Peter Zeihan: The Future of Manufacturing Supply Chains

Peter Zeihan: We are gonna jump right in. Stalin! This is the most important dude in the last 500 years. He was important not because of what he did, but because of how he scared us. We were so terrified of needing to fight Stalin’s armies on the planes of Europe, that we changed everything about the world. ’cause we knew we needed cannon fodder people to stand between us and the Red Army and the Europeans had just gotten out of the most brutal war in human history. They weren’t really up for it, so we had to bribe them. We sent out our Navy to patrol the global ocean so that anyone could go anywhere at any time and interface with any partner and access any market in any commodity if you sided with us in the Cold War. And it worked and it generated the greatest alliance in history. However, the war ended in 1992 and in a series of evermore narcissistic and nationalist electoral contests, we consistently went with the guy who wanted less to do with the international system.

The biggest difference, in terms of international economics between Biden and Trump, is that the Biden administration has hired a grammar checker. And that’s it. Every tariff that Trump put into place is still there. So let’s talk about this from a strategic point of view for a couple minutes and we’ll spend the rest of the time on the economic implications. What you’re looking at here is a pair of carriers. The one on the right is a traditional jump. The one on the left is a super carrier. The super carrier has seven times the combat capability of the jump carrier. Now there are 24 jump carriers in the world. 10 are American, two are British, two are Japanese, two are Chinese. Of the two that are Chinese, one used to be a casino and the other one is a clone of the one that used to be a casino.

No One Super Power Controls the Global Oceans Today

There are 12 super carriers in the world. They’re all American. [laughter] It’s like the math isn’t hard here. If the Chinese continue their current rate of naval buildout, they will be a peer competitor to us sometime in the year 2170. They don’t have that kind of time, but I’m getting ahead of myself. Now, these are great, if your goal is to knock over a country, a lot of fire power. You get to choose the time and the place of the fight. But if you wanna patrol the global oceans like we used to, you need smaller ships like this little guy that’s behind the carrier, that’s a destroyer. You need about 800 of those. We have 60, half of which are around the carriers at any given time. So even if, strategically, we thought it was a good idea to maintain the global system, we no longer have the military posture that’s necessary to try.

So that’s the strategic picture. The US position is strategically unassailable, but we are incapable and no coalition of countries is capable of patrolling the global oceans any longer. So this whole system, from a military point of view, is already at the end. And then there’s the economic issues. What you’re looking at here is net worth by decade. And it’s an old story. As you age, you get better at your job. Maybe you start a business, your income goes up. But the real magic happens when you turn 50 because on average in North America, when you’re 50, your single biggest expense, your youngest child leaves home and is someone else’s problem. And the money that you save by being an empty nester, you used to pay down your second biggest expense, which is typically your homestead. And by 55 on average, that is paid down as well.

So from 55 to 65, your income is the highest it’s ever been. Your expenses are under control. And the delta between those two makes you the wealthiest you’ve ever been. And the money that is held by people 55 to 65, that is 70% of global private capital, that is literally where the money is. That is what makes the system run. Now, this is an old story. It’s kind of a boring story ’cause it really hasn’t mattered until recently. And that’s because of what Stalin did. As part of our panic, we changed the way the world worked and that changed economics too. It changed the way we live. This is the demographic profile of the Koreans at the start of the globalized era back in the 50s. It’s a normal portfolio. You’ve got children at the bottom, young adults, mature adults, retirees at the top, men on one side, women on the other.

Today’s Economic Systems and the Family Structures Leading the Way

In an economic system like this, there aren’t a lot of people aged 45 to 65, the capital rich folks. And so capital’s hard to come by. The tax base is small, infrastructure tends to be poor, education is substandard. But all those people down below, that drives a lot of consumption because when you’re in your 20s and your 30s, you’re having kids, you’re buying homes. It’s very inflationary because of that consumption. But it’s also very high growth. This is what almost everybody… What everyone looked like before the 50s. But then Stalin scared us. We created globalization. And with globalization, people could specialize in their economic lives. We started taking industrial jobs and all those industrial jobs were in the city. Now, when you live on a farm, kids are free labor. You have as many of them as you possibly can put up with plus one. That’s how you find out it’s too many. [laughter]

But when you move into town to take an industrial job kids are no longer free labor. They’re an expense. And adults aren’t stupid. So we have fewer of them. And you fast forward two generations and here’s where the Koreans are now. Very different economic model. Not a lot of young people, not a lot of consumption, but a lot of those high wage earners without kids who are paying taxes and investing for the future. Very capital rich system, great tax-based, great infrastructure, high value added workforce, but not enough people to sell to. This decade, the Koreans now transit to something else because that bulge at the top moves into mass retirement. And we don’t have an economic theory as a species for what happens when you don’t have consumption or production or investment. But we’re gonna find out real soon and the Koreans are gonna lead the way.

They won’t be alone. Bottom left’s, Germany, it’s not that the Germans are running out of kids. That happened 30 years ago. This is the decade they run out of working-aged adults. So if you want a Mercedes, buy it now. Maybe get 10 years apart, so you’re gonna need those. Get United States. We’re a little different. More of a chimney. We’ve got two things going on that’s helped us. Number one, for us, globalization was a bribe. We never invested our economy in the system so we industrialized more slowly. Second, we also urbanize more slowly because there’s a lot of elbow room here. So we didn’t just go farm to city, we went farm to small town to suburb to city. And that slower process meant that our birth rate did shrink. But at a much more manageable rate, if we keep aging at our current rate, we will be in a German or a Korean style problem around 2070.

That’s a lot of time to figure out something new. The Mexicans have even more time. They didn’t begin their industrialization process until the 1990s with NAFTA. Now you’ll notice that they’ve got a pure pyramid that goes down to about the 30, 35 year olds. And then it drops straight down 30 to 35 years ago that was NAFTA, which means net migration from Mexico into the United States has now been flat to negative for the last 15 years. They’ve run out of young people. The Central Americans signed a trade deal with us 10 years after that, which means at some point over the next decade, the southern border is gonna look very, very different because the Central Americans won’t have people to send as well. And then there’s China. Now that is already one of the world’s five fastest aging workforces in human history.

How Birth Rates Affect Manufacturing and Global Supply Chains

And three months ago, the Chinese government updated the data. They’re now reporting a 70% drop in the birth rate since 2017. That’s a faster decline than what was suffered by the Jews of Europe during the Holocaust. And the Shanghai Academy of Sciences, which is kind of the Wiseman organization of statisticians in China that interprets all the data, says that this is still wrong. They estimate that the Chinese system has overestimated its population by over 100 million people. With all of the missing millions being people who would’ve been born during the one-child era, which is a rather sterile way of saying that all the missing millions are under age 40 suggesting that these yellow bars don’t even exist.

China has, at most, 10 years before it faces national dissolution. They will not be a unified industrialized nation state 10 years from now. The question is how much ahead of 10 years would happen? But I’m getting a little ahead of myself. Let’s talk about us for a minute. All right, I could talk about this for an hour sometimes I do not today. Two big takeaways. First of all, the baby boomers, largest generation we have ever had. And as of the fourth quarter of last year, half of them had already retired, which means that half of them have already liquidated their savings. And that is why capital costs have increased by a factor of three in the last three to four years. It’s demographics. It’s not the business cycle, it’s not the Fed, it’s not the Biden administration. It’s demographics. And capital costs will continue to go up as the rest of them retire and liquidate their savings.

Demographics, Birth Rates, Retirement, and Labor Shortages

And that will last until another large generation ages into that late 50s group. That will be the millennials. But that will not happen for another 10 to 15 years. Now there’s a couple good things here and a couple bad things. The good things, all the millennials 10 years from now are gonna be having midlife crises. And that will be delicious. [laughter] But it means we have to wait till after 2035 before capital costs start going down at all. This is just the environment we’re in now. Second labor, largest generation ever retiring. Largest workforce we’ve ever had retiring, and the replacement are the Zoomers who are the smallest generation we have ever had. This calendar year, the difference between the exiting boomers and the entering Zoomers is a shortage just this year of 450,000 workers. That’s how much smaller the workforce is now, that number will increase each and every year for the next 11 before peaking at about 900,000 annual shortage. Then the millennial’s kids will finally be entering the workforce in numbers and labor will start to get look a little bit normal. But for that, we have to wait until 2045.

So if you remember nothing else from what I’m saying today, remember this, hire, borrow. This is the cheapest capital we will have for 10 to 15 years. And the cheapest and most abundant labor we will have for 20 to 25. Chop, chop. Let’s put some of this into context. Here are some monthly labor costs for a number of countries in Southeast Asia that I think will actually do pretty well in a de-globalizing world. Here are our Mexican partners, right in the middle, very competitive. And here are the Chinese. That’s the fastest increase of labor costs we have ever seen in human history faster than what happened during the Black Death. The Chinese are no longer cost-competitive in any manufacturing industry. The only reason we still think about the Chinese as an industrial power is because of the sunk cost of the industrial plant. And that’s $35 trillion worth. That’s not small. You don’t just wave that away and replace it overnight. But reshoring is a winner’s game here.

Post COVID Consumption Trends

Now this is of course hitting consumption as well. We’re looking at car sales here in China. The blue bar is the start of COVID. The dotted red line is the 12 month moving average. When a country industrializes in the modern age, everybody wants the same four things in the same order. Smartphone, refrigerator, climate control, typically air conditioning. And a car not only has that dotted red line not recovered to the pre-COVID levels, you’ll notice that it peaked a year and a half before COVID. What we’ve been dealing with for the last few years has kind of a fog of war, statistically speaking. ‘Cause if you think back, a lot has gone down. The Chinese have descended into a narcissistic cult of personality. We had the Trump administration, which was like living inside of a bullhorn, and we had COVID, which scrambled all the data.

So we didn’t get a good picture of anything for a half a decade. And what we’ve discovered since the Chinese finally came out of COVID in the second quarter of this year, as we’re starting to look and suss through the data, is a lot of the things that we thought might happen, actually happened in the fairly distant past. So think of the three big things that have happened with Chinese demography in the last five years, officially. Number one, their population peaked. Number two, India’s population surpassed China’s. And number three, the United States, the average age of the US citizenry is now younger than that of the Chinese citizenry. Those all happened in the last five years. And what we’ve discovered in the last five months is no, they didn’t. Those happened 10 years ago.

Global Financial Landscapes: Peering Into the Economic Realities of Leading Nations

China’s not about to peak; China peaked years ago. And we’re only now starting to get a feel for just how bad the situation is there. And I think a great way to underline this is to look at the financial world in general. This is the private credit curve for the United States. So starting at 2000, going up to 2007, that first bump, that’s the subprime build. We doubled total private credit in seven years. Too much too fast. And our correction, the great recession knocked 5% off of headline GDP. Nothing too crazy there, right? We all follow that, right? Audience participation, please. We follow that, right? Okay, great. Same data, different scale. Again, the bump in the middle is a doubling. Here are the Canadians. Where are my Canadians? Canadians build things. Yeah, security in Florida always sucks. Yep.

Okay. I would argue from 2000 to 2007, that Canada had the healthiest banking sector in the world. They had made none of the mistakes that we did. But then we had the great recession and the Canadians had a very Canadian response like, “Americans just had the greatest recession ever.” We can totally have a greater recession. And they systematically dismantled everything about their financial sector that had kept them safe. And they tripled down on every mistake that we had made. And by the time we got to 2014, they were like, “Whoa, maybe we don’t want to win this one.” And they dialed it back. I’m not gonna say that Canada’s out of the woods. I will say I feel the best about Canadian finance now compared to 10 years ago.

Here’s Germany. If you want to get a mortgage in Germany, you don’t get your 20% together and go to the bank and ask for a loan for the other 80. No. You go there and it’s like, “That’s great. Give us a deposit today for what you expect your mortgage payment to be.” And then come back in a month and do that again. And then in two months, and then in three months, and then in four months, and then in five months, you do that for 60 months. Then you apply for the loan. You have to prove you are not a credit risk. There are many deep structural problems that are potentially system-ending in the German system today. Financial overextension does not make the list. But wow does it in Greece, sevenfold increase in seven years. As of the day that COVID started, they were already down by 55% of GDP, and COVID messed up the numbers.

Here’s Australia, I love Australia. Okay, so Australia and the United States are similar cultural structures, similar government structures. And one of the reasons why US finance generally does well is while our federal system allows a lot of pluses and minuses, all of decision making for regulation at the finance industry is made at the top by a small group of people. So it can be implemented very quickly. So when the financial crisis hit note seven, Sheila, bear of the FDIC, Paulson of Treasury and Berke of the Fed basically crowded around a two top at a bar in DC and on the back of some cocktail napkins worked out what we would eventually come to know as TARP, which was the restitution program that put a floor into the crisis. But they were very American about it. If you had done something stupid, either as a lender or a lendee, you were on the hook for some of the losses. The Australians did something similar, but without that American characteristic, they provided 100% government-guarantee for every mortgage loan. And if you could prove that you could meet your mortgage payment with 100% government-guarantee, then you automatically qualified for a second mortgage and a third and a fourth. The Australians have not had yet had their subprime adjustment. And when they do, you’re not gonna want to be down under. India, same policy as the Australians. But in order to qualify for the funds, you had to be a friend of the Prime Minister.

And then here are the Chinese. Are you kidding me? [laughter] This is what we’re scared of? On a good day, the Chinese system is a badly run Enron. Now, that doesn’t mean you don’t get growth. When you just throw scads of capital at anything regardless of profitability or efficiency, of course, you’ll get growth, but it’s really weird growth. You guys have probably heard bits and pieces of what’s going on in the Chinese housing industry, right? According to the Shanghai Academy of Sciences, they have enough spare condos that have never been lived in to put up an extra 1.5 to 3 billion people. The market value of those things is probably less than 10% of what they’re booked at.

And that’s the sum total of the private savings of the bulk of the population. And the economic sector most exposed to this in China isn’t manufacturing it’s agriculture. So when this breaks, not only do they have something that’s worse than the Enron collapse in every sub-sector. They also have a social breakdown because people have lost their life savings while they’re starving. This is gonna be hideous. And this is where government authority and wise policymaking would really come in handy. And we are not going to get that. Chairman Xi, has built the world’s tightest cult of personality. He has systematically executed or exiled or imprisoned or, at least, at a minimum, intimidated to silence everyone in the country who’s capable of conscious thought. His cult is now stricter than Marius stricter than Cicero and Nero’s.

And he’s destroyed lines of communication. People will not bring him things, not that he doesn’t want to hear. They don’t know what he doesn’t want to hear. They won’t bring him anything. And as a result, we’re getting really weird policies across China. This is how you get bureaucrats going out on their days off to disinfect airline runway… Airport runways. ‘Cause I think that’s what he wants to do. Let me give you a couple of good examples of just how crazy it’s gotten. You guys remember in January of 2021 when the lights went out in Beijing and for the next 14 months we had rolling brown and blackouts throughout the entire country? Xi didn’t know. No one would tell him. Do you know who ultimately did break down and tell him? Joe Biden. It came up on a zoom call. Now don’t get mad at Uncle Joe. He didn’t know it was a secret. We could see it from orbit. It was in USA Today.

But Xi has established himself as the the only decision maker while he’s destroyed the information flow that would allow him to know that he needs to make a decision. And so we’re getting policy paralysis. But the best example I can give you overall is that stupid balloon. Now when it floated across from the Canadian border, thanks for that by the way, Canada [laughter], I had the same response as Joe Biden. Clearly this is a spy platform. It’s 350 feet across. It’s dangling something the size of an embryo jet. Do you guys know embryo jets? The the Barbie Dream Jets like two seats on one side, one on the other. Really cramped, really small. Unless it’s hanging from a balloon, in which case it’s up-size, clearly spy platform. Let’s shoot it down. See what we’re dealing with. I’m not a balloon expert. Uncle Joe’s not a balloon expert.

But unlike in China, where information is circumscribed, in the United States, despite all of our flaws within the government system, information still flows. And somewhere in the bowels of the Pentagon is some dude in the basement. He’s like, “I love balloons.” And his report made it to the top. And so the president was sat down by the CIA director and the defense secretary and said, “Mr. President, please don’t shoot this thing down. We’re not worried about this. We know where it’s gonna go. It’s gonna float over the missile silos in Montana.” But Mr. President, unless you’re planning on nuking somewhat in the next four days, those hatches will be closed. They’re always closed. The Chinese will get photos of closed hatches from seven miles away. This is not a security threat. What it is is an opportunity. ‘Cause Mr. President, if you let this thing go on its merry way, we will put a spy plane above it and a spy helicopter below it and we will track it with every single whisper sensor we have for the next nine days.

And then we’ll shoot the son of a bitch down over at Carolina. And this will allow us to copy all of their cryptography. We’ll see how they’re using the satellite network and our civilian network to send information and signals. And Mr. President a quick reminder, we have a more capable offensive hacking system within our government than the rest of the world’s governments combined. So at the end of this, we’re gonna be able to tell you not what city, not what block, not what building, not what floor, not what office, what terminal’s controlling it. And we’ll hack the tar out of that terminal and we’ll tag every individual who touches it and we will rip apart their entire intelligence network from the inside.

And Mr. President, this is the intelligence breakthrough of the decade and they just handed it to us. We now know from the after action that Xi was unaware of the balloon until after it had been shot down. We now know that their defense ministry was unaware of it until after it crossed in from Canada. It was just some ass hat. And the intelligence director was like, “Whoof, we’re a diplomacy. This is how you stick it to the Americans.” It was the dumbest thing I have seen any country do in the last 20 years. Think back on the last two decades, there has been an abundance of dumb, but this is happening across the length and the breadth of the entire Chinese system. In every government office, in every economic sector. 10 years is the best case scenario, assuming an intelligent, engaged, forthright government. And they have none of that.

Now, whether this is beautiful or disastrous, of course depends upon who you are and what you care about. A couple of things I’m not worried about goods exports. The Chinese have a hyper capitalized system. They’re very protectionist. They produced anything for their own market that they can, they only import the things that they can’t produce, which means that their total import of all finished goods is only about three and a half percent of GDP. That’s the lowest in the world. It’s not zero. We’ll still feel that if that disappears. But it’s not the end of the world. It’s not like losing Canada, which is much more important to us. I’m not worried about banking and honestly that’s because of the Russians of all people. When the Russians invaded Ukraine, Western institutions, without prompting from their governments, liquidated their entire position. So no western banks hold any assets in Russian banks.

Now Chinese banks rushed in to fill that void. And so the Western banks were like, “Whoa, this just screams of a future sanctions target. So we better reduce our exposure to the Chinese as well.” And so today, total Western Bank exposure to all Chinese banks is less than 1% of their total global holdings. I feel pretty good about that too. Commodities, of course, are gonna be a problem though, they’re number one importer of almost everything. But let’s break that into two categories. Food stuffs. The last thing the government does before it dies is inhibit food supplies to the population. So that is gonna be good till the bitter end. Industrial commodities are different.

China’s impact on Industrial Commodities and Electronics Manufacturing Companies

We’re gonna have to rebuild the industrial plant of China somewhere else, but probably not all of it. A lot of it is just hugely wasteful housing industries. Case in point, we’re probably not gonna have to rebuild $35 trillion, but we are gonna have to be rebuild what we rebuild fast. That suggests a lot of this in industrial commodities. But the real issue, I think, is gonna be electronics. What we’re looking at here is a fun little graphic from the American Enterprise Institute. The yellow arrows in the middle are pointing at what our total inflation rate has been since the start of the century. 75% roughly. Everything above that line has gotten more expensive. Everything below it has gotten relatively cheaper. And I’m oversimplifying here, but everything above it is something that requires fingers and eyes, it has to be a person that does it. It’s usually a service.

So healthcare, for example. And everything below that is something that beeps or you can plug into a wall. Typically electronics. The reason that Asia dominates electronics manufacturer is they’ve got a differentiated labor system. The person who does the programming is not the person who makes the semiconductor, is not the person who bends the metal or does the injection molding or pulls the wire or coats it. Those are all different labor skillsets at different price points. There are 13 different priced labor markets within the Asian system. And you can shuttle intermediate goods around. They all have their own economies of scale. They all have what they’re really good at. We don’t have that here. We have two labor price points. Anglo America, Mexico, that’s it. That’s not enough. But that doesn’t mean I don’t think we’re gonna find something new. And I bet, I think the best way I can explain that is what has already happened to us with textiles, which is like normally a very unsexy sector.

Textiles and the Manufacturing Supply Chain

Back before 1992, all the textiles, most of the textiles that we consumed in this country came from the Appalachian states. And the business model was women with sewing machines. Then NAFTA happened and all of those jobs moved to Mexico. But the model stayed the same women with sewing machines. Then the WTO happened and all those jobs moved to Indian and China. But the model stayed the same, women and sewing machines. And then COVID happened. And all of a sudden, we had no clothes. And we’re not Swedish. So that was never gonna fly. So we need a new streamline model here. And what we discovered is some companies started up in North Carolina with these giant facilities, at least two acres each, where they would bring in raw cotton, it would get cleaned, bleached, turned into thread, turned into yarn, turned into cloth, cut into clothes, and then sewed together the finished products. And the final product on the other side of it was cheaper than the textiles that we used to get from Bangladesh. The staff of these facilities, two; software engineer, mechanic. That’s it. That’s all it took in the last 50 years. The model changed. And it wasn’t until we found ourselves against the wall that we even felt to look for it. We’re gonna find things like that, but we’re not gonna know what they are until they happen.

Let’s talk inputs. This is Siberia. In case anyone’s looking for a nice summer home, it’s permafrost. The Canadians will tell you all about it. So permafrost, there’s a point below the surface where the ground never thaws, but that doesn’t mean it’s a frozen landscape. That top layer melts every summer and you get something like that Looks like this thermal car lakes. Now, if you wanna produce something in this zone, you wait for it to freeze solid, you build a berm up above that melt layer, and then you run a piece of infrastructure down that berm, A road, a rail system, a pipeline, whatever happens to be… Until you get to a concrete pad. And that’s where you do your manufacturing operations. And you can only do the operations in the winter. ‘Cause you can only drill when it’s frozen. That means the Russians have the highest upfront cost for mineral extraction on the planet. Now it’s a dynamic landscape. So sometimes an aquifer cracks open and the whole thing slides to the side. Or sometimes that aquifer drains down, in which case you get a sinkhole. Or sometimes you have a cold winter and extra water freezes into ice. And you know when ice freezes, it expands and it takes the land with it. These are all really bad for infrastructure.

So they have the highest maintenance costs in the world. Now, the Russian population is going through a nearly Chinese population collapse. And the Russian educational system collapsed before the Soviet system died. So the youngest people in Russia who are worthy of the title “engineer”, they turned 63 this year. You think you have skilled labor problems? Oh, Nelly. So the Russians don’t do this work ’cause they can’t. They rely upon foreigners, Exxon, BP, but really mostly the Germans and the Dutch. And that all stopped a year and a half ago. Whether it’s because of war damage or sanctions or lack of maintenance, we need to prepare for a world where pretty much everything that comes out of the Russian system doesn’t.

The Imperative of Sourcing & Supply Chain Management

And we’re on the opposite side of that. Here is the upper Midwest at night, who can see their home? Do we have any Midwesterners, few of us? Woo-hoo. This, as the Midwesterners will tell you at length, they will sing its praises, this is the most important city in the history of western civilization. It’s Marshalltown, Iowa, where I’m from. Oh, come on. That was funny.

All right. Here is Bismarck, North Dakota. If you find yourself in Bismarck, you’re gonna have to ask yourself the very deep soul-searching question. How? And this is not a frat party. This is the shale field of Western North Dakota, the backend. And it’s lit up because of a problem with transport. Now, oil’s a liquid, it will conform to the shape of its container and stay there. So you can put into a rail car or tanker truck or whatever, but natural gas is gas, it disperses.

So you have to have a system to gather it, to transport it, to use it, and you have to use it at pretty much the same pace that it’s produced because storage is almost impossible. In North America, we have the world’s largest and most redundant natural gas transport management system. But we can’t keep up with what is coming up out of the Shale oil projects as a by-product. And so until we can expand the physical infrastructure, we have to flare it. And that takes six to nine months to get it under control. And you can see the flares from space, which means that in the United States only in the United States, natural gas is priced differently. Not pure supply and demand, because most of the stuff is sold into the system at a loss. We have waste market economics. Here’s what that looks like. This is Henry Hub. This is our primary natural gas pricing location. Do we have Texans in the room?

Woo-hoo. You guys know what this is? Those are hurricanes. Storm comes through, mucks up. Everything, it takes months to undo the damage. You get an elevated price environment or you did until 2009, which was the year that the majority of the natural gas produced in North America came from Shale fields. Here’s February of 2021. This is what happened when Texas got cold. It got down to 25 for four days and they lost their minds and everything shut down. Not just natural gas, coal, wind, solar, nuclear, all of it just stopped. Here is the Ukraine bump. Even at the worst, at the beginning of the war, never got as bad as our hurricane bumps. But here’s everyone else. This is our new normal. In North America the production is local. It’s waste market driven. Everywhere else, it comes from a different continent and it’s driven by normal economics.

America’s Competitive Advantage in Real-Time

There is now a permanent price disconnect between us and everyone else. And you can imagine what that means for competitiveness. Part of it means that we have the cheapest electricity in the world because 40% of our power comes from natural gas-based generation, but we’ve also retooled our entire chemical system. Now, this ridiculously over complicated graphic, it’s really not as bad as it looks. If you start with the bottom left, that dark gray bar, that’s crude oil. You refine that to get something called Naphtha. And then Naphtha makes thousands of daughter products we use everyday. Or you start with the bottom right, the light gray bar, natural gas, you crack that to get ethylene. And again, daughter products. Normally, you would only use natural gas to make this relatively narrow product set. The methanol and the Butadiene groups, for those of you who live in that world, because normally natural gas is much, much, much more expensive than oil because it’s difficult to produce and transport and store. But in the United States where we have waste economics, we have retooled our entire industry to make this product set out of natural gas, which makes us the lowest cost, highest volume producer for every intermediate petrochemical process that humans use.

And these are the products that ultimately go into consumer goods. The first phase of this, the chemicals build out, is already done. The second phase, the mass manufacture that is underway right now, to give you an idea of what this looks like sector by sector. Okay? I Love a good matrix. If you’re at the bottom, your supply chain is a breeze. You can fit it all onto the back of a cocktail napkin, even after you’ve thrown back a couple of bourbons. If you’re at the top, you don’t know who your third tier suppliers are, much less your 13th.

Global Dependency Check: Navigating the Geopolitical Landscape from Energy to Tech Supply Chain Disruptions

If you’re at the left, you’re dependent on mainland China, and if you’re on the right, you’re already enmeshed within the NAFTA system. A couple of pegs in the ground to get you oriented. Energy. American workers, American capital, American steel, American midstream, American production, American processing, and for the most part, American consumption. Hard to go wrong there. Hard to go right with this one. The average iPhone has 1,400 supply chain steps, 91% of which involve mainland China in some way. The new iPhone dropped last month. Customer demand: If you’re an Apple person, get two. This is likely the last one. Even if you disagree with me on everything I’m saying versus China, keep this in mind. The president of Foxconn, the number one company that makes the iPhone happen in China, has thrown his hat in the ring to become president of Taiwan, and so the Chinese have opened land violations and tax evasion investigations into every Foxconn subsidiary in the mainland, and they will lose access and partnerships to all of those facilities within two years.

Let’s go through a few of these. This is how you start. We basically need to double the size of the industrial plant on the continent. Now, chemicals being the base material that goes into everything else that we need to do, that is in our back pocket. We’ve already done that. Machinery. Where are my Houstonians? There’s got to be some people from Houston. Houston is the second largest producer of machinery in the world. Think of machinery as the stuff that builds other stuff. Oh, my God, get to it already. You need to double at least. Quadruple would be better, and you need to do it by Tuesday. That’s the volume that we need here. But electrical steel, I think, is the single biggest limiting factor. Doubling the industrial plant, adding in the manufacturing process capacity for a lot of the stuff that the Chinese do, we need to increase the grid’s capacity by roughly 50%. That means the amount of electrical steel we’re going to consume is going to go up by at least a factor of 30. We haven’t had to do this since the 50s when we first electrified.

Now we just have to have a massive expansion, and if we can’t pull that off, none of the rest of this can even be attempted. Electronics we talked about. Okay. Automotive. Not a big fan of Donald Trump for a number of reasons, but NAFTA II I thought was very well done, and 85% of the supply chains for American-headquartered automotive firms, they’re already done within the North American market. Network effects are very rapidly taking care of the rest. The Asians, especially the Japanese, have seen the writing on the wall, and they’ve followed suit. They’re very close. The Europeans have pretended that this isn’t a thing and that protectionism was just going to go away as soon as the Biden administration came in, and they have been proven to be very, very, very wrong. Semiconductors are a bit of a mess, okay. There is no one quality of semiconductors. You’ve got your cheap ones, 90 nanometers and bigger. This is your Internet of Things, your iot. This is your smart refrigerator, your smart light bulbs. Then you’ve got your 10 nanometers to 90, your mid-grade.

Navigating the Global Impact on Tech, EVs, and AI with Shifting Supplier Relationships

This is most of what we use. This is cars and planes. This is power management. Then you have your 10 nanometers and smaller, your Superchips. IPhones are in this category. EVs are in this category. Artificial intelligence is in this category. The low-end, the 90 nanometers or smaller, 80% of that is China. We’re going to lose all that. So you’re probably not going to be able to get the same variety of singing margarita machines that we’ve had in the past. We’re going to have to get by without it. Your 10 and smaller, 90% of those are produced in one town in Taiwan. And that makes it sound better than it is, because there are 9,000 companies involved in the operation of the fab facilities and the lead time that make these chips. Half of them only produce one product for one end user and have no competition anywhere in the world. And if anything happens to any of those companies, the fab facilities no longer function. It is globalization in its purest form. We are going to have to rebuild a lot of that ecosystem somewhere else.

That’s going to take a decade, which means in the meantime, anything that relies upon those chips, we’re just not going to have. So all the arguments and hand-wringing that we’re having over AI, I think this is good. I think that we’re, for once, actually ahead of the conversation. And I think we have an extra 10 years to figure it all out. The stuff in the middle, 10 to 90, I’m not worried about that. Those come from Italy and Germany and the United States and Japan and Korea and Taiwan and China. It’s a redundant ecosystem with a lot of competition. And you peel entire continents out of globalization, and this is going to be able to continue to function. So the chips that we need for most of what we do, we’re okay. It’s just the low end and the high end that we’re going to lose.

The Effect of Inflation on Effective Supply Chain Management

All right. Final slide. Inflation. This is the US and Canada. Similar systems, tightly integrated. You would expect the data to track. It does. Let’s start with where we are at the far right. The inflation we’ve experienced in the last couple of years is due to two factors.

Number one, labor. Baby boomers are retiring. A lot of them retired early. That’s probably one quarter of the total impact on inflation. And that’s going to be a bigger and bigger impact as they continue to retire. That’s just part of the system now. The other three quarters was the COVID pandemic. Every time we had an opening or a closing or a new vaccine or a new variant or the anti-vaxxers threw a fit or the hypochondriacs got a hold of policy, whatever it was, every time something changed, we changed our consumption profile. And every time that happened, it took you all a year and a half to figure out how to service the new demand profile. Well, about two years ago, Florida, Arizona, and Texas reopened for the last time. And over the next five months, every other state except for California, plus Alberta, opened as well. And then about three months after that, the rest of Canada and California finally joined in. It’s been a year and a half. Supply chains are mostly back to normal.

And so we’ve seen inflation tracking down for months. Joe Biden deserves none of the credit for that. This was us, not him. But he also deserves none of the blame for going the other direction in the first place. Because, again, it was us, not him. I’m not overly worried about where we are right now. I’m worried about where we’re going to be as all these other big things happen. And to understand that, we need to look back a little bit. So in North America, we’ve had three big phases with our inflation pattern since World War II. First, we had that initial urbanization and industrialization push. We built our cities. We built the interstate highway system. We ran power to the countryside. And for a quarter century, we had industrial demand-driven inflation. Then the baby boomers came of age. They raised their kids. They built their homes. And we had two decades of customer demand driven inflation. And of late, we’ve all been living in this weird period. The Chinese entered the chat with a billion industrial workers, pushing down the cost of manufactured goods for everybody.

And the Soviet system dissolved, pouring an empire of raw materials upon global markets, keeping commodity prices under control. We had 30 years of disinflation. It was the most abnormal period in human history, but we think of it as the sum total of our business experience. And it’s over. The Chinese labor is literally dying out. The Russian materials are going away. And at the same time, those inflationary trends are back. The boomers may be exiting stage left, but their kids, the millennials, are in their mid-20s to mid-40s. They’re at the prime of their consumption years. They’ve got several years left to run with that. And if we still want stuff in a post-Chinese world, we are going to have to build it our damn selves, which means for the next six years, we should expect something in the vicinity of 9% to 15% inflation annually before we get to lower costs.

Charting a New Course: The Blueprint for Resilient Local Economies and Sustainable Growth

Now, before you have a stroke and call your broker, deep breath, double the size of the industrial plant. That means local workers filling local orders for local consumers on this continent using local energy, less water, more capital efficiency, greater technological penetration. And when we’re done, we’ll have a supply chain system that is largely immune to international shocks. This isn’t a good story. This is the story of the greatest economic growth in the history of Canada, Mexico, and the United States. This is a great story. It’s just that it’s not a straight line. And there are a lot of bumps between here and there. And the more we front load, the better we are going to be on the backside. So chop, chop.