Author: Flip Research
Compilation: DeepTech TechFlow
The comprehensive retreat of American exceptionalism
Warren Buffett often mentions the concept of ‘American tailwind’ in his annual letter, referring to the long-term advantage of the American economy globally. His views have consistently proven to be correct, and this philosophy has helped him achieve astounding returns across multiple generations, making him one of the greatest investors in history.
However, I believe that this trend is rapidly changing. By the end of 2024, I only held a small amount of US stocks and cryptocurrencies. In this article, I will elaborate on the logic supporting this trade and explain why I think we may see the US Dollar Index (DXY) decline in the future, as well as the continued underperformance of US stocks (including cryptocurrencies).
The Rise of AI: Global Competition and Value Transfer
In the past few years, the rise of AI is undoubtedly one of the most important trends. AI is quickly changing our way of life, and the speed of this transformation is constantly accelerating. Behind this trend are a variety of factors driving it together:
Computing power grows exponentially according to Moore’s Law, and the powerful parallel computing capability of GPUs further empowers it, with NVIDIA consistently maintaining a leading position in this field.
The breakthrough in science and technology, such as the birth of the Transformer architecture, has laid the foundation for the performance improvement of AI models.
Massive investments from governments and private enterprises. For example, the seven global tech giants (often referred to as the ‘Mag 7’) are expected to invest over $300 billion in the field of AI by 2025.
The combined effect of these factors has significantly reduced the inference cost of AI models (i.e. the cost of using AI models). According to A16z’s estimation, this cost has decreased by 1000 times in the past three years.
In particular, the release of DeepSeek r1 has accelerated this trend. Many people refer to it as the AI ‘Sputnik moment’, similar to the technological race sparked by the launch of the first artificial satellite by the Soviet Union in 1957. The difference is that this race is focused on building the most powerful large language model (LLM) worldwide. Currently, it can be seen that the cost of inference is rapidly decreasing, approaching zero.
So, who will capture these values? In the short term, value will flow downstream along the industry chain to the application layer, those enterprises and businesses built on LLM. However, in the long run, with the continuous improvement of LLM performance, competition between application layers will become more intense, development will become more convenient, and there will be more and more plug-and-play solutions. Ultimately, these values will be directly transferred to individual users.
I believe that the next 2-3 years will be a key period of transformation in the AI field, and its impact will far exceed the expectations of most people. That’s why I firmly believe that AI-based robotics technology will gradually demonstrate stronger competitiveness, as hardware interfaces have higher competitive barriers compared to software applications.
From an investment perspective, there is a clear misalignment in this area. Regardless of which country you are in the world, investment portfolios usually focus on the S&P 500 index (S&P). With the popularity of index funds, this trend is further amplified - many ordinary families directly invest their idle savings in the S&P 500 ETFs (such as VOO), and investment forums commonly advise to ‘put all your money into the S&P 500 and don’t look back.’ The traditional 60/40 stock/bond investment portfolio has almost become history. Therefore, the S&P 500 currently accounts for over half of the global stock market capitalization, with a total market value of around $55 trillion. This concentration of investment may overlook the new opportunities brought by the rise of AI.
Technological change and global value transfer
Although the global financial capital is highly concentrated in the US market, the most revolutionary technology of our generation is redistributing value to the global population. This may be one of the most powerful ‘balancers’ we have ever seen—value is gradually being redistributed according to the distribution of the population. So, what does this mean for the United States? Although the US holds over half of the world’s financial capital, its population accounts for only 4.2% of the global population.
Of course, to convey the information more clearly, some of the above points have been simplified. For example, Mag 7 company (the seven tech giants) has realized these potential risks. Companies like Meta have taken action by building open-source models (such as Llama) to reduce inference costs, while also investing in robotics technology and application layers. However, these facts do not change the core logic of the overall argument.
The Trump Effect: Concerns about the Global Position of the United States
There’s no doubt that Donald Trump is changing the landscape of global politics – the Make America Great Again (MAGA) campaign marks a sharp departure from traditional political discourse. Yet, despite Trump’s claim that his policies will make America great again, I believe that his policies are significantly weakening America’s influence on the global stage and may ultimately lead to a gradual decline in America’s outlook.
To understand this, we first need to understand why the dollar can become the global reserve currency. At first glance, this can be attributed to the strong driving force of the US economy: the US economy accounts for about 26% of the global GDP and has a stable, open, and highly liquid capital market.
However, this does not fully explain the global dominance of the US dollar. If it were purely economic, we would have seen the use of other currencies in proportion to the size of their economies. However, the fact is that the US dollar is involved in almost 90% of global transactions. What really supports the dollar is the political and military power of the United States. Whenever a country behaves too strong, the United States imposes sanctions on it and demands that allies do the same. For example, the recent ban on the export of high-performance GPUs to China is a striking example. This model is not new – historically, the British pound was the world’s reserve currency, relying on British military power until the decline of the British Empire deprived it of that status.
However, Trump is rapidly changing the traditional positioning of the United States politically and militarily. His philosophy of “America First” emphasizes the primacy of domestic affairs at the expense of a focus on traditional alliances and global military commitments:
General tariff threats: Trump has launched general tariff threats against all trading partners, including long-term allies. This has not only fueled anti-American sentiment (for example, phenomena of boycotting American products have already appeared in countries like Canada), but also forced trading partners to turn to other countries to establish closer economic ties.
Isolationist military policy: Trump pursued isolationist military policies to weaken NATO’s influence while demanding that NATO members increase defense spending to 5% of GDP. This policy has prompted many European countries to compromise and begin to increase their defense budgets and reduce their dependence on the United States, which has undoubtedly weakened Trump’s main influence in Europe.
Europe’s pro-independence tendencies: this trend is playing out in real time. Today, the winner of the German elections, Friedrich Merz, openly stated that he would quickly push for European unity and “achieve independence from the United States.” The statement underscores Europe’s gradual erosion of dependence on the United States under Trump’s policies.
Foreign Aid Cuts: The Trump administration has slashed U.S. foreign aid programs, which have long been an important tool for U.S. influence around the world. At the same time, China has taken a completely different approach, notably pursuing expansionist policies in Africa, including through the Belt and Road Initiative (BRI) to ensure access to valuable resources and critical supply chains.
Tilt towards Russia: The Trump administration’s apparent focus on “ending the war in Ukraine at all costs” has led to a deepening of U.S.-Russia relations – which ranks only 11th in the world in terms of GDP. Such a policy choice not only alienates America’s traditional allies, but also threatens to weaken its strategic position around the world.
The Fed’s dilemma
The current political and fiscal policies of the United States have put the Federal Reserve in a difficult dilemma. Many isolationist policies implemented by the Trump administration are not economically rational. The economic community has long proven that autarkic policy is far less effective than global cooperation. For example, the principle of comparative advantage clearly illustrates the advantages of international division of labor.
Despite the overall strong performance of the US market, some signs of weakness are beginning to emerge. The labor market is gradually cooling, and business investment is also decreasing. This is mainly because companies tend to reduce long-term investment in an uncertain policy environment. The GDP growth forecast for 2025 is 2.2%, which is a moderate growth level.
At the same time, inflationary pressures persist. The Consumer Price Index (CPI) in January this year increased by 3% year-on-year and has been rising continuously over the past 6 months. This upward inflation trend contradicts the slowing economic growth, forcing the Federal Reserve to find a balance between the two. As of now, the market generally predicts that the Federal Reserve may only cut interest rates once or twice this year.
Observing the flow of funds has always been an important method to understand the market. Last year, the market’s rise was mainly driven by expectations of relaxed regulation and increased liquidity. However, the market sentiment this year is quite the opposite, more influenced by tightening policies. It is worth noting that the Federal Reserve’s Quantitative Tightening plan (QT) will gradually ease in the first half of this year, injecting additional liquidity into the market.
Conclusion
The “American exceptionalism” deal may be coming to an end, and the reasons behind it are complex. But as the proverb goes, “The irrationality of the market may last longer than the solvency of investors.” ”
So, why now? In my opinion, the Trump administration is the catalyst for this change. He has changed the global political landscape in a way not seen in decades, forcing traditional allies to reassess their positions and causing serious damage to America’s standing on the international stage.
The current situation is already fragile, and it only takes a small trigger to trigger dramatic change. For example, the EU leadership may be able to unite EU countries simply by saying “no” to Trump’s position on Ukraine; Or allies are beginning to form new trade alliances in response to uncertainty about U.S. policy. In fact, we are already seeing the signs of this trend in the policies of the new German leadership.
However, the economic situation in the United States cannot provide much confidence. At the same time, the impact of artificial intelligence (AI) transformation is also beginning to show. For example, this year the performance of the Chinese stock market is significantly better than that of the US stock market, which may reflect the different development paths of the two countries in the field of technology.
As for cryptocurrencies, I think institutional investors see them as high-risk assets in the risk spectrum and will adjust their money flows in line with the aforementioned trends. In the crypto space, institutional investors are often given an “aura”, and many members of the crypto community (especially the crypto-Twitter community CT) have high expectations for their investment behavior. However, these agencies don’t actually have any insider information (perhaps even less than the CT community knows). As a result, when there is a sharp correction in the market, they can suffer losses just as badly as the average investor. As for the question of whether MicroStrategy (MSTR) has a Ponzi scheme or not, this is another topic that deserves to be explored in depth.
Disclaimer: The above views are all my personal opinions, reflecting my own investment portfolio positioning. The content is highly condensed to cater to the reading habits of the crypto Twitter community (CT focus is relatively short). Please always do your own research (DYOR) and draw your own conclusions based on your own judgment.
