In the early days of the tech boom, ambitious young French entrepreneurs formed startups aimed at producing novel hardware and software products. When the time came for the first batch to sell to larger–non-French–firms, however, Paris revealed that not only did the government have the right of first refusal for any sale, it was exercising its right to forbid sale to anyone but itself. And it named prices,

This led to a mass emigration of French entrepreneurs to Silicon Valley.

NVDA has just learned that the gross margin on the sales of its AI chips to China has been arbitrarily reduced by the president from 80% to $70%. This is a special tax that applies only to NVDA, and maybe AMD. Better than not allowing sales at all, but still an arbitrary act, and a loss of $2 billion a year to NVDA.

What NVDA may be thinking:

–the difference between 1 and 2 is a lot smaller than between 0 and 1. That is, there’s no reason to think that this tax isn’t just the first step rather than the last

–in addition, the Trump US is a more dangerous place to live as it has been. Hard to know whether vaccine denial or ICE is the bigger threat

–over the next five years, NVDA would save maybe $15 billion by reincorporating in someplace like Canada

If it were me, I wouldn’t be leaving today. But I would be speeding up my contingency planning.

I’ve been fooling around with Claude AI and decided to start an inquiry into INTC’s recent agreement to sell the federal government a 9.9% equity interest in the firm at a 17% discount to the then-prevailing stock price. President Trump, who ostensibly brokered the deal, is quoted as saying, “I paid zero for Intel. It’s worth $11 billion.”

The actual terms are complicated. The most important, as I see it, are:

–the government pays INTC $8.9 billion, of which $5.7 billion is in government support already promised but not yet disbursed; the rest comes from a classified defense program. The 443 million shares purchased translate into a price of $20.47 per share, a 17% discount to the then-prevailing stock price

–in addition, the government gets 240.5 million warrants that each entitle the holder to purchase one new share at $20 each over the next five years. These are only exercisable if INTC no longer has ownership control of its foundry business

–the government gives up its claim to repayment of $2.2 billion in previous loan-like grant instruments

–the government is able to resell these shares, but only in, in effect, a public offering. The shares have essentially no voting rights, however. As I read the 8-K describing the sale, the shares must be voted with management, except in a case where the company would be trying somehow to damage the government’s interest.

If we look at this deal in the simplest terms (my favorite way), Washington is injecting $8.9 billion in cash into INTC and dissolving a potential liability of $2.2 billion. That’s a total improvement in INTC’s financial value of $11.1 billion. The current market cap of INTC is just under $110 billion, meaning that the government’s 10% interest, ex warrants, is about $11 billion. So, as I see it, Washington is paying $11 billion for stock now worth $11 billion.

Three caveats:

–the warrants arguably have some value, although my guess is that Washington would arrange another bailout rather than allow INTC to sell its foundry business

–other semiconductor firms, from TSMC to Micron, are getting very large amounts of government money without having to give up equity. On one hand, Washington is clearly committed to keeping INTC afloat. On the other, the fact that no other major semiconductor firm has had to give up equity to get government funding indicates how weak INTC’s competitive bargaining position is

–I wonder who, other than INTC itself, would be a buyer of stock without voting rights. Could a fiduciary–and institutional investor or an index fund–legally do so? Does the restriction on resale of the government-owned shares apply only to Washington or to any subsequent holder as well?

“Drill, baby, drill” was one of Trump’s more important election campaign slogans. It holds the implicit promise to favor oil and gas as an energy source over renewables like solar and wind. Trump can, and has been doing so, ignore the problem of petroleum-induced global warming–and order the shutdown of renewables projects. In addition, it could well be that at the behest of mega-donor Elon Musk, he may also restrict (bar?) imports of cheap EVs made by Chinese companies in Mexico.

Two issues:

–lots of domestic oil and gas extraction, including in the state of Pennsylvania, where I’m writing this, is done mainly through hydraulic fracking, i.e., using high-pressure streams of water and sand to make big cracks in solid oil/gas-bearing rock. That creates paths for trapped hydrocarbons to reach a well, and from there get to the surface.

Fracking more about engineering prowess in squeezing more output either from mature areas, or ones uneconomical, pre-fracking, than finding completely new deposits, which tend to be in remote areas or deep under the sea. Costs are relatively high with fracking, something like $50+ per barrel vs maybe $20 (a number I just made up–it could be lower) for a big offshore find. On the other hand, there’s much lower risk of coming up completely empty.

So frackers make a ton of money when the oil price is, say, $80 a barrel, and lose their shirts at $40.

–Saudi Arabia controls the world oil price, as I see it. That’s because it has decades worth of potential production that can be brought to the surface very cheaply–$10 a barrel or less. Since the 1980s, the kingdom has looked to set its benchmark price based on creating the highest present value, assuming production for, say, 30 years. It has been less concerned with near-term market share, since its total reserves are so vast. More important to it to have oil buyers still there a quarter-century+ from now.

This may be changing, though. The rise of alternative power sources and the rapid proliferation of electric vehicles as replacement for gasoline-powered cars both argue that 30 years is too long a time frame to bet on. The profit-maximizing path is more likely to be to produce more, sooner, accepting lower prices, to get more output out the door before petroleum goes the way of coal and whale oil. The most obvious way to increase unit sales is to price below the breakeven for frackers.

If what I’ve described above is anything near the case, the Trump strategy isn’t the best.

The straightforward play, which has worked exceptionally well so far this year, has been to look for companies with costs in a depreciating dollar and revenues in more vibrant currencies–meaning just about anything in the OECD other than dollars.

It seems to me, though, that there’s a case to be made now for left-behind, “broken” stocks. In a way, this is just classic value investing. But to a potential European or Asian acquirer, prices are now something like 15% cheaper than in January, due to the dollar’s decline. And arguably the lion’s share of the bad news of Trumponomics is already baked into today’s values.

That’s my sense of things.

one

I think the US stock market–and all the rest of the world’s major stock markets, for that matter– have pretty much finished the process of digesting (discounting) the most straightforward macroeconomic implications of the change of administration in Washington.

The “big picture” issues I see under Trump’s administration are, in no particular order:

–an effort to shift responsibility for the cost of running the the federal government away from the wealthy and toward ordinary Americans through changes in the Internal Revenue code and a shift from taxing the accumulation of wealth to tariffing consumption

–the decision to shrink the workforce through ICE arrests and deportations

–the apparent desire to lower the cost of servicing the national debt by weakening the dollar and reducing interest rates (a potential reprise of the disastrous policies of the 1970s).

“Joining the Third World” (JTW) is probably a more accurate description of the economics of this program than MAGA–whose social meaning seems to have morphed into something far more sinister than aspiring to be great.

Wall Street has expressed its dismay at this turn of events mostly through a sharp decline in the USD vs. other major currencies over the first few months after the inauguration. Recently, though, the stock market has gone more or less sideways.

two

There’s a lot of recent anecdotal evidence that the US economy is slowing, despite the boost to exports from the dollar’s decline. Numerous firms have remarked that consumers are taking a wait-and-see stance in their discretionary spending–either trading down or postponing purchases. Something that particularly resonates with me–Home Depot is saying that customers haven’t “abandoned” major home improvement projects. But they are postponing the biggest, say, adding a new room to the house and substituting planting a new garden instead.

“Haven’t abandoned” is corporate-speak for “have put off for as far as the eye can see.” The surge in business at the dollar stores and discount clothing chains is another sign that people generally feel that bad times are in the offing.