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- [00:00]
Michael Batnick
Today's Animal Spirits Talk youk Book is brought to you by Crane shares. Go to kraenchairs.com to learn more about their whole suite of products, including K Web, that we're going to be talking about today. That's craneshares.com for more.
- [00:14]
Ben Carlson
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnick 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 Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:44]
Brendan Ahern
Welcome to Animal Spirits with Michael and Ben. Last time Brendan joined us was the end of 2024, and I don't know if he was despondent or if I'm just making that up. I can't quite remember. But the average American investor had absolutely thrown the towel on international stocks. We were like, literally, what would have to happen? What would have to happen for international stocks to outperform? And sometimes that's the way it goes.
- [01:09]
Michael Batnick
Yes. No one predicted trade war and following dollar and all this other stuff. Deep seek. Yeah. And people were negative on China, too. Now I've seen the sentiment totally swing in the other direction of. Wait a minute. Derek Thompson had a podcast asking the question, could this be the Chinese century? And it's totally, it's, it's totally flipped. So we got into all really great stuff with Brendan from Kraneshares Micro iMacro.
- [01:34]
Brendan Ahern
Would you say we, we, we zoomed in and we zoomed out.
- [01:36]
Michael Batnick
Yes. Yes. You really wanted to know, are earnings driving these Chinese tech stocks or is it sentiment or. Which is a legitimate question. So we talked about the trade war and the technology space in China and all this other good stuff. And Brendan's always great for this stuff from Crane shares. So here's our conversation with Brendan Ahern, CIO at CraneShares.
- [02:00]
Brendan Ahern
Brendan, welcome back to the show.
- [02:01]
It's great to reconnect.
- [02:02]
Michael, okay, we had you back on in December 2024. The world looks a little bit different today than it did back then. I think maybe there was, was there was tariffs in the air. There must have been, must have been. But not, you know, certainly more than we expected.
- [02:19]
Michael Batnick
Maybe.
- [02:19]
Brendan Ahern
Let's start with this rewind to Trump presidency 1.0 his first term. How did Chinese stocks do during the first Trump administration?
- [02:31]
Shockingly well, I think I Think a you had, you had volatility because you'd have these kind of tweet bombs that would come out. But, but for us with K Web actually that period, 2016 up through 2020 was one of the great time periods for performance for KWEB and Chinese equities. And that was under the art of the deal. Right. Despite all the trade war, tech war actually performed really well.
- [03:04]
Michael Batnick
So when we talked in December, I remember we were kind of grasping for what could cause international stocks to outperform. Like it was hard to come up with a good idea at that point.
- [03:16]
Brendan Ahern
Sentiment was on, that was on the mat.
- [03:18]
Michael Batnick
It was, I said it was the, it was the lowest sentiment I had seen in my 20 years of investing for international stocks. Everyone hated them. And now things have shifted. The dollar is down. International stocks are doing well. The trade war has seemingly benefited international stocks way more than the U.S. do you think that this has legs or is it too hard to tell at this point?
- [03:41]
Brendan Ahern
I, I think, I don't think this is the end of American exceptionalism. I don't think it's the end of US equities, but I'm more talking about the cycle.
- [03:51]
Michael Batnick
I agree like that, that stuff, let's put that aside and yeah, debate the Roman Empire stuff later. But for now, like is this has enough change that you can see that like oh actually you know what? This, this change has, is better for ex US than things were before. Just a few months ago, I think.
- [04:07]
Brendan Ahern
You, as we saw in Canada where you know, Pierre, the leading candidate ends up losing to Carney because of national pride. And it's about to happen again in Australia. I was in Europe last week and there is a lot of national pride is back and there's about 17 trillion of foreign assets, foreign ownership of US stocks and that some element of that is going to come back to local markets. If it's Europe, if it's Asia, and then I think later on when the Fed does cut and the dollar declines because of just interest rate differentials, it'll give these non US equities a little bit of a further tailwind. So yeah, I think, you know, diversification is great. Again, I don't think it's some black and white situation. I think both markets in general can do well. But I think some of it will come back and some of that's for national pride. Some of it's from valuations and just opportunity.
- [05:21]
All right, let me ask you a basic dumb question. What drives the price of, of Chinese Internet stocks? And the reason why I asked that is because I think maybe we take for granted that here in the United States there's a confluence of factors, but ultimately earnings are what drive stocks over any meaningful period of time. A stock is a, is a share in a business and if the business is doing well, the price will reflect that. Does the same hold true in Chinese stocks? And if not, what is, what does drive performance?
- [05:56]
I think in the short term you, you have media driven headlines, particularly for the names that are listed here in the US A lot of that's geopolitical and, and that's why actually we, we're seeing the Hong Kong lines, arguably intraday do better that you take the same piece of news and you give it to an investor in, in Asia on say, about Alibaba, their reaction versus you give that same piece of information to a US Investors about Alibaba, that's probably just less enthusiastic. Which is, which is why we've kind of, you know, why we've migrated a lot of our exposures out of the US Names into the Hong Kong lines is we actually think they'll, they'll actually perform better. I mean, there's fungibility. So. Right. Like some, not like the two are totally disconnected. It just intraday, given the same piece of information, the investors in Asia are more positive. And then the media narrative in the US Is always so negative on China versus what people outside of the US consume, I think is, you know, maybe more balanced or at a minimum less negative.
- [07:19]
All right, but you're, you're, I get it. You're talking on a very short term though. Does, do these companies benefit from the growth of the businesses or not?
- [07:31]
Oh, they, they certainly do. But if, if you have a lack of ownership, so, so Alibaba, just as an example, is like basically no debt, but they do have a US dollar bond. And how is it that the bond has outperformed the stock by like 60% over the last four years?
- [07:54]
Say that one more time.
- [07:55]
Alibaba's US dollar bond has outperformed Alibaba's stock by like 60%.
- [08:02]
Michael Batnick
Whoa.
- [08:02]
Brendan Ahern
Okay.
- [08:03]
Michael Batnick
Why Wait, So how much of that is currency?
- [08:06]
Brendan Ahern
No, it's a US dollar currency.
- [08:08]
Michael Batnick
Oh, duh.
- [08:09]
Brendan Ahern
Oh yeah, it's a US dollar. It's a fixed income. Investor gets out their 12C calculator and says, does Alibaba generate enough cash flow to pay back coupons and principle. And the answer is yes. I mean, they've got like 60 billion in cash. Unequivocally, yes. A stock investor. Sediment matters. And that's where I think this geo, There's a geopolitical narrative about China that is really negative. You know, if you get your news from Bloomberg or the Wall Street Journal or the Financial Times, the news on China is always negative. I mean, I mean it just, it's always negative and.
- [08:52]
But is it, is it, how much of it is deserved?
- [08:56]
Well, I would, I would, I would preface some of what's happened is deserved that, that arguably you've had a number of policy errors from the Chinese government and there's a rationale for why they made these decisions. Internet regulation, zero COVID policy. That's what's happening in terms of real estate, which is the real issue in China today is the decline in real estate prices and the knock on effects on consumer confidence and domestic consumption. Those were policy errors and you're seeing a pivot to rectify them. And so some of it is the derating because of the, these growth stocks stopped growing as quickly. And so some of that's just been that rerating effect. And our belief is these stocks are just really, really cheap. You've got the second largest economy in the world, stimulating ownership levels are non existent relative in the U.S. not so much outside of the U.S. and then we think the fundamentals of the underlying companies are actually going to improve.
- [10:13]
Michael Batnick
So I agree with you on the idea that the financial media is generally negative about China. But one of the surprising things to me about the trade war is I think that sentiment has kind of shifted in this way. I think a lot of people say if there's going to be a steering contest, China has the ability to wait this out much longer than we do because the way that their system is set up, their government can essentially force the pain, I guess on consumers and businesses much more easily than we can here. And a lot of people seem to think that, well actually China is way more important to us than we are to them. Do you agree with that sentiment?
- [10:47]
Brendan Ahern
Yeah, I mean, I think that there's been a sea change over the last three, four months from the Wall Street Journal, you know where they've been interviewing the CEO of Flexport, this logistics company. And yes, you know, they're, they're speaking about and obviously even President Trump, he meets with Tim Cook and you have an exemption on electronics. You had the CEOs of Walmart, Target and Home Depot meet with President Trump and lo and behold, Bessant and the U.S. trade Representative are going to Switzerland to meet with their Chinese equivalent. And I think just to your point, Ben, you know, China is far less geared to the U.S. economy or to the, you know, for the U.S. than I think people in D.C. really thought. I mean that's why they've not bowed at the knee because they're like you're, you're more exposed with two thirds of your economy geared to consumption. And yeah, I mean, you know, the Port of Seattle, it's empty, there's no boats. And in early June, the tariff run up, you know, the, the front running of tariffs, those inventories run out and, and, and that, that becomes a very big problem for the US consumer for the shelves. And. Yeah, I mean it's, yeah. So I agree. I think there's been a turning and I think that's why the two sides, hopefully for both of them, you know, are able to find, you know, to do a deal, you know, start with something small and you know, build some momentum there.
- [12:32]
You mentioned that everything China hinges on their real estate. And there was obviously an over abundance of construction, supply and it crashed. Crushed sentiment. Where are we? Where or where are they? I should say in the process, you.
- [12:55]
Know, for real estate, it's location, location, location. So you're seeing the, the tier one cities, the rich cities, you know, Beijing, Shanghai, Shenzhen, Guang. You know, those cities are recovering, the lower tier cities. It's still a very, very bad, you know, tough situation. And, and you know, we in the US our retirement savings are in the stock market in China, it's in real estate. And so you've had a 50, 60% drawdown in your 401k or IRA. It really affects your consumption and that's what's happened in these lower tier cities. And it explains why in September you had this big movement from the government and they continue to add to policy support to the real estate sector. And you know, it's, it's slowly coming back, but it'll take time.
- [13:54]
Michael Batnick
The other, I think the other big sea change in the sentiment towards China has been, I think for a number of years most people just assumed, well, China is just kind of stealing all of our IP and technology and they're not really creating anything themselves and they're, it's just we, we innovate here and then they steal it. But now I feel like the deep seq thing really was kind of a shadow cross the bottle for a lot of people. And then the other thing is people are just looking at like, oh my gosh, if you just look at all the infrastructure and everything that China builds, it just, it seems like they're living in the future in ways that, that we just aren't I think that's another way that people have kind of changed their tune. So in this tech arms race, like where would you pit things in terms of the technology sector in the US versus China? And I guess that can be either the biggest stocks or just, just sort of overall how we want to take that.
- [14:41]
Brendan Ahern
I mean, Deep Seek forces you to do the valuation comparison of your stocks trading at 40 times sales versus something trading 14 times next year's earnings. And I think the Deep Seek puts a little crack in that huge valuation premium on US tech versus China tech. But I think definitely 16 years ago, these companies were counterfeiters, espionage. But that's. They've moved way beyond that. And you know what's coming in terms of flying droid, flying drones, autonomous vehicles, the robot thing is a real thing. And just the quality of their electric vehicles and the breadth of brands, the choice that they have in terms of not just EV hybrid gets kind of lost. They're arguably a lot further along than we are. And. But, but I like to think it doesn't have to be a war. It doesn't have to be, I win, you lose. And I think that can be maybe part of the, the art of the deal is, you know, can you bring a company like Catl, their big battery maker, who had said they were willing to build a factory in Michigan and Biden said no, and, and you know, could that be part of a deal? And I think that's part of big picture. You step back. The one US investor that loves KWEB and China Tech stocks or technical analysts who are like higher highs and higher lows is an uptrend and yeah, there's volume along with it.
- [16:28]
Michael Batnick
Michael's pulling up the chart right now. I can see him.
- [16:30]
Brendan Ahern
No, I already had it up. I already had it up.
- [16:32]
Michael Batnick
So when are we gonna get like the. Is there ever gonna be a deal to. Cause I keep seeing people say, like, listen, I've toured the BYD cars before and they're am. They're very affordable. Why wouldn't we want to bring cheap electric vehicles here? And obviously the. It's. It's a political thing. It's like, we don't want China to take over. Like, can you see a company like that ever being able to sell cars here? Is it just never going to happen?
- [16:53]
Brendan Ahern
I mean, the little secret is that BYD makes bus electric vehicle buses in, in California. They have a plan outside of Sacramento. They don't really publicize it, but they did. They did a deal with the state of California to supply buses, EV Buses. So, so it shows that they. You can do it. You know, they can hire Americans. And we've allowed the South Koreans and the Japanese and Fiat and others to come. So why, why not do this? You know, why not do the same, you know, or at a minimum, allow them to do a JV with Ford and General Motors.
- [17:29]
Michael Batnick
Right.
- [17:30]
Brendan Ahern
You know, I mean, yeah, I mean, we actually are invested in a. A Chinese solar company that they want to build solar panels here in the US and they've, you know, started down the path of, of buying property and they're going to, they want to manufacture here. You know, they. They want to get their stuff to their best customer, which is us. And, and that's, that's something that they've moved to Mexico. Like other South Korean and Japanese automakers, you know, it's like Canada, you know, Canada doesn't make cars. GM and Ford make cars in Canada. Why, why can't. Why not let the Chinese do it?
- [18:12]
Brendan, one of the interesting things, interesting things about KWEB is, and I'm sure part of you likes this, part of you doesn't like this, is that it's on the list of ETFs, the top ETFs of dollar losses, which is an unusual and interesting list to be on because it shows that there's been a lot of money coming in, despite the fact that it has been a rough and volatile investment, which, again, I'm sure there's parts of it that you like. I'm sure there's parts that you don't like. Like, I obviously don't like people losing money, but you love the fact that there's still a lot of confidence behind that. How does that make you feel? I want to put words in your mouth.
- [18:50]
I mean, I mean, one, I think, you know, people have found stock picking in the space really, really tough. And, you know, so I think some of that movement is money coming out of people saying, wow, like, trying to pick the names is really hard. So I'm just going to buy the beta. But, but I think, unfortunately, you know, when you get the green light of, like, oh, the coasts are clear, that's where the money has come in. Historically. It's interesting. I mean, you know, God's honest. True. I met, you know, I was with an institutional investor yesterday was like, listen, I have a constant position in K Web. And that way, when KWEB goes on these runs, like we saw in January coming out of January of 2024, in September and October of 2024, and more recently, January of 2025. Because I have a position. When Kweb goes up, I trim it. And then when you get this pullback, you know, I'll add to it. And he's like, literally like, I've got the same position size. I just, you know, and he's like, I'm simply buying low and selling high through actively rebalancing. And, and that, that is the argument we, you know, we continue to try to make with him as, instead of waiting for some green light of like, oh, the coast is clear, like when, when it, when everything says it's time to buy, that's probably when you want to be lightening up and. Yeah, yeah, I mean, I think, you know, we can't control when people buy and sell our ETFs and you know. Yeah, they kind of wish, you know, people would buy more on weakness than buying on strength.
- [20:33]
Well, you're never going to fix that. Unfortunately, there's a lot hardwired into our DNA.
- [20:40]
Exactly. Behavioral finance.
- [20:42]
Michael Batnick
My other question about like the Chinese consumer, I guess is you mentioned that like stocks and bonds and investing here is just so much more of a big deal and consuming is more of a big deal. What would it take to get Chinese consumers to just spend more on retail and then get more involved in the stock market? Because you mentioned like the idea of international investors. You know, they've been pouring a lot of money into here in recent years and that's one of the reasons US stocks have done so well. So if they start to pull out and invest more in their home country, like is it a cultural thing? What is it, what would it take to get the consumer there to be more involved in the market and spend more money and consume like we do?
- [21:19]
Brendan Ahern
Yeah, I mean, I mean, you know, the Chinese government is not socialist. You know, they don't have the social safety net like we enjoy. So you know, they have de minimis unemployment, de minimis healthcare coverage, de minimis Social Security. And so you save out of necessity because you're responsible for your well being. And then culturally you're not shipping grandma and grandpa off to the old folks home. You're responsible for your family. And so you save a lot because you have these obligations for yourself and your family. And then I think it's something that, you know, I've experienced. My father was born in the late 1920s and so he grew up in the Great Depression in World War II. And he was, you know, he was this uber saver. He got married later in life. So my mom is a baby boomer. And you know, she's experienced nothing but great times, you know, economically her whole life. So it's like, oh, you know, you can spend and you know, that's a little bit of. In China you have, your grandparents are people who experienced the great plea forward and experienced extreme poverty. And you're not even a full generation removed from, from that experience. Like something that I experienced which was don't spend money, don't take out loans, just save and invest. And you know, I think that's an element as well. But it is also one thing Trump and, and Xi agree on, which is they do want to raise domestic consumption and it's, you know, Trump wants it so that they buy more of our stuff. And China, they want to be less reliant on export driven manufacturing, which is down to less than 20% of GDP. It was like 36% in 2009. So, so it's maybe an area that when the sides meet that they can, you know, have some mutual agreement.
- [23:24]
How is the Chinese economy doing? I know there's like really, I think Vanguard did a piece about this. The stock market is not. The economy is really, really true in China. There could be a giant disconnect. So maybe not super relevant for kweb, but just curious, how is the Chinese economy doing?
- [23:40]
Well, no, I mean, I mean, you know, I mean just to answer your question, but you know, yeah, we would argue KWEB is the transmission vehicle for domestic consumption in China. Right. That the, there's underlying companies e Commerce benefit from. So that's part of why we're, you know, we're constructive. I mean obviously we're, we have our bias, but.
- [24:02]
But you're constructive on kweb.
- [24:04]
Yeah, exactly. Yes. You know, highly biased and, and self serving. But you know, I think, I think the economy, you know, in your head you'd think, you know, buildings are on fire, you know, it's. And that, I mean when I was there in January, I'm going back very soon. It's just not, it's just not, it's not at all. I mean, and yeah, I mean there's a bias. I'm going to rich cities, you know, Hong Kong, Shanghai. But it's just, it's literally, it's not, it's not, you know, it's so they're chugging along. It's just, you know, consumer confidence is low because of this downdraft and you know, that's slowly improving.
- [24:44]
Michael Batnick
What is their sentiment that you get from, from your contacts and being over there? What is their sentiment of the, of the trade war? Are they Kind of thinking like why are we doing this? Or are they nervous and anxious about it? Are they feeling like what is the sentiment in China from that perspective?
- [24:59]
Brendan Ahern
I mean, I think the Chinese government is playing tough because they've done the math and that, that they know we're more reliant on them than the other way around. And, but, but it will certainly affect, there are, you know, geographical areas that are very much dependent upon export driven manufacturing. Those geographical areas will suffer. You know, they have this kind of Christmas town, Christmas tree lights, Christmas ornament town, you know, city and that, that will shut down because you know, the tariffs will just make it, you know, uneconomical. But a lot of China is not geared that way and it'll be just fine. So I think there's more of it's what tariffs are irrational. And that's where unfortunately this is the most expensive history lesson and Economics 101 lesson ever given. Because if you just studied history, be like, oh wow, Smoot Hawley, Great Depression, you know, if you studied economics, you know, they call them economic laws, you know, comparative advantage. And so that's where it's really, you know, I think it's, you know, I mean, I think it's really unfortunate that you're willing to play kind of Russian roulette with American investors savings to try to drive this issue. I mean it's, it makes no sense to me and I think that's the view in China. And I mean I was recently in Europe and, and you know, people were just, you know, we've been your allies, we've been your friend and you're, you're giving us the middle finger. Like, like, you know, how, how can we who are poor and you know, buy as much from you, from us? Like, you know, it's just, it just, it just doesn't make any sense. And in Europe people were, you know, it was a big topic of discussion.
- [27:07]
Let's, let's end with this. We mentioned Deep Seek earlier a bit. What, how does the semiconductor chip war, all that stuff factor into the future of Chinese Internet stocks?
- [27:20]
I mean they've, they've had to deal with the Biden export controls. You know, there was clearly a lot of inventory front running. But you know, I think a lot of, a lot of those banned ships, they end up going through other countries and making their way. But, but it's, it's forced local companies to step up their game and that, that isn't going to happen overnight. But you know, Deep Seek, you know, if you believe their claims they were able just to use more chips, you know, cobble Instead of using one Nvidia, use 10 Huawei chips and the computing power works out.
- [28:07]
Michael Batnick
Okay, so let's put you on the spot here. Does the trade war help or hurt these Chinese tech companies or is it is it doesn't really matter at all. Where do you stand?
- [28:16]
Brendan Ahern
I mean for US Investors, it's career risk, as in, you know, for instance, for professional investors to buy something with China in the name. And I think that's where that is not true. Out of outside of the US which is why I spend so much time in Asia, in the Middle east, in Europe. I'm going to places where institutional investors are not beholden to this media narrative or the geopolitical. And a lot of parts of this world are much more geared to the Chinese economy than to the US Economy. And any commodity prison country cares a lot more about China than the United States. And those investors welcome back and arguably are coming back. But I think the one US Investor that is involved, besides the technical analysts, are the hedge funds that a lot of prominent US Hedge fund managers said. And why? Because they can hedge, they can trade. And so I think these, you know, these big swings in volatility in Kweb, you can do what this one, you know, professional investor is doing, which is just a small piece of his portfolio. He's letting it ride up and down and you know. But others, you know, we did do this call writing fund off K web called Clip Calip Yeah Caleb. Well, that's where somebody like the Queb. I'm like what? The Queb. And they're like kweb. I'm like kweb. And they're like yeah, the Queb. I'm like, what? So Calip I've not heard that Michael, but like we're just going to write calls to monetize that. Or we got KMQ where I'm like hide the China, right? KMQ is the EM version of K Web and it includes the K Web companies, but includes Mercado Libre and other non US companies in that space. And you can hide the China and get the exposure. And yeah, it's again, I don't think the volatility will go away because of this geopolitical where it's really tough to have that China line item. You know, people throw stuff at you but but you can take advantage of it. And I think for those that, you know, I always say it's the Danny Kahneman Are you thinking fast or you thinking slow? If you'd spend the Time and think slow. There's a lot of, a lot of, lot of really good opportunities there.
- [30:37]
Michael Batnick
But even if, like I always think that the, the narrative is usually if the dollar is weak and that's what it seems like they're trying to do, whether they mean it or not, that's typically good for emerging markets. Right? A lower dollar is, tends to be good for emerging markets, I think.
- [30:52]
Brendan Ahern
Yeah, I mean, I think, you know, the Fed, you know, just, just pause but, but you know, you're probably going to have, you know, interest rate cuts later, later this year. Interest rate differentials determine effects and that will weaken the dollar, which makes this huge tailwind helping US Stocks just being dollar denominated becomes a headwind for these foreign investors and certainly a lot of US multinationals, their foreign sales. Right. So anyway, yeah, I'm in your camp. I think the dollar declined. It's come back a bit, you know, later on this year. I think it rolls over as well as just, you know, if you have, you know, from just being in D.C. you know, there are no fiscal conservatives in that zip code, you know, it's, it's a bipartisan spending binge, you know, you know, you know, you know, whatever effect Doge has, you know, the, the, you know, a lot of this budget spending is simply on rails and the probability, I put the probability that the budget deficit gets bigger at 100% this year, next year, until you have some sort of existential crisis. And that will make people increasingly wary over time, I believe.
- [32:20]
Brendan, for people that want to learn more about the lip and the web, where do we send them?
- [32:26]
Craneshares.com Appreciate it.
- [32:28]
Brendan, always great seeing you.
- [32:29]
Yeah, likewise Michael. And great to see you as well. Ben. Thank you again for the opportunity.
- [32:34]
Thank you to Brendan. Thank you to Crane shares. If you want to follow more of Brendan's work, go to chinalastnight.com he writes a daily blog, updates you on all the macro and the micros going on across the globe. Email us at animal spirits the compoundnews.com thank you for listening. We'll see you next time.