The Cold War defined the second half of the 20th century. From a breakdown in relations after 1945 through the fall of the Berlin Wall in 1989, the intense rivalry between the Soviet Union and the United States had a profound impact on the world.

Now a new Cold War is upon us, and a new multi-way arms race to go with it — and they have significant consequences for investors.

The new Cold War — already underway — is a three-way arms race between the United States, the Chinese government, and the world’s most powerful technology companies. The fourth player in this drama is the private citizen — individual investors like you and me.

The “arms race” described here has nothing to do with nuclear weapons, however. It is all about artificial intelligence — the software programs and algorithms and machines that will shape the future and increasingly run it and possibly even control it.

China currently has multiple significant advantages. It is the “Saudi Arabia of data,” as The Economist has called it, due to the government’s unrestricted ability to collect information.

The Chinese government can also coordinate directly with its homegrown tech giants — Alibaba, Tencent, and Baidu — and direct hundreds of billions in funding into AI initiatives.

To give you a taste of what is coming, China plans to have 300 million closed-circuit television cameras in operation by 2020. The goal is to equip all these cameras with face-scanning technology hooked into a national database, as such that any Chinese citizen will be recognizable in seconds.

Imagine having footage of your facial expression retrieved when saying the name of a political leader as caught by audio surveillance, flagging you for bad behavior if your tone doesn’t sound right.

This is the direction China is headed, and many other countries could follow them, just as many countries followed the USSR communist model in the second half of the 20th century. The digital authoritarian state will be seen as a palatable alternative to messy and volatile democracy.

The West still holds that democracy and free speech are the best way to bolster free markets and the best way in general to live life while China is heading down a different path, what some call “algorithmic governance” or the “digital authoritarian state.”

The unbridgeable conflict between the Soviet Union and the West was about communism versus capitalism. With China versus the West, it will be about societies controlled from the top down — algorithmic governance — versus societies that remain free.

Countries will choose sides; they are already doing so. The internet itself — in a phenomenon dubbed “splinternet” — could even split roughly in two, with China’s firewalled internet on one side and a Western internet on the other.


This arms race is also guaranteed to turn unfriendly because of the sharp divergence between the West and China in terms of systems of governance.

But the artificial intelligence arms race will be three-way, not two-way, because the great AI powers of the West are private corporations rather than governments.

Think big-tech juggernauts and investing household names — companies like Google, Amazon, Microsoft, and Facebook. These powerful Western tech companies offer their own reasons for concern.

While Amazon, Google, Facebook, and others do not wield direct political power, they have an ability to shape behavior and influence consumer choices in ways that are highly disconcerting. The arrival of advanced AI will only make them even more powerful in this regard.

Wall Street, too, is another area of worry, as the less than scrupulous big banks use algorithms and big data to try and manipulate the behavior of their customer base and investors in general to generate more fee-based profits.

Less than a decade out from the global financial crisis, an event for which no top-tier bank executives were punished, we can see that the predatory behavior of large banks and powerful financial institutions hasn’t really changed.

What will they do with increasingly powerful algorithms and big data tools once they have them?

How will these giant entities, not really beholden to anyone, attempt to even more aggressively control or manipulate the behaviors and capital flows of private citizens — individual investors like you and me?

These questions demand answers because there is no way to avoid what is coming. The new Cold War is already upon us. Advances in artificial intelligence and machine learning are already building at a breakneck pace.

China is driving the development on one vector, the United States on another, and giant private corporations and Wall Street on yet another — and the private citizen and individual investor threatens to be caught in the middle, ground up like cannon fodder if he isn’t careful.

This is why we feel a sense of urgency when it comes to areas like machine learning and artificial intelligence and the development of investing algorithms. Somebody has to democratize this technology and put it in the hands the individual investor, the human individual, the private citizen.

Without such access to new technology in the world that is coming, investing the old way will be like walking onto a modern battlefield with a civil war musket.

Individual investors will be empowered in this new landscape, or they will be left behind. That is a big reason why we are here, and why we take our mission — “empowering the individual investor” — very seriously.


Founder, TradeSmith