Keith Kaplan goes live at 8:00 pm Eastern … global trade as “deteriorated sharply” … who really wins in the push for reshoring manufacturing
We’ll begin today’s Digest with a reminder…
Tonight at 8:00 pm Eastern, Keith Kaplan, the CEO of our corporate partner TradeSmith, is holding The AI Predictive Power Event.
The evening centers on TradeSmith’s AI-powered algorithm “An-E” (short for Analytical Engine).
Built in-house using machine learning models trained on over 1.3 quadrillion data points and 50,000+ backtests, An-E can help you better time and target your trade entries/exits within a 30-day price projection.
The technology forecasts the share price of thousands of stocks, funds, and ETFs one month into the future along with the conviction level of that prediction. It’s equally applicable in both bull and bear markets.
Here’s Keith:
While human investors react with fear, delay, or overconfidence, a new breed of trading algorithm – like our cutting-edge system, An-E – is making precise, unemotional forecasts about where the market is heading next…
Unlike humans, AI doesn’t get emotional. It doesn’t chase headlines. It doesn’t second-guess every move. Instead, it digests mountains of data and makes calculated projections – especially when things get messy.
And in this turbulent market, messy is the new normal…
Because the platform is rooted in quantitative analysis, its advanced predictive modeling isn’t guesswork. An-E analyzes millions of data points, learning patterns, pricing behavior, and momentum signals that most investors would never catch.
It’s not too late to join Keith. By clicking here, you’ll automatically be signed up and registered to attend tonight at 8:00 pm Eastern.
Quick news roundup
There’s so much happening these days that it’s tough to stay on top of every headline.
I want to take today’s Digest in a specific direction, but let’s do a brief walk-through of a handful of stories impacting the market as I write Wednesday morning.
First, there’s Nvidia Corp. (NVDA), which announced on Tuesday that it will incur a $5.5 billion charge due to new U.S. export restrictions on its H20 AI chips. The U.S. Commerce Department now requires licenses for exporting these chips to China and certain other countries, citing national security concerns. This is dragging NVDA down about 10% as I write.
Related to the trade war, China is apparently open to tariff negotiations but wants to see a series of steps from the Trump administration before it will enter such talks.
These steps include showing more respect to Beijing and, according to Bloomberg, “a more consistent US position and a willingness to address China’s concerns around American sanctions and Taiwan.”
Michelle Lam, Greater China economist at Societe Generale SA says:
There is a bit more clarity on what China is looking from: respect, consistency and a point person.
So now the ball is in US court on whether they can meet these demands. But that is still difficult — especially if the aim is to contain China’s rise.
Next up, this morning’s retail sales report found sales increased 1.4% in March. This was more than the forecast of 1.2%.
In one sense, this is a great report, showing that the U.S. shopper remains able – and willing – to keep spending. On the other hand, the heavy spending might reflect a frantic “clearance sale” mentality as shoppers rushed to buy ahead of what many believe are higher prices on the way.
Finally, Federal Reserve Chair Jerome Powell spoke earlier today at the Economic Club of Chicago, saying:
We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.
If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.
Shortly after the comments, stocks hit their lows of the session (up to that point). As I write early-afternoon, they’re still sliding.
Switching gears, what could be the real impact of President Trump’s push for onshoring?
Let’s establish some context before we try to answer…
At face value, these trade wars are about unfair trade practices.
But that can’t be the whole story. After all, we’ve already had Israel, Vietnam, and the European Union either lower their tariffs on U.S. goods to 0% or propose such a move, and yet the Trump administration’s response was “not good enough.”
What appears to be “good enough” is mass onshoring. In other words, the real goal appears to be bringing back manufacturing to within the United States.
Last week in the Digest, we offered an explanation for why Trump finds this so important:
The U.S. has a key vulnerability that most Americans don’t realize: We no longer produce the vast majority of the goods that are critical for day-to-day “normal” life…
If China cut us off today, we’d have a national emergency on our hands tomorrow.
Just three days later, President Trump wrote:
What has been exposed is that we need to make products in the United States, and that we will not be held hostage by other Countries, especially hostile trading Nations like China, which will do everything within its power to disrespect the American People.
So, we have a huge push to bring back large swaths of the supply chain within U.S. borders.
Now, various politicians and business organizations are applauding the number of domestic jobs and economic tailwind this could create.
A few examples…
- “We’re going to bring jobs back, and we’re going to get new and improved reciprocal trade agreements done.” – Senator Roger Marshall, M.D. (R-Kansas)
- “President Trump has the right plan to secure our economy, restore fairness to international trade, and bring back good-paying jobs to the United States.” – Rep. Greg Steube (R-FL)
- “President Trump is right: restoring a level playing field on trade will unlock the next blue collar boom – creating jobs and powering our economy through ‘Made in America.’ Huge news for Main Street!” – Small Business Administration
They could be right. We hope they are.
Yet this is where we need to dig in. You see, even if they’re right, those jobs will come with an enormous asterisk – one that points toward an equally enormous investment opportunity.
“But then what might happen?”
That’s the question that most people (and investors) aren’t great at asking – much less answering correctly.
We’re decent at looking one step ahead to that first fork-in-the-road decision and its potential outcomes. But beyond that, most people stop evaluating.
Too often, this lack of “second-level thinking” leads to an array of suboptimal outcomes. In the investment world, the consequence is usually underperformance.
In his book, The Most Important Thing, the co-chairman of Oaktree Capital Howard Marks writes:
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority).
All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.
What does first-level thinking suggest about Trump’s onshoring push?
Tons of new jobs! Economic explosion! Earnings bonanza! Stocks to the moon!
Perhaps.
But second-level thinking suggests something else…
Rubber, meet road
Below, we quote RSM, which is a global network of audit, tax, and consulting firms, particularly focused on serving the middle market.
It’s from 2021 so the numbers have likely changed slightly, but you’ll get the idea.
From RSM:
In 2019, the average hourly manufacturing wages in China were about $5.25 per hour, according to the latest available data from the Chinese Bureau of Statistics.
The comparable U.S. average manufacturing wage in 2019 was nearly four times that, at $21.38 per hour.
According to ZipRecruiter, the most recent average manufacturing wage in the U.S. has climbed to about $25.00 per hour.
A moment ago, I quoted Rep. Greg Steube, speaking about “good-paying jobs.”
I assume “$5.25 per hour” is not a good-paying job.
If not, then we have a tricky binary on our hands…
- We can choose “bad-paying jobs” that keep retail prices stable yet would seemingly not provide a livable wage (and potentially be illegal, coming in below minimum wage). Or…
- We can go with “good-paying jobs” that would be great for new workers, but the U.S. consumer would foot the bill via much higher retail prices.
Not a great choice.
“Jeff, you’re creating a false binary. Domestic hourly wages wouldn’t push retail prices that much higher.”
It depends on which sector and specific type of manufacturing. But overall, don’t fool yourself – payroll costs are a massive part of overall expense.
Here’s HR company, Paycor:
Labor costs can account for as much as 70% of total business costs according to the U.S. Bureau of Labor Statistics.
And while we could quibble about how much more expensive onshoring might be, “some degree of higher prices” appears inarguable. Shifting from lower-cost production overseas to higher-cost production domestically brings a cost.
Here’s the AP News:
Imports help keep prices in check, economists say, partly because of lower labor costs overseas and because increased competition in the U.S. market forces American companies to be more efficient.
Even if I’m wrong about salaries, it’s not just salary expense
Domestic real estate for manufacturing is significantly more expensive than foreign real estate for manufacturing.
Here’s Tetakawi, a business consulting company:
Industrial real estate is in hot demand in Mexico, but still remains highly competitive compared to costs found in many U.S. markets.
Tetakawi’s research finds that “Typical Monthly Industrial Building Rent” in the U.S. is about 62% more expensive than rents in Mexico for mid-price rents, and 42% more expensive for high-price rents.
Tetakawi comes to the same conclusion when looking at typical electricity rates. They’re vastly more expensive in the U.S.
For one example, high-price rates (as measured in per kWh in USD) are about 78% more expensive in the U.S. than in Mexico. Mid-price rates are more in line, but remain more expensive in the U.S.
Bottom line: Someone eats this cost.
Will it be the U.S. companies (and our portfolios via lower earnings) or U.S. consumers (and our economy, via higher retail prices)?
Keeping with Marks and “second-level thinking,” what is Corporate America likely to do in this situation?
Trump is pushing hard for domestic jobs… but domestic jobs would explode labor costs… C-suite executives don’t want exploding labor costs because it hits earnings, stock prices, and their bonuses…
What’s the action step?
I suspect you already know…
Robotics.
What CEO won’t be doing a direct cost comparison?
On one hand, we have a human manufacturing workforce with its higher U.S. hourly wages, not to mention healthcare and other benefits expenses. Then there’s the downside of human error on the job…
On the other hand, we have the one-time CapEx expense of robots and their marginal upkeep expense. Of course, they don’t come with benefits expenses, not to mention sick days and human error.
Barring some sort of policy guardrails, how does this push for onshoring result in anything other than an acceleration of the transition to robotics?
From Time:
If tariffs persist in the medium term, [Nobel Prize-winning economist Daron Acemoglu] tells TIME, he expects companies “will have no choice but to bring some of their supply chains back home—but they will do it via AI and robots.”
Our technology expert Luke Lango has reached the same conclusion
Let’s go to Luke:
The U.S. government is now pursuing an economic strategy built on reindustrialization, supply chain security, domestic manufacturing, and economic sovereignty
But to pull it off in a globally competitive world? You need automation and robotics – AI in the real world.
With tariffs in place, trade deals being renegotiated, and the reshoring wave gaining steam, this strategy is already in motion. And the robotics arms race is officially on.
To achieve its economic goals, the U.S. will need to deploy millions of intelligent machines in warehouses, fulfillment centers, ports, airports, factories, fields, and construction sites.
In short, intelligent robots are now a national necessity.
We’re running long, but we’ll tackle this in more detail with Luke’s help in an upcoming Digest. But if you’d like to jump ahead to a research presentation Luke created on the topic, you can click here.
For now, let’s wrap up by stepping back to get a sense for the larger dynamics at work
Forget country-specific tariffs, trade imbalances, and “deals.”
Yes, all that stuff will push and pull at stock prices in the coming weeks. But big picture, it’s just noise.
The more important influence is Trump’s goal of radically reshaping domestic manufacturing and supply chains as a matter of national security. It carries a high price tag that businesses will be eager to work around.
And the winners of that workaround?
The companies that leverage robotics, and the investors who saw the writing on the wall.
Here’s Luke:
The trade war may have lit the match. But the fire now spreading across this country is an economic one, unleashing a new 21st-century Industrial Revolution powered by AI, fueled by necessity, and backed by policy.
If you’re an investor, this is your early-in moment…
Because we’re confident that in five years, everyone will be talking about robotics stocks the same way they talk about AI chip stocks today.
More on this to come.
Have a good evening,
Jeff Remsburg
