Is China Quietly Winning the Trade War?| Macro Mondays: November 3, 2025

Key Concepts

• Crypto Market Performance: Underperformance in Q4, overshadowed by AI investment cycle.
• AI Investment Cycle: Significant investor attention and rapid development in the AI space.
• Rare Earths Dependency: US and allies seeking to reduce reliance on China for critical rare earth minerals.
• Operation Warp Speed: Analogy used for the US initiative to build domestic rare earth supply chains, referencing the COVID-19 vaccine development program.
• Data Centers and Cloud Computing: Massive investment in infrastructure to support AI growth, with companies like Microsoft and Iron Mountain involved.
• Geopolitical Risks: Increased rhetoric and military posturing concerning Venezuela and potential interventions in Nigeria.
• Oil Markets: Potential for an asymmetrical upside bet on oil due to geopolitical tensions and OPEC's defensive stance.
• US Economic Data: Challenges in interpreting economic data due to the government shutdown, with a focus on alternative data sources.
• US Treasury Cash Holdings: Significant increase in US Treasury cash reserves due to the shutdown, leading to tighter market liquidity.
• Solar Energy Sector: Underappreciated domestic solar buildout in the US, but concerns about China's dominance in the supply chain.
• SOFR Rate and Repo Facility: Spike in SOFR and utilization of the overnight repo facility indicating tightening liquidity and a potential shift away from an abundant liquidity regime.
• Federal Reserve Balance Sheet: Expectation of future balance sheet expansion by the Fed, which could impact debasement bets and crypto markets.

Sponsorships

• Bitwise: A crypto asset manager with over $10 billion in client assets, offering over 30 products. They are noted for donating a percentage of profits from Bitcoin and Ethereum funds to developers.
• Binance: The world's number one crypto exchange, with over 275 million users. It offers features like Binance Academy for learning, a clear portfolio dashboard, and Binance Pro for professional traders. 24/7 customer service and low fees are highlighted. (Note: Binance is not available in certain countries, including the US).

Macro Mondays Discussion

1. Crypto Market Performance and AI Dominance

• Key Point: The crypto market has experienced a difficult Q4, with many investors not making significant gains in the space this year.
• Supporting Evidence: A meme is referenced where people laugh at the idea of a zero capital gains tax on crypto because they haven't made any gains.
• Argument: The crypto space is currently overshadowed by an "incredible investment cycle in AI."
• Technical Term: AI (Artificial Intelligence) - A field of computer science focused on creating systems that can perform tasks typically requiring human intelligence.
• Data/Observation: User adoption of AI has been moving faster than crypto. Many tech-savvy investors have shifted their attention and portfolios to AI, with positive results.
• Observation: There has been a rotation of crypto holders over the past 12-18 months, with institutional investors and governments potentially replacing some "OGs" (original/early adopters) of Bitcoin. This shift in investor psychology is considered important for Bitcoin's price action.

2. Geopolitics and Rare Earths Dependency

• Main Topic: The US and its allies are actively working to reduce their dependence on China for critical rare earth minerals.
• Key Point: The Trump-Xi deal involved a one-year delay in Chinese export limitations on rare earths and a reduction in US fentanyl tariffs, but the underlying dependency persists.
• Case Study/Example: The "Trump sheet deal" and the rare earths case are discussed. A clip from Scott Besson is featured, highlighting China's long-term plan for rare earth restrictions and the US's need to "derisk" by forming new supply chains with allies.
• Argument: Besson argues it's naive to think China wouldn't implement rare earth restrictions, and the US needs to "go at warp speed" to build its own supply chains. He emphasizes rallying allies (Western democracies, Asian democracies, India) to achieve this.
• Technical Term: Rare Earths - A group of 17 chemical elements with unique properties crucial for many modern technologies, including electronics, magnets, and defense systems.
• Real-World Application: The US, Europe, and India are moving towards solving their dependency on China for rare earths, which implies significant public investment in mining and processing.
• Andreas's Perspective:
  • The US, Europe, and India are moving towards solving this dependency, but "warp speed" might be an exaggeration. More action is needed.
  • China's restrictions on seven critical metals, including those used in F-35 fighter jets, are still in place.
  • Public investments have been seen, such as the Treasury taking a stake in MP Materials.
  • The "Operation Warp Speed" analogy is used, referencing the COVID-19 vaccine initiative, to signal to China that the US can solve this within 12-18 months, though Andreas considers this optimistic.
  • For large parts of the supply chain, a two to three-year timeline is more manageable with the right investment pace.
  • This is not a free market bet; it's a small market with low margins, likely requiring price guarantees or price floors to ensure feasibility in a Western context.
• Quote: Scott Besson: "They've been putting this plan together for 25, 30 years, and the US has been asleep at the switch."
• Quote: Scott Besson: "We don't want to decouple from China, but we need to derisk."

3. Data Centers, Cloud Computing, and AI Bubble Concerns

• Main Topic: The expansion of computing power and data centers globally, particularly in the US, driven by AI.
• Key Point: Microsoft and Iron Mountain have agreed on a $10 billion cloud computing contract in Texas.
• Example: Iron Mountain is mentioned as being in the model portfolio and performing well.
• Argument/Question: The hosts discuss whether the market is in an AI bubble and how current investments fit into this.
• Andreas's Perspective:
  • Iron Mountain is an "asset heavy" case compared to other high-performance compute lessors.
  • Asset Heavy vs. Asset Light:
    • Asset Heavy: Provides barriers to entry, scaling benefits, and better durability but is more sensitive to capital expenditure cycles and utilization rates.
    • Asset Light: Less sensitive to capital expenditure cycles.
  • Currently, being asset heavy is an advantage as companies like Microsoft are securing access to high-performance compute power for the next 2-4 years.
  • However, in a downturn, asset-heavy companies are more sensitive to declining utilization rates.
  • The more asset heavy a company is, the more cyclical its bet on the AI cycle becomes.
• Supporting Evidence: Decent earnings reports from Amazon and Alphabet last week suggest continued positive momentum for AI and capital expenditure bets.

4. Geopolitical Developments: Venezuela and Nigeria

• Main Topic: Emerging geopolitical tensions with potential market implications.
• Venezuela:
  • Observation: Trump is increasing rhetoric on Venezuela, moving a carrier task force.
  • Mixed Signals: Rhetoric suggests a desire for regime change ("Maduro's days are numbered"), but actions are focused on attacking smuggler ships and potentially drug cartels.
  • Analysis: Bringing an aircraft carrier to attack small boats seems like an "overkill." The buildup is substantial enough to suggest action is imminent, potentially a "point of no return."
  • Market Implication: The best bet on the crisis is the opening of Venezuela's oil and gas industry, which would cover both forced regime shifts and negotiated solutions.
• Nigeria:
  • Observation: The concept of "responsibility to protect" (R2P), popularized in the 90s, seems to be resurfacing, potentially as a front for action in Nigeria.
  • Market Implication: Neither conflict has the same direct market implications as the Iran conflict, but they are worth monitoring, especially for oil markets.
• Andreas's Perspective on Oil:
  • OPEC agreed to a small production hike, adopting a more defensive stance.
  • Oil is potentially bottoming, presenting an "asymmetrical" bet to the upside, especially given the situations in Venezuela and Nigeria.
  • The market is leaning heavily short on oil, which, combined with geopolitical factors, creates an attractive upside opportunity.
  • Most OPEC countries are at or near maximum production, except for Saudi Arabia.

5. US Economic Data and Government Shutdown Impact

• Main Topic: The reliability and interpretation of US economic data amidst the government shutdown.
• Key Data Points: ISM manufacturing report, non-farm payrolls.
• ISM Manufacturing Report:
  • Observation: The headline number was not good, showing sideways movement with slight declines in some categories.
  • Explanation: This is not surprising given the Trump-Xi standoff in October. Inventories are down significantly due to a lack of shipping momentum.
  • Forward-Looking: The spread between new orders and inventories suggests a couple of good months ahead now that the standoff is past.
  • Caveat: The report is considered somewhat outdated as a deal was reached after data collection.
• Data Reliability Concerns:
  • The ISM report is seen as too focused on cross-border operations compared to the S&P PMI, which remains more upbeat.
  • Government data is largely unavailable due to the shutdown.
• Alternative Data Sources:
  • State-level data, such as unemployment claims, provides insights. Claims have been decent, suggesting no major labor market deceleration.
  • The ADP Institute is expected to release a one-week measure for the private labor market.
• Impact of Shutdown on Liquidity:
  • The US Treasury is hoarding cash because it has fewer bills to pay due to furloughed workers.
  • This withdrawal of money from the system is tightening market liquidity.
  • US Treasury cash holdings have surpassed $1 trillion, significantly higher than the steady-state of $250 billion lower. This effectively removes $250 billion from private markets.
• Quote: "The most important impact of the shutdown is currently that the US Treasury hoards cash because they don't have a lot of bills to pay simply because people have been furled, right?"

6. Listener Questions and Thematic Investments

• Solar Energy Sector (TAN ETF):
  • Question: Is the TAN ETF a good way to play the solar thematic, or should focus be on the US solar buildout?
  • Analysis:
    • US solar buildout has been slow compared to the EU, despite having better conditions (more space).
    • The domestic US solar buildout is likely to be larger than anticipated.
    • The US administration is focused on nuclear, but short-term solutions for data centers are needed, leading to bottlenecks in gas turbines.
    • Solar is underappreciated domestically.
  • Counterpoint: The solar supply chain is heavily China-dependent (e.g., polysilicon, with over 80-90% market share). This dependency is a reason the US administration might not accelerate the agenda too quickly.
  • Portfolio Strategy: The hosts have 4-5 bets on solar, including indirect ones, and like the TAN ETF. They emphasize looking at input parts of the supply chain (like DAQO) and software companies not impacted by Chinese margin pressures.
• SOFR Rate and Overnight Repo Facility:
  • Question: Thoughts on the spike in the SOFR rate and the $50 billion injection into the overnight repo facility.
  • Explanation: This is a result of the US Treasury building up cash, leading to scarce liquidity in the narrow money market.
  • Significance: This is why Quantitative Tightening (QT) is ending on December 1st.
  • Federal Reserve's Role: The Fed has a solution in place with the standing repo facility (SRF). This is the first time in a while that borrowing from the Fed exceeds dollar deposits, indicating a move away from an "abundant liquidity regime."
  • Future Outlook: This suggests a need for balance sheet expansion from the Federal Reserve, likely next year. This expansion is where "true debasement bets" could gain traction.
  • Crypto Connection: The Fed's balance sheet expansion is seen as a prerequisite for AI-related positivity to spill over into crypto.

Conclusion and Synthesis

The discussion highlights a complex macro environment characterized by the overshadowing influence of AI investment on the crypto market, significant geopolitical shifts impacting supply chains (especially rare earths), and evolving US economic conditions influenced by a government shutdown. The hosts emphasize the need for investors to be aware of these interconnected themes, from the strategic importance of rare earth supply chains and the rapid growth of data centers to the subtle but significant shifts in market liquidity and the potential for geopolitical events to impact commodity prices like oil. The conversation also underscores the importance of alternative data and nuanced analysis in navigating an environment where traditional economic indicators may be unreliable. The potential for future Federal Reserve balance sheet expansion is identified as a key catalyst for broader market shifts, including a potential resurgence in crypto.