Jacob Shapiro: Hello, listeners. how about this for a segue, Rob? I’m dealing with computer issues, but the people of Taiwan dealing with the worst earthquake that they’ve had in 25 years, a 7.4 on the Richter [00:02:00] scale. The only saving grace is that it was not right in Taipei. It was southeast of Taipei itself. It looks and it’s a little early here, we’re recording Thursday, April 4th, but a lot of semiconductor facilities and other tech companies as a precaution, shut down operations, evacuated some staff.
But it looks like no serious damage to any of the most important facilities there that semiconductor workers are getting back to work. And then on top of that, China was very tongue in cheek. They thanked the world for their concern about the earthquake, which Taiwan, of course was [00:02:30] offended by Hey, didn’t happen to you, China.
It happened to Taiwan, which is a whole thing in and of itself and rejected Chinese aid. And the Chinese are not trying to push the aid. So at a geopolitical level in terms of immediate implications for supply chains, probably not that important. I’d like to see all of these facilities back online before we get there in the first place.
But I did, I don’t know if you noticed this, Rob, like a bunch of, news publications, whether it was Bloomberg or, FT or the Wall Street Journal, they took the opportunity to talk about the earthquake for three or four paragraphs in an [00:03:00] article. And then it was like, and by the way, China might invade Taiwan.
And if they did, it would cost an estimated 10 trillion to the global economy and everything would be terrible. They’re just like backing in the world war three scenario when guys, it’s an earthquake and there’s some stuff that we need to talk about there. But I thought it might be worthwhile to take a step back and understand why Taiwan has become a center.
of the global semiconductor supply chain. I think it’s something that gets thrown out there a lot, but I thought we could put a little more meat on the bone. Is there anything you want to start off with, Rob, from your perspective about [00:03:30] Taiwan, or would you like me to give the listeners some context here?
Rob: No, why don’t you start with the context and then we can go from there. Okay.
Jacob Shapiro: I’ll try to do this very quickly. In some ways, this is akin to some of the micro geopolitics. segments that we were doing before. Taiwan really, it’s an incredible economic story. So if you go back to roughly 1980, overall IT tech output from their economy was something like a hundred million dollars.
Basically nothing. And by 1989, that figure goes to 5 billion. And [00:04:00] then by the end of the 1990s, we’re talking about 21 billion, growing annually at 20 percent from 1989. TSMC, the sort of famous semiconductor company that is at the front of the cutting edge right now is founded in 1987. So they go from not existing until 1987 to within 10 or 20 years being at the cutting edge of global semiconductors.
And this is why everybody freaks out about Taiwan because about 80 to 90 percent of the high end chips, the ones that you need for artificial intelligence or all these boondoggles that everybody’s always talking [00:04:30] about. They’re made in Taiwan. They’re probably made by TSMC and there’s really no substitute in the market right now.
Maybe Intel will get there in five years. Maybe Samsung or some of these others will get there in five or seven years, but TSMC is really the only game in town. There’s a couple different reasons that Taiwan emerged. I was reading a great article by Evan Fagenbaum who really put all these things together and he associates it with basically three things.
It’s a three legged model from his point of view. The number one is that Taiwan had a really [00:05:00] interesting and contrarian competition policy. So they were flexible and decentralized when the trend in East Asia was actually state dominant state dominated. Now, China’s the best example of this, top down priorities, working with state owned enterprises to build, critical sectors of the economy.
But it’s true of Japan and South Korea, too. They were the miracles of the 60s and 70s. But by the 80s, you’re talking about governments partnering with big national champions and that’s the way that the economy worked in Japan and South [00:05:30] Korea and into the 1980s.
That wasn’t how Taiwan worked. It was decentralized. It was all about tech startups. They negotiated a lot of tech transfers. They invested a lot in higher education a lot of a government budget in research and development a really different atmosphere than these other countries encourage.
It’s, I think it’s ironic that Japan is trying to encourage that atmosphere. Now, if you look at what Japanese policy’s trying to do today, it’s what Taiwan was doing in the 1980s. The second is the internationalization of Taiwan’s Brain Trust, and it’s [00:06:00] ironic that. Even as the united states was basically giving up on taiwan You know in the context of nixon and then later carter the united states decides to recognize the people’s republic of china as one china in return for Basically an economic alliance against the soviet union and what that means was they gave up recognition of taiwan as the legitimate china But in the context of that a lot of taiwanese americans or taiwanese scientists came to the United States and discovered Silicon Valley before anybody else discovered Silicon Valley.
And these people [00:06:30] worked in Silicon Valley and got to knew all of the tech startups in Silicon Valley and brought back everything that they learned to Taiwan in the 1980s. So you had this weird sort of development, and this is only possible in a world of globalization and free trade where. Silicon Valley and Taiwan have this marriage of convenience, where Taiwan has, labor advantages and all of these interested folks who have gotten good educations because of the competition policy, and they are rubbing shoulders with people in Silicon Valley, and I bet there’s a smidge of the United States feels bad for hanging Taiwan out [00:07:00] to dry, so they’ll give them sort of favorable considerations.
Taiwan’s. Also tiny by comparison to a Japan or a China. There was no threat to the United States from the Taiwanese economy, their way there was from Japan or the way there is from China today. And the last thing is just this intangible thing because Taiwan was good on quality. Its labor costs were low.
But for some reason Taiwan was able to innovate independently. It was able to take what it learned in Silicon Valley, take some of these things and push it forward. And that’s how Taiwan gets [00:07:30] to the present day, but it’s really been in decline probably for more than the last five years, which is when people have started to get more interested in Taiwan as a result of deglobalization and geopolitics and things like that.
Feigenbaum’s article, which is from 2017, but the sort of coup de grace of the article, and we’ll put a link to it in the show notes, is that And I’m going to quote him here, a new generation of Taiwanese startups has failed to emerge. So all that intangible stuff that made Taiwan innovate and put them at the cutting edge, that’s, they’re coasting on the path.
They are no longer the ones that are pushing the [00:08:00] forefront. And that could be because free trade is declining. It could be because They were big in hardware and now software. We could argue about why exactly that’s the case, but they’re not at the cutting edge anymore. That’s not where all the startups are happening.
I think the other thing that I, that for me is more particularly disturbing, and this is what I worry about in the context of Taiwanese relations with China number one is that 80 percent of the ICT products that are designed in Taiwan by Taiwanese companies is now manufactured in China.
So China basically swallowed a lot of the manufacturing that [00:08:30] Taiwan was doing in the first place, just like China swallowed it from everywhere. It swallowed it from Apple, it swallowed it from all these companies that in the past might have looked at Taiwan for this. And then, this article’s from 2017, so the statistic is probably very low but it estimated that 3, 000 out of 40, 000 Taiwanese semiconductor engineers had left Taiwan by 2017.
That’s almost 10 percent of your semiconductor engineer workforce. And that’s not something you just flip a switch and suddenly you replace your semiconductor engineering workforce. And before it was China that was [00:09:00] trying to incentivize these semiconductor engineers to come, but now it’s the United States and it’s Japan and it’s South Korea and it’s anybody else who wants to build their own domestic semiconductor industry, which is something that we’ve talked about here for a long time and which seems to be the sort of center of global geopolitics right now when it comes to tech supply chains.
So I, I think we’ve alluded on the podcast before to why we’re pessimistic about Taiwan, why we avoid Taiwan and some of our strategies. It’s not because it’s hard not to root for Taiwan and not to be impressed by their history, but you just look at [00:09:30] what allowed them to become what they are today and you look at where the winds are blowing.
And things don’t look particularly good.
Rob: Yeah, I think it’s interesting to compare Taiwan against a Japan or a larger country. We’ve spoken a lot about different modes of development and different models and how the liberal model does not apply in most cases.
Like most of the countries that got rich did not get rich through free markets or more. Globalization focused low tariff [00:10:00] strategy in the Ricardian sense. But Taiwan is very unique in that way because they did tuck into this very specific niche of the broader global economy, as you point out.
And now it seems like they have suffered from being so small because it’s almost like they have a bit of Dutch disease. Where, so much of their human capital, so much of their focus has been on one area. And as you point out, they haven’t really [00:10:30] emerged as an area of true kind of widespread innovation.
They don’t really have many leading companies in the world outside of, a few small a few small niches. So it’s from a competitive standpoint, nation versus nation. It does seem like they’re not very well positioned for the next 20 years, even, all the issues of China and potential threats aside.
Jacob Shapiro: That’s the other thing they really don’t have going for them though, [00:11:00] because I would actually make the argument that in this multipolar world, if your geography is favorable, I think it actually opens up the door to more Taiwan examples. It’s, you can’t find a global niche, but if you can find a niche within a sphere of influence run by a dominant power, or if you can be a sort of a political.
Place for trade to happen or for financing to happen the way that the UAE is trying to work right now There’s a real chance for you to build those sorts of things in a world There’s a lot of opportunity the problem for [00:11:30] Taiwan is all the reason All of this is happening with Taiwan and probably the reason they weren’t able to innovate is because the world changed around them because they’re right Next to China if they were not right next to China if they were next to Uruguay, and China still claimed that Taiwan was part of China I don’t think anyone would care, and probably Taiwan would continue to innovate.
The big problem that they have for themselves in the long run is that everybody sees the writing on the wall. Taiwan is more important to China than it is to Everybody else in the world. And eventually and that could be 10 [00:12:00] years from now. That could be 50 years from now. It could be 100 years from now.
Probably Chinese power is going to re assimilate Taiwan back into the mainland. By the way, listen, I’m sure that will upset some listeners. I’m not saying that’s a good thing. But if you just look at the trajectory of history and where the interests are going, that’s true.
And so if you’re a company that is thinking about investments in these types of facilities, which take Many hundreds of millions, if not billions of dollars. They’re not simple to set up. It’s, it is physical hardware that has to be there. And it’s not easy to [00:12:30] replicate and move particularly easily.
So you’re worried about a Chinese invasion. You’re worried about earthquakes because they’re on some tectonic plates. plates. You’re worried about climate change. There have also been problems with Taiwan in terms of drought and lack of water, which is also critical. So you start like going down the list of things.
And their geography is not particularly favorable. It wasn’t particularly favorable in the eighties and nineties, but nobody cared about this stuff in the eighties and nineties and the eighties and nineties. As you said, it was all about driving down cost. It was all, oh, they could make it cheaper. Oh, they figured out a different way to do it.
Cool. Let’s do some [00:13:00] business with the Taiwanese. That’s just not the way that it’s working right now in the
Rob: And the broader thing that I find interesting about Taiwan also is it tells us something about how economic decisions get made because everyone is hemming and hawing now about this exposure in the global economy to this small, vulnerable island, vulnerable in many ways, earthquakes, Chinese invasion, all these issues, none of these things are secrets.
It was funny when you [00:13:30] wrote your analysis of the earthquake and then in the knowledge platform, I think you referred to it as a black swan like event, but then you showed the chart of all the earthquakes that have happened in Taiwan over the last, 50 years, the black swan. By definition is something that’s previously unthinkable.
Like you didn’t know that was a thing. And then it shows up even aliens showing up as not a black swan event. We know that’s possible at some level. So the Taiwan issue [00:14:00] is interesting because a lot of these things should have been apparent years and years ago, before we had hundreds of billions of dollars of fixed PP and E invested in this country, that It’s very difficult to move and to diversify and to get out.
And in some ways we’re making the same issues again, where, the U. S. is trying to replicate its own supply chains. Where is it building semiconductor fabs in freaking Arizona, where we’re running out of water and any analysis will tell you that we’re going to have meaningful water [00:14:30] issues within the next, some odd years, but we’re not, we’re not operating on that timeframe.
And I, I think that’s just a broader principle that I find interesting. And that we’ve been trying to be more thoughtful about here, where we’re starting to do analyses of these kind of not black swan risks, as I said, but tail risks, infrequent, but predictable things and what impact could they have.
The pandemic is a good example. People know [00:15:00] that there are pandemics. People predicted before COVID that there could very well, very easily be a global pandemic because the precursors are in place and you have global transport and it’s going to transmit quickly and even people, identified animal to human transmission as a growing issue.
None of this was unknown, and yet we were so unprepared and falling all over ourselves for this because it’s just whatever, all of the [00:15:30] benefits it has, our system is not very good at preparing for stuff that’s either very low probability, even if it’s almost bound to happen at some timeframe, or, it’s sufficiently far out in the future that, Yeah, we’ll deal with that later, so this is a from an investment standpoint a very Important theme that crops up again that we’re trying to take really more closely into account
Jacob Shapiro: The other thing about Taiwan it really is the perfect [00:16:00] symbol of globalization in some sense what people call the liberal international order I’m putting that in air quotes like Taiwan is the example of That’s the good version of it.
It’s where it doesn’t matter that there’s conflict It’s everybody’s joining the WTO even A place that the United States doesn’t recognize as a country. Okay, like you’re going to be part of this supply chain. We’re going to give you tech transfer. You’re going to do all these things, and you’re going to become a very wealthy country overnight.
And that just, there just really isn’t space for that anymore. There are examples of small countries or city states trying to do this, but it’s a [00:16:30] place, like I said, like the UAE, which is trying to become You know, a place where no matter who you are or what you’ve done in your past, you can park your money and figure out how to clean your money and get it to whatever market you want to go to.
It’s places like Qatar, which has a lot of natural gas and has a media empire and is trying to parlay that into some kind of power. Maybe a place like Guyana that has a fairytale, oil discovery. They have some asset that everybody wants. So people are going to come in, take it, and maybe they’re going to be able to harvest money out of that.
It’s much harder now for a country [00:17:00] like Taiwan, which has, maybe. 20, 25 million people, roughly, they’re not going to build an economy of scale. And build a semiconductor company or a tech company or something like that just selling to the taiwanese market And if there’s all these political problems with selling into the big markets that actually allow them to scale It’s not going to work and it’s also I really want to emphasize this it’s not just china Which has been predatory in terms of stealing taiwan’s expertise you alluded to the tsmc plant in arizona That’s the united states trying to steal taiwan’s expertise.
Japan is trying to steal [00:17:30] Taiwan’s expertise. All of these different countries don’t want to be exposed to Taiwan, the geography anymore. And Taiwan and Taiwanese companies are caught in this really unenviable position where it’s they still want partnerships and they still want to work with these different countries and other companies.
But they also know that in order to do that, they’re having to give up some of their tech. They’re having to transfer back the other way. And that’s not the way that, the sort of Taiwanese innovation is supposed to work. I do think it’s an example of how the world really has changed in that sense.
And I [00:18:00] hope I’m wrong about this. I’m very pessimistic about what direction things go from there. You mentioned the Arizona plant, by the way, I think it’s already like way like past budget and late and things like that. I it’s been interesting to see how Japan is doing a better job at working with TSMC and actually making progress and building facilities.
Whereas the United States made a big deal about it, but like it wasn’t I don’t think that partnership was actually emerging the way that the United States thought it would. Before we leave this, Rob point taken on black swans. And I actually thought of that while I was writing that in the knowledge platform.
But [00:18:30] doesn’t that mean that this is where I struggle with black swans, and maybe I need to go back and read Talib or whatever, but so what like, as soon as we say what a black swan isn’t it no longer a black swan? It’s it’s like beetlejuice or something. You say it and it appears, right?
Rob: Yeah, I think that’s right. As soon as you identify it, it has some probability of being right.
Jacob Shapiro: I guess so, but as soon as you identify it, it’s no longer, it’s like no longer a black swan in the first place. So it’s like a completely self negating definition of something that you absolutely can’t prepare for.
So is the concept of [00:19:00] black swans literally just gonna be, hey, sometimes things happen that you can’t prepare for. That sucks.
Rob: Yeah, that’s the definition. A black swan you cannot prepare for. You cannot put a probability on it. Like a black swan would be, for example, just to make something up, like there’s some weird chemical reaction In, when PFAS levels reach some thresholds in drinking water that causes some massive environmental problem that we didn’t foresee.
That’s a black swan. And I just made that up, [00:19:30] that’s not true. But that would be something that no one, Even thought about before until I just pulled it out of my butt right now. Yeah,
Jacob Shapiro: it’s no longer a black swan. You, thank you for ridding the world of that terrible black swan. Now we are completely prepared.
Exactly,
Rob: But that’s the idea with black swans. Everything else can be anticipated to some extent. Everything else is a tail risk, no matter how teeny tiny the tail. And the issue is with a lot of these things, Like the tail is not very [00:20:00] tiny. For example, I’m going to turn to my hobby horse here, coronal mass ejections.
This is, I don’t think the listeners know this, but this is a too frequently recurring conversation internally here, but coronal mass ejections happen on a very predictable basis. We are almost certainly going to have A coronal mass ejection from the sun hit the earth that is of significant size, like the Carrington event of [00:20:30] 1859.
Like we almost, very close, almost got hit with one in 2012. So within the next 30 years, probably there will be one. And that will have massive ramifications for satellites, for electrical grids. That is, I’m not just making this up, like this is just, I’m making this up. So how do you protect against that?
How do you buy insurance against that? I don’t mean literally buy insurance, but how do you [00:21:00] make yourself resilient against that by being thoughtful? Because I don’t think a lot of people necessarily are who are building things on a shorter time horizon. So that’s what I mean by the difference between tail risks that you can try, even if it’s something where you say, okay, the cost of insuring against this is not worth it.
At least you can identify that versus true black swan events, which is like. An earthquake in Manhattan like never saw
Jacob Shapiro: that [00:21:30] coming, fair enough are you sure you don’t want to just quit our jobs and start a coronal mass ejection insurance firm? That sounds like it might be something that would be keep your eyes on the coronal
Rob: mass ejection strategy coming here already
Jacob Shapiro: Yeah, it sounds good before we leave this topic I’m trying to be better about also approaching this from practitioner.
I don’t want listeners. Of course, nothing you hear here is investment advice listeners. This is a podcast for your entertainment, blah, blah, blah. But I don’t think we’re [00:22:00] telling you to run for the exits and avoid TSMC stock or short TSMC stock. So like when you’re thinking about this from a practitioner standpoint, Rob, like how are we implementing this in some of our strategies for our actual clients?
Rob: If you’re talking about Taiwan in particular, we don’t in our In our international strategy, we don’t have any exposure to Taiwan for the geopolitical reasons that you laid out, and that includes TSMC, which, if you have a passive exposure to any sort of international index, is probably going [00:22:30] to be the largest holding it’s the largest holding in the index.
So you are exposed to that. And again, I’m, I don’t mean to the alarmist but that is whether you. Realize it or not, that is the number one holding in most of these, in most of these, and we deliberately have cut that out of our strategies.
Jacob Shapiro: Yeah, and it’s, I think it’s a way of trying to balance passive and active, because as you said if you’re holding an international passive index TSMC is probably 2 3 percent is the [00:23:00] largest holding, so it’s it’s not going to sink the investment entirely, but our supposition here is that there is some gain to be found if you can filter out the bad with a little bit of activism in there.
Filter out the bad countries, maybe overweight some of the good countries and you’re going to be able to create maybe some gains for yourself on the back end. Let’s turn in a very different direction. I don’t want to go with anything in the headlines. I want to talk about and we’ll also put A link to the report.
We’re just about to mention the show notes. It’s by it was published by briefing book, published by a gentleman named ernie tedeschi [00:23:30] I hope i’m getting that right ernie I’ve never met you but You’re a research scholar at yale law school and formerly chief economist for the white house council of economic advisors.
Very fancy and the reason this Stuck out to me so much I’m, just going to give a very brief synopsis of the article and then i’m going to let you riff a little bit rob So he talked about how Us gdp is roughly double what other countries have experienced since the pandemic. So the US GDP has grown by 8.
2 percent since just before the pandemic. That’s almost twice as fast as the next best performer in [00:24:00] the G7. And the controversial assertion that he makes is that the rise and not just makes he backs it up with a lot of data and charts is that the rise in the immigrant population since the end of 2019 accounts for at least a fifth.
So 1. 6 percentage points of that us growth. accounting for direct labor supply, the unemployment rate and productivity effects. He notes that without immigration, U. S. Labor supply would have shrunk by 1. 2 million since 2019. Instead, it expanded by two million [00:24:30] over that same time period. And he says, This is how we can explain the behavior of the U.
S. Economy, which has had stronger growth relative than most. Very low unemployment, and at least until recently cooling inflation data. And even if inflation starts to go up again, I think his point would be relative to other countries, the United States has experienced less inflation. We have not been at the front of the pack in terms of high inflation rates.
Generally in Europe and some of these other markets, you’ve seen more pronounced inflation than you have in the United States. But And the last thing that he mentions that really [00:25:00] stuck out to me was that the Congressional Budget Office upgraded its 2026 outlook for immigration and it revised it upwards because it thought that immigration was actually understated in 2022, 2023, and is projecting something like 7 trillion, that’s trillion, more economic output over the next decade over the baseline as a result of immigration.
So I know that there’s probably a lot to break apart there and that immigration has become an extremely controversial topic in the United States. I’m sure everybody is going to want to write in and [00:25:30] send angry letters to us after we talk about immigration. Feel free. I love the hate mail. But Rob, I’ll set you up there.
Was this compelling for you? Do you think that there is something here? Do you think it’s making a mountain out of molehill? I’m curious for your take. Hey,
Rob: it was not compelling. And but before I rip into it and give my take, I want to hear. What is your interpretation of this report from your standpoint?
From a geopolitical standpoint?
Jacob Shapiro: Yeah, I get asked, so I get asked a lot about immigration when I’m giving talks and things like that. And [00:26:00] I, the way I tap dance through this, not really tap dance, at the broader level, so at the level that I usually sit at, that the United States is still a country that attracts immigrants at the level that it does is a major source of geopolitical strength.
There are very few countries in the world, the best and the brightest, or even not the best, but that people just want to go to because they think that they and their children can have better lives there. And it’s a source of enduring strength for the United States. I am a son of a, of an immigrant and many Americans have similar stories.
And when you talk about the people who have innovated the [00:26:30] most in the United States immigrants are a part of the fabric of the United States. That is separate from Immigration law reform has needed reform for probably 50 years. It’s become a political football that Republicans and Democrats kick back and forth to each other and there’s no accountability and no responsibility and obviously you need secure board.
Like I’m with you. Like all of that stuff is absolutely true, but China or Japan, they would love to be able to attract immigrants. that would want to come to China or Japan and learn Chinese and Japanese and integrate themselves into Chinese and Japanese life and assimilate and help them [00:27:00] with their terrible demographic picture.
So I think that this is a picture of that innate geopolitical strength. Now, U. S. politics is so topsy turvy that we can’t see that strength for what it is. And because we have kicked the can down the road for The border security or for immigration law reform and all these other things it has become a really pressing political issue And if i’m being really cynical It’s one that both sides like to have because it’s a way for them to kick back at each other Because the issue is there so they don’t actually have to solve it and when they’re having an election They can drag it [00:27:30] out and say oh ex official or ex president was terrible on the border and terrible Then we’ll get through the election And suddenly we won’t be talking about this anymore and everything will go away, which is my cynicism coming out.
And then the last bit was just I, I thought it was interesting because this economist, Ernie, is trying to explain economic data that doesn’t make sense to economist orthodoxy. It doesn’t make sense that there should be strong growth and super low unemployment and inflation is not that bad and so I, it’s nice to see [00:28:00] someone wrestling with that and trying to give a novel take on it.
I can’t imagine that it is just the immigration thing, that seems a little bit too simple, but he had some very compelling data talking about how this is moving into it. So that was my take from my perch. So
Rob: where to begin with this one? I guess the first thing to say is more of a caveat, which is it’s very difficult to speak about immigration, and I think even economists have trouble doing this outside of the context of politics and sort of emotion, because this is such an [00:28:30] emotive Idea and everyone says, Oh, it’s become such a big issue in American politics.
I’m not sure when it has not been a big issue in American has anyone else seen games of New York? My God, this is not a new thing. So I want to take all of that and just put it aside and just speak about this purely from a, an economic. And and a markets perspective, cause I think that’s the cleanest way to do it.
And I guess what I would say is, there’s no question that [00:29:00] immigration and demographics do matter for growth, but, and we’ve gotten some questions about this in the context of China and Japan recently. So I think this is worth going into. But the extent to which they matter, I think is way overblown.
Part of that is it’s very easy to make a simple equation that says number of people. Plus output per person equals GDP, like done and dusted. Wasn’t that easy? So my God, there’s only two [00:29:30] variables in that equation. Demographics must be of this huge importance, right? And immigration, of course, is a big part of that.
I don’t that’s quite right. And I think if you look at not just common sense, again, I thinking, but also just look at some of the academic work that’s been done and economic work that’s been done in recent years around culture and around different productivity levels across different people and different nations.
And it really shows you that the pure like number [00:30:00] of humans is much less important to economic growth than the old style of thinking is because when all of these things were formulated, these. These two factor equations. People used to think of this in terms of a factory.
How many people are in the factory making widgets, and how many widgets per human? And things have just changed so much now where the majority of the economy is not dealing with physical stuff. The majority of output is in services and [00:30:30] brain work. And if you think of how squishy the connection between having a person in the seat and the output in a professional environment or a services environment is it becomes clear that, it’s not just about how many people you’re letting in and out of what the babies, coming in are and how many people are dying because the differences are very stark.
So just to put some numbers around that, because I was curious to see this. If you go to the official U. S. data and you see the [00:31:00] studies that they’ve done, even if you take, not individual people, but if you take individual firms within the same industry gap between the 25th percentile of firms in terms of their productivity and the 75th percentile.
So we’re not talking about the extremes here, the 25th percentile. Okay. The gap in productivity between those two is about 2. 6 times. So that [00:31:30] is at the firm level. That’s not at the individual level. So that’s going to be magnified even more between individual people within any given firm. So what does that mean?
It means so much like the magnitude of the difference that depends on human capital and depends on organizational capital. Is so much more important than just Oh, throw another human in there. [00:32:00] Then that it’s almost it’s almost a sideshow to look at some of these flows and you can look historically, like periods of population growth haven’t necessarily corresponded all that well with economic growth is so driven by other factors.
So to round back to this guy’s article earning, I don’t know him either and I don’t mean to shit on him but to point to a five year period and say that us growth since 2019. Is a couple percentage points higher than the rest because of immigration, I [00:32:30] think is really just wacky. There’s so many variables in there that are way more important than immigration.
That I think it’s, I think it’s a really it’s a real limb to, to stand on, even if it is backed up by the inflation data and everything else that one is trying to tease out to support this. Thanks. Let me pause there and get your initial,
Jacob Shapiro: initial feedback. I wasn’t expecting you to feel so strongly about this one.
I’m here for it. If you were gonna the, [00:33:00] I think the obvious question is, so what is what is more important? Or, obviously I don’t think we want to just have one variable in there. So I don’t think you’re saying that this data is not important. You’re just saying that there’s other stuff that you have to think of in context of it.
So if you were critiquing this, like where would you look for to balance the equation?
Rob: Yeah, to back up Ernie a little bit because it is very important. I just don’t think in the context of the way that he’s described, it’s not as linear as he just described. It’s much more interesting than that, right?
So the context around this [00:33:30] is immigration, I think is not necessarily tied to these factors in the short term, but it’s hugely important. The fact that the U S does continue to attract immigrants because we’ve demonstrated that we have a capability. To take people and to inco incorporate them into the economy in a way that’s extremely productive.
You don’t need me to tell you that the numbers show immigrants are way overrepresented in the highest productivity, most innovative sectors of the [00:34:00] economy. Look at all the freaking brilliant Indians we bring in who are coming out of India, coming to the us starting lives here. I don’t know the data offhand, but I think if you look.
The CEOs of some enormously high proportion of U. S. tech companies come from the Indian subcontinent. So that’s just one example of many. So we have this ability to It’s almost alchemy. We take people out of bad organizational capital nations or environments and put them in [00:34:30] good ones and they can somehow thrive in the U.
S. in a way that they struggle to do so elsewhere. All else equal, you want lots and lots of U. S. immigration to the extent that it doesn’t tip over into, okay, we’re really starting to, To struggle to, to incorporate people. So that’s a huge factor, but again, like this gets to issues of culture, it gets to issues of behavior.
I think if you look at any of the data that shows like there’s a strong selection bias [00:35:00] in immigrants. The people who come to the U S on average are more. Go getting, they’re more ambitious, they’re more intelligent, they’re physically, in better condition than otherwise. All of these factors really matter.
We’re getting the cream of the crop, even the people who come here illegally, who are making that journey, that, whatever, I don’t want to get into the political side of things. There’s a selection bias there as well. Those are not the unambitious. You can say [00:35:30] what you want about people who are.
Making the journey from, central America across the U S border, but they are not unambitious people. They’re there, they have some VIM and that’s on average something that you want in your economy. So that’s a very important, aspect of the, I don’t want to call it the melting pot cause it’s not really a melting pot.
That’s a myth if you really look at integration measures and stuff like that. But Anyway, I’m going on and on, but that’s, [00:36:00] I don’t want to say, I don’t want to downplay immigration as a positive, especially in the U. S. context.
Jacob Shapiro: No I hear you, and I it’s fine, I’m going to make a really nerdy comment here now, so apologies for people who are not at our level here.
I never thought of the Borg in Star Trek as a As a synonym for the United States, but it is what you’re talking like, because the word you’re looking for is assimilate. We assimilate immigrants in the United States in a way that most countries do not. And we put them into the collective and they become more productive and they become part of I don’t know, like I, I think the Federation was [00:36:30] supposed to be the United States, but maybe I had all of my metaphors wrong with Star Trek.
I want to take this in a different direction, but before I do, you, you said you looked at some stuff with China On demographics. Do you want to save that for later? Or did you want to chime in with that now?
Rob: It’s a reflection of the same thing. And I think For China and Japan, you really have to talk about this in the context of AI and what’s happening.
Because that’s really important. And I can talk about the AI element in a second. But just, one thing that really struck me, if you want to say that [00:37:00] demographics is destiny, Um, maybe to a limited extent and maybe at the technological frontier, because if you look at China, for example.
China had 550 million people. This is banal, but just to think about these numbers, which no one ever does is just mind blowing. China had 550 million people roughly in 1950, and its GDP in today’s dollars was $30 billion [00:37:30] in 1980. Population was a little over a billion, almost doubled in that period.
Huge growth, right? GDP was 300 billion. So up 10 times against two, two times population growth. Today, China has about 1. 4 billion people, depending on which numbers you believe. These are very rough. As you can see, the magnitude is such that it doesn’t matter. It could be 2 billion. GDP is 18 [00:38:00] trillion dollars.
So 60 times, all of this is in today’s dollars, 60 times what it was. What does that mean? It means the human capital in China, people knowing how to do stuff, has grown so exponentially during that time period. That it swamps all other factors by, by, an exponential degree. And I know that’s an extreme example and it’s a positive one, but the door sort of swings both [00:38:30] ways.
And, Japan I think has a similar story. But the way that AI and to a related degree of robotics ties into this as Japan was very early in trying to promote robotics because it perceives itself as having a labor shortage, robot robots are just AI with arms and legs, right?
But this is a really important area to think about because as AI really gets to the point where you can have. Not only AI [00:39:00] agents doing stuff in the economy and I don’t think it’s an exaggeration to say these are agents doing things and the impact on an individual person’s productivity, when you even look at how wide that gap is now.
We are going to have individual people with productivity levels that are just off the charts. So to think of it like to lump everyone into some big mass and be like population growth is 0. 2%. Like it’s gonna be a rounding error as far as [00:39:30] what actually drives things up and down. And then robots very similar, if you want to do physical stuff, a robot is an AI agent connected to mechanical arms and legs that grab stuff and move around and do things and flip burgers and paint cars and whatever it may be.
And that sounds like silly, but as these things really improve and that improvement is happening at an accelerating rate. That’s going to have an enormous impact on per capita [00:40:00] productivity. And if you want a historical example of that, just look at the 1920s per capita manufacturing productivity in the 1920s, just from electricity grew by eight to 12 percent per year.
That is absolutely bonkers off the charts growth in a very short period of time. And I think, we’re experiencing or about to experience something like that. So to round up all of this talk of demographics and I think it’s [00:40:30] just going to become from a true like analytical standpoint.
What do you focus on? It’s just going to become not very important in the grand scheme of things in the next 10 years.
Jacob Shapiro: Yeah. I’ve been saying that for some time. And in some way, again, this is not, I don’t want to throw the baby out with the bath water. If I’m. Like for instance, I was looking at Guiana the other day because of their fairytale oil discovery, and I just wanted some ba and, listeners, I’m not a Guiana expert if you hadn’t, if you hadn’t gathered that already.
So what was the first stuff that I went to? I [00:41:00] went and looked at the demographics, I went and looked at the make of the, like I went and looked at a couple different things. Like demographics is a Google search when you’re starting your research. It’s very hard to extrapolate from there.
But I was I was on the Bitcoin layer last week, Rob. I think they just put out this episode. And they asked me about India. And I’ve been asked about India a lot. And I think I want to bring India to close this conversation because I think it’s a good example of everything that you’re talking about.
Because if numbers were really that important India would have already taken over the world. They’ve got the best demographic pyramid. They’ve got a billion plus young people, everything else. But [00:41:30] when you look at their GDP per capita, I haven’t looked at it in the last six to 12 months. So maybe they’ve gone up a little bit since then, but they’ve got a GDP per capita hanging out around the same level as Haiti.
And if you’ve read the newspapers at all in the last couple of months, you know what a complete dumpster fire and how impoverished Haiti is in general. And I think for everyone, they saw what happened with China, like the market saw, oh, they went, from point A to point B and it was a 60x or whatever it was increase in GDP.
And I think people are looking at India and thinking the same thing is going to happen. [00:42:00] that, okay, India is starting where China did in 1950. And if you want to ride the next big wave, like India is going to have the demographic wave that is going to take it into the future. I have some reasons why I’m skeptical of that take, but I assume that you are also skeptical of that.
Or do you think that India in this sense, what the law of large numbers is just, it’s just going to outweigh everything else.
Rob: I think the law of large numbers matters. It’s not something that you should ignore, but I think if you’re trying to evaluate how well India does or doesn’t do like [00:42:30] it’s probably number five on the list, organizational capital efficiency human capital, culture, all of those things are just going to swamp.
How many people there are. And if those other things fall into place, Oh, of course it’ll absolutely accelerate that because you have that many more people to benefit from these things. But if you don’t have those other ingredients, number of bodies is not going to save you.
Jacob Shapiro: Before we get out of here, I wanted to read something from this is an IMF economist. [00:43:00] I don’t know if he actually works for the IMF. I assume he does because the IMF published his article. This is Angus Deaton. I had not heard of him before. Have
Rob: you heard of him before, Rob? Yeah, he’s pretty famous for, especially for his work on kind of happiness studies, income and happiness correlated over time, those sorts of things.
Jacob Shapiro: Yeah, an emeritus professor at at princeton also a 2015 recipient of the nobel prize in economic sciences So angus, i’m, sorry that I didn’t do more research and I didn’t know you better but he wrote an article [00:43:30] that the imf published and I just want to read a couple of the sentences because I think it I’ll tell you why I wanted to read it in a minute.
So let me just read it and we’ll go into it. So I’m quoting him here. The credibility revolution in econometrics was an understandable reaction to the identification of causal mechanisms by assertion, often controversial and sometimes incredible. That’s the jargon for the lead in here, but here’s the meat of it.
But the currently approved methods, randomized control trials, differences and differences, or regression discontinuity designs, have the effect of [00:44:00] focusing attention on local effects. And away from potentially important but slow acting mechanisms that operate with long and variable lags. Historians who understand about contingency and about multiple and multi directional causality often do a better job than economists of identifying important mechanisms that are plausible, interesting, and worth thinking about even if they do not meet the inferential standards of contemporary applied economics.
So that is a Nobel [00:44:30] Prize winner in economics telling you that maybe historians are better at thinking about applied economics than actual economists. And I wanted to read it for a couple different reasons, and I’d love your reaction to it, Rob. The main reason I wanted to read it was because I very low key and secretly don’t like geopolitics, and what I mean by that is that I don’t, geopolitics is what I’ve become associated with, it’s a shorthand for the type of research that I do, and I do think geopolitics is a really powerful analytical tool but in the same way that demographics can become a straitjacket, I also [00:45:00] think Geopolitics can become a straitjacket.
And when I’m tackling an issue for a client whether it’s one of their portfolios or an investment decision we’re making, or one of our corporate clients or things like that, geopolitics is a part of what I do. But in some sense, it’s a very small part. I had an interaction just yesterday with a client where the conversation got deep into cybersecurity and I had to stop the client and say, Hey, I am not the expert on this.
I can get you this far. And if you want to go further, you either need to give me some time to do some more research, or I got to go find an expert on this particular thing. And for a lot of my career, and I think you [00:45:30] might this might resonate with you, Rob, that kind of generalist thinking, I can’t tell you how many jobs I lost or how many opportunities I didn’t get, or how many times somebody thought I was full of shit, just because I wasn’t so focused in one different thing.
I had a lot of different interests and I was putting different interests together on the table and trying to figure out how they worked. And the way that the knowledge economy works, whereas if you’re not hyper specialized in one thing and you don’t have four different degree credentials and X number of letters next to your name on this thing that you’ve devoted your life to, people don’t really take you [00:46:00] seriously.
And I’ve always felt most PhD programs in history at one point in my life. My graduate degree is really in history. My near Eastern studies degree is area studies, but history was really, Sort of what turned me on when I was an undergrad and what I’ve spent the most time doing.
And you put all these different pieces together and it gives you a really interesting analytical toolbox as you’re trying to think about the direction of the world. I wanted to thank Angus for writing that because he said it far more eloquently than I’ve been able to ever been able to put it.
I’ve just been sitting here stewing. Oh, I hate that guy [00:46:30] who didn’t give me that scholarship because he thought I was a dilettante because I was interested in too many things. Not the one thing that he said that I should be interested in. I appreciated that. And I also just think it’s a warning for listeners because one of the things I want you to get from this podcast in general, is not to take geopolitics and say, Oh, now I understand the world.
I want you to take geopolitics and say, Oh, I had no, I have no idea about the world. I need to understand like five different things about economics and cybersecurity and about underwater basket weaving and maybe some semiconductor [00:47:00] engineering on top of it. And maybe then I’ll have enough knowledge to maybe try and make a decision.
So that’s my soapbox for the episode, but I’ll let you take it from there if you want.
Rob: No, I think, it just reinforces something that we’ve talked about. Quite a bit in the past, which is the value of humanism and that what I always have said to you and said publicly also that I think one of the reasons you’re so successful at what you do is because you’re not a geopolitical analyst.
You’re not some, is some guy sitting in a [00:47:30] silo who does this thing. You’re just a curious thinker who’s interested in humans and how they. Behave in groups and individually and what makes them tick and I think taking that view imbues you with a humility that many don’t have because
There’s a great book that I always reread by a guy named Clive James. I don’t know if you ever heard of him He’s a he was a well [00:48:00] known Essayist and he was on television for a long time in the UK He had a bunch of shows but one of my favorite books is called Cultural Amnesia. And it’s James at the end of his life, summarizing his thoughts on all sorts of different figures from history and literature and philosophy and that sort of thing.
And at the beginning he says, I’m putting this together not to show young people a path to success. I’m showing them the path to a necessary failure, [00:48:30] which is realizing that you just, there’s you just can’t know everything that you can spend your whole life trying to be curious about all sorts of different things.
And you just it’s the act of the seeking that matters. There’s no destination. And I think that’s what Angus is getting at, and probably at the end of a long storied career in economics, which, aspires to be a science, as they say, it has mathematics envy. And that’s that’s always, I think that’s very true.
And a lot of investing has [00:49:00] mathematics envy and a lot of people try to reduce it to, economics or a model or a formula. And as Angus says, like there are historical forces that are bigger than that. There are things that make that implausible and not feasible. And yet it’s very difficult to accept that we don’t have the answers.
And you’re groping in the dark for a lot of these things. Anyway, I don’t know where I’m going with this, but that’s
Jacob Shapiro: No I think where you’re going with this, and I think this episode has actually done a really [00:49:30] good job of pointing this out, which is, we’re groping in the dark because we have the sense that the historical forces are moving.
Like that this is a period of immense historical change that we were in, I don’t want to call it the doldrums, because a lot happened in the unipolar era of U. S. hegemony and free trade and globalization. There were tons of times, like all sorts of things happened. I’m not saying anything didn’t happen.
But I think we are living at the very beginning stages of wrenching change. And I debate with myself whether my multipolarity take is going to be the right mental model or not. I’m constantly interrogating it. But I think the one [00:50:00] thing that I would say that I feel most confident about, and maybe I need to go back and double check it, is that things are changing.
Like we’re going to see like that example that you talked about with China, the AI and robots, like all these sorts of things that we’re talking about, like it’s here, it’s now that’s the change that is in front of us. And so I think that’s what we’re building up to. And one of the reasons why even.
On a day when we talked about a terrible earthquake in Taiwan and immigration, which is a terrible hot button issue and all these other things, like the takeaway for us really is like when you [00:50:30] look out and you’re looking like where to invest in this world, you don’t lack for options. There is a lot of change happening and if you can get.
some of these historical forces a little more right than everybody else. Like you, you will be positioned extremely well, even if you’re not going to know exactly what it looks like five years from now. It’s about prioritizing flexibility and being able to roll with change rather than assuming that India is going to be the next China or that, yeah, like we’ll just take Taiwan’s semiconductor factories and we’ll park them in Arizona and we’ll continue on as everything was before.
[00:51:00] Everything’s going to be fine. Like that’s not like that. That I am sure is not the way it’s going to go.
Rob: I, I think just to offer a concluding thought here, just on Angus’s thing about history versus local factors, as I think you put it and what you’re saying that’s the most exciting thing about what we do.
And I think earlier in my career, cause I always liked history, right? So when you read some history, enough to be dangerous. You think, Oh, it’s going to play out just like history. I’m going to use this mental model from the past. And, Oh, this is [00:51:30] just pre world war one, when everyone said that all the trade, was it going to keep us from going to war?
And then we did you think you’re such a smarty pants. And I was walking to work this morning and I was thinking like, everyone talks about Norman angel’s book. I forget what it was called. As, Oh how hubristic we were. We’re experiencing the same thing again.
And then I thought to myself that was a hundred years ago. Do you know how different the world is? People used to bear bait like as a regular pastime back then. That’s how different it [00:52:00] was that you know as Philip Larkin said people with old styled hats and coats like weirdos We don’t know those people things have changed so much and just I feel like in investing especially there’s this tendency to try to be a little too cute about using historical examples and Everyone likes to say oh, history doesn’t repeat, but it sure does rhyme maybe it doesn’t even rhyme that much.
I’m moving more towards this view. And one of the reasons, another, internal hobby horse, another reason why [00:52:30] I love the three body problem, which recently came out on Netflix is just this notion of we are, we’re not stuck in some cycle, like human, humankind is on some trajectory and we don’t know where it’s going to go, but it’s moving in an exponential and unstoppable way.
And it’s very exciting and it’s scary at the same time, but it’s not going to be like once we went into the industrial revolution, once we got out of, whatever cycles of history we’re keeping, the hockey stick from [00:53:00] forming, like we’re off and to look too far into the past and try to say, Oh, we’re going to just focus on this local effect or, Oh, this is just 1914.
It’s just 1979, like things are different and they’re different all the time and they’re going to be very different in the future. So I think. The result is I would just be very cautious about being too mechanical about applying historical lessons or focusing just on the local because these big sweeping forces of history [00:53:30] are extremely important.
The scary thing is they’re not just you can’t just read some history books and be like, Oh, this is what’s going to happen because this is what happened in the 19th century. No, things are very different and it requires creativity and imagination and we don’t have all the answers, but at least.
We’re trying. The answer is coronal mass ejections, like that’s what’s gonna get us in the end, clearly. But aside from that, it’s all uncertain.
Jacob Shapiro: No, it’s about creativity and imagination. It took me a long time [00:54:00] in my career to realize that analysis is a creative process. That it’s not rote, that it’s not some sort of oh, you plug this thing in here and plug this thing in there.
Roger Baker, who’s been on this podcast before, when he trains young analysts, he trained me once upon a time. I vividly remember the first time he sat us down at that stupid table in the old Stratfor office talking about how analysis is much more like pottery than it is like social science. Get used to the fuzzy edges here because you’re going to be dealing with things.
You’re not looking into the past. You don’t get to read a bunch of work and decide something and put up an equation. It’s going [00:54:30] to, you have to think about the world and think about people. And then somebody’s going to make a decision based on that in the future. So use the past all you want for developing your ideas, but understand that the choices that you make, like they’re going to have ramifications going forward.
And that it’s not like unscientific, but it’s much more art than science in some ways. So enough of the hobby horse, but. It was nice to get that off my chest at least I hope it was for you and listeners We will anything else to say to the listeners besides they should go see Three Body.
Have you seen Dune yet, Rob? I keep wanting to do the Dune 2. 0 episode I’m gonna have to find [00:55:00] somebody else if you don’t get your butt to a movie theater.
Rob: Jacob I have two children under the age of two. I get home and I’m in bed by nine I’m not, I can’t make it to any movie theater probably in the next five years
Jacob Shapiro: Rob, there’s no human on the earth who is more sympathetic to that argument.
I, even before I had children, I wanted to get home at nine and park myself on the couch. But, the spice must flow, okay? The spice must, fear is the mind killer, your couch is the mind killer, go see Dune. Oh, how about this? [00:55:30] I’ll come to Paris and I’ll babysit while you go to the movie theater. Does that sound good?
All right, we’ll stop it there
Thank you so much for listening to the Cognitive Dissidence podcast brought to you by Cognitive Investments If you are interested in learning more about Cognitive Investments, you can check us out online at Cognitive dot Investments That’s Cognitive dot Investments. You can also write to me directly if you want [00:56:00] at jacob at Cognitive dot Investments Cheers and we’ll see you out there.
The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Cognitive Investments LLC is a registered [00:56:30] investment advisor. Advisory services are only offered to clients or prospective clients. For cognitive and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at www. cognitive. investments. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security that does not take into account any investors particular investment objectives, strategies, tax status, or investment horizon.[00:57:00]
You should consult your attorney or tax advisor.
