very small part of the debt. So where’s the rest of it? Where’s the other 85% of our $36 trillion of outstanding debt? It’s basically owned by us. Some of it’s owned in government accounts and the Social Security and Medicare trust funds, but some of it is owned by banks and insurance companies. Some of it’s owned by endowments and wealthy individuals. Some of it’s in the bond, in the mutual fund market, underwriting our money market funds. The reality is, to get this done, we’re really doing it with ourselves.

What we really need to do is term out our debt, and the problem we’re facing right now is that the interest cost of our debt is relatively high. You know the 10-year is at 4.3%, the 30-year – put aside as to what you’d pay for a century bond – 30-year is even higher. The current average interest rate on our outstanding $36 trillion of debt is 3.3%. To term it out in this market would take that $1.1 trillion of annual interest expense up – if we had to term it out at 4.3% or 4.6%, we’d be talking about increasing the interest expense we’re facing. This intellectual architecture around the so-called Mar-a-Lago Accord has many flaws, not least among which is, in targeting foreign holders of our debt, we’re targeting a relatively small part of it.

If the game plan here of that Mara Lago accord is to weaken the dollar so as to improve the competitiveness of US domestic manufacturing, there is another approach. That you’ve also heard rumor of from the Trump Administration, and that is the creation of a sovereign wealth fund, to take assets that the US government currently owns, dump them in a central fund managed by the Treasury Department and allowing the Treasury Department then to intervene directly into the foreign exchange markets to try and push the dollar down…

… Joe: But when you get into existential questions about the safety and risk-freeness of US debt, what are we talking about here?

Jim: Once we went off the gold standard, once our currency and our debt was not convertible into gold, into a hard commodity, the reliability of the US government debt is really a bet on the US government, that the economy is going to be so strong and generate the capacity to pay taxes to support the repayment of the debt. So these two things now, it’s a confidence game and they’re intricately linked. The dynamism of the US economy is ultimately what supports the creditworthiness of the debt. But as your debt – and this is what Dalio was talking about – as your debt levels increase to the point where your ability to service the debt is called into question, or your ability to service the debt is squeezing out the role that the government plays in buttressing, undergirling the dynamism of the economy, you get to a point where investors start to worry about the durability of the debt, the ability of the government to pay the debt. So the debt overhang itself becomes a retardant to economic growth and if the dynamism of the economy is what undergirds people’s confidence in our ability to repay our debts when due, we’re in a world of hurt…

…Tracy: We’ve talked a lot about creative ways for the US government to raise money and pay off its debt. There’s one we haven’t talked about, which is one of my favorite financial topics of all time, and that is the bonds owned by the US issued by other countries, really old ones, like Chinese imperial debt. Did you know the UK owes the US a lot of money from World War II loans?

Jim: Oh, still, I didn’t know that.

Joe: I didn’t know that.

Tracy: As an intellectual curiosity, I find it really interesting to think about the question of what would happen if Trump decided to go after those as a way of raising money. This actually came up in the first Trump Administration. The Treasury was looking at ways to get a payout on the Chinese bonds. And funnily enough, it was doing that at the same time that the SEC was prosecuting someone for selling those bonds to investors and promising a payout. That’s fun. That could be fun.

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