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The Global Regime Change | Jason Hsu on AI, Factor Investing and What Investors Miss About China
01:03:04
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- [00:00]
Jason Hsu
China has become the world's factory. In fact, it may be the world's only factory. Everyone else is sort of, you know, much smaller by an order or two. The Chinese government probably is the largest you know, LPGP in sort of private equity and VC funds. And these VC funds are all very, very, you know, IR driven. They're trying to maximize return to shareholders. And so they, they drive a hard bargain, they drive a hard deal with entrepreneurs in China. You kind of go there, it's like, wow, they got tens of brands, they compete fiercely. It's cheap, it's, it's effective. They got, you know, better in Tesla quality at a third of Tesla price. You know, that doesn't come from just state subsidy and state intervention. That can only come from fierce profit driven competition. I think what we've seen from Deep seat, right, they just have a, you know, like it cost them 1/20 of money to get 80% of the way in training in AI. That's the kind of innovation that happens when you don't have enough money. And I think we'll continue to see that coming out of China.
- [01:02]
Jack
Jason, welcome back to Excess returns.
- [01:04]
Jason Hsu
Jack, glad to be back.
- [01:05]
Jack
I'm really excited today because we're going to talk about a wide range of topics. We're going to talk about China and China is really interesting right now in terms of what's going on geopolitically, but also what's going on in terms of AI. We're going to talk about factor investing and you've got some exciting new stuff we're going to talk about as we get towards the end.
- [01:19]
Jason Hsu
But before we get started, just to
- [01:20]
Jack
give viewers some background on you, you are a co founder of Research Affiliates with Rob Arnott and you're currently the founder and chairman of Rayliant Global Advisors and you've also got an exciting partnership with SAL Management that you just launched that we're going to talk about as we get into the podcast. I guess we could call you an OG of Factor Investing.
- [01:33]
Jason Hsu
I think that would be fair. I still like it.
- [01:38]
Jack
Yeah. And I'm excited to talk about that too because there's so much changing in the factory world right now with AI. So we'll get into that. Stay with us and we'll get into that towards the end. But I want to start with China and as this US investor, like, I don't feel, I feel like I'm like many US investors in that I don't completely understand what's going on in China and I think there's so Many misconceptions about China out there. And so I want to start with that, like someone like me, like a typical US Investor, what do you think the biggest thing they get wrong is about China and its economy?
- [02:06]
Jason Hsu
Yeah, I think the biggest thing we get wrong at the highest level is we make it into a bit of a, you know, values, a judgment player. And it's like, okay, you know, US represents the light, China represent the dark. Or we want to think of China as the old Soviet bloc. It's corrupt and a monolithic, and it's just sort of state central planning. And from that kind of judgment perspective, right, it's easy to discount them. It's easy to sort of celebrate everything that goes wrong. But China is much more complex than that. And I think if you look at Chinese companies, the Chinese economy, Chinese consumers, right, you start to realize that it is not one monolithic thing, right? There's a lot of things that, you know, the, the, the state does wrong, but it doesn't cascade into the business world. There are a lot of things that the business owners may do wrong, but doesn't. So casket everywhere they got superb workers. You know, they, they got, you know, you know, just, just really creative entrepreneurs. And so once you realize that, you know, when you're looking at companies, when you look at economy, right, just a lot of good players, hard working entrepreneurs come into play. You start to have a more balanced perspective. And I think that's what's lacking, right? More balanced perspective to want to understand more of the people, the entrepreneur, the workers, the consumers. With that balanced perspective, I think you'll get a lot more out of the analysis.
- [03:28]
Jack
I think you made a good point, because we all get trapped with words and when we hear words like central planning, we assume a certain thing. But China does practice a form of capitalism, right?
- [03:38]
Jason Hsu
Absolutely. So if you think of the Communist Party, Communism is just the name of the party. It is not the economic model they practice, right? It may have been at some point in time, but they quickly learned that that was a bad model, right? So they quickly adopt what's worked for everyone, which is basically capitalism. US has been the greatest exporter, champion of capitalism. China's been probably one of the greatest students in that regard. So China's capitalism is, they're, they're fiercely protective of their domestic market. But you know, that's true for a lot of countries, right? US increasingly is very protective of our domestic market. But once they protect the domestic market, it's fierce internal competition, right? The kind of capitalism you see inside China People often say China is more capitalistic than the US and then I think there's a lot of truth to that. You know, doing business in China, you'll discover you're competing with lots and lots of companies who hire lots and lots of super hardworking, super smart workers. And, and workers are super competitive for the good jobs, the better jobs, for opportunities. And so it's fiercely competitive. And you know, what we know about the most important ingredients to drive innovation, to drive an economy forward is competition, right. If you have smart people competing against each other out of self interest, out of profit motive, you're going to have great innovations. You're going to have really hard working entrepreneurs, really hardworking workforce. And that's actually what China has, right? It's fiercely competitive entirely. Even if when you engage China as a, you know, nation versus nation, right. There's a lot of protectionism going on. But in Charlie, it's fierc competitive.
- [05:16]
Jack
How does the government play a role in that? Like how is it from the top down trying to cause that competition to exist?
- [05:23]
Jason Hsu
So you know, I, I was speaking with a very good friend who thought, oh, you know, Chinese government are actually directing how corporations operate, right. So they, they concede, okay, their companies in China, it's not just all central point from Beijing, but then they imagine, oh well, the, that, that you know, the, the bureaucrats, you know, Beijing must sort of get their tentacles into companies. That's not all true. You know, Beijing recognizes that it has no idea how to create AI, how to innovate, you know, how to create, you know, semiconductor chips. Right. So it depends on private enterprises and how entrepreneurs. So you know, Beijing might offer grants, right? Might offer so co investments. So in some ways, you know, the Beijing government is the biggest VC in China trying to take a, take a stake in sort of, you know, creative new business ideas. But largely it doesn't just let people to go to battle, right. It lets entrepreneurs who raise capital to go and innovate and fail when ideas don't pan out. So they come in more. Think of them as VC capital.
- [06:26]
Jack
Yeah, I think VC is an interesting analogy because the government is not picking winners, right. They're spreading capital across a bunch of companies, right. And then letting the companies compete with themselves. Like in a lot of ways it's probably more cutthroat than it is here
- [06:36]
Jason Hsu
in the U.S. yeah, you know, like in, if you think of like in the US we tend to have more of a grant money approach, right. You know, universities, companies, right. And they get large grants and those that are, you know, sort of, you know, more familiar with the grant process, have better lobbyists who could get big, large government subsidies. I think in, in, in China, right. It really is more of a VC approach. Right. Like, you know, the government has lots of funds, right? The government, the Chinese government probably is the largest, you know, LPGP in sort of private equity and VC funds. And these VC funds are all very, very, you know, IR driven. They're trying to maximize return to shareholders. And so they, they drive a hard bargain, they drive a hard deal with entrepreneurs making sure that, you know, they're, they're maximizing their chance of winning and they're certainly spreading their bets to ensure they, they, they, they will have a winner in, in, in their portfolio. So it is very cutthroat and, and in some ways, like you say, much more capitalistic.
- [07:35]
Jack
Is that how China's become so dominant in manufacturing? Like, I was reading an interesting article in the Wall Street Journal recently where the, the writer got a BYD car and they were just completely blown away by like how much better this car was, than our cars, but also like for the money, how much better it was. So like, is this, this whole system, is that how they're able to do that?
- [07:51]
Jason Hsu
Yeah. So I mean, you know, a lot of people, like sometimes you just look at the outcome and you know that your hypothesis must have been incorrect, right? We think of, you know, China as like, everything must be central planning. It's, it's Beijing intervention. If that was true, right. We should see what, we should see the same outcome as any economy that has sort of, you know, state owned enterprises are protected from competition. Right. You think of a lot of car makers in different countries, like their cars are horrible, right? They're expensive, they don't perform, they can't even compare against, you know, the worst of the American automakers. But in China, you kind of go there, it's like, wow, they got tens of brands, they compete fiercely, it's cheap, it's, it's effective. They got, you know, better in Tesla quality at a third of Tesla price. You know, that doesn't come from just state subsidy and state intervention. That can only come from fierce profit driven competition. And byd, right? BYD competes with a dozen other EV makers out there. It, it's fighting for market share, it's fighting for capital, it's fighting for, for, for consumer dollars. And it's in that sort of fierce competition that they've gotten so good.
- [08:58]
Jack
One of the things that many people argued when the whole terrorist situation happened was that the US Had a huge upper hand on China because of all the exports that go, that go to the US but you had written something back then and you would argue that's not the case. So. And I think that proved to be right. So can you explain why that is?
- [09:13]
Jason Hsu
So, you know, we, we Americans forget, you know, we say we have the biggest consumer economy, right? And consumers, in a way, sort of owns the manufacturers, right? That's kind of silly, right? If you think about it, right? Like every trade, there's a consumer, there's a producer who owns the upper hand, has to do with supply and demand. And this is why we don't like monopolies, right? If you have a monopoly, that means there's only one guy who's supplying something. And all the consumers have to sort of fight to get that supply, right? And so the fact that we say monopoly is bad for consumers tells you that there are situations where, where the manufacturers has the upper hand. So let's just think about that, right? China has become the world's factory. In fact, it may be the world's only factory. Everyone else is sort of, you know, much smaller by an order or two, right? One order magnitude or 2 smaller. And so in a way, like the entirety of China is a big monopoly when it comes to manufacturing, right? And then the rest of us are consumers sort of fighting to consume what they produce. Then you kind of say, well, if China was a manufacturer, how come, you know, goods prices coming out of China so dirt cheap? Well, that's only if you treat China as a whole, right? But when you look at China as hundreds, even thousands of factories are competing to sell to Americans, to Europeans, then, yes, that's why price is cheap. So if we want to go after one Chinese company, it's easy, right? You put tariff, you put some kind of special sanction against that company consumer, rotate away from their product, go to another Chinese company who will compete. But if you put tariff on the entirety of China, like on the thousands of factories in China, and all of a sudden, right, you're picking a fight with a monopoly, right? You force them to collectively act like a monopoly, and that's why you're unlikely to win that fight, right? US has become so dependent on Chinese manufacturing, and frankly, this is true for the entire world. And when you don't have a better alternative, when you can't go immediately to India and get your iPhones made for cheap at the same quality, then all of a sudden you come back and say, fine, you know, locking a tariff on you is just hurting ourselves. So it was obvious from the beginning, right? Like consumer does not always have the advantage. And certainly in this case against China, the entirety of China is a giant manufacturing monopoly.
- [11:27]
Jack
So when you think about how the tariffs played out from like liberation data now, I mean, did, did it play out pretty much as you would have expected it to?
- [11:32]
Jason Hsu
Yeah. But what you see is it, it, you know, China is the one that is the least affected by it. Right. You know, I think basic tariff has gone back to where it started. Other countries like, you know, South Korea, Japan, Taiwan, Vietnam, right. It's, it's more of our ally countries who end up being the, the, the sort of the biggest victim to, you know, for, you know, first like terror, volatility and ultimately higher terror.
- [11:57]
Jack
Right.
- [11:58]
Jason Hsu
Because they don't have the same negotiation power. And when they don't have negotiation power, they become a price taker. They simply have to accept the tariff that US slaps on them.
- [12:08]
Jack
When we last talked to you, it's been years since we've talked to you. China was in the midst of what was a bear market, which is a pretty significant bear market. And you were pretty constructive throughout that. And you've been proven right in terms of what's gone on in China since then. So what kept you constructive on China throughout that?
- [12:23]
Jason Hsu
I mean, I think it's no different than how Warren Buffett invests. Right. As long as, you know that something isn't going to go away, right. Then when prices fall, it becomes a good value buy. Right. I mean our relationship with China, you know, investors relationship with China is often, you know, a massive whipsaw. Right. Sometimes we're fully in love with China thinking China is about to overtake the US and then sometimes we get so pessimistic thinking, oh, you know, communist economy is going to fall apart. And the fact is, you know, China is somewhere in between. Right. There is, you know, the, the, the, the, you know, the, the totalitarian regime which have its natural sort of negative impact on the economy. But there's also the fiercely capitalistic competitive economy that has become the global monopoly in manufacturing. That is sort of the positive for it. And so, you know, China is gradually trending up with a lot of massive whipsaw for its market. I think when everyone gets so pessimistic, and I would say it's usually irrationally pessimistic, I'm a buyer and then people get irrationally optimistic, I become a seller.
- [13:27]
Jack
I'm wondering when the real estate crisis was going on in China. And it seems like the government sort of. And we had Louis Vincent Gava on recently and he was talking about this. It seemed like the government sort of intentionally made a shift there towards manufacturing or towards technology, towards all these things. I mean, do you think that's what happened? I mean, because we, it seemed like there was the potential for a major real estate crisis in China and then it didn't really play out that way.
- [13:49]
Jason Hsu
Okay, so the real estate crisis is, is fascinating, right? In some sense, right? The kind of a real estate dependent economy has been the bang of all Asian government's existence, right? This is not China. I mean it was the case for Japan. Korea had its own version, Thailand's own version. You look at Hong Kong, you know, forever one of the most miserable place because the, the cost of real estate is so high as a fraction of income, right? And China saw it, right? If they build an economy that's heavily dependent on real estate, what's going to create is more and more wealth, are going to concentrate into a non productive asset, right? Like imagine like if you store your wealth in a building or an empty, you know, apartments, right? It does not become capital for someone else to do something productive, right? It's one of the worst way to run your economy and Asia's plague with that, right? This is why Asia has such poor growth, despite how hard they work, how much they save. So China has solved that problem. They want to avoid the Japanese real estate bubble, you know, that happened to Taiwan and, and in South Korea. And so they have to prick the bubble, right? And Xi Jinping was kind of the unfortunate person, right? He has to prick the bubble. It was his turn, right? If he doesn't prick it, probably be much worse now containing it. You got to say, okay, they did a good enough job containing, right? If you're going to prick a bumble, you can't expect nothing bad to happen, right? Like you've sort of built up so much froth in the system, so much leverage, so pricking it is going to be painful, but it's the right thing to do. And they done a good enough job containing, so it didn't spread. And I guess they pricked it early enough so it's not so big a bubble that when you prick it, you know it was going to take down entire economy. But this pivot is the right one, right? You're forcing capital to go from something very unproductive, right? Just building buildings that are just store value, right? That's not actually productive into, you know, capital for AI, technology, capital for ev, so they make the right move. You, you can say maybe a little. They should have made it earlier, but certainly it's better know sooner and later.
- [15:42]
Jack
I want to shift AI. And before we talk about China and AI, I just want to talk about AI in general. I was, I was looking at your website, we prepped for this and you had given a lecture, I believe it's to the UK CFA society. And you had argued in that lecture that what globalization did to factories, AI is soon going to do to professional services. So can you talk about what you mean by that?
- [15:59]
Jason Hsu
Yeah. So the funny thing is, you know, like, of course, the AI technology is a foundational change in technology and there's so many things it's going to do that we can't even imagine today. But one thing is not different is its impact to the labor force. We've seen that movie before, right. When, when China joined wto and of course, even before that, when Japan, you know, brought its labor force online. Right. It took a lot of jobs away, but it brought a lot of prosperity. Why? Because global businesses can now go to Japan, later on to China to do things cheaper and over time to do things better and cheaper. Right. And that just increases profit, increase productivity, increases prosperity for everyone involved except those whose job went elsewhere. Right. Whose job got outsourced to, to Asia, got outsourced to China. Well, you know, AI is the same thing, Right. We are just finding a cheaper source of labor. Now it might be a, you know, a Elon Musk Optimus, you know, robot who's doing the job instead of a factory worker in China doing their job. And that robot will be doing, of course, high level professional service job, right? Yeah. I mean, a lot of us are going to be replaced by AI. I mean, we are already seeing lead law clerks, we're seeing accountants, we're seeing creative design agencies, all being replaced by AI or being replaced by people who use AI who can now do 20 people's job with one person. So it's coming and it's going to hit the professional services really, really hard.
- [17:35]
Jack
Do you have any thoughts on what that means overall, economically? On one hand, you have tech people who will say, we're going to go to a world of abundance here and this is going to be an incredibly positive thing. On the other side you talked about, it's going to replace jobs. So a lot of people are worried about are we going to have mass unemployment in the near term. Do you have any thoughts about the balance between those two?
- [17:51]
Jason Hsu
Absolutely. And again, Jack, like, the good news is, as Economist, we've seen this all before, right? Like you look at a statistic that people don't talk about a lot is the US labor non participation, right? It's not the unemployment, right? Because our unemployment is always about 4%. Right? Like you know, the government makes sure it stays somewhere around there. But labor unemployment went from under 20% to close to 30% over the last 30 years, right? As again China joined WTO, right? As more job got outsourced to Asia to China, more and more people simply become unable to join the workforce. It's not that they're lazy. Their skill set and the price that's necessary to survive in the US just does not allow them to enter the global workforce. What's going to happen is yes, great jobs are going to be created and some people are going to get those great jobs, but many more of us, probably myself included, when I, when I talk to an AI, I realize I'm dumber than an AI most of the time, right? More and more of us are going to not be qualified to hold a, a well paying job versus versus an AI. So I think our labor non participation is going to go from 30% probably to 40%. Right? And what that means is, look, the government is simply going to have to print more money and hire more of us to work at some equivalent of a dmv. I, that, that is just unavoidable.
- [19:14]
Jack
But how do you, how do you think that from your own personal perspective? Because you talked about, you're worried about yourself being disrupted. I'm worried about me being disrupted and I'm trying to think about like what I can do in my life to deal with that. Like one thing is I'm hosting a podcast. Although maybe eventually your AI will be talking to my AI and that'll be disrupted as well. But like, what are you thinking about as a person? Like, what are the things humans are going to be able to do better? Like, what are you focused on doing personally?
- [19:36]
Jason Hsu
Yeah, So I really do think that three things are going to be left over, right? We'll start with the easy one, like the protected class, right? And again, we've already had that. Athletes, entertainers, performers, they're the protected class, right? Because we like to see humans perform and do amazing things by human standards, right? We don't care about robots doing amazing things, right? Because robots, you know, have much higher standards than humans, right? We're not going to watch football played by a bunch of robots who can bench, you know, £2,000, right? And so they're going to be things that are only interesting when the humans do them. Right. And so that is a protected class. Maybe podcast hosts will be part of that.
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Jack
Right.
- [20:13]
Jason Hsu
And then there's the other one, again, fairly easy is someone who holds the legal liability of being sued, right? So I mean, an AI might be much better filing your taxes, but someone's got a sign that when something goes wrong, like you get sued and you go to jail, right? Same thing like, you know, if someone's going to have to be a lawyer, right. Even the documents are all drafted by, by, by an AI. But you know, ultimately, right, you know, there's a human being who has to hold the liability. And obviously the third thing would be there just some things where we require another human being on the other side. Right. We, we all know, like, there are a lot of brilliant doctors with horrible bedside manner and we don't actually want to see them. They don't actually drive patient outcome because they are unable to convince our human being to do the right things. Right. I think that's going to be the same thing with robot, right? Robot just lacking that warmth, lacking that human connection, oftentimes won't be able to get a human being to do something that he she needs to do. So I think things that really, truly require deep human connection, deep human understanding, that'll still be within kind of the realm of sort of so where human is required. But, you know, that doesn't leave a lot for the rest of us, especially people who are in the pure intellectual work. Yeah.
- [21:23]
Jack
My cousin is competing in the big air skiing in the Olympics right now. They're jumping and doing flips. And I'm like, he's probably pretty safe.
- [21:29]
Jason Hsu
Yes, robots may be able to do that, but we don't care, Right?
- [21:33]
Jack
Yeah, that's right. Yeah. People wouldn't want to watch robots do that. And I'm hoping that's the same thing with podcasts. I'm hoping people would rather hear me talk to you than hear my AI talk to your AI. How do you think about the positioning of China and the U.S. there's this perception out there that this is an existential battle between the two countries and that the winner, there's going to be massive, you know, gains to the winner relative to the other one. Like kind of like a winner take all type thing. Do you think that's the proper way to frame it?
- [21:57]
Jason Hsu
No. And, and, and only reason is even though it, it might from y look like, oh, it's a pissing match, right? Like, you know, US says, look, you know, Chinese Tech can't come to the US and China says no, US tech can't come to China. So like China won't buy Nvidia chips and US as like, you know, know Chinese technology like, like Tik Tok can't, can't come into the U.S. right? But that actually is going to be quite beneficial because what's happening is it's you know, last 30 years since the Internet, right? It is winner takes all, right? Like you, you have one search engine which is Google, right? It just, no other search engine sort of, you know, has a, has a place, right? And when it's winner takes all, right, the, the fight can be brutal and bloody. Now with US and China it is not winners take all because once they kind of carve up you know, the world in the G2 and US technology will service kind of us and us spheres of influence and China will service its own economy. You kind of have two innovation that competes fiercely within their own domain and they may find different way to train AI, they might find different ways to do the hardware and then they'll keep out stealing and imitating each other, but they can never cross over to the other guy's market, right? And that gives each competitive, big enough market share, enough resource to keep innovating. And I think that may not actually be a bad thing, right? Because if you think about it, right, like with the US Magnificent seven, right? Like you got the dominant, you know, OS and then business productivity in Microsoft, right? You got, you know, you got Amazon E Commerce, you got, you know, Apple on, on the phone side, right? Like you have these Monopoly and, and they, they could squash competition, right? Better ideas won't emerge because no one's big enough to compete against them. And same thing in China, right? You're going to have these, you know, incumbents, the Baidu's, the alibabas, the 10 cents. But fortunately they can now all imitate from, you know, their counterpart in the U.S. their counterpart in China. So there's still enough competition and enough sort of cross pollination which I think is, is healthy and good. So I actually quite like how things are going on right now.
- [24:03]
Jack
Yeah, I've always wondered whether the idea of keeping the best chips from China is good or bad. I don't know if I have the answer. I mean it's good in terms of slowing them down maybe in the short term, but does it give incentive to build this stuff on their own in the long term and they get there faster on their own. So I don't know if you have any Thoughts on that. But I've always thought about that.
- [24:19]
Jason Hsu
Yeah. And this kind of relates to the last point I just made. It is for sure short term painful. But like you say, Jack, it's long term good for China in the sense that, look, when China could just buy US chips just sort of easier, less risky and they find value add by doing other things, using a chip to train AI. But now someone in China has to go figure out, well, how do I design gpus or how do I do something smarter than gpu that's just for AI. And that innovation is going to come, right? Just imagine, look at Silicon Valley. Look at the hardware and software engineers in Silicon Valley. A good third of them, maybe half of them are Chinese, right? So like, you know, Chinese people throw enough money at them, enough time, they will come up with something, right? It's, you know, the same Chinese people just sort of, you know, one, one's in China and one's working in San Francisco. So they'll come out with a solution and it might be a different solution to something we haven't even thought of and then we can sort of, sort of learn and then kind of, you know, take that idea and use that to, to innovate and create something even better in the US So I would say long term it's actually good for China. It forces them to create that capability and so they're less dependent on the US Just like US is trying to take some manufacturing back sometimes so dependent on China. So it could be long term good for us, but it's actually long term good for everyone because competition is just long term good, right? Because the world, the right solution can't be only Nvidia knows how to make gpu, right? That cannot be a right solution, right? Like, you know, the history of human innovation is always looking lots of competition and you want to break up Monopoly so no big giant to squashes other smart entrepreneurs. And now, you know, in the US we can't break up our own tech giants or they have such a hold on everything. Well, okay, well you kind of go, okay, well if some Chinese competition now finds a cheaper way to train AI, great. You know, the US can then learn and benefit from that. And Chinese come up with like a AI only type of a chip that, that's better than gbu, great. You know, the US can, can, can, can benefit from that. So that kind of competition is much better than just having one dominant chip maker in the U.S. one of the
- [26:26]
Jack
things that struck me about the difference between the US and China here is The US and this is in the news all the time, is going with a much, much more capex intensive approach. Like there's tons of debate as to whether this will all be worth it. But China seems to be going the opposite way. They seem to be going with a much like more of an asset light type approach in terms of what they're doing here. Like do you have any thoughts on that contrast and which one might work out?
- [26:44]
Jason Hsu
You know, necessity is the mother of all invention, right? I mean here are a few American, some examples for us to think about, right? Like the Wright brothers, they were the underdog with no funding, right? They were not the only game in town. There was a much better funded, you know, technologist who was supposed to create the airplane. But Wright brothers, no funding, they were just gutsier, grittier, more innovative. You look at Bill Gates, right, the one who's supposed to win now and, and, and own the OS and, and business software world should be IBM, but it became Microsoft. Bill Gates was significantly less funded. It's, he's the underdog, right? So sometimes being the underdog and just having to think outside the box could, could give you an edge. So in this case, you know, I think what we've seen from Deep Seek, right, they, they just have a, you know, like it cost them 1/20 of money to get 80% of the way in training in AI. That that's the kind of innovation that happens when you don't have enough money. And I think we'll continue to see that coming out of China. And again, I think because they've gone the open source route, right? It becomes open source, it becomes available to everyone else. And again that's, you know, the kind of innovation that we want, right? It's the kind of innovation that just drives everyone else forward.
- [28:05]
Jack
And it seems like the Chinese government is betting on that type of innovation because they could throw more money at this like the US companies are, but they've made a conscious choice not to.
- [28:12]
Jason Hsu
Right?
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Jack
And I assume part of that is trying to foster that innovation.
- [28:16]
Jason Hsu
Yeah. And they also realize, and this is just painful experience, right? Like there was a point in time when the Chinese government threw just stupid money at anything that they thought could have so national strategic importance. And what they realized is when you throw stupid money at people, you have a lot of stupid people who come take your money and you don't get more output, you just get a lot more wasted money on project that never should have been funded. So they have become quite VC like that's why they don't sort of incubate and subsidize directly. They basically become LPs in VC funds and PE funds. Because what they want to make sure is they want to make sure they get a gritty, half starved, hungry, right. Steve Jobs hungry entrepreneur innovating.
- [29:03]
Jack
One of the things I think all of us have sort of believed over the past 20 years is like, you should have a US centric portfolio. And I guess the returns, at least for that period, have backed that up. But you've talked about how maybe things are shifting now. Maybe that's not the right way to look at things. So can you talk about that?
- [29:16]
Jason Hsu
Yeah. So I mean having a US centric portfolio absolutely did great. And there's a reason for that, right? A lot of people, oh, you know, the, with Asia coming online capital market should rotate from, from US to, to Asia. And of course Asia is growing faster GDP wise, but their capital market never reflected that. That's because we sort of understood things wrong. Right. Like American companies were outsourcing to Asia, driving Asia GDP growth. And American companies are capturing all the profit from this cheaper, you know, workforce. Right. So American company were the best performing companies because they discovered sort of the pre AI, right, like, which is cheap Asian workers. And now when you, when you think about like with AI, right, AI becomes cheap worker for everyone, all corporations, and they become cheaper worker in China, even cheaper than their existing workers. So what you're going to see is you're going to see greater corporate profitability in China. And within their protected market, those big tech companies are going to experience record profit growth, just like the tech companies in the US are going to experience insane record profit growth. So I would say in this case, the rebalancing away from US to China is less about, ooh, you know, US is going to suffer from AI or lose China in the AI competition. It's, you know, before wto, the cheaper global labor cost only benefit American companies, no one else was in position to benefit from that. Today, the AI technology China carving its economy away from the US is sort of positioning themselves to capture all the AI profit, AI driven profit for their own tech companies. And so that is the, the because you can't access that market now through, you know, only American companies, that a diversification play is sort of, you know, rebalancing some of the US exposure to China. And of course they're cheaper, so there's a valuation play there as well.
- [31:08]
Jack
Yeah. One of the things we've talked about on the podcast a lot is this idea of the end of US Exceptionalism. It seems like some of those factors you're talking about there, I mean, maybe it doesn't end, but at least would lead to a reduction in US Exceptionalism relative to the rest of the world.
- [31:19]
Jason Hsu
Yeah. And again, when we had the world as G7, frankly, it was like G1 plus six.
- [31:24]
Jack
Right.
- [31:25]
Jason Hsu
Like the other six doesn't really get a say.
- [31:26]
Jack
Right.
- [31:27]
Jason Hsu
You know, like the US exceptionalism was. The world was essentially G1. The world is now, whether we like it or not, as American, we, I think we, we should simply accept that we're moving there. Right. The world is moving toward G2. And then certainly I think recently with the trade tariff, the trade war and the tariff war, we kind of have accelerated the G2 migration. So yes, the exorbitant privilege of the dollar is going to wane a little bit. You've seen that in terms of dollar weakening against gold. You're seeing China being a bigger trade partner for Europe since the start of the trade war. So all of that. Yes, I think we're moving very much toward G2 and I think it wouldn't hurt for investor portfolios to also sort of diversify near that trajectory as well.
- [32:19]
Jack
Yeah. And one of the things Matt Favor
- [32:20]
Jason Hsu
pointed out this out when he was
- [32:21]
Jack
on the podcast is as a US Investor, you have, if you just go with the market cap, global weights, you've got a lot of your portfolio in the U.S. and most U.S. investors have significantly more than that in the U.S. that's absolutely true.
- [32:33]
Jason Hsu
I mean, home country bias is one of the things that we, we have sort of taught over and over and over again in B school. But no one ever believes it, but you see it everywhere. Right. And in the US Home country banks have certainly worked, as I mentioned, right. The last 30 years. Right. Global profitability growth has all accrued to American companies. And so that mass of raging bull market has cost us going, ah, you know, why do you need the world if American companies will just sort of take profit from the entire world? Right. You're globally diversified, right. Because American companies out there harvesting, know, premiums and profits for you. But you know, if you were in Asia, right. That home country bias would have been a very bad thing. Right. It would have all been better buying American stocks. But I think, you know, with, with truly the global economy rebalancing toward G2, you know, home country bias for Americans may for the first time not serve you as well.
- [33:25]
Jack
We don't do investment advice on the podcast, but I just want to ask you at a high level like you, US investors are thinking right now, they're thinking about their allocation to US they're thinking about their allocation to developed countries and they're thinking about their allocation to emerging markets. And at a high level, how would you think about that thought process in terms of where we are right now and thinking about that allocation relative to what probably is a heavily US centric portfolio right now?
- [33:46]
Jason Hsu
And I would say most endowments, foundations are significantly more diversified. And we know endowments and foundations historically have done better. They've been, they've been smarter, they're more tactical. So I kind of go, you know, that's probably not a bad investment style to imitate, right? What, what do they do? Right. They start with kind of the boring allocation which is like, hey, you know, 80% of your equities allocation to us, the other 20 to international, and of that 20% in national, it's probably only 5% or 20% to emerging markets. So very U S centric and very EM light. But if you look at a lot of endowments and foundations and people are a bit more forward looking, right, Their deviation is their US lightness. Certainly, you know, with US running up in valuation, they've become more US light. And when they move to international, they're actually probably more developed market light and more emerging market heavy. And again, that's all informed by data, right? The last time US generally outruns everyone in terms of stock market return. But the last time EM actually beat the US by about 9% per annum over almost a decade long period, right? So 9% over a decade per annum is quite, quite amazing. That was what that was actually from 2000 to 2010. You know, that is kind of at the front end of the Internet revolution. And it's like, well, you know, I didn't realize the EM actually beat the US during the first part of the Internet sort of run. Well, it's because look for the software to work, the hardware's got to go first, right? And then Asia is dominant when it comes to hardware, right? Like Cisco might have initially owned all the market share, but very quickly the Asian tech makers were able to make the same thing at the quarter of the price and took off Cisco's market share. And you're going to see the same thing with AI as well, right? The hardware is going to get deployed, right? You got new, have new hardware, new phone, new laptop, new towers, right. New cloud centers and all that hardware. I think that's, that's going to be profit for Asian company. So I think, you know, from A diversification perspective. This may be the time to be more diversified toward emasia because you know, I think history rhymes and we're seeing a shift here.
- [35:52]
Jack
It's interesting. Like I've always been an advocate for international diversification, but for about 20 years I looked like an idiot because of that. And I would go to my clients and say, you know, we did international diversification. They say you were wrong last year, you were wrong the year before that. But now people are like, absolutely, I would love to have international diversification. You know, you get a year or two where it turns people have a completely different opinion. I wanted to ask you about, you mentioned China tech before and investing in, in China tech is something that can be challenging to do. But you've launched an ETF CNQQ with China AMC to allow investors to have access to this. So can you talk about what that is?
- [36:25]
Jason Hsu
Yeah. So China MC is the biggest ETF company in, in China. So you can think of it as like black wack of China. And so all, all we wanting to do is look, you know, investors, if they bought the qq, sorry, the QS as a way to capture the, the most dominant and the most liquid American tech companies would have done really, really well. That would be a simple easy access tool to get access to big American tech. And so we just want to create something that's comparable. Right. So cnqq, you know, China's qq. Right. So that American investors who go, hey look, you know, I realize American tech companies can't go to China and harvest all the profit that can't be had from the AI innovation. Right? Just, you know, just like the Internet. Right. You know, Google did not get to go to China and make money with their search. Right. It was Baidu, Right. It's home incubator version. So this is an opportunity sort of to capture all the growth that you can see from big Chinese tech companies that you otherwise won't be able to access easily, that you're either unfamiliar with them or just the access cost or your broker don't let you buy international shares or Chinese shares. So we simply created a ETF that gives you equivalently the American qq, but just the China version.
- [37:42]
Jack
And so what you're trying to do is make a broad based bet on China tech.
- [37:45]
Jason Hsu
Yes. Like you don't know who the winner is going to be. Just like right now you don't know who the winner is going to be. Is it going to be Microsoft OpenAI? Is it going to be, you know, Elon Musk Grock Is it going to be someone else? You know, it's when the winner comes, it's going to be 100 times payoff. And so you might as well be diversified and hopefully you, you got the winner in your basket.
- [38:06]
Jack
What does the Chinese tech universe look like relative to the U.S. like, I know in the U.S. we have an incredibly dominated tech by, you know, a few big names. Like how does China contrast with what you see here?
- [38:16]
Jason Hsu
It's largely the same, right? I mean, they have their, you know, Baidu, their, their Tencent, their Alibaba, their Xiaomi, their byd, right. And so they all map into almost one for one to an American tech giant, right? BYD on the EV side to our Tesla, right. Their Baidu to our Google, right. Their Amazon to their Alibaba. So it, it's also concentrated big tech who's in a way dominating the economy, dominating growth there, just like the U.S.
- [38:46]
Jack
how do you think about policy risk? Because that's something you'll hear about China a lot of, a lot is like the worry that the government will take over companies or the government, you know, gets involved a lot more than they do in the U.S. like, do you think that's a legitimate risk investors should be concerned about?
- [38:58]
Jason Hsu
Yeah, so I think, you know, governments getting involved is always a legitimate risk. Right. I mean, we didn't think that was the case in the U.S. right. We are starting to see our own government getting a lot more involved. Right. I mean, boy, you know, for a while we thought intel was going to be completely backed by, by the, the U.S. government. Right. And, and you know, that's actually been quite positive for, for Intel. So yes, sort of government intervention, I would say in, in China is very real. Now what they have done over time is they realized whenever he got involved it was negative. When they had a fight with Jack Ma, he was very negative. And then Beijing kind of learned from it. Right. They short of coming out and go, okay, sorry, we shouldn't have done that. Right. You know, Jack Ma is now welcomed back and sort of, you know, allowed to be the national hero that he was. So I think, you know, Beijing has now taken much more handoff sort of role in terms of letting the, letting their capital be used by people who can best create from the capital and not really get involved in terms of, you know, what initiative, you know, what project to prioritize. Now again, you know, with might this change absolutely possible, but I would say that's absolutely possible almost anywhere else in the world.
- [40:17]
Jack
In getting ready for this, I came across you referring to China as the great Alpha reservoir. And it made me think about our first interview with you back in 2021 because you talked about this idea that there's so much retail activity in China that like using a factor based strategy is actually more effective because you have all these behavioral issues with all the retail activity. So is that still the case?
- [40:35]
Jason Hsu
That's absolutely still the case. You know the one thing that I say the US is still generations ahead versus China is the quality of our stock market. Right? Our stock markets by and large institutional in nature. Even if they're sort of retail money. A lot of that retail money is guided by financial advisors who are in some ways institutional investors as well. You don't have that in China. In China, first of all, most estate pension funds are just fixed income only. They're either funded as you go, they're fully funded. So they don't need to take on any equity risk. So there's very little institutional long term capital in their market and their high net worth are just retail gamblers for them. That, that, that's, you know, there's some casino element to how they invest. So it's fairly even, it's very liquid, right? It's just insane trading volume. But it's fairly fragile in the sense that it's very retail. It's not long term capital. As a result of that, all the behavioral biases that we document in the academic literature is right there in plain sight. And this is why, you know, a lot of high frequency traders, you know that, that are now sort of investing in China, right? Like the citadels millenniums are making record profits, right? Just these behavioral factors work insanely well. And this is what I mean by the alpha reservoir. There are a lot of willing losers in that market and they, they, because they save so much money, right? They lose money and they come back in, they reload up, they save more money, they come back in.
- [42:04]
Jack
And I think we, in our last conversation you had talked about some research that had been done that like the traditional factors work better in China, right than they do in the U.S. oh yeah, absolutely.
- [42:11]
Jason Hsu
By, by a wide margin, right. I mean a lot of factors don't work in the US anymore because look, the in, in the US factors discover, right, that all the institutional money comes in ars that out so it doesn't happen again. And there's just not enough retail individuals who keep making the same mistake. But in China, again, first of all, the institutional arb isn't quite there. And then the retail, right. Not only is there a Lot of retail. They also save so much money, right? It's like, it's like you go to casino, you lose your money, you go back, you work for two weeks, you load up, you come back in, right? That's that. That really is not a bad analogy. To think about the Chinese stock market.
- [42:44]
Jack
I want to get into factors a little bit more, but first I just want to ask you one more question on China. How do you think people in the US should think about their allocation to China and emerging markets? Like, are those two separate things that should be managed separately? China is such a huge part of EM indexes. Do you think people should treat those as two separate things or do you think it should be kind of treated as one basket of emerging markets?
- [43:02]
Jason Hsu
I think treating China as separate has a lot of benefits. One being when you think about developed world, right? You know, using my analogy of G7, it's really, you know, G1 plus 6. Because once you put us in there, it's just so overwhelmingly large. Other things in the same basket don't matter, right. And same thing, right? You put China in the em, its market capitalization is so large, right. Its GDP is so large that everything else just sort of dwarf by comparison. You can't see it. And it's almost not worth time researching it, right. If you're an em, you know, manager, you just get the China stuff, right? And then you're good. So pulling that apart allows, I think, for better specialization, right? You can look for someone and once you take out China, then you got, you know, South Korea, Taiwan, India, Mexico as being kind of the four large dominant weights in there. And then now you got some diversity, like, you know, what's your view on Taiwan, what's your view on Mexico? And then you can just separately deal with China in that case. I think that's just a better way to source the right managers for the exposure and also being a little bit more thoughtful about it.
- [44:11]
Jack
And do you think China now is probably a better opportunity relative to EM in general?
- [44:16]
Jason Hsu
I would say yes, and only because a huge part of EM is in India, right? And I think, you know, India, unfortunately, I would say they're really, really unlucky in the sense that people keep on thinking, okay, well, you know, US has bad relationship with China, that means all the China manufacturers go to India. India will be the next China and that's going to be enormous amount of growth, right? So that's very exciting for emx. China, unfortunately, as it turns out, doesn't look like it's going to go Our direction. Right. The U.S. you know, China relationship is normalizing and also I think, you know, before any more outsourcing goes anywhere, it's going to be outsourced to AI and robots. So India sort of the, it's the first country to miss the major American outsourcing kind of prosperity. And so I think with India being so dominant in the EMX China basket, it can be a bit of a weight that drags on the basket. So I would say again, you know, we're over the next five years, it's probably going to be the most dominant hardware manufacturers who will make kind of the true profit for the first wave of, of, of the, the kind of the AI run. And, and India doesn't have that. You know, China has that in Spain. So I would say yes, you know, right now we probably are overweight. China. Well, when we think about the broader EM exposure, just because of all the high quality kind of tech mini factors there.
- [45:39]
Jack
I have to ask you about factor investing in general. You mentioned this idea about factors being commoditized and not working as well as they used to, particularly in the us like how are you thinking through that? Like on one hand you could argue the factors struggling for a really long period of time where, you know, we had a US market that was completely dominated by huge tech companies. Not a great environment for factor investing. But on the other hand you could argue these, these things have been public. You know, a lot of people are using them, they're just not going to work as well. Like how do you think about that?
- [46:03]
Jason Hsu
Yeah, so I mean in the US and that just use one factor. I think it's sort of easy if we just name that one factor. Value. Right. Value has always been the most study factor. It's, it's the first amongst many. And then, you know, certainly Warren Buffett talks about value investing. So value factor is kind of special. It hasn't worked in the US for a very, very long time. Part of it is because US markets become more efficient. Right. So there was a point in the US where high PE companies, growth companies were more sex and glitz than their actual growth. Right. So if you actually buy, you know, cheap PE company and high PE company over time, the earnings of both camps are actually about the same. Just you pay a lot more for very average earning and so buying growth is a bad idea. But over time things have completely changed. Meaning when you look at high PE companies, they do forecast high growth and it's, it's not generally overpaying. Right. It's, it's not overpaying for sex and glitz and a PowerPoint show. It is actually paying for true innovation and companies that know how to grow capital. So if you buy growth companies in the US you are going to get earnings growth. And oftentimes the earnings growth is faster when it's priced into the price. If you buy a value company in the US you do get companies that don't grow and you're not getting a better deal. Right. You're just getting a safer company that doesn't grow. So the market efficiency in the US is such that you're just not going to have a disadvantage buying growth. I just believe that you're overpaying. That hasn't been true for a long time. Just credit to the US market efficiency, I guess.
- [47:42]
Jack
Yeah. It's interesting because if you think about one of the unique things about the Mag 7 is if you had predicted with base rates like how fast companies of that size could grow, they've exceeded that by a lot. Going to your point that growth was actually underpriced in the US here for a long period of time.
- [47:55]
Jason Hsu
Yes, absolutely. And that again was never in the data. And I think that's, that's really important. Right. You got to understand historical data is historical data. They can only predict the future if you think some aspect of that is going to repeat. And Internet and also improve market efficiencies are two sort of catalysts that tells you things aren't going to repeat. Like Internet didn't live in older data. Right. U.S. nursing that kind of explosive technology being adopted by listed companies to drive corporate profitability. So you didn't have that in data. Clearly you're not going to get that repeat. And the other one is you study the US when the US was more inefficient. Right. Maybe at the time when US was part like China and US become very efficient. So that kind of inefficiency is also not going to repeat. So I think it's just useful for people who are data driven, quantitatively driven to go, okay, data is backward looking. It's only useful as a forward guidance if we know for sure what is going to repeat.
- [48:56]
Jack
So as a factor investor, how are you thinking about evolving your strategies in a world like that? I know you've talked about using next gen approaches. I mean we have a lot more data that's available to us maybe outside of the standard fundamental data. We have stuff with AI, you know, we have better processing systems like how are you thinking about evolving your strategies in this type of world?
- [49:11]
Jason Hsu
It's a check, something you mentioned. It's like if the factors will know, it's going to get arbed out. And that's absolutely true. Right. So the, the approach, understanding that the capital market is so intensely competitive, well known stuff can't work. So you naturally have to assume decay and you have to assume things that are less well known will decay slower. And, and you also got to figure out, well, you know, some things are cyclical, meaning they stop working and they work and some things just sort of, you know, decay away when they get arbed down. It's very hard for humans to tell which is which and to calibrate it correctly. So the beauty of machine learning is with enough data, the machine can start to say, okay, well you know, this, these type of factors are crowded and so, you know, they're being armed down, they're not going to work. These type of factors actually have a cyclical structure to it. And when you, you know, have a large universe of factors and the larger the better. Right, because that means you have more esoteric stuff that other people don't know about. And if they're esoteric and people don't know about them, they're more likely to work. Right. They won't be armed out. So we're now moving from a curator, right. The Chicago approach, which is like, oh, the IU has like 200 papers, so that's a good factor. Oh, you know, this small cap has 100 factors. Good. And we got to move away from the curator, curator approach to the, you know, kitchen sink approach and then let the machine go. All right. You know, the esoteric, the weird are more likely to be successful. And how do you calibrate and bring that into the model?
- [50:42]
Jack
So do you think you can still have an analytical edge like you've talked about, getting all this data in there and analyzing it better? How do you think about that relative to an informational edge in the world of AI? Because on one hand you could argue AI can pretty much analyze anything, so the people who have unique data are going to do better. But you also could argue we're all going to take a different approach to analyzing that data and there's still an edge to be had there. How do you think about that?
- [51:01]
Jason Hsu
Yeah, so I would say ultimately it's man plus machine. And so the edge is not going to be in the machine because it's not like, ooh, someone is going to have a better machine and someone has a bad machine. Right. Someone's gonna have algos that someone else wouldn't find on open source.
- [51:16]
Jack
Right.
- [51:16]
Jason Hsu
So the man in the machine, that machine scales the man, but it's gonna be the man that's being scaled that matters. Right. So, like, what becomes useful like this? Oh, doing things cheaper, doing things faster. Right. Not everyone else will have the same. It becomes. Some people using AI are sort of mesmerized by the technology, learning the technology, and then there are people who use it long enough to go, oh, I know where this technology doesn't work. I know all the places where it makes a mistake. Right. So just think of just like the difference between a senior litigation lawyer and a junior lawyer. A junior lawyer with AI can just do legal case research very fast. Right. A senior litigation lawyer will kind of know every word that the AI is wrong, where it's making up a fake case, where it's delusional. And so it's using AI for the right places and sort of, you know, picking mistakes where his experience tells him otherwise. And I think that's ultimately going to be the difference between, you know, quants that truly benefit from AI and versus, you know, quants where AI just make them do things faster and sometimes could be the wrong things faster.
- [52:21]
Jack
That's interesting because I'm thinking about, like, on a different thing, but thinking about using LLMs. Like, the people who are able to prompt the LLMs properly and properly analyze what comes back and turn that into another prompt. Those people are the ones having the most success, you know, so it is. It is still a human needing to go in and figure out the right way to use the machine.
- [52:37]
Jason Hsu
Yeah, I mean, it's Iron Man. I think Ironman is the best analogy. Right. Like Tony Stark with Jarvis. Like without Jarvis, Tony Stark can't do many things, but Jarvis can't, you know, sort of do useful and interesting things without Tony Stark.
- [52:51]
Jack
Do you think. Do you think it stays that way? Do you think AI gets better? I mean, I'm thinking about, like, discretionary portfolio managers and like, their world and their role in the world. Like, do they still have that role in. As we move forward, or will AI get so good that, like, no human can be better than AI?
- [53:05]
Jason Hsu
Well, I would say yes, AI will get better and better, and more and more people will find themselves not needed. Right. And so it's a matter of you will need people who can ask great questions and who will seek out the right problem to solve and will ask the right questions to solve those problems. So people in those positions are going to be needed. Now, at some point, we. We might sort of run out of positions.
- [53:35]
Jack
Right.
- [53:35]
Jason Hsu
Because there may actually be more people who are, you know, thoughtful, who can see problems and ask the right questions than they are sort of positions of authority where you can stamp them. So you know that that day might come, but it's not anytime soon. But in the meantime, I think we are going to phase out people who have a job or whose approach to job is. So do what other people tell them to instead of proactively look out, look for problems, and proactively thinking about how to solve problems. So I think we still got a long Runway for people like that.
- [54:05]
Jack
When you think about building quant models, do you build them different for different things? Like in, in terms of, like China versus the U.S. like, does the quant model that works in China is that different than the model that works in the U.S. absolutely.
- [54:16]
Jason Hsu
Most quant models don't work in the U.S. anymore, but they were originally developed in the U.S. so that's like the fascinating part, right? So in some ways, the historical data of the US Is irrelevant for understanding the future of the US but the historical data of the US Is quite relevant for understanding the future of China. Just like historical data of the US Was relevant for understanding the future of Japan, you know, back in the 70s and 80s was relevant for understanding Korea and Taiwan, you know, in the 90s, they're very relevant for understanding China from, I think, 2000 and on. And so in some ways, yes, their capital markets and their economies are rhyming to the same rhythm as what's in the US Data. And so again, this is about a quant understanding. Where does the historical data teach us the right lessons about whom?
- [55:06]
Jack
Do you have any thoughts on using LLMs in terms of stock picking? You're seeing a lot of people do that now. Make a prompt. You are Warren Buffett. You know everything about Warren Buffett's history. Give me the best stocks to buy now. I mean, that's obviously an oversimplification of it, but how. What do you think about LLMs and being used in that role of like, stock picking up as a portfolio manager? Yeah.
- [55:24]
Jason Hsu
So, I mean, Jack, your example is perfect, right? Like, you can say, hey, you know, like, Warren Buffett is, is one of the most successful investors of all time, right? Just tell me what he does and suggest a portfolio. And I'm sure, you know, your, your AI or chat GPT will go and actually pull the Berkshire Hathaway holdings and give it to you. If you bought that, you'd probably be okay, right? And so in this case, right, the, the Issue isn't that, you know, AI did give you a good answer, but like a portfolio manager, right, who is hoping to charge a fee, right, clearly can't do that. He has to be better and smarter than Warren Buffett. And then, so that comes down to what AI can do is AI can go and research and give you answers that are the kind of the, the, the standard sort of best practice answer, right? And that answer is worth something, right? But it isn't worth enough for you to sort of replace a active portfolio manager with. Because the, almost the, the, the, the, the, the definition of a active portfolio manager is he's got to outperform things that are easily so available, right? The Warren Buffett Berkshire Hathaway portfolio weights are easily available, right? That's all you do, you don't get paid. And so I would say yes. For, for investors who don't know any better, asking AI is going to give you some really good answers. But if you're running a mutual fund company and you're trying to find someone who has a unique insight into AI and the tech who can generate alpha above and beyond the QQQs, then AI can't do that, right? AI doesn't, doesn't, isn't trained to do that.
- [57:03]
Jack
And I've always struggled as a quant guy because you can't really do what we've been trained to do, which is we do in sample testing, we look at stuff out of sample. You can't tell the AI only know what you knew in 1990 and build me a portfolio and then see what happens. So because it knows everything, it's hard to think about that as a quant manager.
- [57:22]
Jason Hsu
And again, what the AI will do, the AI will give you the curated University of Chicago B school factors and say, hey, you know, these are the things that famous professor says would work. And yes, that would work. You know, circa, you know, 1960 to 1990s when that research was done, you know, will it work in the future? AI wouldn't know, it just wouldn't. Because there's no one who's definitively researched and say no, no, those factors stop working or I know those factors will come back. And so things that are still a debate where intelligent scholars and investment researchers don't agree on, those are things that an AI is going to come in and say, oh no, no, I know it's the professor, that's right. Or I know it's the active portfolio manager, who's right. AI was simply summarized this agreement. They wouldn't know who is Right.
- [58:16]
Jack
So as we wrap up, I wanted to ask you about something I mentioned at the beginning. You have a new exciting thing going on where you've become the chief investment strategist at sowell Management. Can you talk about what you're doing there? Yeah.
- [58:24]
Jason Hsu
So, you know, Raelian has always been the institutional shop. You know, we, we, we provide advice to a lot of pension funds around the world. We provide advice, we co create portfolios with like big asset managers like, you know, Namura Sumitomo in Japan or China MC in, in China, you know, with lots of financial institutions all over the world. And you know, what we have recently done is we sort of brought our institutional products to the retail world, created ETFs, and we're now working with big R platforms and coming in and serve as their, you know, chief investment officer, chief investment strategist. So they can have sort of institutional asset allocation advice. Institutional. So due diligence in selecting products and building customized SMA portfolios. So, you know, the institutional investment best practice can now be available at the wealth level. And so that's. The partnership with Sal is first of our many partnerships in the wealth space and we hope to see that blossom and we hope to see our institutional strategies become more available across the board for everyone.
- [59:38]
Jack
And I think that's a great thing because we're seeing that more in the market across everything, we're seeing more strategies that were only available to institutions. Getting down to your average investor and you know, as long as investors understand those strategies, I think it's a great thing for investors. Just one more as we wrap up, I want to ask you, like, we've talked about so much stuff and you know, as a factor guy, I'm, I'm like really excited about so much that's going on in the world. And I'm wondering, like, what most excites you? I mean, we've got AI. We've got so many different things going on in the investing world. Like, as you think forward, like, what are you most excited about working on? What are you most excited about in terms of like the things that are developing in the investing world?
- [60:09]
Jason Hsu
Yeah. So the things that I'm most excited about is AI. Right. Because there are clearly two things that's happening simultaneously. One is great technology is being created right in front of us and many more amazing technologies will be created that we can't even begin to imagine. Right. And as a, as a investor. Right. It's sort of understanding that trajectory and also understanding how this impacts the labor force, which is going to impact, you know, rates, monetary policy, how government's going to have to step in and deal with the increased labor non participation. So all these are opportunities for kind of macro asset allocation, which area you want to go when, where the rate is going to have to, you know, fall more. Whether US is going to have to go from 40 trillion in debt to 100 trillion in debt because more people are going to, you know, basically exit the labor force and become part of the government's sort of liability and therefore part of what's financed by the government balance sheet. So all that's super exciting. As an economist, as an investor, I want to understand, I want to forecast and there are a lot of historical data set that can inform us on that. So that's part super exciting. And then you get that, right? You're going to create a lot of wealth and growth for your investor. But there's the another part that's kind of, you know, along the same thing.
- [61:27]
Jack
This.
- [61:27]
Jason Hsu
There's a lot of hype, right. There's just a lot of things that are really irrational and silly. It's part of fomo. It's part of, you know, people have sort of past success that's caused them to believe they have now become investment gods. And so you see a lot of so silliness out there and you want to make sure you, you avoid that, but also don't get crushed by it. Right. Because it's very easy for a rational investor to get crushed by the irrational retail army. So. And how do you manage that as a portfolio manager who's looking to beat the S and P or the qqq? And you know, a lot of that's driven by irrational pricing. So you know, both are super exciting for an investor to, to think about and to get right. And, and you know, and as a researcher. Right. This just keeps me very occupied thinking about all sorts of exciting things.
- [62:17]
Jack
Yeah, there's so much cool stuff going on. Like I was going to say, like the next five years are going to be exciting, but I think in the world of AI, I have to say, like next five months are going to be exciting because the pace it's going, like, who even knows what's going to be happening in five years? Well, Jason, thank you so much. This is awesome. I learned a lot. I really appreciate the time.
- [62:32]
Jason Hsu
Jack, really glad to be back on your show and it's been a great conversation. Thank you for having me.
- [62:37]
Jack
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com if you have any feedback or questions questions you can contact us@xsreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.