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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).
Welcome to the Confluence Investment Management Bi-weekly Geopolitical Report for 09/15/2025. I'm Phil Adler. The race for global AI dominance has crucial implications for governments and financial markets. Confluence Associate Market Strategist and Certified Business Economist (CBE) Thomas Wash joins us today to offer some guidelines for investors. Thomas, the title of this week's report is "The Great AI Race: A Sputnik Moment for the 21st Century."
Phil Adler:Sputnik is a powerful symbol for a number of reasons. What exactly is at stake here?
Thomas Wash:Thank you for having me, Phil. Much like Sputnik, this isn't just about a single technological achievement. What's at stake is nothing less than the future of the global order. The nation that dominates AI will set the technical standards, ethical norms, and regulatory frameworks that every other country will have to adopt. This leadership translates directly into economic dominance as it dictates how AI is integrated into global supply chains, financial system, and defense networks.
Thomas Wash:Ultimately, the winner will cement unparalleled influence over the 21st century geopolitical landscape.
Phil Adler:So, this is a lot more than just a battle between capitalism and communism.
Thomas Wash:Yeah. You're exactly right. The struggle is about which approach to innovation is more effective. While both the US and China leverage their structural power, their models are fundamentally different. The US uses a bottom up approach where private sector innovation is the engine, and the government's role is to protect and promote those interests abroad.
Thomas Wash:China, on the other hand, employs a top down, state directed model where the government sets national objectives and guides the economy to achieve them.
Phil Adler:Thomas, you make the point in your report that the US and China are employing very different strategies to try to win this race for AI dominance. What, in a few words, is the US strategy?
Thomas Wash:Well, the US strategy is to leverage its formidable private sector to take on the Chinese bureaucracy. The government effectively outsources much of its R&D to tech giants and startups, creating a very powerful relationship with Silicon Valley. The goal is to achieve cutting edge AI capable of achieving artificial general intelligence that are capable of reasoning at a human level and beyond. The focus is dual purpose, ensuring the US companies achieve global technological supremacy while generating massive economic value.
Phil Adler:You you said something that interested me very much in your report that is the China top down strategy is more focused on results. What do you mean?
Thomas Wash:Let me elaborate on that. China's approach is intensely pragmatic and results oriented. While the US prioritizes frontier blue sky research, Beijing concentrates on applied AI, solving immediate practical problems and meeting specific industrial goals. Their central aim is to demonstrate rapid, tangible progress towards national objectives, often prioritizing implementation over groundbreaking discovery.
Phil Adler:Well, what role do US tariffs play in this competition?
Thomas Wash:I think the tariffs are a strategic tool to solidify the US as the central hub of the AI revolution. They're designed to encourage the reshoring of critical industries, giving America greater control over the entire AI supply chain. This reduces reliance on strategic adversaries and mitigates economic and security vulnerabilities. A key benefit is that it also incentivizes foreign companies to invest directly in US advanced manufacturing capacity.
Phil Adler:Thomas, is it fair to say that by taking a stake in US technology companies and also using tariffs as a tool to force foreign countries to align with us, that the US is becoming a little bit more like China with our government wresting at least some control from private companies?
Thomas Wash:Well, I don't really think of it like that. I think the objective isn't to emulate China's model, but to fundamentally shift the US's role in the global economy. The strategy is to move away from simply being the world's consumer market and instead position American firms as the world's essential suppliers. The goal is to create global reliance on US technology and innovation, ensuring our economy remains at the center of the global system.
Phil Adler:In the race so far, who's ahead? Are US firms lagging their Chinese rivals?
Thomas Wash:While the US maintains a very sizable technological lead over its Chinese rivals, breakthroughs from firms like DeepSeek demonstrate that China has made significant leaps in recent years. This rapid progress is precisely why the US has implemented stringent measures to slow China's advancement, aiming to prevent it from catching up and ultimately surpassing American technological leadership.
Phil Adler:Thomas, what does the Middle East reveal about this competition so far between these different visions for the future?
Thomas Wash:The way we see it is that the Middle East has become a strategic testing ground. The region is leveraging its relationship with both superpowers to pivot from an energy based economy to one built on AI and digital infrastructure. This highlights a fundamental divergence. You know, China often shares ideas in IP to help partners build indigenous capabilities fostering a technological order based on collaboration. The US, by contrast, often provides its own proprietary technology which can create a model of dependency, albeit on more advanced solutions.
Phil Adler:I was thinking, Thomas, China with its heavy handed government approach is great at generating results and profits from existing technologies. But this is also a battle between cultures. Are we maybe underestimating the traditional American innovation generated by private entrepreneurs working in garages and unencumbered by government mandates?
Thomas Wash:Personally, I think both models have their distinct strengths. China's state driven approach allows for intense focus and long term commitment, but can lack market discipline, leading to inefficiency. The US model, driven by profitability and entrepreneurship, attracts superior capital and generates strong returns. However, its short term market pressures can sometimes overlook foundational innovation that lacks immediate commercial appeal. You know, the garage entrepreneur remains a vital unmatched American advantage, I think.
Phil Adler:And you say the victor in this competition will also be the victor in attracting global capital. So far, betting on American AI and the Magnificent 7 stocks has been a very winning strategy for investors. What happens if profits begin to be affected by trade constrictions?
Thomas Wash:I think you just hit the nail on the head. This is a critical tension that we find ourselves in. While trade constrictions may create short term volatility, the long term stakes are much higher. This isn't just about next quarter's earnings. It's about which nation writes the rule of the next century.
Thomas Wash:The leader will embed its standards and technology into the bedrock of the global economy, securing enduring economic strategic advantages that will far outweigh near term profit fluctuations.
Phil Adler:What's your advice right now for investors?
Thomas Wash:Well, the current momentum in tech stocks may still have room to run. However, investors should be cautious of the significant concentration within the Magnificent 7, which now accounts for nearly 35% of the S&P 500. This focus can lead to portfolios to be blindsided due to sudden shifts in market sentiment. While monitoring established tech names, particularly those aligned with government initiatives are prudent, it also makes sense to diversify into value stocks as a portfolio shock absorber during periods of market uncertainty.
Phil Adler:Are you perhaps advocating an abrupt or more measured transition to value stocks from growth?
Thomas Wash:Well, no, I'm not. I don't want anyone to do anything abruptly. Sentiment remains high, and a more accommodative monetary policy could further fuel growth stocks. We're not calling for a sudden exit. We're advocating for a measured strategic diversification.
Thomas Wash:Given the current concentration levels, adding exposure to value is a prudent way to manage risk without sacrificing all the potential upside and growth.
Phil Adler:Thank you, Thomas. The title of this week's report is "The Great AI Race: A Sputnik Moment for the 21st Century." You can find a link to the written report on the Confluence website, confluenceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice.
Phil Adler:And this information does not constitute a solicitation or an offer to buy or sell any secure. Our audio engineer is Dane Stole. I'm Phil Adler.