The US, China, and 3-D Chess

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The United States and China play global economic and political chess games. There are many moves and defensive and offensive strategies, not only for trade but also for energy and natural resources (rare earths among the most recent flavors of discord), geopolitics (Russia, Ukraine, Iran, the Middle East generally), technology (Taiwan and AI), and global economic supremacy. It’s a long list, but China and the US drive the outcomes. Instead of working for mutual benefit, regardless of fundamental cultural and political differences, we are now drawing bright lines demarking battle zones (Ukraine and Russia; Taiwan; AI and advanced technologies). The result will be economic and technical inefficiency and degradation in the quality of life, safety, and prosperity. China must acknowledge the outrage caused by its overreaching bids for control, and America must adjust to China’s presence without selling honor for profit. Competition is not us-or-them; reality is us-and-them. The U.S. semiconductor industry gets 30% of its revenue from China. China’s resulting products service the world, and China’s producers need the U.S. as well. If allowed, such examples of mutual benefit will proliferate.
It is naïve to imagine wrestling China back to the past. The project, now, is to contest its moral vision of the future. Connected, collaborative engagement is the only practical way. China has come a long way, and its trajectory cannot be ignored or dismissed. The U.S. and China will be much better off from this more enlightened, realistic perspective. See the whole board.

Rationality and Exuberance

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Predicting what’s next has been a fool’s game, and it continues to be. The S&P 500 was up 26% in 2023 and 25% in 2024, for the best two-year stretch since 1997-98. That brings us to 2025. What lies ahead? Rationality, Optimism, exuberance, disappointment, correction, and more frequent and intense volatility—with uncertainty about the timing, extent, and outcome. Is enthusiasm for new technology creating a bubble, and will the bubble burst? Optimism has prevailed in the markets since late 2022, generating above-average valuations and astonishing returns for some (primarily AI-related) equities. Stocks in most industrial groups sell at high multiples, but enthusiasm for artificial intelligence and the persistence of the Magnificent 7 drive most market expectations. There is the implicit presumption that the top seven companies will continue to be successful and that the “new thing” (artificial intelligence) will drive valuations even higher. However, stocks may sit still for the next 10 years as earnings rise and multiples return to earth. Another possibility is that the multiple correction is compressed into a year or two, implying a significant decline in stock prices. Be aware of Mr. Market’s irrational behavior. It’s not going to be a smooth pathway forward; there will be great investment opportunities, as there are in any market, but overall, it’s a high starting point. It’s time to be neutral.

Artificial Intelligence: The Sharpened Rock

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AI is a powerful tool under human direction, not an autonomous entity with consciousness or emotions. It examines artificial intelligence’s opportunities, limitations, and risks while giving a reality check to the hyperbole and fears.

The first and most crucial principle in understanding AI is recognizing its inherent nature as a tool, a creation of human ingenuity designed to augment, rather than replace, human intelligence. AI systems, at their core, are complex algorithms capable of processing and learning from data at a scale and speed unattainable by human cognition.
However, it is an unprecedented, powerful tool that can permeate every aspect of society, industry, and human ingenuity globally. Its impact can be equivalent to Prometheus giving humans the gift of fire.

An Optimist’s Vision of AI

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The era of artificial intelligence is here, and it’s generating despair and fear over the loss of control and the worry that artificial intelligence is about to unleash killer robots and enslave humanity. Perhaps…or, something else. Artificial intelligence will improve lives and generate greater access to education, improve healthcare, and advance climate science. Among many other improvements, AI’s benefits greatly outweigh its costs. AI has its costs since everything comes with a price (there are always both sides to the ledger), but the extraordinary benefits that artificial intelligence can unleash are worth the effort. Don’t slow down, pause, or restrict research, development, and AI applications. Prometheus gave the world fire and while we can still cause great harm, it was among the single greatest advancements for humankind. Artificial intelligence can be the same thing for our modern-day recipients of fire from the gods. But, we can’t be naïve. We can still burn the earth down if we are not careful.

AI will not destroy the world – and is more likely to save it. I’s trajectory points towards a future where it not only enhances technological capabilities but also enriches human lives. Its evolving role will be characterized by a synergy between human and artificial intelligence, propelling societal progress and opening new frontiers of innovation and discovery is not just a technological advancement; it’s a catalyst for a new era of human endeavor.

Its impact is vast, touching every aspect of our lives and work. As AI continues to evolve, its role in shaping our society and driving innovation will only become more significant, opening new horizons for growth, creativity, and human potential.

The Hitchhikers Guide to Climate Change

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Addressing climate change requires a mix of practical solutions, innovative thinking, and a change in our collective attitude. It’s like realizing that the Earth is not unlike a spacecraft, and we’re all astronauts. The only difference is we can’t step out for a breath of fresh air if we mess this up. As we embark on this journey, remember the words of the great intergalactic traveler, Ford Prefect: “Don’t Panic.” With a bit of effort, creativity, and a willingness to change, we can navigate through this. And perhaps, one day, we’ll look back and tell ourselves, “So long, and thanks for all the fish” – knowing that we did our part to keep the planet habitable for the dolphins, and ourselves.

Today, Tomorrow, and the Apocalypse

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The future does not need us, and apparently, we don’t need it either.

The future isn’t what it used to be.

Humankind evolved to have a long-term view, either from religious teachings, the seasons, empires, and epoques, beyond the temporal spaces of our lifetimes. We went from living in an extended present to thinking about a long-term future.

Our horizons have gotten much shorter. When I wrote my latest book, “The Ten Year Horizon,” ten years seemed a sufficient and faraway temporal space to discuss a long arc of basic scientific research and discovery that could address our most urgent problems. However, it’s most appropriate to think a century ahead in order to understand the future we really want. It’s not just for us, it’s for generations to come.

Collectively, mankind has never had so many ways to destroy itself through self-made dangers including nuclear weapons, bioterrorism, climate change, antibiotic resistance, and many other self-manufactured threats. It is time for temporal maturity and ignore the tumultuous waves striking the boat today and keep our eye on the long-term horizon.

Short-term thinking has brought the potential for a catastrophic crisis even closer. Perhaps now it is time to grow up and think about the future. What do we want to be – because whatever that may be, we are certainly not working towards it now.

Lessons Lost

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Open markets, free global trade, and limited state interference lead to greater shared prosperity. Heavy-handed Industrial policy and state intervention impede progress. It’s the economy and inequality, trade imbalances, are not what drive shared global wealth. Industrial policy, restricted trade, government subsidy, and overall intervention are challenging to get right, and hoping to achieve multiple goals simultaneously. One subsidy does not tackle climate change, boost industrial and economic growth, or enhance security. It is bound to fail. Time to revisit how things actually work through incentives to innovate, sensible economic models, prosperity, and wealth creation. No other mechanisms drive change or address the world’s most critical issues.

Put Down the Pitchforks

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Stunning capabilities are emerging from large language models like GPT 4 that, until very recently, were thought to be only theoretical. We could never have the data sets or the processing power to generate real and usable results. Well, all that has changed – rather suddenly.

But is it time for the torches and pitchforks? What are the serious risks that accompany this technology?

There will be good and bad, like every new era. Will it be the Middle Ages all over again and we’ll experience The Plague before the Renaissance, or will it be more balanced and reasonable? There are good, bad, and many things in between whenever humanity advances.

Let it happen. Put down the pitchforks.

Uncertain Markets and Future Returns

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Volatile stock and bond markets are not going away anytime soon, and investment strategies focused on discipline, market-tested algorithms, and the patience to withstand near-term turbulence will continue to deliver better results. As US stocks have dropped about 25% and US long-term treasuries dropped nearly 30%, specific strategies that combine futures, derivatives, and other securities along with market-neutral equity trading have produced superior returns. This impressive overall performance can be expected to profit from market movements and even market shocks that, while specifically unpredictable, will be inevitable from now on. In the face of dismal predictability and lack of confidence, it is discipline, time-tested algorithms, and a multi-strategy perspective toward broad market sectors that have outperformed and will continue to deliver superior risk-adjusted returns and better overall performance.

Digital Assets, Central Banks, and Regulators

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The collapse of FTX shows how easily crypto is manipulated and the “crypto ecosystem” is fundamentally driven by centralized players and not any true form of decentralized or digital assets. Cryptocurrency is a sideshow and benefits no one other than speculators hoping for a greater fool. However, the combination of digital asset regulation, central-bank cooperation, and distributed assets via decentralized platforms still represents one of the most intriguing opportunities, and, with the potential disruption of global finance, one of the most exciting investment areas today.