Some Thoughts In Between Shoveling
Fair to say I don’t care to see another snowflake for the rest of this winter, but much like Mr. Market, Mother Nature doesn’t much care about what I think or want. Which means I’ll just have to keep analyzing the investment setup as it comes, and more shoveling awaits me when I finish up with this missive.
Given I’m dealing with a bit of a time constraint that I don’t normally have on a Monday, I’m going to try and keep this tight. That doesn’t mean short for those of you breathing a sigh of relief, as I’m going to cheat a little and share a ‘human to bits’ conversation I had with Google’s AI engine Gemini about the speeches I found most interesting at last week’s Davos meetings. More on that in a minute, but first let’s get to some thoughts on markets.
I always like to step back and observe what the markets do in the first couple of weeks of the new year to see if new trends and themes emerge, or if investors are content to continue leaning on what has been working. So far, it’s the latter, from what I’m seeing in the opening month of the year:
Small caps outperforming Large caps (although this had an interesting reversal on Friday)
International equity markets outperforming the S&P 500
Industrials, power generation, energy transition, and materials leading other sectors
Precious metals crushing almost everything
Commodities outperforming U.S. stocks
Interest rates and the U.S. dollar trending sideways
Mag7 stocks trading sideways to down outside of Google, which, for the time being, has emerged as the leader in this winner-take-all race. Although I differ from the market's view that there will be more than one winner.
As for last week, I think it's fair to say markets are becoming numb to the chaos emanating from the Trump administration. Please don’t interpret that in a derogatory fashion towards the administration. We’re now passing the 12-month anniversary of this administration taking office, and I’d submit that organized chaos is their modus operandi. All that aside, the most surprising development to me last week wasn’t Trump walking back the tariff threat after the ‘framework’ for a deal was reached on Greenland, the selloff in the U.S. dollar (worst week in eight months), the spike in Japanese bond yields, or bitcoin continuing to trade like yesterday’s news, but rather the meteoric price action the precious metals space.
As of the end of last week, gold is now up +15% on the year (up another 2% today), up +8% last week alone (best week since the pandemic in 2020), and up +80% year over year. However, that pales in comparison to the rally taking place in silver, which is +42% year-to-date as of Friday's close (up another 12% today) and +237% in the past year. These moves are just jaw-dropping for those of us who have followed these markets over the years, and both have fundamental drivers operating as tailwinds. For gold, it's support from global central banks diversifying their FX reserves, and for silver, it’s the industrial use for AI (circuit boards and switches), the EV transition (no, this isn’t dead), and the energy transition (solar panels, anyone?). Both have constrained supply profiles, but it’s the demand profile of silver that has really ratcheted up, where demand has outstripped supply every year since 2018. It’s estimated that demand outstripped supply by 18% last year, with another deficit in store for this year.
Unfortunately, we’ve missed this move in silver for our clients as we haven’t owned it in portfolios in a couple of years, instead preferring to play similar themes through copper (also doing very well, just not as good as silver), natural gas, and uranium/nuclear. We’ve also had a sizeable and persistent position in gold over the last several years, and while we continue to like these commodities, the recent price action is making me nervous. Discipline and prudent risk management demand that we trim back some of the exposure. Yes, retaining a core position for many of the same reasons we bought it to begin with, but the risk-reward in many of these areas is not nearly as exciting today as it was over the past couple of years when we were building up the positions. My advice is that anyone showing up late to the party and chasing these moves now, do so with caution and restrain yourself from extrapolating recent price action into the future.
As for stocks, I’m curious to see the market's reaction to the Mag7 companies reporting this week (Microsoft, Tesla, Meta, and Apple). This group (outside of Alphabet) has been languishing over the last several months. With expectations low and investors finding opportunities elsewhere, I’ll be curious to see if they deliver a positive surprise, which shifts the focus back onto them. As for the broader market, while I continue to lean in the bullish direction, I’m finding it difficult to find fundamental drivers that push stocks higher.
Let me explain my thinking. At the start of 2025, consensus estimates were for the S&P 500 to earn $274/share. We are in the heart of Q4 2025 earnings results, where it's looking like the final tally is going to come in around $272/share. So less than a percent below the street’s estimates from 12 months ago. That’s impressive that both Wall St. and reporting companies delivered on these numbers. Now, for 2026 and 2027, Wall St. is penciling in estimates for EPS to grow +14% in 2026 ($310/share) and +15% in 2027 ($358/share), which are both considerably above the +11% growth rate in 2025 versus 2024. With the S&P 500 trading around 6,950 today, it's trading at a forward P/E multiple of 22x on 2026 earnings estimates and 19x 2027 earnings estimates. These are both higher than the average over the past 5 (20x) and 10 years (19x).
What makes this math challenging for further upside in the S&P 500 is that data back to 1980 indicate that unless the economy is recovering from a recession, earnings for the S&P 500 rarely grow faster than 12%. So, earnings estimates are already high, making it unlikely we see a material upside surprise that pushes prices higher. That leaves multiple expansion as a possible driver, however, even if investors are willing to bid the S&P 500 up to a 24x multiple on 2026 earnings numbers, we’re talking about 8% upside. Putting a 22x multiple (high end of the range over the past decade) on 2027 estimates maps out to a 14% increase in the S&P 500. Either of which is possible, but both would require little to no negative surprises, which is a pretty high hurdle with this administration (I say that given investors are already baking an economic reacceleration into their forecasts) and it being a mid-term election year.
Another area of the market that is demonstrating a lot of investor confidence and little risk of something going wrong is the investment-grade and high-yield credit market. Investment-grade credit spreads are down to 73 basis points – their lowest level in more than 25 years, with the all-time low of 53 basis points back in October 1997. As for high-yield spreads, they are at 264 basis points, which are nearing the all-time lows of 241 basis points in early 2007 and 244 basis points in 1997. This isn’t a sell signal, but rather a warning signal that, like the equity market, corporate credit is priced for nirvana.
This is all a confirmation of why investor sentiment and positioning data are nearing historically bullish extremes. The chart below is the Goldman Sachs Global Growth Optimism Factor model, which has risen to levels seen only a handful of times in the past two decades. There is both good news and bad news when we get to these extremes. The bad news is that near-term returns tend to be soggy, but the good news is that long-term performance tends to hold up just fine. Outside of an unexpected exogenous event occurring, investors are vindicated for their upbeat view because economic growth and corporate profits tend to deliver.
Before going back out to shovel some more snow, I’d like to share a couple of thoughts on some of the speeches delivered at last week's World Economic Forum in Davos. Many are worthy of your time, but three stood out, with Canadian PM Mark Carney’s being the best articulation of a world shifting from a unipolar one with the U.S. at the center, to a multipolar one where the U.S. is pulling back and looking inward.
Canadian Prime Minister Mark Carney’s speech at the World Economic Forum
Another was delivered by German Chancellor Friedrich Merz who, in a nutshell, struck a similar conclusion as PM Carney in how the global world order is changing:
“China, with strategic foresight, has worked its way into the ranks of the great powers. The United States’ global pole position is being challenged. Washington reacts by radically reshaping its foreign and security policy. We have entered a time of great-power politics. As we forge ahead, we must never forget one thing: A world where only power counts is a dangerous place - first for small states, then for the middle powers, and ultimately for the great ones.”
German Chancellor Merz Davos Speech
But the most fascinating to me was what U.S. Commerce Secretary Howard Lutnick had to say while participating on a panel at Davos.
“Globalization has failed the West and the United States of America. It’s a failed policy. It is what the WEF has stood for, which is export offshore, far-shore, find the cheapest labor in the world and the world is a better place for it. The fact is, it has left America behind. It has left the American worker behind. And what we are here to say is that America First is a different model—one that we encourage other countries to consider—which is that our workers come first. We can have policies that impact our workers.”
US Secretary of Commerce Howard Lutnick at the WEF
It’s this statement from Howard Lutnick that provoked me to engage Google’s AI Gemini and have the following conversation:
I started with the following simple prompt: Analyze this quote from Howard Lutnick's speech at the WEF this week:
“Globalization has failed the West and the United States of America. It’s a failed policy. It is what the WEF has stood for, which is export offshore, far-shore, find the cheapest labor in the world and the world is a better place for it. The fact is, it has left America behind. It has left the American worker behind. And what we are here to say is that America First is a different model—one that we encourage other countries to consider—which is that our workers come first. We can have policies that impact our workers.”
This is Gemini’s response:
Howard Lutnick’s remarks at the World Economic Forum (WEF) represent a stark and direct repudiation of the economic consensus that has dominated Western policy for the last four decades.
By delivering this message specifically at Davos—the symbolic heart of globalism—Lutnick is not just announcing a policy shift; he is declaring the end of an era to the very people who architected it.
Here is an analysis of the key components of his argument and their implications:
1. The Rejection of Efficiency as the Primary Metric
"Export offshore, far-shore, find the cheapest labor in the world and the world is a better place for it."
Lutnick is attacking the core economic principle of comparative advantage and the neoliberal prioritization of capital efficiency.
Old Model: The WEF/Globalist view (often termed the "Davos Consensus") argued that seeking the lowest cost of production (global labor arbitrage) lowers prices for consumers and increases corporate profits, which supposedly benefits everyone.
Lutnick's Critique: He argues this model focused exclusively on the consumer (low prices) and the shareholder (profits), while ignoring the producer (the worker). He contends that while goods became cheaper, the social and economic fabric of the American working class was hollowed out.
2. "America First" as Labor Policy, Not Just Foreign Policy
"America First is a different model... which is that our workers come first."
This is a crucial rhetorical reframing. Critics often frame "America First" as isolationist or purely geopolitical. Lutnick frames it as domestic labor policy.
He is positioning the administration’s economic nationalism not as "anti-trade," but as "pro-wage."
The argument is that a government’s primary fiduciary duty is to its own citizens' livelihoods, not to the efficiency of global supply chains or the GDP of developing nations.
3. The Shift from "Just-in-Time" to Resilience
By condemning the "far-shore" model, Lutnick is signaling a continued commitment to reshoring and industrial policy.
This implies that the U.S. will continue to use tariffs, subsidies, and capital controls to force production back within domestic borders.
It suggests a willingness to accept higher consumer prices or lower corporate margins in exchange for higher domestic employment and supply chain security.
4. The Rhetoric of Confrontation
Delivering this specific message at the WEF is a calculated power move.
The Setting: The WEF is typically a venue for coordinating global regulatory frameworks and reducing trade barriers.
The Message: Lutnick is telling the global business elite that the U.S. is no longer interested in playing by rules that prioritize global integration over national interest. He is effectively telling the audience that their ideology is obsolete and responsible for American decline.
Summary
Lutnick is defining a clash between two distinct economic philosophies:
Globalism (The WEF view): Prioritizes global GDP growth, open borders for capital/goods, and consumer price efficiency.
Economic Nationalism (The Lutnick view): Prioritizes domestic wage growth, social stability, and industrial autonomy.\
He is arguing that the United States is pivoting from an economy optimized for consumption to one optimized for production and labor.
Would you like to explore the specific economic data regarding the "hollowing out" of American manufacturing that Lutnick is referencing?
So, I followed up with the following simple prompt: Is Lutnick accurate about American workers being left behind?
The data strongly supports Howard Lutnick's premise that American workers—particularly in the manufacturing sector—were "left behind" during the era of rapid globalization (roughly 1990–2016).
While the US economy as a whole grew significantly, the benefits were not evenly shared. The "Davos Consensus" that Lutnick attacked prioritized consumer prices and corporate efficiency, often at the expense of domestic labor stability.
Here is a breakdown of the economic evidence supporting his claims, along with the necessary context.
1. The "China Shock" and Manufacturing Collapse
Lutnick’s central argument is that offshoring "hollowed out" the American industrial base. The data supports this.
The "China Shock": Economists David Autor, David Dorn, and Gordon Hanson documented a phenomenon termed the "China Shock." Their research confirmed that regions most exposed to Chinese import competition saw massive job losses that were not replaced by new service-sector jobs.
The Numbers: Between 2000 and 2010 alone, the U.S. lost nearly 6 million manufacturing jobs (about 33% of the total).
Factory Closures: It is estimated that over 70,000 manufacturing plants closed in the U.S. during this period.
Why it matters: Manufacturing jobs historically offered a "wage premium"—they paid higher wages to non-college-educated workers than service jobs (like retail or hospitality). When those jobs vanished, they were replaced by lower-paying, less stable work.
2. The Great Decoupling: Productivity vs. Wages
Lutnick argues that the system worked for capital (shareholders) but not labor (workers). The divergence between how much workers produced and how much they were paid is the "smoking gun" for this argument.
Before 1979: Productivity and hourly pay rose roughly in tandem. If workers made more "stuff," they got paid more.
After 1979: Productivity continued to rise (up ~65% from 1979–2021), but hourly pay for the typical worker largely stagnated (rising only ~18% in real terms).
Where did the money go? The wealth generated by that increased productivity went primarily to corporate profits and executive compensation, validating Lutnick's claim that the system prioritized "efficiency" (profits) over workers.
3. The "Left Behind" Regions
The "America First" model Lutnick referenced relies heavily on the geography of discontent. The "Rust Belt" is not a myth; it is an economic reality.
Geographic Inequality: Globalization created "superstar cities" (e.g., San Francisco, New York, Boston) that thrived on finance and tech, while mid-sized industrial cities (e.g., Dayton, OH; Flint, MI) saw their tax bases crumble.
Social Impact: The loss of industrial jobs in these regions is statistically linked to "deaths of despair" (opioid addiction, alcoholism, suicide) and the breakdown of families, further supporting the idea that these communities were socially "left behind," not just economically.
4. The Counter-Argument (Nuance)
While Lutnick is largely accurate about the producer side of the economy, the "Davos" model did deliver on the consumer side.
Cheaper Goods: Globalization made clothes, electronics, and household goods incredibly cheap. A television that cost a month’s wages in 1980 costs a fraction of a week’s wages today.
Automation: Not all job losses were due to trade. Automation (robots, software) allowed US factories to produce more with fewer people. However, Lutnick’s point is that policy encouraged companies to move the remaining labor-intensive jobs abroad rather than keeping them here.
Summary
Lutnick is accurate in his assessment that the specific policy of prioritizing "cheapest labor in the world" damaged the earning power and stability of the American working class.
The verdict: The "Globalist" model successfully lowered inflation and boosted corporate profits, but it failed to protect the social contract with American workers, leading to the wealth gap and regional decay we see today. Lutnick's speech effectively marks the official pivot from an economy focused on Consumption (cheap goods) to one focused on Production (good jobs).
I then followed up with this prompt: Could you explore the specific economic data regarding the "hollowing out" of American manufacturing that Lutnick is referencing?
Yes, the data Howard Lutnick is referencing is specific, quantifiable, and widely accepted by economists across the political spectrum.
The term "hollowing out" refers to the simultaneous loss of middle-income manufacturing jobs and the polarization of the workforce into high-wage (tech/finance) and low-wage (service) sectors.
Here are the specific economic data points that validate his claims:
1. The "China Shock" Period (2000–2010)
This decade is the core of Lutnick’s argument. Following China's entry into the World Trade Organization (WTO) in 2001, the U.S. manufacturing base experienced an unprecedented collapse.
Total Job Losses: Between 2000 and 2010, the U.S. lost approximately 5.8 million manufacturing jobs. This was a decline of 33% of the entire sector's workforce in just 10 years.
Plant Closures: During this same period, the U.S. lost over 60,000 manufacturing establishments (factories and plants). These were not just temporary shutdowns; the physical infrastructure was often dismantled or abandoned.
Direct Link to Trade: A seminal study by economists Autor, Dorn, and Hanson estimated that import competition from China was responsible for roughly 2.4 million of those lost jobs directly.
2. The Productivity-Pay Gap (The "Great Divergence")
Lutnick argued that the system worked for capital but not for labor. The data on productivity vs. compensation is the "smoking gun" for this claim.
1948–1979: Productivity and hourly compensation grew together. As workers made more, they were paid more. (Productivity +108%, Wages +93%).
1979–2021: The link broke. Productivity grew by 64.6%, while hourly pay for the typical worker grew by only 17.3% (adjusted for inflation).
Implication: This gap represents trillions of dollars in value that went to corporate profits and shareholders rather than to the workers producing the goods, validating Lutnick's "America First" labor argument.
3. The "Wage Premium" Loss
The "hollowing out" isn't just about unemployment; it's about the quality of jobs that replaced the lost ones. Manufacturing jobs historically paid a "wage premium" to non-college-educated workers.
The Swap: When a manufacturing worker lost a job paying $35/hour (with benefits) and found a new job in the service sector (retail, hospitality), the new job typically paid 20% to 30% less.
Impact: This shifted millions of Americans from the "middle class" to the "working poor," even if they technically remained employed.
4. Regional Desolation (The Rust Belt)
The aggregate national data hides the severity of the collapse in specific regions. The "left behind" communities Lutnick mentions are visible in regional economic data.
Concentrated Losses: In states like Ohio, Michigan, Pennsylvania, and North Carolina, manufacturing employment dropped by 40–50% between 2000 and 2010.
The Multiplier Effect: For every 1 manufacturing job lost, an estimated 1.6 additional jobs were lost in the local economy (suppliers, truck drivers, local diners) because the factory was often the primary engine of local commerce.
5. Investment "Far-Shoring"
Lutnick criticized the "export" of capital. The data on Net Domestic Investment supports this.
Declining Domestic Investment: As a share of GDP, U.S. domestic investment in new factories and equipment trended downward for decades as companies chose to invest CAPEX (Capital Expenditure) in facilities overseas rather than at home.
Intangible Shift: The U.S. economy shifted investment toward "intangibles" (intellectual property, software, branding)—assets that benefit high-skill coastal cities—while physical capital investment (machinery, plants) stagnated in the heartland.
Summary of the Data
The "hollowing out" is not a political talking point; it is a statistical reality. The U.S. traded labor resilience for capital efficiency.
Consumer Benefit: Prices for goods (TVs, clothes, toys) dropped or stayed flat.
Producer Cost: The median male worker in the U.S. saw his real earnings stagnate for 40 years, and the industrial capacity of the nation contracted significantly
I then asked Gemini the following prompt: Can you look at the Trade Deficit numbers to see how much wealth was transferred abroad during this period? Also consider capital flows. Lastly, was Europe as negatively impacted as the U.S. during this period? Meaning, did the "China Shock" have a greater or lesser impact on Europe?
You have touched on the financial engine that made the "hollowing out" possible. The trade deficit and capital flows are effectively the receipts for the policy shift Howard Lutnick described.
Here is the breakdown of the wealth transfer and a comparison of how the "China Shock" impacted Europe differently.
1. The Trade Deficit: "The Wealth Transfer"
When critics like Lutnick say the U.S. "transferred wealth" abroad, they are referring to the Trade Deficit. This is the difference between what the U.S. earns from selling goods and what it pays to buy them.
The Explosion: In 1991, the U.S. trade deficit in goods was roughly $77 billion. By 2022, it had exploded to over $1.1 trillion annually.
The "Goods" Gap: The U.S. actually runs a surplus in services (selling software, consulting, banking). But the deficit in physical goods (cars, electronics, steel) is so massive that it wipes out those gains.
Cumulative Impact: Since 2000, the U.S. has run a cumulative trade deficit of over $15 trillion. This represents $15 trillion of demand that leaked out of the U.S. economy to factories abroad instead of supporting domestic production.
2. Capital Flows: "Selling the Furniture to Pay the Rent"
This is the most critical but least understood part of the equation. If the U.S. buys $1 trillion more from the world than it sells, how does it pay for it?
Answer: By selling assets.
To finance the trade deficit, the U.S. sells Treasury bonds, real estate, and corporate equity to foreign investors. This is recorded in the Net International Investment Position (NIIP).
The Number: As of late 2024, the U.S. NIIP is roughly -$26 Trillion.
What this means: Foreign investors own $26 trillion more in U.S. assets (land, debt, stocks) than U.S. investors own in foreign assets.
The Cycle:
The U.S. sends dollars to China/Germany/Japan to buy goods.
Those countries do not use those dollars to buy American goods (which would balance trade).
Instead, they "recycle" those dollars back into the U.S. financial system by buying U.S. government debt (Treasuries) or real estate.
Result: The U.S. gets cheap consumer goods, while foreign nations get ownership of U.S. debt and assets.
3. Was Europe Impacted the Same Way?
No. The "China Shock" in Europe was fundamentally different, particularly for Germany. While the U.S. and Southern Europe (Italy, Spain) competed against China, Germany partnered with China.
The German Exception: "China's Tool Shop"
Academic studies (such as by Dauth, Findeisen, and Südekum) have found that the "China Shock" had a benign or even positive net impact on the German economy during the critical 2000–2010 period.
Complementary vs. Substitute:
The U.S. produced consumer goods (textiles, furniture, appliances) that directly competed with Chinese exports. (Substitute).
Germany produced high-tech capital goods (industrial robots, heavy machinery, luxury cars) that China needed to build its factories. (Complementary).
The Result: As China grew, it bought massive amounts of German machinery. Germany effectively sold the "shovels" for China's industrial revolution.
Trade Balance: Unlike the U.S., Germany ran massive trade surpluses throughout this era. They maintained their industrial base by integrating their supply chains into Eastern Europe (cheaper labor) while keeping the high-value engineering at home.
The Southern Europe Problem
Countries like Italy and Spain suffered a fate similar to the United States.
Their economies relied more on mid-tier manufacturing (textiles, leather, shoes, ceramics) that faced direct price competition from China.
Like the U.S., they saw significant de-industrialization without the offsetting boom in high-tech machinery exports that Germany enjoyed.
Summary
The U.S. Model: Accepted massive deficits, sold debt to finance consumption, and allowed its industrial base to erode.
The German Model: Maintained surpluses, sold the machinery that powered globalization, and protected its industrial core.
This contrast reinforces Lutnick's argument: The "hollowing out" was not an inevitable force of nature; it was the result of specific policy choices about how to engage with the global economy.
So I followed up with this: Can the U.S. compete with China to regain lost industries without making any changes to existing policy? If not, what changes need to be made? Is a pivot by corporations to robotics and AI inevitable in order for them to protect profits and margins?
The short answer is no. Under the current "status quo" policy mix—even with recent tariffs—the U.S. cannot cost-effectively regain lost industries from China. The structural math simply does not work without significant intervention.
Based on the economic data and recent signals from the administration (including Lutnick’s 2026 agenda), here is the breakdown of why the current path is insufficient, what changes are required, and why the pivot to robotics is not just a choice, but a mathematical necessity.
1. Why the Status Quo Fails
If the U.S. relies solely on "market forces" or simple tariffs without structural change, reshoring fails for three reasons:
The Labor Cost Chasm: Even with rising Chinese wages, U.S. manufacturing labor is still 4x–6x more expensive. A 10–20% tariff does not bridge a 400% wage gap.
The "Skill Void": The U.S. currently has a projected shortage of ~2 million manufacturing workers by 2030. As Apple’s Tim Cook famously noted, you can fill a soccer field with tooling engineers in China, but you might struggle to fill a conference room in the U.S.
The Supply Chain Ecosystem: China didn't just build factories; they built "industrial clusters" where component suppliers, assembly plants, and logistics are all within a 50-mile radius. Recreating this deep ecosystem in the U.S. is impossible under current regulatory and capital cost structures.
2.The Necessary Policy Changes
To actually move the needle, the policy framework has to shift from "incentivizing" (subsidies) to "restructuring." Based on the "America First" model Lutnick is articulating, three major changes are likely required:
Aggressive Deregulation (The "Red Tape" Cut):
Problem: It currently takes 5–7 years to permit and build a major factory in the U.S. due to NEPA (environmental reviews) and local zoning. In China, it takes 18 months.
Fix: A federal override on industrial permitting to shrink timelines to <2 years. Capital will not wait 7 years for a return.
Energy Dominance (Lowering OpEx):
Problem: U.S. industrial electricity costs are competitive but rising.
Fix: Massive expansion of cheap baseload power (likely natural gas and nuclear) to give U.S. factories a permanent operating cost advantage over Europe and Asia. This aligns with Lutnick's focus on "energy sovereignty."
Capital Controls or Dollar Management:
Problem: A strong U.S. dollar makes American exports expensive and imports cheap, naturally favoring offshoring.
Fix: This is the most controversial but potent tool—active management to weaken the dollar or tax capital outflows, forcing investment to stay domestic.
3. Is the Pivot to Robotics and AI Inevitable?
Yes. It is the only way the math works.
You cannot pay American wages to do Chinese-style labor and remain solvent. The only way to protect margins while producing domestically is to de-couple production from labor hours.
The "Great Equalizer": If a factory is 90% automated, the cost of labor becomes a rounding error. At that point, the U.S. advantage in cheap energy and legal stability outweighs China's advantage in cheap labor.
The 2026 "Robot Push": Lutnick and the administration are reportedly pivoting from "software AI" (LLMs) to "Embodied AI" (industrial robotics). The goal is to replace the "China Shock" with a "Robot Shock"—using machines to do the low-value assembly work that left the U.S. in the 2000s.
Protecting Margins: For corporations, this is defensive. If tariffs cut off cheap labor access, they must automate to preserve the margins Wall Street demands.
Summary: The U.S. can regain production, but it cannot regain the jobs of 1970. The new factories will be American-owned and located on American soil, but they will be populated by robots, maintained by a smaller, higher-skilled workforce of engineers and technicians
Which got me thinking, and I follow up again: This path sounds like it extends, if not magnifies, the "China Shock" impact on the U.S. labor market. With aging demographics and historically low fertility rates, not to mention minimal increases in industrial / reshoring jobs (all of which weaken Federal tax revenue), how will the U.S. be able to manage its growing debt load?
You have correctly identified the "fiscal cliff" of the 21st century. Your logic highlights a massive structural contradiction in the current U.S. economic model.
If the U.S. pivots to a "High-Robot / Low-Labor" manufacturing base to compete with China, it breaks the feedback loop that has funded the government for 80 years.
Here is an analysis of how this "Triple Whammy" (Demographics, Automation, Debt) interacts, and the specific mechanisms economists and policymakers are proposing to prevent collapse.
1. The Core Problem: The Tax Base Mismatch
You noted that reshoring with robotics weakens federal revenue. This is because the U.S. tax code is designed for a labor-intensive economy, not a capital-intensive one.
The Reality: Approximately 80% of U.S. federal revenue comes from taxes on human labor (Income Tax + Payroll Tax).
The Conflict: If a factory replaces 1,000 workers ($50k/year each) with 100 robots, the government loses the income and payroll taxes from 1,000 people.
The Deficit: Robots do not pay FICA (Social Security/Medicare) taxes. Under current law, an automated reshoring boom effectively privatizes the profit (higher corporate margins) while socializing the cost (lost tax revenue + displaced workers).
2. The "Deflationary Trap" for Debt
Your concern about the debt load is amplified by deflation.
The Mechanism: The goal of robotic reshoring is to lower the cost of production (deflation).
The Debt Problem: National debt is nominal. If the U.S. owes $36 Trillion, and robots drive down the price of goods and wages, that $36 Trillion becomes harder to pay back in real terms. You generally want inflation (cheaper dollars) to pay off massive debt, not deflation.
3. How the U.S. Manages This (The "New Math")
Since the status quo is mathematically impossible under the conditions you described, financial planners and macroeconomists foresee three inevitable pivots to manage the debt:
A. The Shift from Income Tax to Consumption Tax (VAT)
Since you can no longer tax labor (which is shrinking), you must tax transactions (which are growing).
The Fix: The U.S. is the only major developed nation without a Value Added Tax (VAT).
The Future: Expect proposals for a "Robot Tax" or a VAT where the government takes a slice of the output of the robot rather than the wages of the worker. This allows the government to capture revenue from automated productivity.
B. The "Productivity Moonshot" (The Denominator Fix)
This is the argument favored by technologists like Elon Musk and some supply-side economists.
The Theory: They argue that AI and Robotics will increase GDP (The Denominator) so radically that the Debt-to-GDP ratio will stabilize, even if the debt itself grows.
The Logic: If robots allow the U.S. economy to grow at 5–6% annually (instead of the anemic 2%), the economy effectively "outgrows" the debt burden. The hope is that the explosion in corporate profits will generate enough corporate tax revenue to offset the loss in income tax.
C. Financial Repression & Inflation
If growth doesn't materialize, the "ugly" solution is essentially a soft default.
Yield Curve Control: The Federal Reserve may be forced to permanently cap interest rates below the rate of inflation. This artificially erodes the real value of the debt over time, effectively taxing savers and bondholders to pay for the state.
Summary
You are right: The current path magnifies the impact on the labor market and threatens the tax base.
The U.S. cannot manage its growing debt load with a 20th-century tax code applied to a 21st-century automated economy. The "America First" production model likely necessitates a radical restructuring of federal taxation—moving away from taxing people and toward taxing machines, consumption, and tariff.
I share this Gemini chat with you for no other reason than I think it's insightful and thought-provoking. All of us know significant shifts are underway. None of us knows with precision how or when it ends. All we can do is be observant and open-minded to the many paths it can take. I’ll leave you with the table below of the 10 largest economies in the world ranked by GDP output as of 2025. I also wanted to incorporate a couple of other big-picture macroeconomic data points (population and employment) and compare them with where they were in 2000, when China entered the WTO (the ignition switch that kicked globalization into overdrive).
The last point I want to make is that both power and responsibility are unbalanced in the real world. In terms of power, no nation in the world has more of it than the U.S. I’m not saying that will always be the case, and I’m not taking sides on fairness, righteousness, morals, or values. I’m confident we all have a view (one way or the other) on the U.S. abusing or flexing that power, but in the three speeches I highlighted above – both PM Carney’s and Chancellor Merz were celebrated for their message and statesman-like delivery, while Lutnick’s was criticized as rude and offensive. I don’t disagree with any of those assessments, but allow me to point out that Lutnick’s (and Trump’s 90-minute word salad) carried the most weight and were the most important. Why? Because the U.S. is the world’s superpower and at least six times larger than any other nation not named China.
What, when, and how PM Carney delivers a speech, no matter how professional the delivery or on point the message, remember in the context of global capital markets and the global economy, Canada packs less than 1/10th the punch as the U.S. Please, please don’t interpret this as anything other than the stark reality that it is. I mean no offense to Canada, Europe, or America. It’s just that many conversations I get engaged in fail to recognize or acknowledge how fortunate one is to be an American. Not to be the bully in the playground, but rather the opportunity it provides to those who inhabit it. In a world where U.S. economic power and national security, (yes values and moral fabric too, but that’s beyond the scope of this missive), are under threat unlike any other time since WWII, be cognizant of what’s at stake if the U.S. doesn’t push back. Look at the column titled “% change in GDP” in the table above, which gives you an indication of which nations are climbing the wall of power (China +1,516%, Russia +861%, India +776% over the past 25 years), most of the other countries are growing but at a rate that would be expected of a mature developed economy. What they say, what they do, when they do it, and how matters. The rest, unfortunately, as both PM Carney and Chancellor Merz pointed out, are just along for the ride.
I apologize in advance for any offense a reader takes from this missive. That’s not my intent. The world has become a very complicated place to interpret and navigate – perhaps this gives you a vantage point you haven’t seen before.
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