What must the US do to prevent losing to China in the manufactured “AI race,” part II?

Happy Wednesday out there, Team 42. It's your skipper here, Darius Delt. I'll present our macro minute for Wednesday, September 23rd, 2026. As always, we'll start with the executive summary from today's lead-off warning note, so let's dive right in. Today's key macro question is, what must the U.S. do to prevent losing to China in the manufactured AI race, part two? The short answer is cooperate. No change to this data-driven view. Key supporting evidence today are reports ahead of President Trump and Xi Jinping's meeting this week signal that cooperation on safety may be achieved, despite neither side wanting AI progress slowed. Washington aims to keep its tech lead while Beijing works to catch up. As a result, Thursday meeting may yield narrow AI safeguards, not limits, with cybersecurity and data leaks as shared worries. Think, targeted AI rules instead of breaks, plus early agreement on key dangers. Additionally, Treasury Secretary Scott Besson said Washington proffered an emergency AI crisis hotline and a formal channel for subsequent talks during Sunday's New York session with Chinese officials. Anthropic co-founder Dario Amadei says denying Beijing an AI lead is vital for safety, which supports stricter chip curves, semiconductor curves. China views this reasoning as containment disguised as safety and calls it fear-mongering. Quote, the existential risk from AI is really not a major topic in China and not a major topic in the Chinese policymaking world. There's growing convergence in some of the concerns around other major AI risks, namely around cybersecurity, biological weapons, non-state actors, said Kyle Chan, a fellow with the Brookings Institution. So what does this mean for your portfolio? In our view, the key reason why China's winning the manufactured AI race represents such a threat to DC and Silicon Valley stems from the greater need for American firms to generate outsized profits relative to their low-cost, state-subsidized Chinese competitors. If China wins, U.S. tech firms will find it challenging to generate the ROIC required to justify trillions in CapEx. Thus, investors should view the national security implications of this race as thinly-veiled motivation for the U.S. public to ensure American tech firms are able to generate broadly acceptable ROICs per unit of investment. Note, this does not mean winning is not important. It obviously is. This reframing, however, is simply helpful for the focus pivot required to exit the AI trade profitably near the eventual cycle peak. Whenever money is invested, you're going to lose a lot of money. And if you're not involved in our capitalist society, you would be wise to start there in the search for any justification. Reminder, China's AI development has a structural advantage relative to U.S. AI development when analyzed through the lens of STEM expertise. China's AI development has a structural advantage relative to U.S. AI development when analyzed through the dual lens of the cost of capital and the cost of tokens. AI development when analyzed through the lens of energy. And finally, China's AI development has a structural advantage relative to U.S. AI development when analyzed through the lens of politics. These are some pretty big structural advantages. Reminder, China currently dominates critical mineral supply at roughly 60% of mine production and roughly 90% of refined production. This is a trump card, pun intended, that China could use to effectively shut down a U.S. military whose arsenal has been depleted via nearly seven months of war in Iran. The Trump administration's strategy to shield China from its hegemonic muscle flexing is extremely important. It's extremely wise in this context. Beijing has long demanded, quote, mutual respect in this relationship and critical minerals are China's primary conduit for obtaining it. As always, I'll wrap up with a question from our community. This was titled Thoughts on Oil. DD, can you please share your wisdom on the crude markets? What is your macro outlook aside from a bullish VAMS condition on USO? DBA also still holding on to its bullish VAMS condition as well. Is there any substance to an oil and agricultural shock thesis? Even respected oil analysts that I follow have a wide variance of opinions on this matter. And deciphering reality on this trade has proven to be the most difficult of my career since I began managing client assets professionally. God bless. God bless you, my friend. Appreciate the thoughtful question. So my first start, when you're talking about commodities, what I found in my career, and this may be different from other people, but just from my career as someone who's, you know, pretty well-trained and well-versed in data analytics, is supply-demand has very little to do with the day-to-day, week-to-week, month-to-month fluctuations in commodity prices. You know, commodity prices tend for more. We can just ascertain, tend to be broadly driven by macro forces such as growth, inflation, monetary policy, fiscal policy, liquidity, positioning, you know, trying to, using our market regime now casting framework to determine the exposure you should have in the commodity markets has proven to be a much more valuable tool than trying to guess supply-demand dynamics at the margins, especially in the context when you layer on weather, which becomes such a, you know, you know, outsized influence for particular markets. And so, you know, my broad general take on commodities, just as an investor is, buy the commodities where supply is in short supply and sell the commodities where there's a lot of supply. The demand component, a lot of folks focus on demand, but the reality is demand is not what really typically drives these markets. When you study their, you know, study their performance, it's usually supply, excess supply, or not enough supply that tends to create outsized moves, the big moves that you care about as an investor, you know, the big trending up moves or big trending down moves that you care about as an investor. So kind of going back to this question, my broad thoughts on oil and everyone's broad thoughts on oil, whenever our president decides he wants to humbly accept defeat in the Strait of Hormuz, the price of oil is going to come collapsing down to perhaps a level that we're not even, you know, thinking about at the current juncture. If they continue, if he refuses to demonstrate the humility required to accept defeat and move on from this experiment, then the price of crude oil is probably going to continue to gradually rise over time, trend higher over time, because ultimately a lot of the, you know, kind of tinkering that we've seen around the global economy, whether it be rerouting flows or China reducing its imports, et cetera, you know, all those, you know, temporary solutions are going to kind of hit the, you know, they're going to get maxed out and eventually, we're going to have a problem. But to me, I think I've said this in previous macro minutes, the biggest problem in the energy market is not the price of crude oil, it's the lack of refining capacity, if you think about what's going on in the Middle East and what's going on in Russia. So that's going to be with us for a while, but that doesn't necessarily mean the price of crude oil has to go up. If we bow out of Iran at some point in this fall, then you would expect to see a significant decline in the price of crude oil. And maybe that's what markets are starting to forecast. If you look at broad risk markets, you know, gold stocks, et cetera, and one final thing I'll say on this, you know, obviously, oil has been very correlated to the long-term bond yield, not just in the U.S., but globally, and part of that is not necessarily through the inflation expectations channel. Most of the move in these bond markets has come in the real interest rate channel, and our ascertaining, our math shows that that move in real interest rates is primarily driven by a backup in the neutral rate in R-star for these key economies. And the reason the neutral rates in R-star estimates and ranges have backed up in these key economies is because of the reduced global dollar recycling flows as a function of the reduced petroleum product flow that's traveling around the world, you know, you're just seeing less current account flows, ultimately less household savings growth, less corporate profits growth, less FX reserve accumulation in these net international investment surplus economies at the margins, and so ultimately, you know, you're just less capital flowing around the global economy, particularly in the context of a massive AI capex bubble, you know, fiscal profligacy across most of the Western major economy roads. And so, you know, this massive marginal increase in demand for capital is coinciding with a marginal reduction in capital, stemming from this issue in the Strait of Hormuz. So if you reverse that Strait of Hormuz dynamic, ultimately the marginal reduction in supply of capital will ameliorate itself at the margins, and you could potentially see a big decline in R-star and neutral across these economies in ways that will kind of truncate these nascent tightening cycles by the Fed, the ECB, the Bank of Japan, and ultimately abort the, soon to be started tightening cycles by the Bank of England and the Swiss National Bank. So that would be obviously an incredibly positive dynamic to, you know, perpetuate what could potentially be a Santa Trump rally into and through year end. So just be aware of all that. Hopefully, if you want to get some more insight on that, check out our most recent Around the Home presentation from Saturday, September 19th, for more details on that. So we'll wrap it up there. Darius Dell here presenting our macro minute for Wednesday, September 23rd, 2026. Best of luck out there today. We will catch you back here next Monday. 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