Late Cycle Investment Theory

🧠 Insights You Won’t Forget

Today's insights are inspired by an essay by Nicolas Colin titled Late-Cycle Investment Theory

1. We’re in the maturity phase of the computing revolution

   Nicolas Colin applies Carlota Perez’s framework to argue that the age of computing and networks is no longer in its disruptive early stages but in its deployment maturity phase, comparable to the 1970s for oil and mass production. Capital should now focus on integration, optimization, and strategy over raw innovation.

2. Innovation has lost its edge, strategy now wins

   Technological clarity, saturation of viable startup ideas, and growing institutional constraints (e.g., GDPR, AI regulation) mean that raw innovation no longer offers durable advantages. Strategic defensibility, capital discipline, and integration into physical systems are the new competitive edge.

3. Stablecoins are America’s silent geopolitical weapon

   Dollar-backed stablecoins (like USDC and USDT) act as digital-age petrodollars: they strengthen dollar hegemony by creating demand for US Treasuries globally and functioning as programmable financial rails. Yet, they also enable fragmentation by bypassing traditional finance.

4. AI is not a new revolution, it’s an efficiency unlock

   In Colin’s view, AI is to computing what lean production was to mass manufacturing: a late-cycle optimization tool. The biggest winners will be those who use AI to amplify organizational capability, not replace it.

5. China is building the next paradigm: programmable electricity

   Colin makes a compelling case that China’s decade-long investment in electric infrastructure (e.g., AI-managed grids, EVs as mobile power stations, high-voltage lines) positions it as the lead actor in the next general-purpose revolution, akin to the US in 1870.

6. Manufacturing, not software, determines geopolitical power

   The myth of software dominance has run its course. Colin shows how China’s mastery of “process knowledge” and integrated supply chains has positioned it ahead of the US, which is now structurally constrained by short-termism and financialization.

7. New intermediaries will profit from global fragmentation

   Just as Marc Rich invented the oil spot market in the 1970s, companies like Flexport are thriving by managing chaos in trade logistics. The next wave of value lies in navigating fractured global systems, not building seamless ones.

8. Financial markets must be rebuilt from first principles

   Tokenization, AI-enhanced operational transformation, and a new high-yield market for capital-intensive sectors (like compute and energy) are essential to align capital allocation with late-cycle realities.

9. The US is playing the British Empire’s endgame

   Just like Britain clung to finance while Germany and the US built steel and electricity empires, America today seems focused on extending its financial dominance through stablecoins, while China builds the next technological base

10. Where to invest now: physical meets digital

    Investors should redirect attention from frontier tech toward real-world infrastructure where digital technologies (AI, tokenization, programmable energy) are embedded into physical systems, especially in manufacturing, logistics, and energy.

Recall from last week

1. Local developers are the missing middle

   Litt champions the rise of “local developers”, non-engineers like power spreadsheet users who tailor tools for their communities. These empowered intermediaries can bridge the gap between rigid software and contextual needs without becoming full-time programmers.

2. AI expands malleability, if we have access

   While LLMs lower the barrier to tool creation, they don’t help unless the software is “open kitchen” rather than “food court.” AI’s true power is realized only when users have control over their environment and can meaningfully integrate generated tools into their workflow.

💡 Eko Worth Remembering

⚡ Active Recall – Test Yourself 

🛤️ Off the Record

This is one of the best essays I have read in 2025. I highly encourage you to read the entire 37 pages, but if not the above insights and my below thoughts do a pretty thorough job.

In times of structural transition, the question of power shifts from balance sheets to factory floors. Yanmei Xie puts it bluntly: “Who would you bet on, a nation of lawyers, accountants, and financiers, or one of machinists, metalworkers, and engineers?” The answer might seem obvious, but it cuts against how most Western institutions think about influence. We’re still taught that strategy lives in spreadsheets. But when systems are under strain, it’s operational capacity, not financial sophistication, that decides outcomes.

That’s what made Detroit the “arsenal of democracy” in WWII, and it’s what makes China the manufacturing epicenter of today’s geopolitical realignment. While the U.S. offshored its production and bet big on financial engineering, China embedded software into its hardware, trained millions in process knowledge, and built a vertically integrated supply chain that now anchors everything from EVs to solar to semiconductors. As Colin notes, software still matters, but only when it’s fused with the physical world.

Britain, flush with capital, missed steel and electricity. America, flush with code and capital markets, may be walking the same path. Its financial dominance remains formidable: the U.S. dollar still underpins over 60% of global reserves, American markets command nearly half of global equity value, and dollar-backed stablecoins now process trillions annually, effectively extending monetary reach through code. But while the U.S. builds faster financial rails, China is wiring a new industrial foundation. It’s deploying AI to balance national energy grids in real time, laying high-voltage lines that reroute solar power across provinces, and turning EVs into bidirectional power nodes. Meanwhile, the digital yuan has quietly become the world’s most scaled central bank digital currency, even just in 29 '“pilot’ cities. One nation is encoding its economic past into programmable money. The other is encoding intelligence into the infrastructure of the future.

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Answer:

Because AI optimizes existing processes rather than creating new paradigms, its deployment rewards firms with robust organizational structures over those pursuing disruptive breakthroughs. The strategic implication is that long-term performance will depend on institutional knowledge and operational alignment, not first-mover advantage or technical novelty.

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