Farewell

I believe China is our biggest threat. China has significant leverage over the US—and the rest of the world—through its chokehold on supplies of various minerals, particularly the high-powered magnets made with rare earths. It controls 60% of global production of rare-earth ores, and 90% of the global supply of refined rare earths, indispensable inputs to automotive and weapons production. And it is essentially the sole large supplier of rare-earth magnets. Ultra-powerful magnets are one of four technologies enabling an electricity-driven industrial revolution. Gavekal says the lead China has built up in electricity will take the US and its allies a decade to close. However, it also argues that China’s rare-earth chokepoint may not yet be quite as powerful as the US strangleholds on semiconductors and the dollar system. And Trend Macro argues that China's rare earths weapon, once unholstered, will make global competition possible. With Operation Warp Speed for rare earths processing, this eventuality could be accelerated. Plus, a raft of startups are working on new technologies to improve energy density and extend batteries’ useful life, as are large corporations, says Yardeni. Last month, GM, partnered with LG Energy Solution, announced lithium manganese-rich battery cells that will offer significantly higher energy density (i.e., more power in a lighter/smaller battery) at a lower cost.

The two largest global superpowers parting ways! In 2015, President Xi announced his “Made in China 2025” strategy. And in just the last six months, three big surprises hit global markets—the ubiquity of EV maker BYD, DeepSeek’s upending AI, and China’s continued 5% y/y GDP growth despite the trade war. Alpine Capital argues that economic decoupling may be inevitable. Two parallel trading and financial blocs implies that economic and financial interactions between them would have to go through third parties, representing an enormous loss of economic efficiency—bad news for global growth and financial markets. Not so fast. By prioritizing control over change, Xi has created his own bifurcated economic system. It tolerates disruption in strategic sectors that advance the ruling party’s agenda—EVs, AI and renewable energy—but squashes innovative disruption in others. The cracks in China’s “old economy,” until repaired, will undermine the potential of the “new” one that Made in China 2025 envisions. Beijing’s emphasis on industrial policy has also contributed to a stall in broader economic reforms, straining relations with key trading partners. If negotiations with its most important trade relationship don’t work out, China’s days of 5% annual GDP growth could soon be over.

King dollar no more Warren Buffett’s father, once a Nebraska congressman, wrote an essay in 1948 arguing that the true foundation of individual liberty lies in a monetary system backed by something tangible, the absence of which would lead to fiscal recklessness, inflation, and ultimately social and political chaos. After abandoning the gold standard, the US built a system dependent on ever-expanding credit, foreign capital inflows, and the assumption that the dollar would always be the global safe haven. Jefferies says that by far the paramount reason to assume a long-term weakening of the dollar is that America’s extreme fiscal deterioration post-Covid most likely means a growing resort to financial repression. Meanwhile, China is stepping up efforts to elevate the international profile of the yuan. They are quietly developing a cross-border payments system, called Project mBridge, that could lessen reliance on the US financial system. Is the US dollar’s strength and global supremacy at risk? No! There is no realistic contender among global currencies. Indeed, the ECB’s President Lagarde asserted: “The euro will not gain influence by default—it will have to earn it.” And today, by IMF figures, the yuan accounts for just 2.2% of global foreign exchange reserves versus the dollar’s 58% share.

Runaway debt The CBO projects that publicly held federal debt will reach an all-time high as a percentage of GDP in 2032—surpassing the level reached following World War II! Will “bond vigilantes” start to push back, sending yields higher? Will interest payments squeeze out other spending at an ever-faster rate? In its downgrade of US debt, Moody’s projects that by 2035 interest and mandatory spending will hit 78% of all federal outlays, deficits will rise from 6.4% of GDP currently to 9%, and debt/GDP will hit 134% (versus 98% today). Is this the end of US exceptionalism and the dominance of the S&P 500? Think twice before betting against the US. Empirical Research cautions that the opportunity cost of abandoning US stocks is still quite high. In aggregate, US stocks are generating a 19% return on equity and pay out 72% of earnings through dividends and net buybacks, thus delivering 14% of the equity base to investors every year. This compares to 9% in Europe and 5% in Japan. Compounding that differential over time is powerful, so one needs to be sure that the profitability advantage of the US system is eroding before heading to the exit. An underweight position in US equities is effectively a short position on the potential for AI-induced cost savings. While we wait for proof, the biggest users of AI also have the highest free cash flow margins. Furthermore, Piper Sandler emphasized the near and long-term supports for growth in capex, which has a huge economic multiplier and is “totally underappreciated.”

AI is going to take my job The rapid development and fast adoption of AI for many tasks is raising concerns that it will lower wages or even displace workers. Already, a quarter of firms and a third of workers report that they use AI, and the numbers are growing rapidly. Higher-paid white-collar workers in professional services industries are particularly affected. You shouldn’t fear AI taking your job, but rather your colleague who understands it better than you! Barclays finds little reason to worry about AI displacing workers. Demand for workers with certain skills can actually increase, not only because of AI's innovation and adoption, but also because old technologies become so cheap that demand for them starts rising again (reinstatement effect). The BLS's Occupational Employment Statistics program shows half of US employees are exposed to AI in a limited way, with fewer than 20% of tasks performed much more efficiently by AI. Further, the rise of a flexible labor force—fueled by AI and remote work—allows businesses to scale up or down more fluidly, muting the kinds of job shocks that once signaled recessions. In government, the inefficiency is systemic, and it’s costly. AI could deliver enormous returns: by modernizing workflows, replacing manual processes with automation and enabling real-time data analytics that hold bureaucracies accountable. Through advancements in diagnostics, personalized medicine and AI-driven drug discovery, we are moving rapidly toward a world where chronic disease is both more preventable and more manageable. The implications for Medicare and Medicaid spending and the deficit are profound. 

We’re running out of workers Recent data suggests that the labor market is running out of people to hire, though at a rate commensurate with the decline in demand for labor, according to Jefferies. The Labor Force Participation Rate peaked at 67.3% in 2000 and now sits at 62.4%. The global population is aging, as increased longevity meets declining fertility. This phenomenon is most pronounced in developed market (DM) economies, where the ‘working-age ratio’ (ages 15-64) is projected to fall from 67% in 2000 to 57% by 2075. However, increasing life expectancy is a fundamentally positive development. As life expectancy in DM economies has increased by 5% from 78 to 82 years since 2000, the effective working life has risen by 12% from 34 to 38 years and the share of the total population in employment has increased from 46% to 48%. So, DM dependency ratios have actually fallen. Besides living longer, we’re also living healthier lives. According to a recent comprehensive study, a person who was 70 in 2022 had the same cognitive ability as a 53-year-old in 2000. 70 is the new 53! And not a moment too soon … 

It went by so quickly … In April, the Mister joined me on a trip to Seattle; we’d visit our daughter at UW while there. Enduring the Uber at dawn followed by flight #1, then flight #2, lugging bags through packed airports, he remarked, “How exhausting to be a road warrior. But you love it!” He’s wanted me to retire for years but it didn’t feel right until this one. Now he hates the idea, having promised me a puppy upon retirement. “But you love it,” he insists. On the plane, a passenger “had to stop working during Covid, and now couldn’t go back if my life depended on it!” Another replied, “I no longer need this job; my identity isn’t there anymore.” Arf, arf, arf! In my 45-year career, I’ve had more assistants than Murphy Brown (incidentally, never my fault), but none better than my last (incidentally, she left me as well). I will cherish memories of my Hermosa advisor “victory lap” debates, the Pinehurst gentlemen and gentleladies, my Moana Surfrider Banyon Tree friends, the Lancaster Chamber of Commerce forecast breakfast (and Tom), my weather hug, and hot tea (later, coffee) from a true gentleman colleague. I am deeply grateful to Steve Auth and the late Tom Madden; also, Phil, you are excellent! And the regular audience request, “Show us your shoes!” But now my bff sister’s expecting me at Max’s. Plus, I must buy those Louboutin ruby slipper flats before the Mister checks the credit card. A heartfelt thank you for reading. Farewell!

What Else

The dreaded Q-Day, when quantum computers will be able to break the encryption codes that protect everything from bank accounts and email to online transactions and national secrets, is expected to arrive anywhere from 2029 through 2055, notes Yardeni. The bad guys are thought to be planning ahead, gathering encrypted data today that they will be able to unlock in the future using quantum computers. If they can break the encryption used on the blockchain, the entire world of crypto currency could be at risk, unless a new generation of encryption is established. 

AI’s demand for power is insatiable, so it was inevitable that nuclear energy would become increasingly acceptable around the world. Trump has signed executive orders explicitly aimed at quadrupling nuclear-power capacity. Even in Europe, where the 1986 Chernobyl disaster amplified fears about the safety of nuclear power, they’re switching up their approach. After Japan’s 2011 earthquake-triggered Fukushima reactor core meltdowns, Taiwan, which also sits on the Ring of Fire, moved to phase out nuclear power. But now there’s renewed interest. Germany voted in 2002 to begin phasing out nuclear power, but its newly elected Chancellor is calling for nuclear energy investment. And recently, in a major reversal of a decades-long policy, the World Bank said it would no longer ban the funding of nuclear power projects. The move could open up competition, speed innovation and further encourage investment. 

With AI, there is no stupid question! 22V Research emphasizes one essential truth: the first step is just to begin. You do not get better at using AI by watching others or reading about it. You get better by doing, by having conversations with it and most of all, brainstorming. It helps you connect ideas. Some of the greatest thinkers in history, polymaths like Leonardo da Vinci or Benjamin Franklin, were known not for specializing in one area, but for pulling insights from many fields and using that diversity to drive breakthroughs. Charlie Munger called this approach a “latticework of mental models.” Annie Duke’s “Thinking in Bets” makes the case that life is one long game of uncertainty, where decision quality matters more than outcome. In that context, AI becomes like having a sharp-minded partner at the table, one who never tires, always thinks in probabilities, and helps you examine every angle before you make a move. The future is so very bright, I’ll have to pick up a pair of Cartier sunglasses.