Trump 2.0: Economic Expectations and Policy Implications

December 2024 Client Letter

Many investors are anticipating positive developments for the U.S. economy and markets from Trump 2.0. Key expectations include the continuation of tax cuts and deregulation. Lower corporate taxes and reduced regulatory burdens are often seen as catalysts for economic growth, potentially boosting corporate profits and encouraging investment.

Additionally, Trump’s focus on infrastructure spending is expected to create opportunities in construction, manufacturing, and related industries. This could lead to job creation and further economic expansion. Despite concerns about excessive tariffs and mass deportation, the overall sentiment among investors appears to be generally positive, with many viewing Trump’s policies as conducive to economic growth.

Infrastructure is an investment theme I favor. In June, I titled my letter to you “Irreplaceable Infrastructure,” discussing essential elements such as functioning highways and energy pipelines as critical to the U.S. economy. 

Digital Infrastructure: The Unseen Economic Backbone

Unlike traditional infrastructure such as highways and pipelines, digital infrastructure often goes unnoticed but has a significant economic and societal impact. Hyperscalers and data centers are central to the U.S. technological infrastructure, supporting cloud services while helping to drive economic growth. They provide the backbone for data storage, processing, and management, enabling rapid business innovation and scalability. This expansion underscores the need for robust digital infrastructure to maintain the U.S. economy’s competitive edge.

Hyperscalers like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud power much of the internet and cloud services. These facilities handle vast amounts of data and computing tasks, expanding quickly to meet demand. Built for scalability and flexibility, they host thousands of servers and manage enormous data quantities. Advances in energy efficiency, cooling, and server density have driven their development. Initially, for tech giants, hyperscalers are now vital for online services.

Hyperscalers support global connectivity and critical applications, ensuring high availability and reliability for uninterrupted digital services. AWS, Microsoft Azure, and Google Cloud are essential for social media, streaming, cloud storage, and enterprise applications.

The Accelerating AI Revolution 

Hyperscale data centers provide the massive computational power and storage capacity needed to run AI applications efficiently. The adoption of artificial intelligence (AI), particularly generative AI, is happening much faster than the adoption of the internet and personal computers (PCs) did.

This rapid uptake is driven by the accessibility and versatility of AI tools, which are used across various industries and job roles. Unlike the early days of PCs and the internet, AI tools are more readily available and often free, facilitating quicker integration into daily life and work. AI is used in management, business, and blue-collar jobs, highlighting its broad applicability.

Bill Gates has emphasized AI’s transformative impact, stating, “The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone.” AI’s adoption is occurring at an unprecedented pace. For example, Netflix took 3.5 years to reach one million users and Facebook took ten months, while newer AI platforms and social media platforms like Threads are reaching one million users within hours.

AI applications are diverse and impactful. In healthcare, AI assists in diagnosing diseases and personalizing treatments. In finance, AI detects fraud and automates trading. In retail, AI enhances customer experiences through personalized recommendations. Autonomous vehicles and personalized education are other examples of AI’s transformative potential.

Gates said AI’s rapid advancements will make the pre-AI era seem as distant as the early days of computing: “Soon the pre-AI period will seem as distant as the days when using a computer meant typing at a C:> prompt rather than tapping on a screen.”

Strategic Technological Partnerships

Amazon, Google, Microsoft, and Meta are driving data center growth through partnerships with companies including IonQ, Rigetti, and Nvidia. These collaborations help meet the rising demand for data center capacity as AI and cloud services expand.
Amazon’s Braket service provides access to quantum computing resources from IonQ and Rigetti, helping researchers and developers design and test quantum algorithms. Amazon’s Center for Quantum Computing (CUA-Q) advances quantum technologies and integrates them into cloud services.

Google Cloud and Microsoft Azure are also investing in quantum computing and AI. Google collaborates with quantum hardware providers to enhance its cloud services, while Microsoft Azure offers Azure Quantum, a platform for quantum computing resources and tools.
Meta, with its extensive data center infrastructure, explores quantum computing and AI to enhance its services. Nvidia provides advanced GPU technology essential for AI and machine learning, integrated into the infrastructure of these hyperscalers to handle massive computational demands efficiently.

GPUs: Powering the Digital Transformation

Advanced GPUs (graphics processing units) offer significant benefits, particularly in AI, machine learning, and data centers. They provide high computational power and faster data processing, essential for training AI models and running data-intensive applications. GPUs enhance performance through parallel processing, leading to quicker insights and faster decision-making. They are also energy-efficient, reducing power consumption while maintaining high performance. GPUs are scalable and versatile and support advanced technologies like neural networks and real-time data analytics. In consumer applications, they improve user experiences in video games and virtual reality. These benefits make advanced GPUs crucial for modern data centers, enabling hyperscalers to handle extraordinary computational demands.

Meta Platforms: Beyond Social Media

Many investors primarily recognize Meta Platforms Inc. (META) as a social media giant, with teenagers frequently using Instagram and adults using Facebook to stay connected with friends and family. However, Meta’s scope extends beyond social media. As a major player in the telecommunications sector of the S&P 500, Meta serves approximately three billion users daily and four billion monthly, nearly half of the global population of eight billion. This extensive user base highlights Meta’s influence and reach. 

In addition to its social media dominance, Meta is making meaningful investments in global infrastructure. The company is reportedly planning to build a nearly 25,000-mile subsea cable network, estimated to cost over $10 billion. This ambitious project aims to enhance global data connectivity, reflecting Meta’s commitment to expanding its technological capabilities and infrastructure. The subsea cable, spanning over 40,000 kilometers, will be one of the longest and most expensive of its kind. It is designed to circle the globe, connecting the East Coast of the U.S. to India via South Africa and then looping back to the West Coast of the U.S. through Australia. 

This project is not just about expanding Meta’s reach but also about ensuring the reliability and speed of internet access for its vast user base. The cable will provide Meta with a dedicated pipeline for data traffic, significantly boosting its capacity to handle the immense volume of data generated by its platforms. The initiative is still in its early stages, with plans to start with a budget of $2 billion, eventually scaling up to over $10 billion as the project progresses.

Digital Advertising: The New Frontier of Marketing

The digital advertising landscape is growing rapidly, driven by the shift from traditional to digital media, technological advancements, and data-driven marketing. As consumers spend more time online, advertisers are allocating larger budgets to digital channels, leading to a 10% annual growth in digital-ad spending. Technological innovations like programmatic advertising, AI, and machine learning enhance targeting and personalization, resulting in higher engagement and better results for advertisers. Companies like Amazon, Alphabet (Google), and Meta (Facebook) leverage their vast data resources and advanced technologies to command the market. 

Amazon’s advertising business has grown rapidly, leveraging its e-commerce platform and extensive customer data to offer targeted advertising solutions. Alphabet, through its Google and YouTube platforms, continues to dominate the search and video advertising markets, driven by its advanced algorithms and vast user base. Meta, with its Facebook and Instagram platforms, remains a leader in social media advertising, capitalizing on its large user base and sophisticated ad targeting capabilities. 

Data-driven marketing is increasingly important, allowing advertisers to optimize ad spend and maximize its impact through real-time user behavior analysis. Amazon, Alphabet, and Meta are well-positioned due to their extensive data ecosystems and analytics capabilities.

The global digital advertising market is set to grow. According to a forecast by GroupM, global ad revenue is expected to reach $989.8 billion in 2024 and surpass $1 trillion in 2025. Amazon, Alphabet, and Meta are prepared to capitalize on these trends and drive continued growth in the sector.

The Taiwan Semiconductor Risk

Geopolitical risks surrounding Taiwan are significant due to the country’s role as home to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest and most advanced semiconductor producer. TSMC dominates high-end chip manufacturing, producing over 90% of the global supply, essential for products ranging from smartphones to military systems. 

Apple, Nvidia, and Qualcomm depend heavily on TSMC, highlighting a critical link between American innovation and Taiwan’s manufacturing excellence. Any disruption to TSMC’s operations, such as from a Chinese invasion, would severely impact industries, causing chip shortages, production delays, and economic losses, particularly in the automotive and tech sectors. 

With no viable alternatives to TSMC’s capabilities, replicating its technological and manufacturing prowess would take years. Such dependency also poses national security risks, as advanced semiconductors are vital for modern defense systems. A disruption would have far-reaching economic and strategic consequences, not only for the U.S. but globally.

TSMC is actively developing semiconductor manufacturing facilities outside of Taiwan to diversify its operations and reduce risks. In the United States, TSMC is building a $40-billion facility in Phoenix, Arizona. This plant will produce advanced four-nanometer and three-nanometer chips, aligning with the U.S. CHIPS Act, which promotes domestic semiconductor production to reduce foreign dependency. In Japan, TSMC is constructing a facility in Kumamoto in collaboration with Sony and other partners. This plant will focus on older-generation chips used in cars and consumer electronics. 

While these efforts can help diversify risk, they do not fully eliminate vulnerabilities associated with a potential Chinese invasion of Taiwan. Establishing facilities outside Taiwan reduces dependence on a single geographic location, but the new plants will take years to match TSMC’s current production scale and technological sophistication. Taiwan will remain the hub for TSMC’s most advanced chip manufacturing for the foreseeable future. Furthermore, TSMC’s core operations, research and development, and cutting-edge production remain tied to Taiwan, meaning a conflict could still severely disrupt global supply chains.

Our Investment Strategy

In an era of rapid technological transformation, our investment strategy remains focused on understanding the fundamental shifts driving economic growth. From the potential policy impacts of Trump 2.0 to the revolutionary advances in AI, digital infrastructure, and semiconductor technologies, we are committed to navigating and understanding these evolving landscapes. By focusing on companies at the forefront of innovation—those building critical infrastructure, leveraging advanced technologies, and adapting to changing market dynamics—we aim to position our clients’ portfolios to capture the opportunities presented by these technological and economic developments.

Warm regards, 

 

 

 

Matthew A. Young
President and Chief Executive Officer

AI Being Used to Run World’s First Indoor Vertical Berry Farm | Fox News

As reported in Fox News, the world’s first indoor vertical berry farm has opened in Virginia, using advanced artificial intelligence (AI) to revolutionize agriculture. Aiming to produce four million pounds of berries annually, the farm leverages AI to optimize growing conditions and maximize yield. AI systems monitor and control light, temperature, humidity, and nutrient levels, ensuring ideal conditions for growth. This precision farming approach enhances productivity and reduces resource consumption, making the process more sustainable. 

AI allows for continuous data collection and real-time adjustments to the growing environment through machine-learning algorithms. Advanced robotics are used for planting, tending, and harvesting, increasing efficiency and reducing manual labor.

This AI-driven farming represents a significant advancement in agricultural technology, offering a glimpse into the future of food production. By integrating AI and robotics, the farm operates year-round, independent of weather conditions, and produces high-quality berries with minimal environmental impact. This innovation addresses traditional farming challenges and sets a new standard for sustainable agriculture.

Algorithmic Warfare

Project Maven, officially known as the Algorithmic Warfare Cross-Functional Team, is a Pentagon initiative launched in 2017 to integrate AI and machine learning into military operations. The project aims to enhance the analysis of vast amounts of data from various sources, such as drone footage, to identify potential targets and improve decision-making processes.

Several large publicly traded companies have been involved in Project Maven. Amazon Web Services (AWS) provides cloud computing infrastructure, while Microsoft contributes with its Azure cloud services. Palantir Technologies supplies data fusion platforms, and L3Harris Technologies offers advanced defense solutions. These partnerships are crucial for leveraging cutting-edge AI technologies to enhance the U.S. Department of Defense’s capabilities.

CNBC and Barron’s

In the sixth-annual CNBC FA 100 ranking (2024), Richard C. Young & Co., Ltd. was again acknowledged for its excellence in guiding clients through their financial journeys. Additionally, Barron’s annually ranks the nation’s top independent advisors, and Richard C. Young & Co., Ltd. has proudly secured a spot on this prestigious list for 12 consecutive years.

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