← Animal Spirits Podcast
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- [00:00]
A
Today's Animal Spirits Talk. Your book is brought to you by Crane shares. Go to kraneshares.com to learn more about their whole suite of ETFs, including Kweb Kraneshares China Internet ETF Clip. That's a Crane Shares K Web covered call strategy. And also check out China Last Night, which is your daily newsletter for all things China. Craneshares.com to learn more.
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B
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
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A
Welcome to Animal Spirits with Michael and Ben. Michael, I think we both learned this past year that we don't really know a lot about China. Is that fair to say? It's the second largest economy in the world and yet I think to a lot of Americans, frankly, the country remains kind of a mystery. It's not exactly a destination people go to travel to for vacations. Right. So I don't think a lot of people know and understand that much about society. And so we read Dan Wong's new book Breakneck and felt like we understood a little bit more. But we have experts from Crane Shares we've talked to multiple times now. Brandon, most notably who writes China last night, who who travels there all the time. He invests in the companies, knows about others to know. But I do think it is kind of a blind spot for US Investors. Is that fair to say?
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C
I was just going to say that exact thing, Ben. It is a blind spot. I think we are fortunate to live in our bubble, a very beautiful bubble it is. But we often don't think about what's going on outside of our borders and China is arguably hard to argue that it's that there's anything else that's the second biggest economy in the world just is it's very important. Dan Wang spoke. Definitely opened my eyes. The stock market versus the economy. I think this is like one of the first posts I wrote how the stock market does not equal the economy. It's, it's no place is it more true than in China. Think Vanguard had a study about this like in probably 2014, right?
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A
The GDP growth versus the stock market growth. Yeah. Right. Since 1990 hasn't really gone anywhere and.
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C
It'S even, it's widened ever since. Pretty, pretty remarkable. What do they say? Some, maybe.
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A
Well, they do have this huge tech sector now and they're fighting us for AI supremacy. And it sounds like the race is closer than most people would assume. And obviously the deep seq thing was maybe a little bit of a wake up call. So we talked to Brendan Ahern, who is a chief investment officer at Crane Shares. We've talked to him a number of times before. It's always great to learn because he's in this, he's following this China news a lot. He's writing on it on a daily basis. First China Last Night newsletter, which has been doing for a long time now. So we peppered Brendan with questions about the book that we read and about the societies and about the tech stocks there and the actual companies. Michael tried to pronounce one of them didn't go very well. So here is our talk with Brendan. Brendan, welcome back to the show.
- [03:09]
D
Great to be back. Ben, happy holidays.
- [03:11]
A
All right. Michael and I are now self professed China experts because we read Dan Wong's book Breakneck. Very good. Curious to hear your thoughts. Do you think he just tonally or. Because China has always been something of a mystery to me and I thought he really nailed the differences between the societies and maybe it was a little too clever to say, like, hey, it's the engineering society versus the loyalist society. But do you think he, Ben, bought.
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C
A hook, line and sinker.
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A
I did. But do you think he was, he was as you being an actual China expert, do you think he kind of nailed the tone of, of the different societies and the pros and cons between the two different systems?
- [03:48]
D
I thought it was a great book. I thought the chapter on the Shenzhen manufacturing ecosystem is worth the price of the book. And the book was expensive. It was like 37 bucks. So I might, I might have to go back and expense it. I thought, you know, a, I mean, I mean he lived there and experienced that firsthand. So I thought that kind of boots on the ground perspective, you know, the, you know, the views of different cities and culturally, you know, arguably academically, you know, China, China is paying the, you know, receiving the dividends of investing in STEM education from 10, 20, 30, 40, 50 years ago. And I kind of jokingly say, you know, there's probably not a lot of middle age French poet, you know, majors in Chinese schools. It's, it's a very STEM orientation, I think. You see, you know, there's, there's, there's an Output to that and they're arguably maybe receiving some of the, some of the rewards of that.
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C
A couple of weeks ago, Ben and I were talking about the, the tech bubble bursting. And I know you know this, but I feel like I don't know if it's being underreported or people are just tired of talking about it, but 21, 22 and 23 was a mini bursting of the bubble. I don't know if it was a bubble or not, but it was similar to 99, 2000. Where do you remember the numbers offhand? 2001 and oh 2. What they were like, oh for the.
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A
Nasdaq, it was down 30% or more each year. Okay, consecutively.
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C
So 2021 was down 49%. I'm talking about K Web. 2022 was down 17%, 23 was down 9%. Now rebound at 24. Healthy year to day in 2025 up 25% as of this recording. It's, it's Monday, December 22nd. Before we look forward 21, 22 and 23. Was that the bursting of a bubble? Like remind us exactly what happened because I know it's not that long ago, but it feels like it's pretty far in the rearview mirror.
- [05:54]
D
You had a few contributors. One of them was, you know, the U.S. hedge fund Archer Ghost was levered up in 10 U.S. listed stocks. Five of those, five of those 10 stocks were Chinese adrs where you know, he was levered up 100 to 1 or. And that was really the catalyst in February of 2021. That was the peak, you know, an element of that rise was driven by, by Archegos's activity and the knock on effect. But yeah, then, then you had a whole host of, you know, these are policy errors and we can rationalize why, why they did each of these policies. They, you know, they popped the housing bubble. You know, the government did that on purpose. Why? Because they don't need more houses, they need technology. And they wanted to shift that savings, that investment that historically went into housing. They geared it into semiconductors and high end manufacturing. You had Internet regulation that you had the pulling of ant groups ipo. And again there's rationalization that you had a lot of data in there that they were going to be come under. You know, they were skirting bank laws by calling themselves a fintech company. You had Internet regulation in terms of online education companies. You had Covid, you know, and, and obviously in Dan, Dan Wang's book, you know, he speaks about his experience during, during zero COVID policy, you have this whole host of policy errors that really slaughtered the China bulls. Right. If you were a China bear, you never owned those names or you had, you know, you had very little non US equity exposure. The China bulls that got hurt. And I think that's where this process of people coming back into the space will take so long that there's a lot of scar tissue, there's a lot of people who hold grudges. And in terms of this RE rating we've seen over the last two years, it's really been, I would argue outside of US hedge funds and US technical analysts, it's really non US institutions are the one coming back into the space. Part of that is just the US markets done so well. Why would you bother with non US equities in general? Right? Yeah. For 16 years they haven't worked. You know, Harry Markowitz is, they should take back his Nobel Prize. Diversification doesn't work. I mean, I don't believe that. But it's hard. After 16 years, 64/4 of these non US equities never keep up.
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A
Hey, they finally did in 2025. I'm curious, how about the AI story in China? Because that's all people are talking about in the US of course. Where do we stand there? I mean we had the Deep Seek moment and that was a freak out for like four days. But other than that, like how far is China really behind the US or are they still behind? Like where, where do we stand in terms of the artificial intelligence race between the countries?
- [09:03]
D
I mean on, on AI, it's, it's, it's a very different, you know how they're going about it is it's all open source. You know, if you look, you look at Deep seek and Alibaba's Q1 Badus Ernie Bot, these are open source code and anyone can download it for free. And that, that's very different than the business model perplexity and anthropic and OpenAI where they're trying to build a moat around their businesses. And, and that's, that's maybe why there's this race element because you have, you're in a race to try to garner market share and, and clients. And in China it's, it's more about the implementing it across businesses. And that's where the real AI companies are really the cloud computing companies Alibaba, Tencent and Badu, they're the ones that are ultimately really benefiting from AI as opposed to trying to monetize large language models.
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A
So what does the adoption rate look like? In China then are people, are people in businesses using it more? Is this something that the government really wants to happen? Like where, where are we in adoption curve?
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D
The government is very geared and we've got this draft of the 15th Five Year Plan. And technology, you'd argue it's all about domestic consumption and technology self reliance. So there's definitely a policy tailwind to not just AI, but you'd argue semiconductors, big data. The US putting China companies on export controls, it kind of forced them to say we have to come up with our own alternatives. I mean there's, you know, Apple, you know, I would argue that trying to bankrupt Huawei by cutting them off from US technology, they were either going to go bankrupt or they were going to innovate. And unfortunately for Apple, they innovated their way out of it by making a phone that's arguably better than an iPhone. I mean, just flat out the, the Pro Mate 60 plus is a better phone than an iPhone. And, and it's a, that's, that's a consequence of, of.
- [11:17]
C
Shut your mouth. Brendan, let me ask you this. I can't say this for sure, but I'm going to guess that K Web is the only chart that looks like this. I have a chart that shows the total assets under management versus the price. And the price peaked. And yeah, this was a hell of a run up. It went from, what is this, 42 bucks a share. I'm, I'm cherry picking the bottom, so forgive me, let's just say it went from like 47 bucks a share prior to Covid. Okay. And it ran all the way up to $103 by the end of February 2021. And then we know what happened. I spoke about that a few minutes ago, but investors didn't really panic the way that you would expect them to. I mean there was of course, ebbs and flows, but my point is this. We're now four years removed from the top. The top was $103. The share price today is $35, give or take. And yet total assets under management hit the new all time high. You don't see too many charts like that. Most of the times investors run away from bad investments. What's your take on what's happening here? Like how do you explain those dynamics?
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D
KWEB is probably unique across the US listed China. Yeah, the majority of China ETFs were closed over the last three years. I mean, the number of funds available declined dramatically. We've been pounding the table for many, you know, for a long time, saying you know, you know, KWEB is really a growth factor for China and we don't hold financials, energy industrials. You know, if you're going to cut your China position down, you're probably going to get rid of old China and maybe the piece you keep is going to be, you know, this kind of growth China tech, you know, China tech, so to speak. So I think, I think we've been very fortunate. You know, where the asset class is either gone out of business or been eviscerated. And you know, I mean literally half of the China ETFs no longer exist.
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A
In the U.S. wait, so why is that? What happened?
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D
Just got destroyed.
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A
Oh, so the bad performance and the companies closed them down?
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D
Yeah, just closed them down.
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A
Okay, I'm curious about that. So we've talked about the currency effects with other countries. European stocks and other foreign developed stocks are benefiting from the dollar falling this year. I assume it's the same thing in China. You're getting a good currency tailwind.
- [13:40]
D
I would definitely agree. I think from traveling to Europe for work, you know, you feel the, you know, a conversation that comes up is, you know, European investors are not up, you know, nearly 20% on the S&P 500. You know, if you're a euro denominated investor in US equities, you're up 4. If you're Swiss franc, your three Swedish kronas like 5. So, so 1. I definitely think, you know, investors are kind of re, you know, not. There's an element of non U S investors, particularly out of Europe are rebound. I mean I'm not saying they're dumping U S equities, I'm just saying they're arguably hitting that rebalance button.
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C
European investors in U S stocks have had a hell of a decade.
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D
Yes.
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A
Yeah. Because they had the dollar falling before which. Or rising before which is good for them.
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D
Exactly. I mean they had this huge tailwind that's becoming a headwind. We're starting to see this particularly in, you know, we have a European business and the, the flows in China ETFs in Europe is, you know, in the US it's about one and a half billion of net inflow into U s listed China ETFs. The US ETF industry is 13 trillion. In Europe it's over 8 billion and that's on a 3 trillion dollar ETF market. So, so like why, why are European investors putting, you know, 4x the money into China? It's just as they rebalance and position, some of it's going to end up in European stocks, but some of it's going to end up in, in Asia and emerging markets. So I think we're seeing the currency a big factor for US1 1.5 billion into China ETFs for 2025. If that was a US equity ETF that had that inflow, it would be the 78th largest inflow year to date, which means it's basically there's zero money despite, you know, really two. Two pretty good years. Two pretty good years.
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A
So in the us, everyone and their brother are worried about an AI bubble popping. People are concerned about, I guess, the ethics of AI and what it could do to the labor market. And you mentioned China has this like five or 15 year plan. And obviously we talk about the Dan Wong book. Building out of stuff is a big part of that. And it sounds like technology is a piece of that. Is the public in China concerned at all that do they have the same fears that we do or is it kind of like, no, this comes from the top, that AI is a part of what we're doing now. Everyone get on board.
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D
I think it's more the latter that I think it's viewed as a tool. The other thing is I'm not, not really a buyer that, you know, I was out in San Francisco where there's waymos all over the place and you know, you know, having lived in San Francisco, you know, Uber was invented in San Francisco, was. There was no taxis. I mean, you literally couldn't get a taxi.
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C
So.
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D
So eliminating your taxicab force for the city of San Francisco, particularly when you got, you know, Alphabet, you know, basically funding the whole thing, like you don't really care. But here in New York, you know, if I want to get from JFK into New York and I don't want to take a cab, I got to get on a monorail. Then the Long Island Railroad, that's all done on purpose. Right? Like the New York taxi and limousine position is like, we've got a lot of money and a lot of political pool. So this, this idea that AI is just going to, you know, you know, I really think locally, you know, municipal governments, state governments, naturally are going to say, you know, you know, we're not just going to put huge swathes of our, you know, of our workforce out of business, like who's going to vote for us if we fire all of our voters? So, so this idea of like, yeah, I think things might get a little more efficient, but I definitely think it'll get, you know, it'll get Implemented very incremental. And in China, you know, I mean, I've heard the argument, well, you know, they got a demographic issue, but it's like, yeah, but so, but so does everybody. Everybody's got a demographic. I mean, I think, I think where we see AI, where we're, you know, kind of, you know, really think AI is going to get there is actually on the humanoid robotics. And that's self. You know, that's self. You know, that's kind of a self fulfilling argument since we have a humanoid robotic etf. But you know, in, in China it's like, yeah, you know, people really want to adopt that technology to make their lives easier. And I think, I think that's true here in the U.S. i mean, you know, Musk is obviously the biggest proponent. I mean there's people that say Tesla will be out of the auto, you know, out of the car making business, just going to be an optimist, just a humanoid robotics company.
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C
When investors are considering buying Chinese tech stocks, like what exactly are they buying? Is it Chinese governance, making some sort of adjustments? Is it the growth in the earnings per share? Is it a potential re rating of how investors feel about this? Like, what are my, if I buy this, what am I betting on?
- [19:00]
D
Part of it is a re rating. The geopolitical, you know, is very hard for U.S. investors. You know, you got your MBA, your CFA, you should be buying low, selling high by, by low valuations and trimming your high. But when then, when you apply that to China, I think it's hard because even if I'm an institutional investor, I have a board, I have trustees. I think the geo, US geopolitical narrative is tough. I mean, I think, I think so. One, I think, you know, if, you know, Trump is supposed to go to meet with Xi in China in April. Their APAC meeting is actually in. Pretty sure it's actually in Shenzhen in the fall. Anyway, like what if, what if, what if some of that geopolitical headwind goes away because Trump says we're going to do a bigger deal with China. I think it allows investment professionals to come back. You know, in the case of K Web, Michael, you know, these are, you know, private companies. You know, the founder is the CEO or the chairperson of every company. You know, there, you know, yes, you have E commerce companies, but you have online video, online gaming, mobile payments. You know, there's a, you know, there's more to the space than just like Alibaba. There's arguably companies like Badu and I think there's a whole Host of value plays. And then you could get this RE rating which is multiple expansion. And that's a part of what we've seen. I think if you get this policy to raising domestic consumption in China, that's where you actually see earnings per share growth.
- [20:41]
A
If you look at the valuations of small caps or mid caps or international stocks, they all kind of trade at a similar discount to the large cap US stocks. Is it similar in China where it's, it's that, that kind of discount with.
- [20:54]
D
China you've got a shares Shanghai, Shenzhen, that's only about, you know, if you're an MSCI investor, It's only like 15 of, of MSCI. It's a small part of the definition of China. That's a closed capital system. So the valuations tend to be very high. And that's where you see some of these companies in the AI space. They're more expensive than Nvidia. And it's just because if I'm in mainland China, my investment universe is really small because I can't buy EFA or VOO or whatever img. I have a really narrow, I have capital controls. My money has to stay in China. So it bids up the growth names, the offshore, the Hong Kong names. USADRs, that's where a lot of other growth companies list mainly because they were funded by US private equity. You know one of these companies you might have heard of, TikTok, you know, funded by ByteDance, is funded by US private equity. But a lot of those companies listed in Hong Kong and, and the US so their US private equity could get a Hong Kong dollar denominated exit strategy. So, so a lot of the growth names are actually in Hong Kong.
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C
How are these companies doing? Like let's talk about, I'll use one example because I'm not familiar with this company, Meituan, I don't know if I said that right. What is this company? How are they doing? It's a 7 1/2% ish weight in the, in the fund.
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D
Yeah, so. So Metawan, you know, this is where.
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C
Not even close. That was close enough. I mean you said Archegos so I think we're fair. Yeah, yeah.
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D
I listen people say like, you know, I say I'm still working on my first language. It's just the struggle is real. This is a restaurant delivery company. Dominant, dominant market share. JD decided to enter into that space and they've destroyed their bottom lines. They, you know, you basically can order restaurant delivery for free in China today because these two companies are just battling it out for market share and it's really, really hurt their bottom line. Their net income and earnings per share growth has just been wiped out. And that's weighed a little bit on Alibaba. They have a restaurant delivery unit. That's where we've actually, you know, we favor some of the other parts of, of the portfolio today.
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C
How is the Chinese consumer and like these tech names, are they, how reliant are they on enterprise deals versus the health of the consumer?
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D
It's more the latter. I mean, it's very much, you know, 25% of all retail sales is online. Online retail sales is up 9% through November, year over year. So that's versus about, you know, 4%. So it's actually, it's the consumer. The consumer in China is very wealthy. It just, they're being very conservative because real estate accounted for two thirds of their portfolio and, and that just really, really came down. So the households have been hoarding cash as opposed to spending it. And that's what why you read so much about, you know, the Chinese consumer isn't consuming. It's not that they don't have money or they don't have a job. It's just there they've taken a such a hit on their portfolio because of the decline in real estate prices.
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A
So you have, I don't know, if you look at the top five or six names here, you have something like 30 to 40% in those top names. Is that pretty standard for the fund to have that level of concentration?
- [24:43]
D
It has been part of that is, you know, simply the big companies like A Tencent and Alibaba are just, you know, worth so much more than some of the other players in the space. So it's not, it's not been unusual. It's. What's kind of been interesting is some of the companies that have been our best performers, online video companies, these are kind of competitors to TikTok in China. Billy, Billy and Kashu have done very well. You know, Trip.com is like their online travel as. As had, you know, has done pretty well. So it's, it's been an inner, you know, 10 cent, you know, it's the Facebook of China, but also, you know, one of the largest gaming companies globally. You know, they own Clash of Clans and Fortnite. They've done well. So it's, you know, that, that's where the, what kind of, what the fund does for you is. It's, it's actually, you know, held a diversified basket and, you know, it's been a diverse Group of winners over the last two, three years.
- [25:47]
C
So I mentioned earlier that the assets in the fund are at an all time high. When you talk to investors, are you sensing their tone is different? Like is this just a consolidation that there's not a ton of other vehicles to invest in or are they like excited?
- [26:02]
D
In the US you say China, people throw stuff at you. Going to Europe, there's a lot of money in motion. You know there's a large part of the world is geared economically to China. So if you think about BHP is the largest company in Australia. So Australian, you know, institutions, they have these, you know, super annuities, you know those Australian super. They don't get their China news from the Wall Street Journal or Bloomberg or you know, they, they get it from listening to BHP on a quarterly basis. And what's BHP saying about China? Things are going well. And in Brazil, you know, Vale, you know, is the second largest company, you know, Rio Tinto, Anglo American, Southern Copper, sqm, Glencore. Right. Like you know, a lot of these non US institutions, their economies are geared, you know, same in Asia obviously ASEAN is China's biggest trade partner. So, so you know, that's where you know we spend a lot of time outside of the US meeting with our very global and very institutional client base. They're not deterred by a geopolitical narrative and I think, I think that is a big issue for U S institutions.
- [27:21]
A
So we're in outlook season now. If you had to give us the 2026 outlook for investing in China, like what are the, what's the glass cell full version of that? What are you bullish on?
- [27:31]
D
I mean I think we're bullish on U S China relations under President Trump that him going to China, taking this trade truce and making it into a broader trade deal will allow for a re rating of Chinese equities. We don't, we don't, we think our view is like uber optimists. The market is not pricing in that outcome and I'd argue there's signs of that. But then obviously We've got this 15th Five Year Plan very focused on domestic consumption and then they've also been focused on actually addressing over capacity overproduction in things like solar, auto steel, cement, aluminum and, and I think, I think if that, that anti, they call it anti involution that could actually make a lot of these Chinese companies much more profitable for their shareholders. So, so there's obviously risks to all of you know, there's obviously risks that you know, Trump could choke on a kung Pao chicken or, you know, like, u. S. China relations could go off the rails. But I think there's a whole wealth of investors are, you know, that don't really care about that. It's. It's a US Centric issue.
- [28:41]
C
All right, bear case. Like, what? Or what are the bears still saying about it? Is it just that why would there be a rerating? There needs to be a catalyst. It's not just going to happen. Like, is that the bear case or is there something else?
- [28:51]
D
You know, at some point, you know, some of these narratives, like, you know, when do you kind of call bs, you know, oh, the. You know, China's economy is about to collapse or they're about to invade Taiwan. I'm like, it's been 76 years since Shanghai Sheik went to Taiwan. You know, 76 times. 365 is 27,740. So if I told you there's the probability event that is 0 for 27,740 and I said, what do you think it's going to be tomorrow? You'd say zero. But I say that, oh, no, I'm talking about China and Taiwan. You'd say, oh, it's at least 50. 50. So. So at some point, some of these narratives, like, maybe we shouldn't believe them, you know, maybe. Maybe we should go to China, you know, and see it for ourselves or, you know, read it. You know, Dan. Dan Wang's book is great, but, you know, I thought Bill Gurley. I don't know if you've listened to the BG Squared podcast. Bill Gurley and Brad Gerstner.
- [29:50]
A
Yeah.
- [29:51]
D
You know, Bill Gurley went to China after Thomas Friedman from the New York Times went. So there's a little bit of, like, I don't know, maybe this narrative that Bloomberg and the Wall Street Journal, maybe that's false. Maybe that's not true.
- [30:07]
A
By the way, that was the most impressive math ever done on this show. That was well done. 27. What? Yeah.
- [30:12]
C
Nah, you know what? No offense, Brendan. I feel like you've used that before.
- [30:16]
D
Just once or twice.
- [30:17]
A
I thought you just did it off the top.
- [30:18]
D
Never really confused with Rain Man.
- [30:22]
A
That was impressive. All right. If people want to learn more and check out your research, learn about Kweb, the other, the humanoid etf. Where do we send them?
- [30:30]
C
Clip. Can't forget clip.
- [30:32]
A
Yep, clip.
- [30:32]
D
I mean, that's the call. Writing. I mean, you know. Yeah, we got like, these are like my kids. I love them all. But yeah, just craneshares.com and then, yeah, I write a daily research blog called China last night.com where the idea is to tell people what I think is the most important thing that actually happened in China. And so obviously you don't need to read it every day, you know, but, but you know, you wake up and there'll be some crazy headline and we try to take a data driven perspective on some of these issues.
- [31:05]
C
Brandon, can I give you an idea? What if we did what if on Friday you did China last week to give yourself a break?
- [31:11]
D
Well, you can subscribe for a weekly. You can actually subscribe for the weekly, Michael, so you don't have to do the daily signup.
- [31:18]
C
All right, Brandon, it's always great to see you. Appreciate you coming on and we'll talk to you soon.
- [31:22]
D
Thank you so much. Thank you, Michael. Thank you, Ben.
- [31:25]
A
Okay, thank you to Brennan. Remember, check out, if you go to craneshares.com you can check out China Last Night and sign up for the newsletter there. Craneshares.com to learn more about their ETFs, email us animalspiritscompoundnews.com.