California moves first on AI… why Luke Lango says stay invested… and two Jonathan Rose trades for a nervous market
Governor Gavin Newsom of California has issued a landmark executive order establishing a regulatory framework for artificial intelligence, marking the first substantive state-level intervention into the safety and oversight of advanced AI models. The order, which arrives amidst a period of heightened market volatility and public debate over the existential risks of the technology, instructs a panel of experts to develop comprehensive safety standards within two months. This state action serves as a direct challenge to what Newsom characterized as the federal government’s inability to provide meaningful oversight, signaling a shift in the regulatory landscape that could have profound implications for the technology sector and global financial markets.
The move by the California executive branch follows a period of intense public discourse triggered by the resignation and subsequent public warnings of Jacon Coxon, a 27-year-old former researcher at Anthropic. Coxon’s public statements, which characterized the development of frontier AI models as a dangerous gamble with human life, have garnered over 165 million views and shifted the conversation from specialized technical circles into the mainstream political arena. Newsom’s order directly addresses these concerns, focusing on the potential for catastrophic outcomes and the necessity of "kill switch" mechanisms to deactivate models in emergency scenarios.
Chronology of the AI Safety Debate and Regulatory Response
The path to California’s executive order has been marked by several key developments over the past year. In late 2023, the Bletchley Declaration, signed by 28 countries, first established an international consensus on the need for AI safety. However, legislative efforts in the United States remained stalled at the federal level.
In early 2024, several high-profile departures from major AI laboratories—including OpenAI and Anthropic—heightened internal concerns regarding the speed of deployment versus the rigor of safety testing. By mid-2024, the "Safe Superintelligence" movement gained traction, with researchers advocating for a slowdown in the development of Artificial General Intelligence (AGI).
The escalation reached a turning point in September 2024, when Coxon’s viral warning catalyzed public anxiety. Shortly thereafter, on Friday, Governor Newsom moved to formalize California’s stance. The executive order not only mandates the creation of state-level rules but also positions California’s policies as a "national baseline," attempting to fill the vacuum left by congressional inaction.
Technical Scope and Proposed Regulatory Mechanisms
The California executive order targets "frontier models," defined as the most advanced AI systems that exceed current industry benchmarks in computing power and capability. The proposed regulations are expected to include several key pillars:
- Mandatory Third-Party Safety Reviews: Developers of frontier models may be required to submit their systems to independent audits before public release to assess risks related to cybersecurity, biological threats, and autonomous behavior.
- Emergency Shutdown Protocols: The "kill switch" requirement would mandate that developers maintain the ability to immediately terminate a model’s operation if it exhibits unforeseen dangerous behaviors.
- Liability Frameworks: The state is exploring how to assign responsibility for damages caused by AI systems, moving toward a model where developers must prove they took "reasonable care" in the testing phases.
This regulatory push comes as the federal government maintains a more hands-off approach. U.S. Treasury Secretary Scott Bessent recently clarified the administration’s position, rejecting the notion of a federal liability shield for AI companies. Bessent emphasized that legal responsibility remains with human operators and corporate entities rather than the software itself, placing the burden of risk management squarely on the private sector.
Market Analysis and the Divergence of Capability and Capacity
Despite the regulatory headwinds, market analysts suggest that the underlying economic momentum of AI remains robust. Luke Lango, editor of Innovation Investor, recently attended the All-In Summit in Los Angeles, where industry leaders including Microsoft CEO Satya Nadella and Nvidia CEO Jensen Huang addressed the future of the sector.
Lango’s analysis highlights a critical distinction for investors: the difference between AI "capability" and AI "capacity." While regulatory debates may slow the public release of new capabilities—the software and frontier models—the expansion of AI capacity continues unabated. Capacity refers to the physical infrastructure—semiconductors, data centers, and energy grids—required to support the AI ecosystem.
Data from recent corporate earnings reports supports this view. Capital expenditure (CapEx) among the "Magnificent Seven" tech companies is projected to exceed $200 billion in 2025, with the vast majority allocated to AI infrastructure. For example, Nvidia’s data center revenue has seen triple-digit year-over-year growth, indicating that the buyers of these chips are not scaling back their long-term infrastructure commitments despite the political noise in Sacramento or Washington.
The Copper Bottleneck: A Structural Tailwind for Infrastructure
As the focus shifts toward the physical requirements of AI, commodities like copper have emerged as essential components of the trade. Data center construction and the subsequent expansion of power grids require significant amounts of copper. According to industry estimates, an AI-integrated data center utilizes approximately ten times more copper than a traditional facility due to increased power density and cooling requirements.
The supply-demand imbalance in the copper market is becoming a central theme for institutional investors. While demand is surging, the supply side faces structural constraints:
- Lead Times: Developing a new copper mine typically requires seven to ten years from discovery to production.
- Declining Output: Global mine output saw a contraction in the first half of 2024, leading Morgan Stanley to forecast the first annual decline in mine supply since 2017.
- Price Action: Three-month copper on the London Metal Exchange recently reached record highs near $14,700 per ton.
Furthermore, geopolitical factors and trade policies are providing a specific catalyst for domestic producers. While the U.S. government imposed a 50% tariff on semi-finished copper products in 2025, raw and refined copper remained largely untaxed. However, the Department of the Treasury is currently reviewing a phased tax on refined copper, with potential rates of 15% in 2027 and 30% by 2028.
This shift in trade policy favors companies with domestic refining capabilities. Currently, the United States has only two operational primary copper smelters: Freeport-McMoRan’s (FCX) facility in Arizona and Rio Tinto’s (RIO) Kennecott smelter in Utah. This represents a significant consolidation from 1976, when 16 such smelters were operational. Domestic refiners stand to gain significant pricing power if tariffs restrict the flow of imported refined metal.
Strategies for Risk Management in Volatile Markets
Trading expert Jonathan Rose, editor of Masters in Trading Live, argues that the current environment of regulatory uncertainty and market "whipsaws" requires a disciplined approach to risk management. Rose emphasizes the importance of "defined-risk" trading, particularly in volatile segments like small-cap stocks.
Using the iShares Russell 2000 ETF (IWM) as a case study, Rose noted that small-cap companies are particularly sensitive to interest rate fluctuations and regulatory shifts. By identifying specific "expected move" levels—price ranges derived from options market data—traders can enter positions with predefined exit points. For instance, the $280.15 level on the IWM was identified as a critical support zone during recent Federal Reserve announcements. This objective, data-driven approach aims to remove emotional "gut feelings" from the investment process, which often lead to errors during high-volatility sessions.
Broader Implications and Global Competitiveness
The decision by California to move ahead of federal regulators raises questions about the "Brussels Effect," where the regulations of a single large jurisdiction become the de facto global standard. Given that California is home to many of the world’s leading AI firms, including OpenAI, Meta, and Alphabet, Newsom’s executive order could force these companies to adopt these safety standards globally to maintain operational consistency.
However, some industry advocates warn that excessive regulation could stifle innovation and cede ground to international competitors, particularly China. The debate remains centered on whether safety and innovation are mutually exclusive or if, as Newsom argues, safety is a prerequisite for the long-term viability of the industry.
As the expert panel in California begins its two-month drafting period, the tech industry will be watching closely for the specific language of the proposed rules. The outcome will likely determine whether other states follow California’s lead or if the federal government is finally spurred into creating a unified national framework.
In the interim, the investment landscape appears to be bifurcating. While the "frontier" of AI software faces a period of intense scrutiny and potential delays, the "backbone" of the industry—the hardware, infrastructure, and raw materials—continues to benefit from a structural shift in global capital allocation. Investors who can distinguish between the political rhetoric of regulation and the physical reality of infrastructure spending may find opportunities to remain exposed to the AI trend while mitigating the risks of a nervous and reactive market.
