C (6:10)

You mentioned the economic reality now in China.

A (6:12)

Can you talk a little bit about that?

C (6:13)

Right? What it looks like right now on the ground in China, like how strong the economy is, how things are going.

A (6:19)

So I think to understand where you are today, you actually have to go back seven or eight years because seven or eight years ago you had a massive, massive shock to the Chinese economy. Essentially the US imposed a semiconductor embargo on China and the leadership felt, okay, the US just declared economic war on us. They transformed what was a trade war into a tech war, saying look, we, we just don't want you to move up the value chain and so we're going to block you from having access to the high end semiconductors. Now the government's reaction to this was essentially to say, okay, if they're blocking us from semiconductors today, tomorrow it could be chemical products, it could be auto parts, it could be anything. We have to totally. And it's not just the US because the US can tell ASML not to sell US machines, it can tell TSMC not to sell US chips. So we have to totally de westernize our supply chains. And so starting in 2018, you see this very clearly in the lending data. The banks are essentially told by the government guys, no more loans to real estate, normal loans to the consumer. All the money has to go into industry because we have to move up the industrial value chain much quicker than we thought we did before. It's a question of economic survival that we need to build resiliency and independence in our industrial supply chains. And so you had a period for seven years where all of China's savings, and those savings are massive, all of China's savings essentially went into industry. Now this represented a massive deflationary shock for China and for the world. It was actually a twin deflationary shock. The first shock was as, as you starve real estate of capital Real estate prices went down, consumers tightened their belt, property developers went bust, commodity prices went down. This was the balance sheet recession that everybody wrote about for seven years. You couldn't pick up a copy of the Wall Street Journal, the Financial Times, without being told of this balance sheet recession. But the conclusion people took from it was the wrong one. Everybody looked at this and said, oh, this is Japan all over again. Except that it's not. Except it's not. Because in Japan, bank lending totally collapsed. In China, bank lending all went into industry. And what I think most people missed during those seven years is how quickly China was moving up this value chain. Now, first because it had unlimited access to capital, but also, and I think this is the part that everybody underestimates is over that period, the Chinese workforce dramatically changed. Um, what do I mean? I went to China to university in the mid-90s, and back then China was graduating 350,000 university students a year. Today China graduates 12 million university students a year. I mean, no, no country has gone in one generation because I'm 52, has gone from 350 to, to 12 million. It's, it's mind boggling. So what you had. And by the way, roughly half of these guys are engineers and like science and science graduates. So just at the time when money was pouring into industry, essentially China was also producing just an insane number of engineers. So, you know, you mentioned Rupert in the intro. I was with Rupert visiting BYD, I think two or three weeks ago, I can't remember three weeks ago, maybe. BYD has 120,000 engineers in their R and D departments. Now to put things in context, Tesla has 85,000 workers not in their R&D department, just 85,000 workers, including the guys in the, on the factory chain, you know, tightening the bolts, et cetera. So BYD in their R&D department is 50% more workers than Tesla. You know, it's. So anyway, so money absolutely poured into industry. And I think what the world missed was as all this money, as all these human resources poured in, China very rapidly moved up the value chain. You know, if I told you, in 2020, guys, by 2023, China will be exporting more cars than any other countries, you would have laughed in my face. And if I had said, By 2025, you'll visit BYD and you'll wish you could buy those cars in your country, you would have been like, you know, you would have kicked me out of the room and called me ridiculous. But yet here we are. And so what you've seen on cars. And I think people now realize it because as soon as you travel, if you go to Brazil, if you go to South Africa, if you go to Saudi Arabia, you see the Chinese cars everywhere. What you've seen on cars, it's the same thing for tractors, it's the same thing for ships, it's the same thing for turbines, it's the same thing for nuclear power plants. It's essentially anything linked to automation and robotics, anything linked to transportation outside of jet planes, anything linked to energy storage, energy transmission, energy generation. By now, China has actually leapfrogged the west where it's producing, thanks to all these people and all this money that's gone into it, it's producing better products at a cheaper price. So that was the, I think that the second big deflationary shocks. So that brings you to today. Sorry, it's a long winded answer to your question, but that brings you to today. You have to understand where you are today. You've had this balance sheet recession, this deflationary shock for China, for the world. That was a direct result of essentially a geostrategic imperative. A geostrategic imperative of we need to cushion our economy against US attacks. So, you know, 2018, the US punches China on the face. China has no choice but to take the punch. So it takes the punch 21, Biden comes back to power. China thinks this is going to be better. It's actually worse. So China gets punched in the face again, can't do anything except go to the gym, get jacked, get strong. So that by 25, when Trump comes back in, and this time Trump is pissed when he comes back in and he doesn't just punch China, he punches Canada, he punches Mexico, he punches Europe, punches absolutely everybody because he's angry. The one country that is able to stand up because they've spent the past seven years getting fit in the gym is China. So, you know, US goes to punch China, says, okay, you want to go, let's go, gloves off, let's go, let's do this. You tariff me, I tariff you. You embargo me, I embargo you. And that brings you to the meetings in Geneva, Kuala Lumpur, Seoul that we just had, where essentially the US is forced to back off. The US is forced to back off because you have the CEO of Raytheon that says, in three weeks I can't produce missiles. You have Ford shutting down factories because they don't have access to rare earths. And so all of a sudden, you know, the end. You know, the main method of pressure that the US has is high end semiconductors. And China with Deep Seq and with Quinn has shown that actually we can do AI without the high end semiconductors. That brings me to, to one of my favorite quotes and I've written a piece about this. It's people, your listeners who follow me on Twitter can get that piece off my, I've opened it. It's a free distribution on my, on my Twitter. You know, it's. If you go back to World War II Rommel, the famous German tank commander would say, our Tiger tanks is worth four of their Sherman tanks. The problem is the Americans always show up with five. And this is where China is today. Today everybody's running around saying, yeah, you know, at, at AI, China can't compete because it doesn't have the Nvidia chips. That's like saying the US can't compete with Germany because it can't produce as good a tank as the Sherman tank. You know, when it comes to conflict, when it comes to challenges, there's a beauty in volume. And this is China's comparative advantage, the US's comparative advantage of World War II, which was essentially being the world's leading industrial power and being able to produce 10 tanks, 10 Sherman tanks for every one Tiger tank, German Tiger tank, that has now shifted to China. And so the US now essentially has no choice but to back down, which allows China to now embrace completely different sets of policies. Sorry, it's very long. It wouldn't answer again. But it's very important to understand this, that five years ago, seven years ago, if you were Xi Jinping, before you put on your pants in the morning, your concern was, how do I cushion my economy from U.S. attacks? That was your number one concern today. You no longer worry about this. That ship has sailed. In fact, now it's the US that has to worry. You know, how can I get rare earths? How do I make sure that my car plants don't shut down? How do I make sure that I can still produce missiles for Ukraine, for Israel? That is now, you know, the concern has shifted. Instead, if you're China now, the concern is my people aren't getting married anymore, they're not having kids, my birth rate is collapsing. Because, you know, the balance sheet recession has hit the millennials, you know, your 25 to 40 year olds, it's hit the millennials really, really hard. They've been the bag holders in the balance sheet recession. And, and so now you have to, to essentially help those guys out. And so now you, you know, if you look at the five year plan of five years ago, it was all about increasing supply. Now the five year plan is all about increasing demand. And so today you turn around and China is now running budget deficits of 10% of GDP, you know, second biggest economy in the world. And I think this matters not just for China, of course, you know, consequences. China's having a bull market, et cetera. But globally, even if you say, I don't care about what's happening in China, I don't want to hear about it, I hate the place. Even if you're the most neoconservative of neoconservatives, the reality remains that for seven years, China was a huge deflationary drag for the world. It followed a very deflationary policy which allowed the us, Europe, Japan to follow very easy fiscal, very easy monetary policies because China was such a deflationary drag. The days of China being that deflationary drag are now going to be behind us. Now, I'm not saying, you know, that China is going to be this big inflationary shock, but at the margin, China's deflationary impact is now abating. They're following much more reflationary policies. And as they follow reflationary policies, you are seeing the impact on the market. You're seeing the impact on the market through the outperformance of emerging market debt, the outperformance of emerging market equities, the outperformance of metals, the outperformance of miners. The. The one reflationary trade that hasn't really worked yet is energy. You know, but if, if that does, then, you know, then we move into a very, very different investment environment.

B (17:42)

Part of what's fascinating about that response is within a day of when we put this interview out, we're going to put one out with Ben Hunt on his note about World War AI. And one of the things that's through that piece is this idea of after a period of easy money, which China and the US Both had a different version of making access to capital easier through the pandemic period. And everything that went on there is that energy, labor, time, those are the scarce assets.

A (18:11)

Yep.

B (18:11)

And I'm curious, contrast, maybe the US and the US And China, but give us that on the ground view for the scarcity of energy, labor, and time as it's being viewed in China right now.

A (18:22)

So to be clear, capital was scarce in China. Depending on who you were. Like, if you wanted to build a car plant, here's some money. If you wanted to build, you know, a battery Plant, solar panel, plant, anything. You, you had money. If you were a consumer, if you were a, if you were into real estate, if you're a property developer, you did not have access to capital. So this is what's shifting now. This is what's shifting now. You know, the, the government through its anti involution campaign has essentially told the banks, guys, go out and lend to the consumer, go out and lend to the real estate and you're done lending to industry. So the access to capital in China, capital was cheap, but it was not available to everybody. Contrary indeed to the Western world where capital was cheap and very, very available. So look, to answer your question, contrast and compare. Access to labor, access to capital, access to cheap energy. One of my core beliefs is that China today is where the US was in 2009, 2010. You guys were around then, you'll remember in 2009, every was going around saying, oh my God, it's, it's going to be a new normal, it's going to be low returns for a decade. It's going to be a lost decade. You remember all this, right?

B (19:49)

I was born in 2012.

A (19:50)

I mean, okay, so yeah, okay, so there you go. Well, you'll, you'll read about it in the history books.

B (19:55)

I'll read about. But those new normal, all those pitches, all those low returns, all those, there's no way we can grow coming out of the, the, the mortgage crisis. Exactly.

A (20:05)

No, no, that was, that was the core, that was the core belief. And in fairness, in fairness, GDP growth and employment growth was weak from 2009 to 2016. It, it really was like if you go back and look at the numbers.

B (20:17)

Beinhart and Rogoff didn't even have AI.

A (20:19)

Yeah, yeah, that's right. But so if you go back, if you go back to then, essentially there were no constraints to US policy, Right? There were no constraints to US policy because there was no inflation in the system. And back then the US had a super cheap currency. The US dollar was super, super cheap. It had the cheapest cost of energy. Thanks to the shale revolution, price of NAT gas had collapsed, et cetera. And you know, with the cheap currency, it had a cheap cost of labor. So you go back to 2009, the US had cheap cost of labor, cheap cost of currency, cheapest cost of energy, and basically unlimited government support. The Fed would do QE1, QE2, QE3, push money into the economy. The economy didn't really need that money because it was growing pretty slowly. The real estate didn't really need that money because the real estate market was on its back. So the money naturally flowed into equities who re rated. This is exactly what you're seeing in China today. So if in 2009, the cheapest cost of energy, to answer, you know, Ben Hunt's point of who's got access to electricity, who's got access to energy? If in 2009 it was the US today it's China. Like China's cost of energy is a fraction of the united China today produces more electricity than the US and Europe combined. You take a province like Shandong. Shandong is to put things in perspective, it's like the Michigan of China, if you want. It's sort of so northeast rust belt province. A lot of steel production, a lot of rubber, lot of sort of old industry. Well, between May and September in Shandong, electricity is. During the daytime, electricity is essentially free because they put in so much solar capacity that they, they can't store it. So this is, you know, what's fascinating to me is if you go back to 2006, 2007, so 20 years ago, the nat gas price in the US was around 10 bucks. In the past 20 years, the net gas price has gone from 10 bucks down to 2, and the electricity price over the same period has gone up 50%. Now, why is that? Because the US has not invested in its grid. Because the grid you have today is the same grid you had 20 years ago. And you know, grids deteriorate, you lose efficiency over the grid, etc. Now China's grid is brand new and China's nuclear power plants are brand new and solar panels are brand new. And, and so today China's cost of electricity because of the investments of the past decade, investments incidentally, that we forced them to make, we being the Western world, we forced them to make because they were so worried of essentially being cut off by, by the Western world that we forced them to up their game. So today, you know, where is there plentiful electricity and cheap electricity? It's in China. Where is there plenty full and cheap labor if in 2009 it was the U.S. you know, today, today it is in China. We wrote a piece, it's also unlocked on, on my Twitter, actually wrote a piece on productivity. You, you take the best example of productivity for me is comparing the Shanghai Tesla factory to the Fremont Tesla factory. They produce the same cars. They produce twice as many cars per worker in Shanghai than they do in the US and the worker in Shanghai cost a fifth of the cost as the workers in the US and that's for salaries. Forget throwing a healthcare cost on top of it. So the bottom line is that in China today, everybody's running around telling you it's uninvestable. But to Ben Hunt's point, where do you have cheap labor, where do you have cheap electricity, where do you have the cheapest cost of capital? And where do you have the cheapest currency in the world? And where do you have now active government support for the markets? Because you have a government that's actively pushing reflation. So I, you know, to me China looks like the US did in 2009, 2010. Everybody's going around saying, you know, it's, it's a short term rally at best, it's going to be a lost decade. Japan, et cetera, et cetera. Meanwhile, the market grinds higher every day.

C (24:38)

One of the things we've been seeing in the media, and this gets back to Ben's point as well, is this idea, the idea of Ben's article was if, you know AI is not going to be as beneficial to the average person as we think, well, the US is going to need a war basically to justify what's going on. And that war would be with China. So how does China view this whole idea of do they view like AI as a winner take all battle with the United States?

A (24:58)

So I don't think that's how it's framed in China, to be honest. But I do think the US and China are on totally different paths when it comes to AI. Again, partly because of the restrictions we, we the Western world imposed on China. I think what we've done in the Western world, when you look at ChatGPT, anthropic, you know, all, all those guys is they've looked back at the past 15 years and essentially concluded the big winner of the past 15 years is Apple because they had a closed end system where they control their customers and they can gradually always increase prices on their customers. Some may drop off, but the Apple ecosystem is an absolute wonder to behold. And as it became clear that Apple had this wonderful ecosystem, the stock price got rerated from 8 times earning to 35 times earnings. All this to say that in the US the push of the OpenAI's, the ChatGPTs, the Anthropics, et cetera, has been to try to create closed end systems. Where I create a closed end system and I sell it to big corporates and essentially they're hostage to my AI solution, China, because it never had the option of throwing computing power on top of computing power to solve Problems because we denied it to them. We, the Western world denied it to them, had no choice but to embrace open AI solutions. So it's actually ironic because the US is called Open, the main player in the US is called OpenAI, but is anything but. It's a closed end system. Meanwhile, Deep Seek Quen are very much open ended systems. And again I, I don't think this was a necessarily a, a policy choice by China. It was just what came out of necessity. But what you're now seeing is, you know, I don't know if you guys saw, but Anderson Oritz recently declared, you know, the big, one of the biggest VC firms in the world, they recently declared that 80% of the startups that come to knock on their door to ask for money now use Chinese LLMs. And they do so not so much because of the cost, although that might be part of it, but very much because it's an open ended solution. So you can take the Chinese platform and modify it to your needs. While if you try to do that with chat, GPT is going to cost you an absolute bomb because you have to ask them. Takes time. They go back and forth, back and forth. This is essentially what the Airbnb boss also said. The Airbnb had the Last earnings results CEO said, Look, we used to use ChatGPT, we've now switched to Quinn, the, the Alibaba platform. Because we take the Alibaba platform, we got, you know, 10 software guys internally who can modify to our tail, you know, tailor it to our needs and off we go. And so, you know, for me, the AI war, to use your term, is not a war between say US and China. It's a war between conceptualization as to how we're going to use AI. And is it going to be a closed end system where security is absolutely paramount, which you can have on a closed end system, or is it going to be an open ended system in which functionality is paramount? I think this is the battle line and most users won't care whether it comes from China or the United States.

B (28:19)

Makes for a really interesting angle. I want to take it here too, because this is something that Rupert made very, very clear when we were talking to him. I think he called it full contact capitalism. I think you've talked about it in terms of China's industrial policy as Hunger Games capitalism. Yeah, it's a different, it's just a different approach. Can you explain what you meant by that and what the advantages and disadvantages are?

A (28:43)

Well, the advantage to the consumer is you get better products at a cheaper price. You know, when, you know, when I was with Rupert and my buddy and my buddy Cuppy and Shrub and Paulo and you know, all of us were together in Shenzhen and we went out and we wrote out on the BYD cars which was, which was a lot of fun. And they all walked out saying, you know, like we rode the car that goes 495km an hour and we rode the car that can spend 30 minutes as a hovercraft going across a river or a lake. We also rode the 7500 BYD, you know, car that's, that's full self driving. We rode the car. My favorite personally was the one with the drone inside that, you know, you plug in on your GPS where you're going and the drone goes about 50 yards ahead of you to warn you in case there's like deers on the road or a tractor or, or anything like that. So, you know, it's the end consumer from all this competition benefits through lower prices and better products. The, for the investors it's tougher. It's a much, you know, hunger games of capitalism is, is no Fun. So today BYD is producing great cars, but it's got 99 companies nipping at its heels, crushing its margins. So you know, as an investor in byd, you might not love that. So it's, it's actually funny because everybody thinks, oh, China's this communist country, et cetera, where really capitalism is on steroids and where the competition is, you know, non stop. Meanwhile you look at most Western countries and essentially what we have is corporatism on steroids where it increasingly feels like governments have been captured by corporate lobbies. So you have, you know, three auto producers and you have, you know, you know, one big software company and one big consumer product company and et cetera, et cetera. And they make sure that they write regulations to, and, and tax, and frankly tax laws. When you look at how Facebook, Alphabet, et cetera, book all their profits in Ireland and tax laws that benefit them. So it's, you know, it's very different concept of how an economy should work. Now the end result, the end result I think is the Western consumer gets screwed. You end up with weaker, weaker products that the Western shareholders make out like bandits and the western consumers get screwed.

B (31:18)

So then talk about the Chinese shareholders because obviously you can't take Cuppy in his event driven monitor over there to look at these things. You can't take Shrub over there to look at these things or Rupert and look at that from the trading versus investing angle of how we even think about this Shrub.

A (31:33)

You know, investing through memes might work very well in China. So Shrub, Shrub, Shrub may do fine. Shrub may still do. Shrub may still crush it. He seems to crush it wherever he goes anyway, so Shrub may still be doing fine. No, to your point. Look, I think investing in China has been a very tough place to deploy capital, partly because there's a lot of capital there. They've got a high savings rate. They don't necessarily need your money. So for somebody like Cuppy, who indeed likes to provide money to people who have access to none, like right now, it's actually there are things to do. And because you've had a lot of people, whether in real estate, but even in some of the consumer names, et cetera, that have been deprived of capital. So for a guy like Cuppy, there is now actually things to do and there wasn't before. The way I look at it personally is, yeah, it's, it's, it's a tough place to, to invest. What you have to do is try to, you have to look for niches. So either you look for a niche of a company that is advanced enough that it'll be very hard for anybody else to compete. And you, historically, you never really had those in China because they were always at the low end of the manufacturing scale. So if you could throw money at it, you could always replicate. But you are now starting to see companies that are genuinely, genuinely original. I'll give you an example of a company I went to visit, actually after all those guys had left, I went up to Shanghai. I met up with a company called Hsai. Now they're, they're the biggest. Well, they're pretty much the only lidar producer that matters in the world now. Now you know, there's a big debate around self drive cars, autonomous driving, whether you should go with cameras or you should go with lidars. Uh, and Elon Musk keeps saying, oh, lidars are useless, cameras are the future. Um, but, so, so that, that essentially is, is the debate. Uh, now I think part of the reason Elon Musk was against lidars was that five years ago equipping a car with lidars would cost over US$35,000. So you could see how it's like, okay, that's going to double the price of my car and nobody's going to want to buy that. Now her side comes along. They now have this factory outside of Shanghai, you know, and it's not the kind of factory that you, you imagine in your head Being a Chinese factory, you know, with like a bunch of 5 year olds on a, on an assembly chain, it's, it's anything but that. It's literally 50 engineers.

B (34:16)

See this engineering point you said about the ratios before, because this is, this is going to stick with me for a long time.

A (34:21)

Yeah, this is it. It's like 50 engineers and it's like all automated. You know the joke in China is that the factory of the future has one guard dog and one guard and the, the guard, the guard is there to feed the guard dog and the guard dog is there to bite the man if he tries to touch the machines. And so the factories have, have changed dramatically. So you look at a company like Husai, you know, it used to be 35, 40 grand to equip a car with lidars. Five years ago, guess what it is today? It's 200 bucks.

B (34:54)

200 bucks.

A (34:55)

200. 200 bucks. 200 bucks. So, so now actually, so her size pitch now and so they've signed contracts with Mercedes, with BMW, obviously with byd, with Liottos, with all the Chinese guys. But the pitch now no longer is, oh, you need this for autonomous driving. The pitch is with lidar, fatality rates in accidents go down 90%. So just like every car has to have a, an airbag because it reduces the fatality rate, actually for safety reasons every car should have a lidar. Now if you think that's a possibility, that this happens. So that's how they're lobbying now in Washington, in Brussels, et cetera, if that happens. Essentially by now they control 75% of the global market and they're such an efficient producer that they'll control 90% of the market and nobody, you know, to like, given the patents that they have given, it's going to be very hard to compete with them. So in all this to say that in China you're starting to get these kinds of companies that you didn't have in the past that can own a niche that is a very high end, technical precision niche, which again, like five years ago, 10 years ago, those kinds of companies would have been a Japanese company or German company. And now you are getting them in China. So, so that's one path that's very exciting because that's new. The other path of investing in China is you either invest in the companies that are, you know, so big that nobody can compete with them, the 10 cents, the alibabas, et cetera. So a bit the same story. You know, you own Facebook because, and you own Google because you kind of have to. So, so that's one path. And to be very clear, Tencent is my single biggest position. It's, I think it's an absolute world class company that essentially makes sense, makes pennies on every single Chinese person out there. So you know, you can go down that path. And the third path is to say, okay, I'm going to invest in parts of the markets that are highly regulated so that there can't be too much competition, but parts that still have growth. So for example Macau casinos or for example life insurance companies, you know, it's, there's essentially three major players and you're not going to get new ones. So, so that, you know, that's how you look at it. But yeah, that's not kid around. It's been a tough place to make money.

C (37:12)

One of the things we're seeing in the US a lot is this whole idea of the AI capex spend and you know, is this, is this stuff going to actually produce money? Is it going to be worth it.

A (37:19)

In the long run?

C (37:20)

And China seems to be taking the exact opposite approach to that. It seems to be a much more capital light approach to AI so can you, can you just talk about that a little bit like the differences in the two approaches and why they're doing what they're doing?

A (37:31)

Yeah, no, I'm laughing, I'm laughing because indeed, like historically through my career, China, when there was an opportunity to set capital on fire, China would like jump on it. Historically, that's, that's just what they did because they were always in a capital rich environment. And this, this time it is the US that is going down the path of, you know, let's throw money at this. We'll figure out later if there's any returns, whatever we need to be number one. So we'll just absolutely plow money. It's such a Chinese approach to the world. And yes to your point, China never had that option. Not because it didn't have the money but because it couldn't buy the chips to, to, to do this. And so you know, for, for whatever reason like they've all gone the U.S. china's been, you know, capital smart about the AI development. But also perhaps in fairness, China had another alternative which was to throw bodies at this. You know, you look at deep seek, they could just throw thousands and thousands of, of engineer hours onto this in a way that it would have been very costly if you were trying to do that in San Francisco. Right. So you could replace the I'm going to plow money into this with, I'm going to plow man hours into this because my man hours are nowhere near as expensive as your man hours. So. But, but the bottom line indeed is very much that this time around it is the US that is proving extremely, extremely capital, capital intensive. It is in the US that growth is now proving capital intensive. And, and on this, you know, one of my favorite quotes about markets is that, you know, in a bull market, companies get rewarded for spending capital aggressively and in a bear market, they get rewarded for getting rid of the things they bought in the bull market. And I'm wondering whether right now we're not seeing that transition because you look at Oracle, Oracle announces, hey, I'm going to spend $300 billion on data centers and the share price rips, but then so does the CDS spreads and the cost of funding for Oracle as everybody's like, hold on, how are you going to fund this? And then the share prices collapses. So, you know, when it comes to AI in the US you've gone through three years where you were always rewarded for throwing more money at the problem. You know, the more money you could spend at the problem, the more your share price went up. And this be, may now be ending in front of our eyes. This may like it. It feels like we're transitioning from all of a sudden the market is no longer rewarding you for, for being stupid with capital.

B (40:16)

How do you characterize or how do you think about another sort of like Western projection on this is it's the US and Europe and then it's China and Russia and we have to think about the world this way still. Is that an outdated way of thinking about this stuff or is there some truth to it? Give me an explanation.

A (40:34)

Well, look, I think when 80% of the US startups that go knock on Mark Anderson's door for money tell you I'm using a Chinese AI I think it's a statement in itself, right? It tells you that this, this approach of, oh, we're dividing the world between the, you know, the good guys who wear white hats and who ride the white horses and who are called democracies and the black hats who are, you know, the evil autocracies. That's completely obsolete. It's completely obsolete because it also doesn't correspond at all to, to trade flows, to investment flows. They tried to make it correspond to trade flows and investment flows and it's been a massive flop and they're now having to, to walk it back very aggressively because you've got the CEO of Ford and the CEO of Raytheon and the CEO of Lockheed that says this doesn't work for us like, you know, where. Now let, let's be very honest here. You know, I, I said everything started seven or eight years ago when China had to confront the fact that it had to de westernize its supply chain. And China took huge sacrifices to de westernize its supply chain. The real estate market went down by a third, the stock market went down by two thirds, the consumption took a huge hit and government dent went up a lot. And budget deficits that were essentially zero are now 10% of GDP. Okay, now can the US do this? Like the China went through it and said, I'm going to de westernize my supply chain. The US Is not saying, oh, we need to de signify our supply chain. That's total wishful thinking. Do you think you could take a third down on real estate, 2/3 down on stock market, a big hit to consumption? There'll be revolution in the streets. They will hang the lawmakers and burn down the Congress if that happens. There's no way, there's no way the US can do this. The people won't stand for it, and they won't because you're also starting from a very different position. You're starting from a position of an economy that's hyper financialized, where people's leverage on asset prices is enormous, and where you're already starting with a budget deficit of 6% of GDP and 120% government debt to GDP. So the room to say, okay, we're going to spend all this money to re. Industrialize. We're going to spend trillions to build up an aluminum supply chain which will allow us to have a rare earth supply chain. We're gonna, it's, it's, it's, it's, it's not true. It's not possible. Like, the numbers are just too big. So it's not gonna happen. And so already, I think, you know, the days of, oh, we're all splitting into, you know, good guys versus bad guys. Those days are now behind us. And you know, I think that's why essentially Trump is now pushing a peace plan onto Ukraine that is nothing short of a massive, massive admission of failure. You know, the, the peace plan that Zelensky is asked to endorse is much, much worse than the peace plan that was on the table in April 2022. He loses more land, it's financially ruinous for his country, and so he'll have fought three years for this. This is a, you know, this is Abdication. And so which incidentally, to your point, it puts on the one hand, you know, the US and Europe against Russia and China, the Ukraine peace, if it goes through, is going to create a huge split within Europe. It's going to tear Europe apart. Because what's going to happen in Europe is you have countries that are very eager to work with Russia again. Your hungaries, your Slovakias, your Czechis, your Germanies, your Austria, they want to work with Russia again. They want to get the cheap Russian energy, they want to sell cars to Russia, they want to, like, they just want to pretend this never happened. And let's go back to where we were and then you have the Poles, the Balts, the Scandinavians. You know, for them the idea of doing business with Russia is like doing business with Hitler. It's, it's complete anathema. And, and so, you know, this is going to tear Europe apart. So the idea that, you know, you have on the one side the nice democracies and on the other side the bad autocracies and this is how the world will now work, I think is about to get disproven in a massive way by how Europe is going to deal with the end of this Ukraine war and how Europe is going to get split down the middle.

C (45:07)

When we take this back to markets, what do you think this means in terms of going forward? I mean, we're used to, as Americans here, we're used to our American exceptionalism where our market outperforms every year and that seems to be shifting. And you know, you talked about China taking a hit to the future. I mean, are you pretty optimistic then that as we go forward in the next decade, China is very well set up from a market standpoint in terms of market performance versus something like the.

A (45:28)

US So decades is a long time. But I definitely think we've started a bull market in China. Like I said, I think China is where the US was in, in 2010. And I think we've started a longer term bull market. Look, I, I think when I look at the world today, if, if I think of prices that are completely wrong, like prices are a total anomaly. The, the biggest anomaly for me is the price of the renminbi. You know, I mentioned the Tesla example, but you know, that week where I was with, with the boys in Shenzhen and then in Shanghai and then I went up to Beijing, you know it. And then from there I actually flew to the US and it feels like, very often it feels like one renminbi equals one US dollar. I mean, you stay in great hotel rooms for five or six hundred renminbi, you stay in shitty hotel rooms in New York for 600 bucks. You know, the taxi from the airport, which takes about just as long in, in China is going to cost you 70 renminbi in the US is going to be 100 bucks and so on and so forth. Food, car prices, phone prices, the, the ratio is completely wrong. And, and you see this in the trade numbers, right? That you see this in the, the China today. You know, five years ago, China was running a trade surplus of US$20 billion. Now, you know, five years into the trade war, China's running a trade surplus of a hundred billion US dollar. I mean, it's, it's ludicrous. A hundred billion trade surplus is absolutely, absolutely stupid. So for me, this is the number one anomaly in the world today is the renminbi is so stupidly undervalued, it has to shift. Now one of the reason it managed to stay so undervalued is the mantra between 2022 to roughly six months ago of China's uninvestable. So foreign investors kept leaving China, kept leaving China. This put pressure on the downward pressure on the renminbi. The central bank had to step in to prevent the renminbi from falling. But now essentially that narrative has changed. And by now all the foreigners who we're going to sell the renminbi have sold the, the foreigners who were going to leave China by now, they're gone. So now you're left with 100 billion coming in every month. And so that leaves you with a fairly easy bifurcation. The first is as all this money continues to come in, the renminbi has to start drifting higher. And as it starts drifting higher, Chinese savings, which for now has accumulated into gold, it's accumulated into, into US dollar assets. It's acute to the extent that it could. It's accumulated into US dollar bank accounts in Hong Kong or in Singapore. All of a sudden, if your rent, your currency starts to go up, say 5, 6% a year, you start thinking, hold on, I can buy PetroChina for a 6% dividend yield. I can buy China Mobile for a 6% dividend yield. I can buy, you know, any number of SOEs for 5,6% dividend yields. Companies that are ongoing bust, meanwhile the currency is also going up 5 or 6%. So that's a 10 to 12% return with very low volatility. So that's, you know, that's if they allow the currency to go up, if they don't allow the currency and they being the central bank, if the central bank fights the upward pressure on the currency, that means that they have to print a lot of money. As the 100 billion come in every month, they got to print the renminbi on the other side. And as they print the renminbi on the other side, remember that money that in the past would have gone into real estate, would have gone into economic activity now has nowhere else to go but the stock market. And that's why I think when you look at the Chinese stock market, you have to build and it's already looking that way, a sort of barbell strategy where if the renminbi goes up, you want to own anything with a high dividend yield or a high bond yield. And if the renminbi doesn't go up, you're going to own the aggressive growth stuff because you'll have so much liquidity creation that it will flow into the, you know, it'll flow into the 10 cents of this world, into the alibabas of this world and so on and so forth. So the barbell strategy for me, because the RMB is the most mispriced asset out there today, you have to have a barbell strategy of owning Chinese growth stocks and high, high dividend yield payers.

B (49:48)

So we hear over and over again about the demographic story and I always shut up because it's, it's, it's not, it's not good on especially for the, as a short term indicator and the stats are ugly themselves. You're talking about the next 10 years for China. What's the tee up where they start now? Does that, can that story get better for China in the next decade?

A (50:09)

So I think that the demographic picture, if you go back to pre Covid China was having roughly 17, 18 million births a year. Last year China had nine and a half million births. This is an epic demographic collapse. Now structurally the trend had been going down and this is a trend that you see all across Asia. You see it in Korea, you see it in Taiwan, you see it in Singapore, Thailand, Malaysia. Even Malaysia, which is a Muslim country, has a ratio of 1.5 children per woman today. Even India is actually below 2 now. So it's, it's everywhere around Asia and it corresponds to urbanization. You know, people in cities have fewer kids than, than if they live in the countryside. It corresponds to women having career choices now, to people staying at university longer. So lots and lots of factors. The fact remains that since China's balance sheet recession, the deterioration in China has been Much faster than everybody else. Within the sort of structural downward trend, China's done much worse. And I think that's why the government is shifting course on the, the whole we need to increase supply to, we need to increase demand. That's why the government is actively trying to push up equity prices, because it's trying to repair the balance sheet of the millennials, essentially. You know, the millennials, your 26 to 45 year olds, those guys have been the, they've been the bag holders in the, in the real estate bust. And they're no longer getting married, they're no longer having kids. So this is what you have to fix for. And you know, the way you fix for this, they hope, is, you know, you create an equity bull market and you create animal spirits and you, and in so doing, you repair balance sheets and hopefully people get married and have kids. Now, I don't know if it's going to work, to answer your question, but I also don't care that much. I mean, this sounds really cynical and I'm sorry, but I'm not in the baby clothes business. I'm in the making money out of stock business.

B (52:12)

Not yet, you're not.

A (52:13)

Not yet, no. No. Yeah, I'm not, I'm not. I don't think I'll be in the baby clothes business or the baby shoe business.

B (52:19)

Famous last words.

A (52:21)

So if, if I was in the baby clothes business, I'd be worried. I'd be very worried. But, you know, right now the policy is we're going to crank up stock markets so that people get married and have kids. The part of that equation that matters to me is we're going to crank up the stock market. Whether you succeed on the second part, getting people married and have kids, very happy. If you do, good for you for the next few years. What matters to me is the cranking up the stock market bit.

C (52:52)

The other big risk you hear with China, which you talked about earlier, is Taiwan. Like, how much of a risk do you think that is? Like, if you go on Twitter, you'll have, see people all the time saying, you know, the next five years they're going to invade and this is going to be a catastrophe for the world. Like, do you, do you think that's overblown?

A (53:04)

Yes, massively. My go to line is the, the closer you live to Taiwan, the less you worry about it. You'll find that all, all the guys who tell you, oh, worry about Taiwan, worry about Taiwan, usually live in, you know, Frankfurt, Dallas or, or Toronto. You, you won't find A lot of people from Taiwan or from living on the east coast of China worried about it. Because, by the way, you know, partly because if China, you know, if you're living in, you know, in Fujian Province or Zhejiang or along the eastern coast, which is where most of China's economic activity happens today, that means you're in direct range of Taiwanese missiles should anything happen. So, you know, perhaps you should be worried as well. Now, I'll give you the main reasons. You don't. You don't need to worry about it. The main reasons of everything to do with, with Taiwan's political backdrop today. Essentially, what you have in Taiwan, the dpp, which is the pro independence party, which is currently in power and has been in power for the past 12 years, is polling in the low 20s. It's never been this unpopular. So if you're China today, you're looking at this and you think, okay, you know, the, the election has to happen between now and May 2028, and at the next election, the DPP, which is the party that obviously the CPC in Beijing absolutely loathes, is going to get obliterated. It might not even survive the election. It'll capture so few seats that it might be the end of it. The only way these guys get to survive is if we rattle the cage. And so China has every incentive to not rattle the cage for the next two and a half years. Then the KMT comes back to power. And once the KMT is in power, you open the checkbook, you sign lots of deal, lots of tourism deals, lots of this, lots of that, and you start negotiating in good faith with the dpp. And remember, what the Chinese leadership wants is some kind of deal that puts a date and a transition. You know, when, when they did Hong Kong in 1992, and they agreed on 1997 as well. 1997 was the date where the New Territories had to go back. But, you know, the reality was that all of the water and pretty much all the food for Hong Kong was coming for the mainland. So in 1949, if the Communists had wanted to take Hong Kong, they could have. But, but, but they didn't. They never forcefully try to take Hong Kong. It was always through negotiations. Now, when it comes to Taiwan, I think ultimately what will happen is you'll get some kind of a deal where the Chinese will tell the kmt, but they'll only tell the KMT if The KMT gets 2/3 of parliament. Because to change the constitutions, you need 2/3 of parliament. But if you get 2/3 of parliament in the upcoming election. Then China says, okay, look, for the next 50 years, you get to stay like you are. You get to stay. You keep your army, you keep your police, you keep your currency. Everything stays the same. Then the following 50 years. So first 50 years, basically status quo. Next 50 years, you move to the one country, two systems, like Hong Kong. So you keep your parliament, your elections, your currency, your police. You just don't have your army anymore. So that brings you to 100 years. And then in a hundred years, we merge. And who knows what China looks like in a hundred years? And whoever signs up on this deal anyway is long gone, long dead. And so I'm absolutely not worried about Taiwan. And I'm not worried about it because unlike, say, the Russia, Ukraine situation, there is no bad blood. You know, if you look at The Donbass, between 2014 and 2022, you had 10,000 dead. So every day when he was waking up, Putin was getting reports of, oh, you know, they ban Russian Orthodox churches or they. They ban the speaking of Russian or such and such. School has been shelled or such. And such. Hospital has been put on fire. And then he'd have a whole. This whole right wing saying, what are you doing about this? You know, we need to intervene. We need to do something. There was a lot, A lot of bad blood. There's nothing like that in. In Taiwan. Like, Xi Jinping doesn't wake up every morning to news reports and part of his party saying, what are we doing about this? Because nothing bad is happening in Taiwan. It's not like the Chinese language is being banned. It's not like religious ceremonies are being banned. It's not like people are getting killed. There is absolutely, absolutely no bad blood. It's. There's so little bad blood, in fact, that more than a fifth of Taiwanese male passport holders aged between 25 and 65 actually work on the mainland and very often are married to Chinese women and have Chinese family. So it's. It is such. For me, the Taiwanese issue is this sort of red herring that is brought up by, to be honest, the US Military industrial complex to justify the buying of the next aircraft carrier or the next nuclear submarine or the next, you know, fleet of F35s. You know, it. If you're the US you have to justify a trillion dollars in military spending when no one can invade you. And, you know, how do you justify this? Oh, because Russia's gonna. Because China's gonna invade Taiwan. So, you know, anyways, I'm not worried about it.

B (58:29)

All right, before we Ask you the standard closing questions here. The bull case. How, how could you be wrong? What worries you where you could be wrong? Besides, you know, you didn't get long baby shoe manufacturers or whatever the, the most insulting trade would be.

A (58:47)

Look, there's many ways, many ways you can, you can be wrong in China, you know, the, but right now you're still left with, you know, foreign investors that, that aren't interested and that aren't there. So for the market to go down, you have to have essentially local consumers that are really down and out and that aren't that exposed to stocks. You know, today China households have 170 trillion in RMB at the bank against a market cap of 100 trillion. When in the US you have a market cap of 70 trillion and 9 trillion in cash at the bank, 170 trillion is in renminbi and in US it's in US dollars. But so, you know, in, in China you have a cash to, to the market ratio of 170%. And in the U.S. it's, it's about 15%. So, you know, when I look at overall exposure, I'm, I'm not that worried that things are going to go collapsing in China. Now, bull markets in China typically end when the governments decide, okay, this has gone on too much. We're going to change the rules on, on reserve requirements, we're going to change the rules on margin lending, et cetera. So far, there's no sign of that. If that happens, then you change your mind. You're like, okay, the government is no longer pushing the stock market higher. They're trying to push it down. I'm done. You know, you cash in your chips and you, you walk away. So far, like I said, I, I don't see that shift in policy from the government, but what do I know? They could shift in three months and six months for whatever reason. But again, so far, so far, I don't see it. So, so that was. Yeah, you know, that for me, I would really change my mind if there was an important shift in Chinese government policy.

C (60:31)

Well, our first client standard closing question. I feel like we could probably come up with 20 things from this interview that you could answer, but I'll ask it anyway, which is, what is one thing you believe about investing that the majority of your peers would disagree with you about?

A (60:41)

I don't know if they'll disagree. It's just like I, one of my starting points, and I'm not sure this is controversial and they disagree with it, but one of my starting points is that Exchange rates and the cost of energy matter tremendously. And so I spend a lot of time looking at exchange rates, looking at purchasing parodies. And I do like buying undervalued assets and undervalued currencies, because I think you get a twin protection. And now, to be very fair, this has not been a very successful strategy in recent years where the US dollar was overvalued and US assets were overvalued, but they kept outperforming. But so, you know, for me, and again, I'm not sure that people would disagree with me if I said, look, I think currencies matter a lot, and, you know, the undervaluation of a currency is going to end up being a big driver of return for, for you forthcoming years. I don't think anybody would stand up and say, well, that's bullshit and that's stupid, et cetera. They'll just quietly ignore it. But, but that is one of my core beliefs.

B (61:42)

And if there's one thing you could teach the average investor, what lesson would you like to teach them?

A (61:48)

I don't know if I'm any position to teach anybody anything. Um, they. Look, I, I think what the main thing about investing, there's, there's no right or wrong way about to go about investing right. There's many, many different ways. And you have to find the way that sort of fits your, your personality, fits your, your weakness. The tough part, I think, when you start when you're young is you don't really know where your weaknesses are. You, you find out your weakness by doing it. And obviously what you need to try to do is avoid putting yourself in positions where your weakness are found out. And one of the best ways to do this I find, and I do this, and I recommend it to young people that I meet, is actually to keep a diary. And not just to keep a diary, but to reread your diary so that you can put yourself back into the mindset you were in, the decisions you took, why you took them. And so, so I'm not sure it's a great piece of advice, but it worked for me.

B (62:52)

I'll say. So I'm going to take that as a great piece of advice. Louis Gav, we want to thank you for your time. If people want to read more online. I know, plug the Twitter handle, plug the website. Where can we send people?

A (63:03)

Yeah, the best is actually the website. I don't tweet that much. Most of what I tweet is stupid jokes that make me laugh. But very often, very few other people but so my Twitter handle is Gav underscore Vincent which is my my middle name. But the the best place to find us is actually on through our website so gaff gal.com g a v k.

B (63:26)

A l.com well I think you know, you might not get invited for the the Chinese Factory tour next time, but you want to follow along with Louis work so you can get all these insights because not too many people are talking this way and if the returns in the last year are any indication, if we're off to something, you got to find somebody who gets this. Louis, thank you so much for joining us today.

A (63:46)

Thanks a bunch guys. It was a pleasure to be here.

C (63:48)

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, you can contact us@excess returnspodmail.com no information on this.

B (64:07)

Podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.