Brendan Ahern (3:01)

Agreed.

Ben Carlson (3:03)

All right, on that sunny note, here's our conversation with Brendan Ahern from Craneshares. All right, Brendan. Something Michael and I have been talking about recently. So you take the ACWI All World Country Index, All Country World Index, however it's pronounced market cap of the US is like 65%. China is less than 3%. But you look at the GDP weighting, the US is 26%, China is 17%. Explain to me this divergence, especially from the China front. Why is it that it's such a big part of the global economy but such a small part of the stock market for the globally.

Brendan Ahern (3:43)

I mean one, one element in my opinion is just the American exceptionalism. Just since the GFC low, the S P 500 is up 1100% and all country world X US is up not even 1/3 of that, just, just over 300%. And, and then I think countries and emerging markets like China historically had very high value weights. So financials, energy were more than 50% of the EM benchmark, more than 50% of the China benchmark 10 years ago. And you throw in industrials, materials, real estate, these are basically slow, no growth sectors. So this idea that China's underperformed because it's a communist country or whatever, that's not really true. Because if you looked at a growth element in China, so MSCI China Tech has done almost 2500% versus the S&P's 1100% since that GFC low. But there's only 2% of the index. And that's literally why we created Crane Shares was to say this growth element in China that is correlated with GDP growth is so underrepresented in indices that you got to go out and get it. And that's literally like, you know, k web or KMQ. Right? It's literally why we built these ETFs, to give you that growth factor for China and emerging markets.

Ben Carlson (5:20)

How hard is it to get the Chinese consumer to care as much about the stock market as we do here. Is that just going to take like a few generations? How does that happen where culturally stock market is such a big part of our national economy and the conscience here.

Brendan Ahern (5:34)

It'S a twofold factor. One is that the China is not a socialist country. There is no social safety net in China today. If, if you lose your job, there's basically no unemployment. If you, if you get hit by a car, you have exceedingly basic health care, you have a de minimis Social Security in China. And so the very high savings rate is out of the necessity of you're responsible for your old age. Culturally, the Chinese really care about, you know, their parents, grandparents. You're not shipping them off to La Boca Vista and some, you know, they're living with you. And so you save a lot out of necessity. So a, you're going to be very conservative. And then I think the other factor is that housing investing in China has been, you know, kind of the broken slot machine. It's just the gift that keeps giving that no one has ever lost money investing in real estate. Up until about, you know, call it two, three years ago, I thought you.

Brendan Ahern (6:48)

Were going to say, I was like, is that a joke? It sounds like the curse that keeps.

Brendan Ahern (6:50)

Cursing the broken slot machine is that it always pays out and it just real estate because of urban, the government policy of urbanization. Chinese cities just get bigger and bigger and bigger. And I kind of like, I always say, my mom's from Denver and so I spent my whole life going to Denver. And when I was a kid, you'd fly into Stapleton. The Brown palace was by far the nicest restaurant in Denver. And when they put the airport out the diary, it was like, man, that thing's out in the middle of nowhere. Well, now the city goes also. So that's like, that's like 130 cities in China. Just. And so you'd be like, well, if you know the city is going to grow, you just invest in where it's going to grow and you're, you're rich. And that that music stopped.

Ben Carlson (7:40)

So that means that most of the money, most of that savings is just in real estate and cash, then I assume to your point about no safety net, it's mostly just very conservative.

Brendan Ahern (7:48)

Upwards of 2/3 of urban household wealth is in real estate.

Brendan Ahern (7:53)

You know, some people say, what's that here?

Brendan Ahern (7:55)

So here in the US most, you know, you know, yes, housing is a big part, but you also have very, very significant stock holdings. In China.

Brendan Ahern (8:05)

Well said differently, Brendan. So like I like do. So rich people here have a portfolio of real estate and private investments and public equities. Is that not the case with rich people in China?

Brendan Ahern (8:15)

No. Maybe 3 to 5% is invested in stocks. You also have, even insurance is very low in China. And so it's just culturally and that's what's almost people say, oh, the Chinese investors like gamblers. No, no, no. It's the opposite. They're the most conservative people. But if you're going to only put 3% into the stock market, you're in it to win it. You're going the most aggressive. And it's interesting, Michael. It's one of the things we think a just like literally this week in China they announced that the basic, what we would call IRAs, where you'll be able to put in 12,000 RMB into like an IRA. It's a tax deductible contribution. You can invest it. And they did it in 36 pilot cities.

Brendan Ahern (9:10)

Hang on a second, Brendan. They've never had retirement accounts, not like.

Brendan Ahern (9:15)

An ri, like an ira. It never existed in China. You, some of the bigger companies have like pension plans. So you know, if you're at like a big state owned enterprise, you, you have a pension, but it's probably de minimis your, your Social Security, it's like $250 a year. I mean it's literally nothing. Some of the newer companies have, are starting to get into 401ks as well as some of the publicly traded private tech companies do have ESOP plans.

Brendan Ahern (9:51)

Okay, so let's, let's talk about these, these, these companies that, that you all own in K Web. So I, we understand the idea of the state owned enterprises and the real estate sucking wind and all these slow to no growth companies. But the companies in this portfolio, these are growth stocks, but the stocks aren't growing. So let's talk about what's going on with these companies. What's going on with the earnings and you mentioned that they're kicking, they're kicking our butt since the GFC lows. But if you look back over the last, you know, three or five years, they've done, they've done horrendously compared to our tech companies. So is this like a lack of investor enthusiasm? Are the companies slowing down? What is the story and how do these companies get back on track?

Brendan Ahern (10:29)

Yeah, it's both. I mean, I mean some of the decline I think is due to just the fundamentals that these companies went from, you know, high octane you know, 20, 30% and because of this collapse in housing prices, you've seen the consumer get very, very conservative and that means the transmission engines for E commerce are feeling that because the economy slowed, you don't have as much advertising, you know, there's less mobile payments because people aren't buying. So, so there is a fundamental that these companies have slowed but I also think it's these companies like non US equities have been totally kicked to the curb. I don't think that's unique to China. No, I don't know what the average US non international weighting is. I bet you it's all time lows. I agree with that. We know, you know, you look at EM Funds and their top holdings are U.S. stocks. That's, that's just to survive, to stay upright, you know and I kind of say like that, that you know, s P up 1100 acquiax US up 313. I mean that's 15 years, that's 60 quarterly statements, you know, trustee meetings, board meetings, board, you know, your investment career, you know, I mean and I'm sure I'd be curious, you know, I'm sure Michael and Ben in your practice, people are like why do you hold this non US it does nothing but underperform, like get rid of it and yeah, and that, but what I would argue is that is global. I mean the amount of foreign capital in US stocks.

Brendan Ahern (12:20)

Yeah, it's very high, you're right. But apathy and even attractive valuations, unfortunately that's not a catalyst.

Brendan Ahern (12:30)

No.

Brendan Ahern (12:31)

So.

Brendan Ahern (12:33)

Valuation is not a catalyst.

Brendan Ahern (12:35)

So yes, you're right. There is absolutely no interest. Which is like if you're, if you're bullish, you like to see that. But I could have said this a year ago and two years ago. So what do we need to have happen? Has the, has the real estate washout been sufficiently washed out such that the Chinese consumer is going to start buying it? And I don't mean buying stocks, I mean buying, buying goods and services and all that sort of stuff to make the 10 cents and of the world go up. Like how does that happen?

Brendan Ahern (13:06)

Thus far we've not, you know, the government is doing a lot to support real estate and that, that's a. To try to get real estate prices to stabilize or stop going down. It's also how your real estate and infrastructure employ a lot of people. You know, you know, plumbers, electricians, cement mixers, home appliance makers. Right. There's this, you know, real economic effect. So, so what we've not seen is the rebound in consumer confidence thus far. But what we are seeing is in terms of like a re rating of China, it would require the Chinese to buy China. And there I would say the companies are all buying stock hand over fist, particularly the K web companies where you have a tech entrepreneur is the founder and the CEO or the chairperson. You know, the buyback yield on a lot of these companies is high single digits, if not, you know, low single teens. And then you're also seeing money come out of mainland China into buying these growth stocks in Hong Kong. So it's over 90, it's about 94 billion year to date has come out of mainland China and buying these growth stocks. That's more than double what they did last year. And then I think what you're starting to see is where did the China money from China or from Asia go? Well, I think it went to Mag7, Japan and India. And in this China rally, it's kind of interesting that India and Japan kind of came down. You know, they've. And that that would indicate that broader Asian investors. And that's almost been our thesis of like, listen, we're not saying like sell all your U.S. stocks. Like, you know, definitely not. I'm just saying why, why wouldn't you do what your MBA or CFA or CFP designation taught you?

Brendan Ahern (15:12)

Which is because it's not working well.

Brendan Ahern (15:15)

Because it will it well. And you know, buy low and sell high.

Ben Carlson (15:19)

Right.

Brendan Ahern (15:19)

You know, buy this, buy just a smidge of cheap China and sell just a smidge of us. And you know, there is someone buying, which is one of the hedge fund managers.

Ben Carlson (15:32)

The reason that we got this huge run up recently, obviously is because of the big stimulus that China announced. And it almost seems like it feels like this happens every few years. Maybe you can correct me if I'm wrong, but I feel like this time most investors and pundits are saying you're not going to fool us. This time it's not going to work because Chinese stocks went crazy. I think your fund went from being down on the year to up like 40% in a matter of what, a couple of weeks probably.

Brendan Ahern (15:55)

But the rally did fizzle again.

Ben Carlson (15:57)

So explain to us what, I'm trying to put it into perspective. Explain to us the stimulus. Maybe you can compare it to the COVID stuff to figure out how big this actually was and what they're actually doing.

Brendan Ahern (16:08)

Yeah, so a get housing, right. So you know, they've refinanced every mortgage in China. You know, they've, you know, they're Trying to incentivize buying.

Ben Carlson (16:20)

So they gave lower rates, more mortgage rates to everyone.

Brendan Ahern (16:23)

Yeah, and that's been part of a broader interest rate cutting that we'll see that. You know, they waited for the Fed to cut, then they'll cut because they don't want.

Brendan Ahern (16:30)

Has that spurred housing activity at all yet?

Brendan Ahern (16:32)

It has. Transaction volume has increased. We're not seeing. And in the big rich cities, prices have stabilized. What we've not seen is in the lower middle class poor cities, prices have not stabilized. So you'd say, okay, it's starting. They are doing what people have wanted to see is the western style, know, free money to spur consumption. And the view has been that's just a sugar high that leaves you with more debt and high inflation. And so they've been very conservative in direct consumption discounts other than in auto sales, which includes EV and hybrid and home appliances. And you'd say why those two? And there it is working. I mean, some of this Chinese EV data that you're seeing is the consequence of the subsidies to buy autos. Why is that? Well, get just, you know, I don't mean to put you on the spot. Like BYD, guess how many people they employ in China?

Brendan Ahern (17:45)

69 billion.

Brendan Ahern (17:48)

Is that in Yen? Over 700,000 people.

Brendan Ahern (17:52)

Wait, hold on, I'm only teasing. Obviously. Wait, 700,000 people are employed in BYD.

Brendan Ahern (17:58)

Okay, so if you, if you, when you give a auto subsidy, think about the knock on effect it has for automakers that they employ more people. You know, the people that work there get paid more. So, so people have really poohed, like, hey, we're not seeing direct consumption but, but they're doing it almost implicitly and very similar that they've said, you know, we're going to clean up the balance sheets of a lot of local governments. People are like, hey, what does that do for consumption? But in a lot of these provinces, particularly the poor provinces, the local governments employ a lot of people. They do a lot of contracts with local companies. So it's an implicit consumption effect.

Brendan Ahern (18:43)

So just getting back to what Ben said earlier, are they interested in getting people to care about their stock market?

Brendan Ahern (18:49)

They care more about the Shanghai Shenzhen market than say the Hong Kong market. Because that Shanghai Shenzhen market is a daily barometer of consumer confidence. And that's been giving the government a thumbs down. Like people are like, hey, not enough. And that's, but this idea that they.

Brendan Ahern (19:13)

Could just snap their fingers and make their stock market go. They can't. Because if they, they can't. If they could, they would. Why would they not?

Brendan Ahern (19:19)

And they've thrown a lot of money into like their, their sovereign wealth fund, their Social Security fund have been, you know, they've allowed insurance companies to buy. The sovereign wealth fund of China has put it's estimated at least 150 billion into stocks over the last year.

Brendan Ahern (19:45)

That's a lot.

Brendan Ahern (19:46)

Which is a lot. But you're talking about like a multi trillion dollar market cap. So.

Brendan Ahern (19:51)

All right, so they're pissing into the ocean. So let me ask you this, is there any way that they would adopt something similar to Japan? And I don't know all the details where they're like, listen, if you're not trading at book value, you're going to get removed from the index. If you're not doing dividends and returning, creating shareholder value, we're going to get, we're going to remove you. Like is there, is that just so antithetical to their culture?

Brendan Ahern (20:10)

No, no, because, because they want, you know, they, part of what they want to do is they want to create that American style that the stock market is a store of value versus money going into brick buildings which they don't need anymore. So, so yes. So if you're a company, you can get a basically interest free loan to buy back your stock or pay a dividend. They've actually said to mutual fund families and insurance companies, we'll give you a loan to buy stocks.

Brendan Ahern (20:43)

What about convertible bonds at 0% interest and then they just start buying bitcoin?

Brendan Ahern (20:49)

We've not seen that. We've not seen that.

Ben Carlson (20:52)

So how we talked about how valuation isn't a catalyst, obviously. And it does seem like everyone is ready to throw their intelligent investor book in the trash. But how much cheaper are your tech stocks in your portfolio than the basket of the mag. Seven Chinese tech companies. Noticeably cheaper than American tech companies.

Brendan Ahern (21:10)

Oh, I mean come on, like the backward, you know, Apple's P E is 37 versus like the K Web PE is like 12. You know, like.

Ben Carlson (21:21)

So your portfolio is trading at 12 times earnings.

Brendan Ahern (21:23)

Yeah.

Ben Carlson (21:24)

Geez. And they're all tech stocks, so how.

Brendan Ahern (21:27)

Do we get that high? Those are rookie numbers, Brendan.

Brendan Ahern (21:29)

Yeah, so, so you know, that's where this rerating idea, you know who is buying. And there are some well known hedge fund investors who. And hedge funds can hedge, right? I mean that's. But I saw, I was in Asia before Thanksgiving and I saw Howard Mark speak and he said listen, I made my career buying stuff out of the bargain bin.

Brendan Ahern (21:55)

He better be buy if he's not Buying China.

Brendan Ahern (21:59)

He is. Oaktree filed for several China adrs for the first time. They initiated in Q3. Now, obviously, Q3, 13F data, no different than other hedge funds. I mean, they could be here today, gone tomorrow.

Brendan Ahern (22:15)

I know. Well, David Tepper was on TV getting pretty damn excited.

Brendan Ahern (22:19)

Well, I think he saw what, you know, if, you know, and to his credit, he, you know, he started buying a few quarters ago.

Brendan Ahern (22:26)

All right, so he probably sold already.

Brendan Ahern (22:28)

He may have. I mean, we don't know. I mean, he's, you know, we just don't know. But I think, yeah, I mean, you know, Michael Burry. I mean, you know, these are, you know, some legendary people are dipping their toes or coming back in. And I think, I think that the issue, the elephant in the room is the geopolitical that, you know, as a professional investor.

Brendan Ahern (22:50)

Right.

Brendan Ahern (22:51)

You know, and if you're a pension, a U.S. pension, you know, how do you say, I'm going to buy more China when the narrative is so negative? I mean, even for yourselves as financial advisors, if you, you know, if you bought China, you know, how many phone calls would you get?

Brendan Ahern (23:08)

Right. It's not easy. So, so how does that, how does that. All right, so there's obviously geopolitical headline risk that is helping to compress multiples lower. Is there any way in which these fears about Taiwan or whatever, like, get lifted? Like, is there?

Ben Carlson (23:23)

Like I said, I have the catalyst. I have it. Isn't it just not even like an AI blow up, Just an AI hiccup where AI somehow sends these big tech stocks down because obviously the rest of the world is not trading on AI these days. Isn't that the catalyst?

Brendan Ahern (23:38)

I don't see it as a zero sum game. I'm not rooting for U.S. stocks to go down. I guess in theory, professionally, I have no exposure, so what do I care? But personally, yeah, I've got a lot, and I'm an American. It would be bad if US Stocks collapsed. I think it's just more of the sum of some of the pulling forward, of forward returns that we're seeing after the election. Just do things kind of go flat in the U.S. but guess what?

Brendan Ahern (24:08)

If things go flat in the, if things go bad for Apple, they're not just going to magically go well for Chinese tech stocks. So, so the, the, the headwind that I'm talking about, like, will they, won't they potentially invade Taiwan if there is somehow a resolution? And I know nothing about this, but if there was like a. Hey, people get less worried. Can that re Rate the stocks higher.

Brendan Ahern (24:28)

Yes. And that's where I think the geopolitical a, it could be the dollar. I mean I do think if the dollar were to weaken, it just makes US stocks which are obviously dollar denominated, a little less attractive for foreign investors. And I'm telling you, foreign investors are up to their eyeballs in US Stocks. You know, the Treasury Department releases that data only annually and it's, I mean.

Brendan Ahern (24:57)

I can't wait to see it in 2024.

Ben Carlson (24:59)

Is that true for Chinese investors too, that they're bringing all their money to.

Brendan Ahern (25:03)

Us out of, out of, out of Asia? There's a lot of money out of everywhere. I mean I kind of say like, you know, Ms, guess how much MSCI Chile is up since the GFC low 4% close 50. I mean S P is up 1100. Chile is up 50. So if you're, if you're a trillion investor, like 50% over 15 years, like, yeah, no thanks. Like guess where your money. You know, but so Brenda, this is.

Brendan Ahern (25:37)

Like, this is the conversation that every investor is having. Like this has gone on for a long time, but it's not just going to magically stop this. The continuing divergence of both valuations and returns and profits. There's got to be something. There's got to be something.

Brendan Ahern (25:57)

Well, I think, I think one, it's, it's potentially the dollar. And the other thing would be the geopolitical overhang going that, you know, a Trump bargain with China allows people to come back into the space. And every, all the data shows particularly US investors have no exposure to China. Very de minimis exposure to non US equities in general. I mean, I mean these em fun families, these non US focused fund families are all going out of business. I mean, I mean literally. And you know, I would just argue that trade probably looks a little long.

Brendan Ahern (26:40)

But what's keeping cleared? The decks have been cleared.

Brendan Ahern (26:44)

Yeah. So just, you need, you need the thing that's kept people from coming back in, you know, which is I think the geopolitical and I think that's a big deal even for institutions. I think it is a big deal.

Brendan Ahern (27:00)

Brenda, what do you say to people that are like, all right, fine, let's just say that I do want to get some exposure to China because the pessimism is so extreme that you just got to hold your nose and buy. Because this is how long term investing is typically rewarded investors is buying what everybody absolutely hates. And then they're like, but I'll just buy the casino stocks. I'll just buy the U.S. i'll just buy, I'll just buy Wynn.

Brendan Ahern (27:24)

Well, I mean, a, I've said, you know, you are implicitly invested in China because of Apple and Nvidia and ExxonMobil. You know, these great US multinationals all have a lot of China revenue. So you're already there, you're already invested in China. It's just more of is there an opportunity for the local companies? And I would argue yes, you know, one would be, you know, just take that idea of a smidge, you know, just like a little smidge, you know, a, you know, you have to volatility adjust this stuff so that way you don't get shaken out. So this is, you know, if your normal position's 3, 5%, I'm like make it a third of that. You know, like literally, like if this stuff is twice as volatile as the S&P 500, then buy half of it and then two would be like, you know, for some people you can use options around K Web. You know, you can write calls and, or, or hide it.

Brendan Ahern (28:21)

Are we talking about Clip? Are we talking Clip? Brendan, I don't think we ever spoke to you about Clip. Did I, did I win or is it still Caleb? Oh, wait, what did I call it? I called it Klip. You guys call it Clip. I called it. We call it Clip.

Brendan Ahern (28:33)

Well, a lot of people call K Web the Queb.

Brendan Ahern (28:35)

No, nobody calls it the Queb.

Brendan Ahern (28:37)

People do. There's, there's, there's, there's a group out there. So Clip does that for you, right? It just writes a call and that's giving you 4 to 5% monthly. But you can do that yourself if you don't want to outsource that to us.

Ben Carlson (28:51)

So those yields are still pretty high on your, on your call writing strategy.

Brendan Ahern (28:55)

Yeah, yeah.

Ben Carlson (28:55)

And so, so I'm curious on the fundamentals. So one of the things that, that Michael, I've been talking about on the US tech stocks is yes, they've had this amazing run, but the fundamentals have also matched. So what like how do the growth rates of these tech companies in China compare with the growth rates of. It doesn't have to be in video because that, that's in another universe it seems like. But just the other tech stocks.

Brendan Ahern (29:15)

Yeah, and actually that 13p is actually the forwards, so just that's a one year forward.

Ben Carlson (29:22)

Right.

Brendan Ahern (29:22)

But yeah, I mean I think, I think a the companies because of this domestic consumption coming down top line growth been single digit, high single digit. It's on the bottom line. Where the companies are buying back so much stock you're seeing earnings per share growth increase. And so the companies do need this stimulus to filter through into the economy, into consumer confidence. The thing that's been hard is that markets must be forward looking. And so we've seen, you know, I think a lot of people are surprised that you know, since the Jan. I think end of January was the bottom in Chinese equities and people would be like that, you know, since then K Web is up like 30, 40%. It just, it's not been like a 45 degree. It's been two steps forward, one back. Two steps forward, one back. But arguably technical analysts would be like it's higher highs, higher lows. Right. Like it's actually doing what markets do. It's just doing it in such a compressed timeframe.

Brendan Ahern (30:30)

Well, here's hoping, Brendan. I have to, I have to for the record, for your compliance department and also for our listeners to make sure the record is straight that Caleb is distributing 4 to 5% a month or whatever it is. That's not, that's not the total return that you're expecting because that's an annualized 60%. I don't think, I don't think you want to say that out loud.

Brendan Ahern (30:48)

No, no, I mean, listen, this is, you know, I think it's an interesting tool for you know, people who need, need income.

Brendan Ahern (30:57)

Just want. Yeah, of course. Just wanted to be on the record for that. Okay, so Brendan, listen, here's to hoping that Chinese stocks stabilize, that something turns the story around. Because as we've mentioned this entire episode, there is investor apathy, the deck has been cleared, there is nobody who's excited. And historically of course, the timing of these things is impossible. But that has been one of the key ingredients to a turnaround. So for global investors and everybody else, let's hope that China stock together.

Brendan Ahern (31:26)

Yeah, yeah. And I think, you know, obviously K Web has been our flagship and but I kind of say like, you know, KMQ is just the EM version. It's just this growth factor for. And then it hides the China. So as you know, you can, you can own this EM growth factor and.

Brendan Ahern (31:46)

Okay, so that's, that's, that's what. Brendan, that's what we call the Grand Rapids hedge right there.

Brendan Ahern (31:49)

Yeah, yeah, yeah, it is. I mean I'm up to my eyeballs in K Web personally. So I'm like, so no one knows how volatile or knows the performance story better than me. And no, honestly that, that's, that, you know, following the valuations engaging these companies, listening to their quarterly calls over the last four years is what actually hurt me. Where I was like, man, like these companies, they've been basically been eviscerated. But the management of the company are big believers in their outlook, and they're proving that by buying so much of their stock. I mean. I mean. I mean, Alibaba is about 2 to 3% of their ADRs volume every day because of its buyback.

Ben Carlson (32:40)

Wow.

Brendan Ahern (32:41)

Wow. All right, Brendan, we're going to leave it there. Thank you very much, as always, for coming on. That was a hell of an education on everything that's going on in China. So thank you. Appreciate your time.

Ben Carlson (32:51)

Tell us where we tell people where they can find more about Caleb and all your funds.

Brendan Ahern (32:54)

Yeah, yeah, certainly. Just right on. Craneshares.com with a K. Wealth of information.

Brendan Ahern (32:59)

Crane shares with the K. All right, we'll see you next time.

Brendan Ahern (33:02)

Thank you, Ben. Thank you, Michael.

Ben Carlson (33:06)

All right, thanks to Brendan, who was coming off of knee surgery for this talk.

Brendan Ahern (33:10)

Credit to him. Shoot or shoot.

Ben Carlson (33:12)

Yep. Production team made him turn off his ice machine for his knee. He gutted through. Thanks to Brendan. As always, great conversation. Remember, visit craneshares.com to learn more about their funds and email us animalspiritscompoundnews.com.