The Next Big Trade Is Hiding In Plain Sight | Citrini

This episode unpacks Citrini's macroeconomic framework, revealing how understanding policy constraints and shifting fiscal priorities can illuminate lucrative investment themes, particularly in the burgeoning field of robotics where AI is poised for real-world impact.

1️⃣ Episode Introduction

• This episode delves into Citrini's strategic analysis of macroeconomic shifts, from US trade policy and fiscal spending to the evolution of AI investment, culminating in a compelling case for robotics as the next frontier where AI will generate tangible value.

2️⃣ Structured and Narrative Organization

Citrini's Macro Framework: Constraints Over Preferences

• James introduces Citrini, a highly requested guest, who reflects on a previous, initially unpopular call to buy semiconductors due to AI.
• Citrini explains his framework for analyzing macro situations, particularly concerning the Trump administration and trade wars, by focusing on the constraints faced by policymakers rather than their stated preferences. This approach helped anticipate a continued off-ramp for trade tensions.
• He emphasizes that even powerful figures like Trump operate under constraints, such as the market's potential to force policy changes to avoid severe recessions or stagflation. Stagflation refers to a period of slow economic growth and high unemployment (stagnation) simultaneously accompanied by rising prices (inflation).
• Citrini: "Trump has constraints just like anyone else... eventually you get bullied by the market."

Current Economic Landscape and Tariff Impacts

• Citrini notes the labor market has cooled, primarily through decreased job openings rather than mass layoffs, with many indicators like credit card delinquencies normalizing to pre-COVID levels.
• A persistent disconnect exists between negative business sentiment about the economy and their actual strong performance ("soft data vs. hard data").
• The tariff situation initially threatened a severe recession if unchanged, but Citrini believed market forces would compel a change. Companies, unlike during COVID, had prepared for potential tariffs, evidenced by a 71% month-over-month jump in pharmaceutical imports in March as businesses stockpiled.

Trump's Constraints and Policy Shifts

• Citrini identifies three key constraints on the Trump administration:
• Debt Refinancing Needs: Approximately $8 trillion in US federal debt was coming due between April and June.
• Market Pressure on Bond Yields: Drawing a parallel to the UK's "war on premium" during the Liz Truss LDI crisis. LDI (Liability Driven Investment) strategies are used by pension funds to ensure they can meet future obligations; the UK crisis saw these strategies unravel due to rapid interest rate rises, forcing government intervention.
• Tax Bill Priorities: The administration needs Republican unity in Congress for its tax policy, a key part of Scott Asen's "three-legged stool" (trade policy, tax policy, deregulation).
• A significant signal was Trump's reported comment, "I don't want to be Herbert Hoover," indicating an awareness of the potential negative impacts of aggressive trade policies and a shift towards focusing on tax cuts and deregulation.

The Fed's Position and Near-Term Outlook

• Citrini views the Federal Reserve as being in a "pretty difficult balancing act."
• Despite some moderate pass-through to goods inflation, disinflation is still trending, supported by services disinflation, making a case for the Fed to resume cutting rates, possibly in June.
• He believes there's a crucial two-month window for significant progress on trade deals, as both the US and China have strong incentives for an off-ramp. The economy is currently too strong for a full-blown recession, though rising long-end rates pose a concern.

Effective Tariff Rates and Recession Risk

• James queries the current effective tariff rate (around 12.5%) and whether the risk of recession is minimal at this juncture.
• Citrini suggests the answer depends on progress with tax cuts and deregulation. The deregulation agenda remains opaque.
• The "One Big Beautiful Bill" proposes $5 trillion in net tax cuts over 10 years, reinforcing Citrini's 2023 "US fiscal primacy" thesis: deficit spending often translates to corporate profits, unevenly distributed.
• The Inflation Reduction Act (IRA), for example, had specific domestic component requirements benefiting industrial electrification and data center-related names.

"The One Big Beautiful Bill": Tax and Spending Deep Dive

• Citrini urges investors to become "trade policy experts by necessity" and now focus on the administration's tax and spending plans.
• Key components of the proposed tax bill:
• Permanent extension of TCJA (Tax Cuts and Jobs Act) individual rates (top rate 37%), which would have reverted post-2025.
• No taxation on tips or overtime income (est. $25 billion/year benefit to service workers).
• Potential repeal of green energy tax credits to fund state and local tax deductions. This is largely priced into stocks like First Solar.
• A 5% tax on offshore remittances, refunded to citizens but not non-citizens.
• Proposed Medicaid and SNAP cuts.
• Citrini anticipates this tax plan will dominate the narrative, though it faces contention from deficit-conscious Republicans.

Shifting Spending Priorities: A "Wartime Bill"

• The "skinny budget" shows a 2.6% spending increase for 2026, but with significant internal shifts: massive cuts to social services offset by substantial increases in defense and homeland security.
• Citrini notes the irony: "most people that you spoke to over the past like three months were like no like Elon Musk is going to... cut the deficit... And now they're like announcing a huge increase in defense spending."
• This spending plan resembles a "wartime bill," directly linked to geopolitical and economic agendas. If tariffs are managed effectively (e.g., back to a 10% blanket level that markets previously welcomed), the risk premium associated with Trump's unpredictability lessens.

Investment Themes from Government Spending

• Citrini emphasizes that reading government policy, though tedious, can yield "alpha" (excess returns).
• Three key investment areas from the spending bill:
• Missile Defense ("Golden Dome"): $12 billion for next-gen interceptors in Alaska.
• Naval Dominance: Focus on shipbuilders, addressing stagnant US capacity despite naval superiority. Shipbuilding is currently only 1.3% of the defense budget.
• "National Heroes" & Drone Technology: Investments in areas where the US lags China, such as Boeing's F-47 fighter jet and drone tech.
• Despite potential hurdles in Congress, defense priorities are likely to survive, as "there are no more China dubs left in the government." This insight is crucial for investors looking at sectors benefiting from increased geopolitical tensions and strategic re-prioritization.

Market Tension and Thematic Investing

• James highlights the market tension: a recent shift from expecting austerity to now anticipating increased spending, creating opportunities for thematic long/short equity strategies.
• Citrini enjoys themes supported by multiple converging trends: a correct macro environment, real-world trend convergence, and investor interest.

AI: From Infrastructure to Real-World Value

• Citrini revisits his 2023 AI thesis: initially, the best play was AI infrastructure ("picks and shovels") because the long-term applications were unknown.
• Now, AI is at a "put up or shut up moment," needing to genuinely generate revenue or margin improvements and show broader proliferation of use cases.
• This transition is critical for Crypto AI projects as well, which often face similar pressures to demonstrate tangible utility beyond speculative hype.

The Convergence: AI, Geopolitics, and Robotics

• The natural conclusion from AI needing real-world application and the US focusing on areas lagging China (often due to government spending) is robotics.
• Citrini finds robotics interesting because many companies with robotics upside are currently exposed to the depressed automotive cycle.
• Citrini: "The best themes are when you have a sector that is like cyclically screwed and has a secular story that can emerge."
• This echoes the Nvidia situation post-2021 crypto GPU glut, where a cyclical downturn met a powerful secular narrative (ChatGPT launch), leading to massive rerating. The framework: "try to buy secular stories at cyclical prices."

Robotics: Cyclical Bottom and Secular Upside

• The robotics supply chain is heavily exposed to the automotive cycle, which has been weak.
• However, recent commentary from companies like Microchip Technologies ("March quarter revenue decline marks the bottom"), Infineon ("markets have bottomed"), and onsemi ("Q1 was bouncing along the cyclical bottom") suggests a cyclical trough.
• The US is significantly behind China in robotics, especially in cost. China's Unitree has a humanoid robot for $16,000.
• Citrini believes that as humanoid robot costs dip below that of a used car, the dynamic becomes compelling, especially since the world's "interaction layer" is designed for human-like forms.
• This presents a timely opportunity to position for the inevitable future of humanoid robots, with current valuations being forgiving.

Inside the Robot: Cost Breakdown and Training

• Citrini shares insights from a teardown of a Unitree "dog robot." Surprisingly, the most expensive parts are not the chips.
• Nvidia's Jetson (the robot's "brain") costs around $60.
• Approximately 66% of the cost comes from actuators, joints, and screws.
• Nvidia's Isaac Sim is a free simulation platform allowing developers to train robots for thousands of hours in a virtual environment rapidly, accelerating development. This is crucial for generating training data for physical movement, which is less abundant than text data for LLMs (Large Language Models). LLMs are AI models trained on vast amounts of text data to understand and generate human-like language.

Macro Impact of AI and Robotics: Labor Disruption and Adaptation

• James brings up Citrini's earlier piece on a potential "white-collar recession" from AI like ChatGPT, and how robotics might affect blue-collar jobs.
• Citrini notes that industries like BPOs (Business Process Outsourcers) and call centers are already being disrupted.
• Historically, new technologies haven't led to mass permanent unemployment because humans adapt (e.g., the loom, Excel).
• He envisions a future where displaced call center workers in places like India (where labor is cheap) could become teleyoperated robot pilots.
• Robotics as a Service (RaaS): Companies might offer subscription services for humanoid robots performing household tasks, initially piloted remotely, with increasing autonomy over time.
• The focus for investors now should be on the reality that "robots are coming," and current valuations offer an attractive entry point.

Citrini's Robotics Primer: Investment Strategy

• Citrini's new research piece on robotics breaks down the supply chain and identifies investment opportunities.
• The key insight from the robot teardown is that cost is concentrated in movement components (actuators, dextrous hands, joints), an area dominated by China.
• The US administration's priority to catch up with China could lead to significant investments or subsidies for Western companies in this space.
• Chinese robotics companies like Unitree achieve low costs by having a highly localized supply chain (e.g., within a 90-mile radius in Hangzhou). The US would need to replicate this or make significant investments to compete.
• Citrini's piece categorizes ~225 names and narrows them down to ~25 with the most upside, including companies like Regal Rexnord and RBC Bearings.
• Citrini: "I don't need AI to write for me. I need AI to do my laundry."

Navigating US-China Dynamics in Robotics Investment

• James asks how to prioritize exposure between China (ahead in robotics hardware) and the US.
• Citrini suggests a smart US strategy would be to "buy robots from China and focus on controlling the brains." The US leads in AI software (Nvidia's Isaac, Google's DeepMind Physics).
• Concerns about Chinese hardware in homes are mitigated if the "thinking" and connectivity components are US-controlled.
• There's potential for cooperation, with the US utilizing Chinese products to catch up, similar to how China learned from and improved upon Western technologies.
• Onshoring priorities also support domestic robotics development for manufacturing and potentially addressing labor shortages if immigration flows are reduced.

Identifying Durable Moats in Emerging Tech

• James raises the issue of AI/robotics companies, like early Uber/Airbnb, intentionally keeping prices low (sacrificing margins) to build user bases, and how to identify durable moats.
• Citrini explains that transformative themes often go through a stage where equity capital subsidizes users until the technology gains traction (e.g., Uber, AWS, AI).
• The pivot point is deciding when to shift from infrastructure plays to implementers. Initially, moats are in manufacturing capabilities (cheaper/better parts).
• Eventually, reliance creates pricing power. If users become dependent on a service (e.g., using ChatGPT for podcasting), they'll likely absorb price increases.
• For Crypto AI researchers, this highlights the importance of building genuine network effects and utility that can translate into sustainable economic models beyond initial token incentives or subsidized access.

Robotics Investment Thesis: A Trifecta

• Citrini's core robotics investment thesis rests on three pillars:
• The automotive cycle has likely bottomed.
• Robotics will eventually become ubiquitous.
• The aggressive trade policy narrative is easing.
• Even if the robotics theme takes longer to play out, companies exposed to the automotive cycle (e.g., Regal Rexnord, Rockwell, ABB, chip names like Infineon, onsemi) are attractive as they emerge from a downturn.
• If robotics becomes a major theme, these investments could "print money." The current "tail of robotics priced in is super, super skinny."
• The main risk is a broad industrial recession, but many of these early-cycle names are just exiting one. Hedging macro risks (e.g., via rates) is preferable to avoiding micro opportunities.

9️⃣ Reflective and Strategic Conclusion

• Citrini's analysis underscores a shift from AI infrastructure to tangible applications like robotics, driven by macroeconomic currents and fiscal policy. Crypto AI investors should monitor these broader tech cycles and government spending priorities, as they signal where capital and innovation may flow, impacting the viability and growth of decentralized AI solutions.