Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week a listener is splitting a $250,000 private real estate loan between a Roth IRA and non-qualified funds and wants to know if they can charge the IRA a higher rate than the non-qualified portion to optimize tax treatment without triggering any prohibited transactions. Then a listener recently obtained EU citizenship through Polish ancestry and is planning to spend more time in Europe. They want to understand what U.S. tax and reporting obligations come with foreign bank accounts and how high net worth individuals structure their finances when they have ties to multiple countries. And to close out the episode, it’s time for our quarterly Scholar Big Picture conversation. We’re joined by Dr. Deon Strickland, financial advisor and in-house economist at Scholar Advising and a finance professor at Wake Forest University, to zoom out from the headlines and talk through market behavior, broader economic trends, and to see what we’re watching right now. So let’s start with question one.
Question 1 – Can You Charge Different Interest Rates on a Private Loan Split Between a Roth IRA and Non-Qualified Funds?
Stephan Shipe: “I’m making a $250,000 loan to a colleague at 8% for up to three years, secured by real estate. $100,000 will come from my Roth IRA held at an alternative investment custodian and $150,000 from non-qualified funds. Can I structure the loan so the Roth portion earns 12% and the non-qualified portion earns 5.3%, blending to 8% total, without that risk blowing up the Roth? If so, could my wife make the non-qualified portion of the loan while my Roth handles its part? And if that doesn’t work, could we split it between a traditional and Roth IRA at differing interest rates?“
So there’s a lot of problems with this situation, lots of red flags. And if I’m spotting the red flags and I’m not a CPA, I guarantee you the IRS is salivating over you trying to do this so that they can be all over the scenario. So let’s start from the top here. And I think you kind of know that maybe it’s not going to work out because you have a lot of hedges in here, which is always good, of different steps that we jump into. But if we look at the very basics of this, of an IRA, there are prohibited transaction rules that come into play. And a lot of them are structured in very broad terms to avoid just this type of gaming that goes along with IRAs.
And the problem is the risk is really high in the sense that if you were to go through with anything that the IRS is going to consider a prohibited transaction, then they can blow up the whole Roth, as you said, and disqualify it. And you’re going to owe a bunch of tax penalties and everything else. So risk here, really high. Reward here, I would say is actually relatively low. You’re only looking at a $250,000 loan at 8% a year. So for three years, you’re looking at 60 grand in total interest. So you have 60 grand in total interest, you’re going to have legal fees to set this up, legal fees to review whether or not it’s done, your CPA is going to have to review all this. So your fees are going to stack up really, really quickly. And that’s going to eat into that return in a big way. So before even getting into the problems of it, I really ask you to look at this from a risk-reward standpoint of what are you trying to earn and what’s the risk here. And I can tell you the risk is very high because of anti-abuse doctrines that are set up with these IRAs. The government doesn’t like this. They’re already giving the benefit of the Roth to exist. So going out and getting a little greedy with it. And this is where the whole pigs get fat, hogs get slaughtered scenarios of taxes come into play, is that I know we all hate taxes, but we have to be careful around any semblance of self-dealing in these scenarios.
So let’s put that one on the table first. You are not allowed to loan people money from an IRA that’s going to benefit you. In other words, I can’t go and loan a family member of mine money from my IRA. And you are in this really weird gray area with a colleague because the IRS could say that you giving money to a colleague that you work with could help you by creating business interests for you in the future, could lead to indirect payback from the colleague to you. So it’s not really an arm’s length transaction that you’re dealing with. And if you were to set this up, you wouldn’t be the one to really be able to structure the note because you couldn’t go in there and you’d have difficulty defending that you weren’t putting yourself first in the loan documents. So you’re going to need an outside party to set this up. So you’d have to pay the attorney fees to come in and structure this so that way it didn’t look like you were setting this up as a self-dealing scenario.
Now, the splitting is where it gets really interesting. So from a creativity perspective, it gets high marks of splitting up the 12% and the 5.3% because in an ideal world, that would be great. Take the 12% and put it to the Roth, and the 5.3% and put it to the tax deferred. So all of your earnings, your higher earnings, end up in the Roth. That’s the basics of where we want to have Roth growing, right? That’s why we don’t put bonds in a Roth IRA if we can help it because we want the high growth assets in the Roth. So you have the right idea there. The problem is this can’t happen within an IRA. And I’ll tell you why, because if you were to jump into a scenario, imagine you have to defend this. The IRS comes after you and says, hey, why did you charge 12% on this portion of the loan from the Roth? I think it was a hundred thousand dollars from the Roth. And then you charged the same person 5.3% on the $150,000 from your traditional IRA. Can you explain why the risk profile changed between the traditional and the Roth loans. And if your only explanation is, I wanted the returns to be in the account that pays less tax, that is not going to fly very well with the IRS. And that’s exactly what they’re looking for. And that’s going to be really hard to defend. And it’s something I would avoid completely and definitely review with any type of self-directed IRA attorney that you’re dealing with, because this is exactly the type of scenario that people get themselves into. On paper, it sounds good. I’m going to put the 12% over here and put the 5.3%. But then they get into a situation and the IRS looks at you and says, you have the same lender, you have the same borrower for each of these loans, the traditional loan and the Roth loan. They have the exact same income. They have the exact same risk profile. So why did you charge them more than double for this loan as opposed to the tax deferred loan. And that’s going to be impossible for you to actually defend. So getting into that splitting is a non-starter for me, or at least sends up so many red flags that if you went to a CPA and they said this sounds good, I would go to another CPA just to make sure that this doesn’t sound crazy. Because again, if it sounds crazy to me and sounds like it’s going to be a red flag, it probably is going to be something that is not going to be in the best interest of you for a conversation with the IRS.
Now, one thing I would add to this just as a follow up on this whole conversation, and it’s something that I see regularly, are these self-directed IRAs. Be really careful. If you get into a situation where you can create loans from an IRA, you can buy real estate with an IRA, sometimes they’re called checkbook IRAs, there are so many rules and red tape that has to go through these that you want to make sure the juice is worth the squeeze. If you’re getting there for $250,000 worth of a loan, I don’t know that it’s worth paying attorney’s fees, accounting fees, all of these fees on the front end, the back end, and just on compliance and reporting every year, that it makes a lot of sense. I’ve seen some traditional IRAs turned into checkbook IRAs work really well for real estate, but they’re few and far between. And you really have to build a team of experts around you who are familiar with those types of scenarios, because even something as simple as you going and doing some work on a rental property or reimbursing yourself for some paint that you bought for the rental property could blow up your whole IRA if it’s not reported correctly. And that’s not having this arm’s length transaction away from the rental property. So keep that in mind. In this case, I would say you are in some dangerous waters that you’re treading in. And while it’s fun to jump into them, I’d be careful going any further.
Question 2 – U.S. Tax and Reporting Obligations for a Citizen With European Bank Accounts and Ties to Multiple Countries
Stephan Shipe: “I recently obtained EU citizenship through Polish ancestry, which allows me to live and work anywhere in the EU. As I’m planning to spend more time traveling and potentially living in Europe, I’d like to set up a European bank account and have funds accessible abroad. What are the key financial and tax considerations for a U.S. citizen maintaining a foreign bank account? And more broadly, what strategies do wealthy individuals use to structure their finances when they have ties to multiple countries?”
So on a broad note, European banks are not big fans of setting up bank accounts for U.S. citizens. It becomes extremely difficult. So your comment about how does this actually work? How it actually works is you’re probably not going to get a European bank account. And you’re probably going to have a U.S. bank account that you’re transferring money around. Or if you do get a bank account over there, it likely has ties to the U.S. So you’re going to be using a lot of credit card options and paying that back at the U.S., spending cash that is not going to be that large. So you’re going to try to minimize and create as much simplicity as possible in this whole arrangement. You want enough operating cash over there, but you want to really try to avoid having a bunch of cash in different countries. Not only does it become a headache with all the rules associated with it, but just the reporting obligations for the U.S. — you’re going to have to report every time you have more than $10,000 in foreign accounts. And then separate from that, you’re going to have to go and report anything, if you start getting $50,000, $100,000 in these accounts, or just ownership in different assets, you have to report that on another form. And the penalties for not reporting this are massive. You’re talking about sometimes much like 50% of your account value if it’s not reported. So you have to be really careful.
That’s why I think you asked it a good way of like, what is the practical way? How does this actually happen? I’d say it actually happens as simply as possible. You’re going to need to have a CPA that’s familiar with foreign accounts, which are few and far between. It gets harder and harder to find CPAs who are comfortable in these areas, and attorneys that are comfortable in these areas, because you start to bring up all of these different idiosyncrasies of all of the different countries and how their tax laws work. I’ll tell you where it’s going to get even more complicated is if you start to actually generate income in Poland. If you start generating Polish income, then you’re going to have to start paying Polish tax. And the U.S. taxes all U.S. citizens based on worldwide income. So they don’t care that you’re in Poland when you earn it. They’re still going to tax you. Now there are some foreign tax credits you can get. So in other words, let’s say for really easy terms, you make 10 grand in Poland in Polish income and you pay $2,000 in tax to Poland. Then the U.S. goes, you report that $10,000 and they’re going to charge you $2,000 in tax. You can take the $2,000 you already paid Poland and use that as a credit against your U.S. taxes. So in most cases, because foreign countries tend to have higher tax rates, you’re not likely to owe U.S. taxes on that. But just that example alone is going to cost you CPA fees every single year on making sure that’s reported in Poland. Now you need a Polish CPA, you need a U.S. CPA, you need everybody working together to make sure all this gets sorted out.
So simplicity is the key here. Investment accounts is where it gets really messy. And the reason for that is as soon as you have an investment account, now you’re earning investment income. So now, even if you say, Stephan, it’s not a big deal, I’m going to go just live in Poland, I’m still going to keep my U.S. job, have a U.S. citizenship, all of that’s fine, I just want to go live over there for a few months out of the year, that’s fine. But be careful of how much money you’re bringing over because if you bring over enough money and you start earning interest, and you start investing it, well, now you have foreign income that you’re going to have to pay taxes on and different investments that you can and can’t invest in. So keeping the U.S. bank account is big. I’ll throw a pro tip in here of what we see being a big problem for U.S. citizens who go to live abroad is that if you’re going to keep the U.S. citizenship, and based on everything I’ve been talking about, the key is you want to keep the U.S. bank account. U.S. bank accounts want you to have an address. So if you’re going to do this, make sure you’re keeping and maintaining a U.S. address while you’re doing this, because if you go to Poland and you say, well, I’m going to keep all my money in the U.S., and you try to open up a U.S. bank account and you have to fill out your forms and they ask for a U.S. address and you don’t have one, that tends to cause a lot more problems even though you’re a U.S. citizen.
So I think wrapping all this up, remember any income you’re generating, whether it’s in the U.S. or outside the U.S., the U.S. is going to take their tax on it. It’s taxed on worldwide income. So why you have EU citizenship or are dealing with your Polish ancestry and all of this doesn’t matter. U.S. citizens are taxed on worldwide income. You’re still going to have to report any bank account over 10 grand, and all of your assets and bank accounts are also going to have to be reported. So that’s where your FBAR and FATCA reporting are going to have to be filed every single year. That’s where complexity starts coming in. I’m not a big fan of adding complexity. I like simplicity on all of this. So I would only keep enough cash overseas that you actually need for operations and for you to have some spending cash while you’re over there, use credit cards for the rest of it, and then base everything still on a U.S. bank account for you to be able to pay taxes on and for you to use as your actual operations of paying bills.
Scholar Big Picture – Market Behavior, the K-Shaped Economy, and What AI Means for the Labor Force
In our Scholar Big Picture segment, we zoom out from the headlines for our quarterly conversation on market behavior, broader economic trends, and what we’re watching right now. We’re joined by Dr. Deon Strickland, financial advisor and in-house economist at Scholar Advising and a finance professor at Wake Forest University.
Stephan Shipe: Deon, welcome back to the show.
Deon Strickland: Thanks. Good to be here.
Stephan Shipe: I don’t know why we’re having this discussion because nothing has happened since we last talked. Not a thing.
Deon Strickland: Oh, you mean like, oh my goodness, right? You mean ending civilizations? I mean, I think there’s been a lot of stuff.
Stephan Shipe: That’s all done now. We won that war. We won.
Deon Strickland: Oh, I see.
Stephan Shipe: Well, we’re all finished now.
Deon Strickland: No. As an economist, I think a lot has happened since then. Gas prices are up. What? More than 25%, 30%. That’s a big deal, right? We know politically gas prices are a big deal. It’s going to be a huge, potentially a huge deal, and everybody knows, right? Everybody knows because that’s why today everybody says gas prices are up. But they’re going to go down, right? So that’s gotta be what you say. But I was thinking, everybody also talks about this K-shaped economy that’s going on. I read a Morgan Stanley paper a little while back and it said, let’s see, the upper K is 60% of spending. The lower K is 40% of consumer spending. And that’s a really big deal because we know consumer spending is nearly 70% of the economy. But if you’re in the upper K, I was thinking about this and I’ll use myself as an example. I drive, let’s say 10,000 miles a year, 12,000 miles a year. If I have a car that gets 30 miles to the gallon, I buy 400 gallons of gas a year. So this increase in the price of gas is going to cost me, say, $400, $500. Say $500.
Stephan Shipe: For the year?
Deon Strickland: For the year. Not going to change whether I go to Disney. My consumption pattern is not going to be affected by that. Whereas if I’m in the lower part of the K, and let’s say if you look at the lower part of the K, the lower part of the K is more likely to be rural, for example. And if you’re a rural, let’s use the word market participant, but voter, if you’re a rural voter, you may drive twice as much as I do. It’s likely your car is less fuel efficient because you’re more likely to have, for example, a pickup truck. Let’s say you get 15 miles to the gallon. That means you’re going to buy four times as much gas as I do, right? So you’re going to, because your car is half as efficient and you drive twice as much, you’re going to buy four times as much gas. So that’s $1,600 or $2,000 a year you’re going to get hit by this oil shock,
Stephan Shipe: which also becomes a bigger portion of their income.
Deon Strickland: Of their income. So that will affect their consumption pattern. So I think the thing that’s really weird about it is that it’s another example of how the K-shaped economy even makes oil shocks asymmetric to consumption spending, which plays into why maybe the market hasn’t, it’s been volatile as a result of the war, right? Every day, if we believe the war’s over, the market goes up. If we believe the price is going up, it goes down, but we’re only 3 or 4% off the highs. So the market has responded in terms of the volatility, but it has not had these sort of huge secular down moves, right? So we’re not in correction territory anymore. Right? So when it looked like things were going to get really, really scary, we were almost into correction territory. Now we’re 3% down.
Stephan Shipe: Yep.
Deon Strickland: Right? And so I think if you’re an asset allocator, the conflict with Iran has induced anxiety but not meaningful changes in the macro economy.
AI, the K-Shaped Economy, and What It Means for Workers and Investors
Stephan Shipe: Do you think that’s also because of the technology shifts as well with AI? Because I was having this conversation earlier, I’d like to get your thoughts on it. Because with the K-shaped economy, you’re talking about basically the economy splits where you have kind of an upper half and a lower half, and both start to act differently because they have different factors. Not only is it the inflation aspect starts to become a concern, but the upper half of the K is also more likely to be asset owners and investment owners. So they get the benefit of any technological shifts. So when you start looking at companies cutting labor forces and becoming more efficient that way, profits go up in those companies, but that’s only affecting the upper half of the K. The lower half of the K is not only not participating in the increased profits, they also could be the ones losing their jobs as well. Basically. Do you see the K becoming more steep then as this continues? Or do you think that the K-shaped economy is a stable K that’s continuing to move?
Deon Strickland: I don’t think we know yet. And the reason I don’t think we know yet is because a lot of the technology you’re talking about, for example, is AI. Of course. We don’t know how AI is going to, and I don’t think we know how AI is going to affect the labor force yet. You have the doomsayers. I think I just read this morning that the state of Maine is getting ready to outlaw all data centers. So there is a lot of anxiety about AI and I think we’re not sure what part of the K AI is going to affect most first, right? It probably is going to have an effect on both parts of the K, but if you force me to take a side, I think it’s more likely, for example, that the people who own the assets benefit, in terms of their portfolio, the price appreciation associated with increased efficiency, but they may also pay for it more because some people at least believe that AI is first going to affect white collar jobs and not blue collar jobs, right? And so you’re more likely to be, obviously, in the upper K with a white collar job and more likely to be in the lower part of the K if you have a working class job. And so I think it’s a more complicated story, right.
Stephan Shipe: Well, couldn’t it also mean that we’re not in a K economy then, right. We’re in a K economy, but the outcome is not a K shape. Right. In the sense that if you have job losses at the upper end of the K, but the portfolio is there to create some ballast for it, but then the lower end of the K is getting squeezed by pricing, they don’t have the assets, but actually see more job stability or maybe an increase in value there. So then it’s just a wash anyways, and we have nothing to worry about.
Deon Strickland: I completely agree with that. I completely agree that that’s the problem. There are two sides. Your labor, the return on your labor capital may shrink as a result of AI. But the return on your equity or your wealth may go up, right? So you can have two contrary effects there. So I joke with my kids and I tell them, you know, to a certain extent one of the few benefits to being old is that AI, right, for me, my wealth or my equity capital is way more important than my future labor capital. So for me, AI is a really good thing, potentially.
Stephan Shipe: Portfolio’s gonna do great.
Deon Strickland: My portfolio’s gonna do great. I’m loving this, right. Whereas if labor capital is a more important component of your overall portfolio, it’s a threat, right? And so I think you’re precisely right that the upper K is benefiting today. And we’re not sure how that’s going to play, I don’t think. I think if anyone says they know what the ramifications for AI are, they haven’t looked back. And economists have been worrying about how technological innovation affects the labor supply for a very long time. Right. Going all the way back to, oh my goodness, when we introduced tractors, it’s going to really destroy the American economy because all those farm workers are going to be out of luck, right? And what did they do? They transitioned to manufacturing, closer to urban centers and other places like that. And it turned out to be an amazing benefit to the overall economy. So I’m hesitant to ever say I know, because I don’t think I do.
Stephan Shipe: Well, because especially when you go into classical economics, some of your first textbook lessons that you get show that a technology change is a structural shift in the economy. It doesn’t actually bend necessarily, big curves. So when you have something like this, it doesn’t necessarily mean that it’s one is replacing the other. We could easily see a scenario where AI just opens up the economy to a level that was unattained before. I mean, that would be the idea. Your tractor analogy is perfect because that’s the same idea. You would never be able to farm the same amount of land that a tractor can farm, so that immediately opens up food resources beyond somebody out there with a rake and a hoe, right? You could see the same for AI today.
Deon Strickland: Right. I mean, in that case, the marginal product of the capital, i.e. the tractor, was so much larger than the marginal product of the labor that it was a huge benefit to us. In this case, I think we don’t know that exactly. I’m a little more concerned than I would be in the tractor analogy because I actually also don’t think we know what AI is going to be able to do. I also teach at Wake, and one of the things students will say, how does it make you more efficient? And the answer to that question is, oh yeah, it makes me more efficient when I’m designing a new lecture. I’m more efficient with AI. I would say maybe a third more efficient. So I think, I’ve been thinking about this a lot, and I think one of the things that’s going to be interesting is I’m not sure AI is going to affect the existing labor force that much, right? Because a lot of companies have a lot of capital tied up in hiring and training and the like, right? And so that might not be as affected as much, but it could affect the next people coming up now. So how is it going to affect the hiring schemes of firms over the next five years?
Stephan Shipe: So do you think, because if you look at five, you’re thinking timelines when you’re talking about what worries you about AI, is it just, do you think it’s more the transition? And because usually with technology shifts, it’s a short term, short term in the grand scheme of things, right, transition. It’s five, 15 years because you have this turnover of different business cycles. Companies continue to get kind of forced to evolve into different scenarios, but then after that point, there tends to be some stability that comes in either from new companies or new services or new types of needs that consumers want. So do you think we go through volatility in the short term, with a loose definition of what is considered short term. Okay, I was about to say, tell me what that number is.
Deon Strickland: Tell me what that number is.
Stephan Shipe: And then after that, we hit some economy that, based on what history shows, is actually greater than where we’re at today.
Deon Strickland: I agree with you, and I think that short term could be really, really expensive, right? For a couple of different reasons. Number one, the disruption from AI could be enormous, right? So even if it’s short run, but if the disruption is large enough, it could be a big deal, right? I don’t know, but it could be a big deal. And I don’t know what the short run is, right? And so the next three, four, or five years are going to be, I think, super interesting if you are a well-established economist who’s looking towards the end of their career rather than the beginning of their career. But if you are starting out now, I think the world is a slightly less clear place. There’s less transparency. We would always tell a young person, you know, you work hard, you do well in school, you make good decisions. And I think that is largely still true. However, the probability of success is unknown to me now. Right. I still think the probability is there. Those are all the great things, of course. But you have to be really, really careful about what you’re going to do, right? What do you choose? Right? If you and I were having this conversation three years ago, I think we both would have said, hey, being a coder could be highly lucrative and makes a ton of sense. Would you give that same advice today?
Stephan Shipe: No. I mean, you get into that conversation of things like engineering and programming and everything, that’s a hard sell right now to say that’s a good path to be going down.
Deon Strickland: No, it absolutely is. I think if a talented young person came to me today, talking about this K-shaped economy, I might look at it and say, you know, another place that’s in the upper K is owning a company that provides working class services.
Stephan Shipe: Yeah. Absolutely. You’re seeing private equity is all over that.
Deon Strickland: Yes. Right. But that, there’s a certain size. HVAC,
Stephan Shipe: HVAC, electricians, and all of those are getting bought up like crazy for that exact reason.
Deon Strickland: That’s exactly right. That’s why the last time I had a tradesman come to my home, I did not get a per hour rate. I got a per job rate. And I have quickly deduced that this per job rate is the presence of PE, private equity. Right. Because they’re like, Deon, let’s see what we can get out of you today. I’m okay with that. But that is the realistic way to look at the world, I think, today.
International Markets, Emerging Economies, and the AI Divide
Stephan Shipe: So I’ll throw a wrench. I know you’re a huge fan of international markets in a portfolio. How does this play out with international? Because everything we’ve been talking about has been more domestic, right. An assumption of growth and trade-offs within a single economy. But sitting in the U.S. is very different than sitting in an emerging market, which in the past has always been a place where you had more risk but more opportunity because of changing structures, regulatory regimes. Right. But this, as you mentioned, is costly on the actual capital outlay that’s required to compete in this area. So if you’re an emerging market at this point, how does this compare to a time where you’re an emerging market and someone says, let’s bring capitalism, or the idea of business ownership, let’s bring all of this, and that helps build up the economy or access to financial markets. That seems like a lower lift than going to an emerging market and saying you’re going to have to create a bunch of data centers if you want an option to compete in this world.
Deon Strickland: Right. I think it really depends. This is going to be a crude, rough cut. But I would say it depends on if you’re an emerging market that provides labor or you’re an emerging market that provides commodities, right? So if you’re an emerging market that provides copper or other metals into the market, I think that’s going to be very different than, say, Vietnam, right? Because Vietnam provides labor, right? And so in terms of the inputs, I think that’s the difference I would talk about. If you’re commodities, AI may just accentuate your advantage in terms of copper, right? Whereas if you’re labor, at least in the long run, I think that’s going to be problematic. I joked with my wife that, for example, let’s give a concrete example both domestically and internationally in terms of supplying labor. Look at the growth of labor in the United States, right? Over the last quarter, last six months, it’s been a huge number, and a lot of that has been healthcare. Right? And if you go deeper into that, you find a lot of ambulatory care and other things like that, because as a society, everybody knows we’re getting older, right? The baby boomers, which I’m not one, right? I’m not a baby boomer. I’m Gen X. I want to be very clear about that. Do not throw me in that bucket. I’m in a completely different bucket. But nonetheless, I joke with my wife that one of the things I’m convinced of is that when I get old enough to need ambulatory care and other things like that, I’m going to have a robot. I don’t know what everybody else is going to have, but I’m going to have a robot. Right. One of the labor substitutions that might occur is that. It makes complete sense that a robot would be in your home in 20 years to help with America’s labor supply needed, because it’s hard work, it’s not well compensated, you wouldn’t call it extremely high skilled. And so having a robot would be helpful. I think the same is going to be true and AI plays into that, right? Because the AI goes into the learning that the robot does and the like. And I think the same thing is going to happen internationally as well. Right? So in the long run, I think AI really hurts some of these emerging markets. But in the end, the ones who produce metals and the like, I think they’re going to be pretty good. What, you want to take a long position in copper mines? Is that what you’re saying?
Stephan Shipe: I think the move would be the companies that are producing, not necessarily the countries they’re in. Right? Because based on that assumption, if we get to the point where there’s a robot dealing with ambulatory care, I guarantee you there’s some robots in a copper mine dealing with everything. So that becomes all automated, which goes back and circles back to what we were talking about originally. The profits then of those companies go through the roof. But I don’t know how much of that would be shared with the local economy if the labor force needed is not there. Right. Unless they were sovereign.
Deon Strickland: I completely agree with that. I completely agree with that. Which adds to that risk. Because then you go back to the emerging markets idea. If there’s no way for them to compete in an AI world without huge capital outlay, they would only be able to compete in a world where it’s input into that technology shift. And if that’s taken away,
Stephan Shipe: that’s, so find me the country that has the largest copper supply in the world. And I might be long that economy, and I might be short, I think I still go with the lunar economy just.
Deon Strickland: The discussion. Right. So yeah, because you don’t need the data centers, you need the data centers in the sense because the notion is you don’t get to train them. You don’t get this first part of the supply of the AI without having the data centers. Right. We’re in a race with China for model supremacy. Right. And part of the thing is we’re not going to, you know, OpenAI or Anthropic, we don’t want them training their models in data centers in China, right. That’s going to be regarded as an unacceptable risk, a geopolitical risk. We want them trained in the United States, right? So as long as there’s data centers here, we build them here, then those models will get trained here. But a country that is emerging, I’m not sure really cares where that model is trained as long as they can use the model. Right? So I think they’re going to stay emerging, I suppose, in some sense. They’re going to stay emerging. If the next notion of what does it mean to be a developed economy is one where AI is a factor,
Stephan Shipe: I think it’s a K-shaped thing for all the countries as well.
Deon Strickland: That’s exactly right. So it’s international versus domestic. Domestic versus international follows the same rule, it seems to me. But yeah, so maybe after the podcast today, I’ll go see where I can take a long position in precious metals. Not precious metals, I’m sorry. Industrial metals.
Stephan Shipe: Industrial metals.
Deon Strickland: I’m arguing for industrial metals more than anything else.
Stephan Shipe: Why not? No gold?
Deon Strickland: No, I’m not saying that. But I think that’s a difference in fundamental valuation and hedge valuation. The precious metal would be more like a hedge kind of thing, where the copper, I think, we both know that’s going to be used in a lot of this. So we’ll see how it plays out. But like I said, my personal wealth is looking okay. My labor wealth, we’ll see how that plays out over the next several years.
Stephan Shipe: Perfect. That sounds great. I think we’ll wrap it up there. Thank you for coming back on.
Deon Strickland: It’s great to be here.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
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