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America’s Decoupling

Throughout history, large macro corrections often spur transformative changes in policy, technology, and society. These changes act as a disruptive reset and are typically followed by a rapid acceleration to a new normal. Economic recoveries following a crisis however do not follow a linear path, as demonstrated in the aftermath of the Global Financial Crisis (please see data below). The US recovered substantially faster than many other developed economies such as Europe. By 2010, the GDP had started growing again, expanding by 2.7% that year alone, with unemployment peaking at 10% and declining thereafter. Europe’s response to the crisis was more restrained and varied. The Euro Area experienced negative GDP growth in 2012 and 2013 (-0.9% and -0.2% respectively), and the unemployment rate peaked at 12% in 2013, significantly higher and more prolonged than in the US.

In the wake of the pandemic, the global economy is in the midst of its own recovery, but the response has been unevenly distributed. Many influential and strategic economic nations are experiencing sluggish to zero growth, weakened financial positions, high inflation, rising interest rates, and political uncertainties. While the United States faces ongoing societal and political challenges, its economic landscape continues to strengthen, showing no signs of slowing down. Decoupling from China has sparked an arms race in technology and manufacturing and aligned policymakers around financial restrictions for foreign investment, unlike we have seen in decades. The result we believe will create sustained US capital inflows as the rest of the world struggles to keep pace.

The US economy is showing no signs of slowing down and accelerating transformation which will likely create a large and potentially dangerous imbalance of power abroad. The world is dividing into the haves and have-nots, with artificial intelligence (largely a US/China story) acting as the proverbial nail in the coffin. The current state of affairs reflects the culmination of several decades of groundbreaking academic research, resilient capital markets, advancements in cloud and data infrastructure, and the rise of innovative technology companies that facilitate the development of training data. Over the next decade, intellectual property will be developed in the United States, taxed in Europe, and consumed globally. We find ourselves in a golden era of computing and AI, although the exact stage of this transformative shift remains uncertain, there is a sense that we are still in the early phases of this journey.

In September 2020, amidst the peak of the pandemic, we published a blog post titled “The Republic of Big Tech”. It discussed how mega-cap tech companies in the United States had transformed into powerful vertically integrated digital monopolies, with an influence surpassing many sovereign nations. This formidable power is now being redirected towards a new arena, one that we believe will further intensify the divide mentioned earlier. The rapid advancement of artificial intelligence (AI) is causing the tech industry to split into a “two-speed economy.” The tech giants, leveraging their scale, resources, and data advantages, are leading this transformation, and reaping substantial returns. Notably, the major tech companies with significant exposure to AI have all outperformed the S&P 500 and NASDAQ indexes year-to-date. NVIDIA has surged by 166%, Amazon by 47%, Alphabet by 39%, Microsoft by 38%, and AMD by 92%.

These companies are built in the US and possess extensive resources for research and development. They attract top talent in the field, which, in turn, accelerates their advancements in AI and results in heightened productivity, superior products, and exceptional services. Sam Altman CEO of Open Ai just last week told an audience in India, you can try and build a ChatGPT competitor but will fail. Consequently, we anticipate that a substantial portion of the AI revolution will revolve around US-based IP investments, primarily due to the country’s significant lead in AI research, cloud/data infrastructure, and implementation. The maturation of AI has the potential to further deepen the divide between the world’s superpowers and other nations. While the prevailing macro narrative often focuses on the “decoupling” between the U.S. and China, the larger narrative may be one of global decoupling propelled by the ascent of AI. As we witness the accelerated progress and deployment of AI applications, primarily in the U.S. and China, we anticipate that this trend will hasten the ‘decoupling’ of these superpowers from the rest of the world, a scenario that carries profound implications.

And despite the common perception that China, with its massive data resources and army of researchers, is poised to lead in AI, a nuanced picture emerges upon closer inspection. In the US, the focus is on maximizing the use of high-quality regulated training data, aiming to build more robust models and iterate faster. Contrastingly, China uses data altered by censorship which will always be a fundamental obstacle to training the best models. While they are currently leading in many areas of high tech by the number of publications (at least measured by influential published papers), the most influential AI research still comes from the United States largely due to the strength of its private sector. Take the commercialization of transformer models, invented by Google Brain, which underscores the dynamism of the US innovation in spearheading groundbreaking technology. The interplay between pioneering research entities like Google Brain and commercialization-focused ventures has created a potent ecosystem that continues to launch cutting-edge tech, strengthening America’s position at the forefront of the global technology stage. This ecosystem is characterized by a dynamic exchange of ideas, resources, and expertise that fuels both technological progress and market growth, fortifying America’s position as the global tech leader.

We are at a critical time in history, where the imbalance of power and technology may be accelerating at a pace we have not seen in a century. Divergence often arises due to an imbalance across three channels: share in production, investment flows, and trade. The acceleration of diverging income levels and the gap in per capita GDP could widen dramatically to dangerous levels. As automation eliminates lower-skilled jobs, we look at which economies could suffer the most. A recent paper published on National Intelligence and Economic Growth looks into the growing divide between IQ and GDP growth as a possible framework.

As investors, our mandate is to invest in US-based technology companies and our conviction lies in the power of the U.S. public and private sectors as the epicenter of critical innovation and capital markets. But we also believe much of the AI-enabled IP will be built by both superpowers (US & China), while the end consumers of these technologies will span the globe, creating an ideal environment for capital deployment. While this accelerated ‘decoupling’ may yield advantages for investors, it may not bode well for global stability. Marc Andreessen wrote this week about “Why AI Will Save the World.” We share much of his enthusiasm but would add that while AI will augment humanity in many positive ways, AI will decouple the world too.

US Economic Response Data:

The US enacted significant fiscal stimulus measures in response to the pandemic, including the CARES Act in March 2020 ($2.2 trillion), the Consolidated Appropriations Act in December 2020 ($900 billion), and the American Rescue Plan in March 2021 ($1.9 trillion). These acts provided substantial support to households, businesses, and state and local governments (while also fueling inflationary pressure). After a contraction of ~3% in 2020, U.S. GDP bounced back with an estimated growth of ~6% in 2021. The unemployment rate, which had spiked to 14.7% in April 2020, dropped to 3.7% by March 2023. And yet again, the EU has faced a more prolonged recovery. Despite a major recovery fund of €750 billion ($890 billion), the EU’s GDP growth in 2021 was projected at 4.6% by the IMF. Unemployment in the EU peaked at a lower rate of 7.6% in July 2020 due to more employee-friendly labor laws but has remained higher as well at around 6.6% as of early 2023. Real GDP growth, benchmarked to Q1’19, has lagged that of the US, as have other developed economies such as Japan (see chart here).


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