A Few Things: What’s Really Happening in China, Deciphering Geopolitical Alpha, Secrets of Peak Performance, Generations, News You Might Have Missed, Investing in the AI Bubble?….

August 29, 2023

Hi, I’m Ahmed Husain, feel free to connect here on LinkedIn or here on Twitter. Every week, I share my view on developments across markets, technology and being a better human. I advise and work with global family offices and investors looking to understand the world and find investment opportunities.

You can check out last week’s edition here: Predictions on Future of Tech, Why Do So Few People Want Children, ILTB & Lee Ainslie, Secrets of Happy Families, How Not To Be Stupid, Making Good Decisions, Gartner AI Hype Cycle....

This week’s copy is early since China may have begun to move already….

Believe it or not, that “♡ Like” button is a big deal – it serves as a proxy to new visitors of this publication’s value. If it was helpful to you, if you got value out of reading it, please let others know.

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Quotes I Am Thinking About:

We are so accustomed to wearing a disguise before others that eventually we are unable to recognize ourselves.

- François Duc de La Rochefoucauld

If you believe everything you read, better not read.

- Japanese proverb

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A. A Few Things Worth Checking Out:

1. I am going to start with two things on China because there are few things as contrarian as China at the moment. At some point China could turn around. I don’t want to be scrambling to find the narrative and investments then. I want to be prepared for it.

There is a saying on Wall Street that goes something like: “Price Creates It’s Own Narrative”. Which means: high prices on an asset create the narrative of how amazing a business or an asset class is and conversely low prices create a narrative of how poor a business or an asset class is.

Price comes first and then narratives are created to justify those prices.

I’ve been thinking about this in the context of the recent Economist covers:

Usually when something is on the cover magazines it’s well discounted into the price of the asset.

Which had me thinking about this Gavekal piece that argues why are we hearing so much about China meltdown story.

Sharing the key bits, emphasis mine:

It is impossible to turn to a newspaper, financial television station or podcast today without getting told all about the unfolding implosion of the Chinese economy. Years of over-building, white elephants and unproductive infrastructure spending are finally coming home to roost. Large property conglomerates like Evergrande and Country Garden are going bust. And with them, so are hopes for any Chinese economic rebound. Meanwhile, the Chinese government is either too incompetent, too ideologically blinkered, or simply too communist to do anything about this developing disaster.

Interestingly, however, financial markets are not confirming the doom and gloom running rampant across the financial media. Consider the following points:

Putting it all together, it seems fair to say that as things stand:

• There is a sizable problem in the Chinese real estate sector, and companies are going bust. Amazingly, however, Chinese banks seem to be weathering the storm, at least for now.

• The Chinese consumer continues to consume, even if not with the same gusto as in the years before Covid.

• Chinese equities have been disappointing, but Chinese equity markets are not in the kind of full-blown meltdown one might expect given the apocalyptic tone of reporting in the financial media.

• Commodity markets do not seem all that bothered by the implosion in Chinese real estate.

• Government bond yields in China remain stable, and have not broken down to new lows. US treasuries continue to melt down, even as returns on Chinese government bonds remain steady.

• The Chinese high yield corporate debt market remains completely dislocated.

So given the apparent lack of contagion from China’s troubled real estate sector to the banking system and broader financial markets, what accounts for the sudden surge in negativity across the world’s financial media towards all things related to China?

Several possible answers spring to mind:

1. For once, the press is running ahead of the markets. The first axiom everyone learns when starting off in finance is that “if it’s in the press, it’s in the price.” Most of the time, this is true, especially in today’s world of high frequency algo trading.
   
   However, every now and then markets are hit by “game-changing” events—such as the Lehman and AIG bankruptcies, the Enron accounting scandal, or the Madoff fraud—which can trigger a whole new wave of forced selling by leveraged investors, or simply of panic selling.
   
   This brings us to the true catalyst for most massive bear markets—what Charles likes to call the Ursus magnus of bear markets. An Ursus magnus is caused not by changes in productivity, or a slowdown in the growth of the economy, which are part and parcel of the normal economic cycle. Instead, an Ursus magnus is caused by a sudden gap between the volatility of asset values and the risk tolerance of savers. When such a gap occurs, either the government or the central bank must step in to bridge the gap when it threatens to become too wide, or risk a financial system collapse.
   
   Today, the obvious fear among many in the financial media is that such a gap is developing—or about to develop—in China, and that the Chinese government is doing nothing to plug it.
   
   So, the first possible explanation is that the financial journalists have correctly foreseen the crisis that is about to engulf China, even as Chinese policymakers and participants in China’s financial markets, commodity markets and OECD government bond markets remain inexplicably complacent about the financial tsunami that is about to swamp the global economy.

2. The press needs a new scare story. Pandemic horror stories no longer sell. Neither do stories of harrowing human suffering in Ukraine or headlines about an impending world war. It’s not that the suffering has ended, or the risk has disappeared. It’s just that people have moved on. Similarly, people are tired of reading about climate change, and even more bored of gender-related culture-war posturing. What’s left? Perhaps impending economic doom might sell newspapers?

3. People have the China-US treasury meltdown relationship all wrong. The Iraqi weapons of mass destruction, the Covid hysteria, the push for vaccination, the “Hunter Biden laptop is a Russian plant” story have all shown that critical thinking within the Western media is in short supply these days, and that most journalists would now rather be wrong with the consensus than be right alone. As a result, when a narrative starts to develop, Western media latch on to it, and lay it on thick.

This brings me to what should be the big story of the summer: the meltdown in US treasuries. Here is the biggest market in the world, the bedrock of the global financial system, falling by close to double digits in a month. And perhaps most amazing, this meltdown is occurring on limited news. There have been no Federal Reserve policy changes, no hawkish speeches from Jerome Powell. Basically, long-dated US treasuries just fell -9% on no news.

This should be the news. Instead, the news is all about China’s financial meltdown.

My initial reaction to this odd combination of terrible Chinese news with rising US treasury yields was to think: “This is odd. Why are US treasury yields rising when the Chinese news is so bad?”

Then it struck me that perhaps I had things the wrong way round and that I ought to be asking: “Is the Chinese news so bad precisely because US treasuries are melting down?”

Why Am I Hearing This Now:

I grew up in a country—France—where about 70% of media advertisements were bought either by the government or by giant state-owned enterprises such as Air France, SNCF, and EdF. Moreover, this was a country where much of the media was owned either by weapons manufacturers such as Lagardère or Dassault, or by public works companies like Bouygues—groups that depended directly on the government’s franc for most of their revenues.

Then, having grown up—physically, if not mentally—in France, I moved to the fringes of a country that makes no bones about the importance of the Chinese Communist Party Central Committee Propaganda Department—a department important enough to occupy one of the most central locations imaginable in Beijing, right next to Tiananmen Square and the Forbidden City. As a result, whenever I read a piece of news, my first inclination is always to wonder: “Why am I reading this now?”.

Why the sudden drumbeat about collapsing Chinese real estate and impending financial crisis when the Chinese real estate problem has been a slow-moving car crash over the past five years, and when, as the charts above show, markets don’t seem to indicate a crisis point?

At least, markets outside the US treasury market don’t seem to indicate a crisis point. So could the developing meltdown in US treasuries help to explain the urgency of the “China in crisis” narrative?

As the first chart below makes clear, an important divergence is now growing between the Chinese and US government debt markets.

Basically, US treasuries have delivered no positive absolute returns to any investor who bought bonds after 2015. Meanwhile, investors who bought Chinese government bonds in recent years are in the money, unless they bought at the height of the Covid panic in late 2021 and early 2022. This probably makes sense given the extraordinary divergence between US inflation and Chinese inflation.

None of this would matter if China was not in the process of trying to dedollarize the global trade in commodities and was not playing its diplomatic cards, for example at this week’s BRICS summit, in an attempt to undercut the US dollar. But with China actively trying to build a bigger role for the renminbi in global payments, is it really surprising to see the Western media, which long ago gave up any semblance of independence, highlighting China’s warts? Probably not. But the fact that the US treasury market now seems to be entering a full-on meltdown adds even more urgency to the need to highlight China’s weaknesses.

A Chinese meltdown, reminiscent of the 1997 Asian crisis, would be just what the doctor ordered for an ailing US treasury market: a global deflationary shock that would unleash a new surge of demand and a “safety bid” for US treasuries. For now, this is not materializing, hence the continued sell-off in US treasuries. But then, the Chinese meltdown isn’t materializing either.

Investment Conclusions:

All this leaves investors at an important crossroads. On one hand, you can look at China’s recent travails and conclude—along with most Western financial journalists—that the world’s second largest economy is about to implode. From there, the investment conclusions follow pretty swiftly: sell all things related to China, sell commodities, other emerging markets, global financials and global value stocks. In a world in which China implodes, salvation will likely only be found in long-dated US treasuries and US growth stocks—which by sheer coincidence happen to be the very assets that the US and most global investors need to do well.

On the other hand, you can look at recent market behavior and conclude that as Chinese banks have spent the last year outperforming US treasuries, the immediate problem is not in the Chinese financial system, but in the US treasury market itself. If so, we are entering a new world in which US treasuries can no longer be thought of as the bedrock on which to build portfolios.

This was the thesis that underpinned my 2021 book Avoiding The Punch. So it is small surprise that I favor the second explanation. Investors should make up their own minds. In an attempt to help, I have summarized the arguments presented in this paper in the following decision tree. Its title should probably be: “Who are you going to trust? The financial media or your lying eyes?”

What do you think?

2. Adding to the thought process is my favourite substack account and twitter follow: Citrini whom’s GLP work I shared last time. He put a good report on China at the Crossroads.

The value in his report was from the open minded thinking around how to play a potential turn in China.

Here’s the preface to his work:

This article aims to equip investors to evaluate China's economic landscape & its effects on cross-asset international markets, assessing risks and opportunities presented by current challenges. Actionable trading ideas are provided, though China often warrants a nuanced approach.

China will likely pursue reforms, targeted stimulus, and oversight to achieve stable, sustainable growth. Markets may continue to be underwhelmed, as massive stimulus appears counter to China's strategic goals. The focus for investors should be gauging whether potential measures could succeed, not anticipating their timing. 

Current conditions make major stimulus probable, but not guaranteed effective. We will explore the context, key indicators to monitor, and trades offering asymmetric risk/reward. While perspectives abound, objective analysis of both bull and bear cases is most valuable for trading China's crossroads. China is, virtually always, a trade – if you’re here for long term investments wait until next week’s article on US Fiscal Primacy. 

China's approach to the myriad challenges it currently faces will likely include a mix of structural reforms, targeted stimulus measures, and regulatory oversight, all aimed at achieving a stable and sustainable economic path. All of these measures will likely continue to underwhelm investors – this has been planned for longer than the market realizes, and a “firehose” stimulus would defeat the entire point. The only way the bazooka is coming out is if something goes seriously wrong, which is looking more and more likely, so the best skill an investor can have now is not to be able to anticipate when the stimulus is coming but whether it will work. It’s not guaranteed this time. Let’s explore the basics and then delve a bit deeper into both the background, what to watch going forward to identify opportunities or catalysts, and a few plays that may present asymmetric risk/reward. 

Some of his ideas:

• long Chinese Property Bonds

• long Gold versus CNH or SGD versus CNH

• Long Chinese Carbon Credits versus CNH

• Stimulus Barbell of Chinese Equities: Long China EV/Battery Metal/Green Supply Chain versus CNH

• Long China Consumer Tech

• Long MSCI World vs China Sales Exposed Global Equities

3. Marko Papic of Clocktower Group was on the CAIA Association’s Educational Alpha podcast discussing his insights on the shifting dynamics of a multipolar global environment and its impact on climate change.

4. Meb Faber spoke with Dr. Gio Valiante. Gio is regarded as one of the most successful performance coaches in the world. He’s currently the Head Performance Coach for the Buffalo Bills and works with some of the top golfers and top investors. He was previously the Head Performance Coach for Point72 and Steve Cohen.

In today’s episode, Dr. Gio starts by sharing the five ways to win on the field or in the market (that itself is worth its weight in Gold). Then he shares the parallels of top performers in both athletics and investing. He walks through ways to help handle failure, navigate fear, and detach yourself from your results.

Simple and powerful masterclass on peak performance.

5. I was born in Pakistan, and there is a big part of me still drawn to the stories of the Indian sub-continent. It’s beautiful to see something as well made and well told as the Amazon Prime Made In Heaven Season 2:

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B. Generations

I am fascinated by the idea of generations.

Why are generations different from each other? Why do we have hard time understanding the values and views of other generations? What does all of this mean for the future?

Generations by Jean M. Twenge is a book that explores how different generations differ in mental health, political beliefs, sexual behavior, gender identity, attitudes about race, life goals, drug and alcohol use, income, self-confidence, trust, and materialism.

Professor Twenge is the global authority on generational data and is the author of more than 180 scientific publications and several books based on her research into generational change.

It’s an eye opening look at who we really are and how we got that way. It will forever change the way you view your parents, peers, co-workers, and children.

The book is broken in three parts: her theory of generations, a deep dive into each generation and her view on the future.

Classical theories of generational change focus almost exclusively on major events - for example the work of Strauss and Howe.

Twenge argues that each generation is different because of the technologies that were dominant during their childhood and because of the unique experiences they endured. Technology is seen as the foundational cause of most generational differences, supported and amplified by unique experiences.

Her theory is that technology is the mother of generational differences with individualism and slower life being it’s daughters and major events are friends of the family that show up every once in a while.

Technology isn’t just tablets or phones. It includes everything from fire to medical care to washing machines and multi-story buildings. Our lives are different from the lives of those in decades past because of the technology we rely on.

Technological change isn’t just about stuff; it’s about how we live, which influences how we think, feel and behave.

Individualism: A worldview that places more emphasis on the individual self. No one will deny that we live in a much more individualistic world, but how is that caused by technology? Until well into the 20th century, it was difficult to live alone or to find time to contemplate being special given the time and effort involved in simply existing. In contrast, modern citizens have the time to focus on themselves and their own needs and desires because technology has relieved us of the drudgery of live.

Technology doesn’t always result in uniformly high individualism - for example, Japan is a collectivistic country immersed in technology. But individualism can’t exist without modern technology.

A Slower Life: Technology also leads to another cultural trend that’s had an enormous impact on how we live: taking longer to grow up, and longer to grow older. This trend isn’t about the pace of our everyday lives, which has clearly gotten faster, but about when people reach milestones of adolescence, adulthood and old age, like getting a driver’s license, getting married and retiring.

Why has life slowed down? A model called life history theory shows that parents have a choice. They can have many children and expect them to grow up quickly (a fast life strategy) or they can have fewer children and expect them to grow up more slowly (a slow life strategy). The fast life strategy is more common when the risk of death is higher both for babies and for adults, and when children are necessary for farm labour.

In the 21st century, infant and child mortality is lower, education takes longer, and people live longer and healthier lives. In this environment, the risk of death is lower but the danger of falling behind economically is higher in an age of income inequality, so parents choose to have fewer children and nurture them more extensively.

These slower life trajectories are all ultimately caused by technology, including modern medical care, birth control, labor-saving devices and a knowledge based economy. A recent study using eight biomarkers of aging found that 60-79 year old Americans in 2007-2010 were biologically 4 years younger than the same age group in 1988-1994, and 40 to 59 year olds were biologically 2 to 3 years younger.

I'll cover her predictions for the future next week, but you can get a flavour for her work here in a chat with Katie Couric:

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C. Charts and News You Might Have Missed:

1. A new survey says people listen to between 1 and 3 different podcasts each month. 51% of respondents claimed this, while 30% say they listen to 4 to 6. Podcasting has become a major form of media, as 73% of respondents said they have listened to a podcast in the past 12 months.

For the first time since tracking American listening habits, more people are listening to on-demand platforms than linear ones.

2. BRICS bloc said it will welcome Argentina, Egypt, Ethiopia, Iran the UAE and Saudi Arabia as new members next year.

The bloc is expanding to help provide a greater voice for developing economies in global economic institutions that are largely dominated by the US and EU. BRICS stands for Brazil, Russia, India, China and South Africa.

3. Alibaba launches AI model that can understand images and have more complex conversations. Alibaba launched on Friday two new artificial intelligence models — Qwen-VL and Qwen-VL-Chat — the company says can understand images and carry out more complex conversations.

One example Alibaba gave is a hospital sign. Qwen-VL-Chat is able to answer questions about which floor of the building certain hospital departments are on by interpreting an image of the sign. This AI push comes from Alibaba’s cloud division which is looking to reignite growth as it prepares to go public.

4. Love seeing how this chart evolves. What will it look like in 2030?

5. You’ve read enough of about Nvidia, but here are the numbers:

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D. The Technology Section:

1. One of my favourite new follows is Citrini Research. He does great deep work, and if you are thinking about AI, how to invest in it and the opportunities around it, check out this interview:

Or this report he produced for subscribers.

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Believe it or not, that “♡ Like” button is a big deal – it serves as a proxy to new visitors of this publication’s value. If it was helpful to you, if you got value out of reading it, please let others know.