Talk Your Book: Buy Low, Sell High in China

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0:43Holtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:51Welcome to Animal Spirits with Michael and Ben. Michael, I've done a lot of studying historically on the sea change we saw in the U.S. really in the early 1980s of 401ks and IRAs and how big that was for the stock market. And the story goes that once IRAs came around, people had a reason to invest in stocks for the long run. It like forced them out on their time horizon. Like, oh, I'm going to have more money in the stock market because of this vehicle. So we learned on the show today, talking to Brendan Ahern from CraneShares, that China has never had anything like this before. And I think we take for granted how far ahead we are in terms of retirement planning, financial products, than most of the rest of the world.

1:35But it sounds like China is just now ruling out their first ever tax deferred retirement strategy for consumers. They had pensions, but they don't have much of a safety net at all. And that is just kind of mind boggling to me. But it also makes sense of why the stock market is so ingrained in us culturally. Because for the last 40 years, the stock market has been a big part of everyone's, not everyone, most people's retirement saving plan. Yeah, this was a great conversation with Brendan. We got into all of that and what is going on with China and how do we get these stocks out of the doldrums.

2:10And yeah, we are, I would say this is as close to, forget hated. It's almost beyond that. It's apathy. Nobody cares, which is one of the key ingredients in a turnaround. Of course, these things are impossible to time and they're necessary, I would say, but not sufficient, right? Like there has to be something to change the tides. And we spoke to Brendan about what that could be. So we talked recently on Animal Spirits about the bears throwing the towel on U.S. stocks, but it feels like internationally, I don't think the sentiment has ever been this bad. In my career, it's never been this bad before.

2:47The sentiment on anything outside of the U.S., it's, yes, interesting times. I don't know what that sentiment means. We've talked that valuations alone are not enough to cause a sea change in these things, but I don't think the sentiment could get any more worse or beaten down. Agreed. All right. On that sunny note, here's our conversation with Brendan Ahern from Crane Shares.

3:14All right, Brendan, something Michael and I have been talking about recently. So you take the ACWI, All World Country Index, All Country World Index, however it's pronounced, market cap of the US is like 65%. China is less than 3%. But you look at the GDP weighting, the US is 26%. China is 17%. Explain to me this divergence, especially from the China front. Why is it that it's such a big part of the global economy, but such a small part of the stock market for the globally? I mean, one element, in my opinion, is just the American exceptionalism. just since the GFC low, the S &P 500 is up 1100%.

3:56And all country world XUS is up not even one third of that, just over 300%. And then I think countries and emerging markets like China historically had very high value weights. So financials, energy were more than 50 % of the EM benchmark, more than 50 % of the China benchmark 10 years ago. And you throw in industrials, materials, real estate. These are basically slow, no-growth sectors. So this idea that China's underperformed because it's a communist country or whatever, that's not really true because if you looked at a growth element in China, so MSCI China Tech has done almost 2 ,500 % versus the S &P's 1 ,100 % since that GFC low, but it was only 2 % of the index.

4:53And that's literally why we created Crane Shares was to say this growth element in China that is correlated with GDP growth is so underrepresented in indices that you got to go out and get it. And that's literally like K-Web or KMQ, right? It's literally why we built these ETFs to give you that growth factor for China and emerging markets. How hard is it to get the Chinese consumer to care as much about the stock market as we do here? Is that just going to take like a few generations? How does that happen where culturally stock market is such a big part of our national economy and the conscience here?

5:34It's a twofold factor. One is that China is not a socialist country. There is no social safety net in China today. If you lose your job, there's basically no unemployment. If you get hit by a car, you have exceedingly basic health care. You have a de minimis social security in China. And so the very high savings rate is out of the necessity of you're responsible for your old age. Culturally, the Chinese really care about their parents, grandparents. You're not shipping them off to La Boca Vista. They're living with you. And so you save a lot out of necessity. So, A, you're going to be very conservative.

6:28And then I think the other factor is that housing investing in China has been, you know, kind of the broken slot machine. It's just the gift that keeps giving that no one has ever lost money investing in real estate up until about, you know, call it two, three years ago. I thought you were going to say, I was like, is that a joke? It sounds like the curse that keeps cursing. The broken slot machine is that it always pays out. And it's just real estate because of the government policy of urbanization, Chinese cities just get bigger and bigger and bigger. And I kind of like, I always say my mom's from Denver.

7:09And so I spent my whole life going to Denver. and you know when I was a kid you'd fly into Stapleton you know the the Brown Palace was by far the nicest restaurant in Denver and and you know when they put the airport out you know the DIA it was like man that's things out in the middle of nowhere well now the city goes also so that's like that's like 130 cities in China just and so you'd be like well if you know the city's going to grow you just invest in where it's going to grow and you're you're rich and And that music stops. So that means that most of the money, most of that savings is just in real estate and cash then, I assume, to your point about no safety net, it's mostly just very conservative.

7:48Upwards a two-third of urban household wealth is in real estate. What's that here? So here in the US, most, you know, yes, housing is a big part, but you also have very, very significant stock holdings in China. Well, said differently, Brendan. So rich people here have a portfolio of real estate and private investments and public equities. Is that not the case with rich people in China? No. Maybe 3 % to 5 % is invested in stocks. You also have even insurance is very low in China. And so it's just culturally, and that's what almost people say, oh, the Chinese investors like gamblers. No, no, no.

8:35It's the opposite. They're the most conservative people. But if you're going to only put 3 % into the stock market, you're in it to win it. You're going the most aggressive. So it's kind of interesting, Michael. It's one of the things we think, A, just like literally this week in China, they announced that the basic what we would call IRAs, where you'll be able to put in 12 ,000 RMB into like an IRA. It's a tax deductible contribution. You can invest it. And they did it in 36 pilot cities. Hang on a second. Brendan, they've never had retirement accounts? Not like an IRA. It never existed in China.

9:21Some of the bigger companies have pension plans. So if you're at a big state-owned enterprise, you have a pension, but it's probably de minimis. your social security, it's like$250 a year. I mean, it's literally nothing. Some of the newer companies are starting to get into 401ks, as well as some of the publicly traded private tech companies do have ESOP plans. Okay. So let's talk about these companies that you all own in K-Web. So we understand the idea of the state-owned enterprises and the real estate sucking wind and all these slow to no growth companies. But the companies in this portfolio, these are growth stocks, but the stocks aren't growing.

10:09So let's talk about what's going on with these companies, what's going on with the earnings. And you mentioned that they're kicking our butts since the GFC lows. But if you look back over the last three or five years, they've done horrendously compared to our tech companies. So is this like a lack of investor enthusiasm? Are the companies slowing down? What is the story and how do these companies get back on track. Yeah, it's both. I mean, some of the decline, I think, is due to just the fundamentals that these companies went from high octane, 20%, 30%. And because of this collapse in housing prices, you've seen the consumer get very, very conservative.

10:51And that means the transmission engines for e-commerce are feeling that. Because the economy slowed, you don't have as much advertising. There's less mobile payments because people aren't buying. So there is a fundamental that these companies have slowed. But I also think it's these companies like non-US equities have been totally kicked to the curve. I don't think that's unique to China. No, I don't know what the average US non-international weighting is. I bet you it's all-time lows. I would agree with that. We know, you look at EM funds and their top holdings are US stocks. That's just to survive, to stay upright.

11:43And I kind of say like that S &P up 1100, AcreX US up 313. I mean, that's 15 years. That's 60 quarterly statements, you know, trustee meetings, board meetings, board, you know, your investment. You know, I mean, and I'm sure I'd be curious, you know, I'm sure Michael and Ben, in your practice, people are like, why do you hold this non-US? It does nothing but underperform, like get rid of it. And that, but what I would argue is that is global. I mean, the amount of foreign capital in US stocks, it's very high. You're right. But apathy and even attractive valuations, unfortunately, that's not a catalyst.

12:30No. Valuation is not a catalyst. So yes, you're right. There is absolutely no interest, which is like if you're bullish, you like to see that. But I could have said this a year ago and two years ago. So what do we need to have happen? Has the real estate washout been sufficiently washed out such that the Chinese consumer is going to start buying? And I don't mean buying stocks. I mean buying goods and services and all that sort of stuff to make the 10 cents of the world go up. Like, how does that happen? Thus far, the government is doing a lot to support real estate. And that's A, to try to get real estate prices to stabilize or stop going down.

13:17It's also how real estate and infrastructure employ a lot of people, plumbers, electricians, cement mixers, home appliance makers. There's this real economic effect. So what we've not seen is the rebound in consumer confidence thus far. But what we are seeing is in terms of like a re-rating of China, it would require the Chinese to buy China. And there, I would say the companies are all buying stock hand over fist, particularly the K-Web companies where you have a tech entrepreneur is the founder and the CEO or the chairperson, the buyback yield on a lot of these companies is high single digits, if not low single teens.

14:07And then you're also seeing money come out of mainland China into buying these growth stocks in Hong Kong. So it's over 90, it's about 94 billion year to date has come out of mainland China and buying these gross stocks, that's more than double what they did last year. And then I think what you're starting to see is where did the China money from China or from Asia go? Well, I think it went to MAG7, Japan and India. And in this China rally, it's kind of interesting that India and Japan kind of came down, you know, and that would indicate that broader Asian investors, and that's almost been our thesis of like, listen, we're not saying like sell all your US stocks, like, you know, definitely not.

15:05I'm just saying, why wouldn't you do what your MBA or CFA or CFP designation taught you, which is - Because it's not working. Well, because it will. It will. And, you know, buy low and sell high, right? You know, buy just a smidge of cheap China and sell just a smidge of U.S. And, you know, there is someone buying, which is some of the hedge fund managers. The reason that we got this huge run-up recently, obviously, is because of the big stimulus that China announced. And it almost seems like it feels like this happens every few years. Maybe you can correct me if I'm wrong, But I feel like this time, most investors and pundits are saying, uh-uh, you're not going to fool us this time.

15:48It's not going to work because Chinese stocks went crazy. I think your fund went from being down on the year to up like 40 % in a matter of, what, a couple weeks probably? But the rally did fizzle again. So explain to us what – I'm trying to put it into perspective. Explain to us the stimulus. Maybe you can compare it to the COVID stuff to figure out how big this actually was and what they're actually doing. Yeah, yeah. So, A, get housing, right? So they've refinanced every mortgage in China. They're trying to incentivize buying. So they gave lower mortgage rates to everyone. Yeah. And that's been part of a broader interest rate cutting that we'll see that they waited for the Fed to cut, then they'll cut because they don't want to - Has that spurred housing activity at all yet?

16:32It has. Transaction volume has increased. We're not seeing, and in the big, big rich cities, prices have stabilized. What we've not seen is in the lower, you know, kind of middle class, poor cities, prices have not stabilized. So you'd say like, OK, it's starting. They are doing what people have wanted to see is the Western style, you know, free money to spur consumption. And the view has been that's just a sugar high that leaves you with more debt and high inflation. And so they've been very conservative in direct consumption discounts other than in auto sales, which includes EV and hybrid and home appliances.

17:25And you'd say, why those two? And there it is working. I mean, some of this shiny EV data that you're seeing is the consequence of the subsidies to buy autos. Why is that? Well, get just, you know, I don't mean to put you on the spot. Like BYD, guess how many people they employ in China? 69 billion. Is that in yen? Over 700 ,000 people. Wait, hold on. I'm only teasing, obviously. Wait, 700 ,000 people are employed in? BYD. Okay. So when you give a auto subsidy, think about the knock-on effect it has for automakers that they employ more people. You know, the people that work there get paid more.

18:13So people have really poo-hooed like, hey, we're not seeing direct consumption, but they're doing it almost implicitly. And very similar that they've said, you know, we're going to clean up the balance sheets of a lot of local governments. People are like, hey, what does that do for consumption? But in a lot of these provinces, particularly the poor provinces, the local governments employ a lot of people. They do a lot of contracts with local companies. So it's an implicit consumption effect. So just getting back to what Ben said earlier, are they interested in getting people to care about their stock market?

18:49They care more about the Shanghai Shenzhen market than say the Hong Kong market, because that Shanghai Shenzhen market is a daily barometer of consumer confidence. And that's been giving the government a thumbs down. Like people are like, hey, not enough. But this idea that they could just snap their fingers and make their stock market go off, they can't. They can't. If they could, they would. Why would they not? And they've thrown a lot of money into like their sovereign wealth fund, their social security fund. They've allowed insurance companies to buy. The sovereign wealth fund of China has put, it's estimated at least$150 billion into stocks over the last year.

19:44That's a lot. Which is a lot, but you're talking about like a multi-trillion dollar market cap. All right. So they're pissing into the ocean. So let me ask you this. Is there any way that they would adopt something similar to Japan? And I don't know all the details where they're like, listen, if you're not trading at book value, you're going to get removed from the index. If you're not doing dividends and returning, creating shareholder value, we're going to remove you. Is that just so antithetical to their culture? No, no. No, because they want, you know, they, part of what they want to do is they want to create that American style that the stock market is a store of value versus money going into brick buildings, which they don't need any.

20:25So, so yes. So if you're a company, you can get a basically interest-free loan to buy back your stock or pay a dividend. They've actually said to mutual fund families and insurance companies, we'll give you a loan to buy stocks. What about convertible bonds at 0 % interest and then they just start buying Bitcoin? We've not seen that. We've not seen that. So we talked about how valuation isn't a catalyst, obviously, and it does seem like everyone is ready to throw their intelligent investor book in the trash. But how much cheaper are your tech stocks in your portfolio than like the basket of the mag seven or whatever?

21:06Are Chinese tech companies noticeably cheaper than American tech companies? Oh, I mean, come on, like the backward, you know, Apple's PE is 37 versus like the K web PE is like 12, you know, like. So your portfolio is trading at 12 times earnings. Yeah. Jeez. And they're all tech stocks. So how do we get that high? those are rookie numbers, Brendan. Yeah. So, so, you know, that's where this re-rating idea, you know, who is buying and, and, you know, there are some well-known hedge fund investors who, and hedge funds can hedge, right? I mean, that's, but, you know, I saw, I saw, I was in Asia before Thanksgiving and, you know, I saw Howard Marks speak and, you know, he said, listen, like I made my career buying stuff out of the bargain bin.

21:55He better be buying, if he's not buying China. He is. He filed, Oaktree filed for several China ADRs for the first time they initiated in Q3. Now, obviously Q3, 13F data, no different than other hedge funds. I mean, they could be here today, gone tomorrow. I know. Well, David Tepper was on TV getting pretty damn excited. Well, I think he saw what, you know, and to his credit, he started buying a few quarters ago. All right. So he probably sold already. He may have. I mean, we don't know. I mean, he's, you know, we just don't know. But I think, yeah, I mean, you know, Michael Burry, I mean, you know, these are some legendary people are dipping their toes or coming back in.

22:40And I think, I think that the issue, the elephant in the room is, is, is the geopolitical that, you know, as a professional investor, right. You know, and, and if you're a pension, a U.S. pension, you know, how do you say I'm going to buy more China when the narrative is so negative? I mean, even for yourselves as financial advisors, if you, you know, if you bought China, you know, how many phone calls would you get? Right. It's not easy. So how does that, how does that, all right. So there's obviously geopolitical headline risk that is helping to compress multiples lower. Is there any way in which these fears about Taiwan or whatever, like get lifted?

23:22Like, is there like - Wait, I have the catalyst. I have it. Isn't it just, not even like an AI blow up, just an AI hiccup where AI somehow sends these big tech stocks down? Because obviously the rest of the world is not trading on AI these days. Isn't that the catalyst? I, you know, I don't see it as a zero sum game. You know, I'm not rooting for US stocks to go down. You know, I guess in theory, professionally, I have no exposure. So what do I care? But But personally, yeah, I mean, I've got a lot and, you know, I'm an American. It would be bad, right, if U.S. stocks collapsed. I think it's just more of the sum of the pulling forward of forward returns that we're seeing after the election.

24:05Just do things kind of go flat in the U.S.? But guess what? If things go flat in the – if things go bad for Apple, they're not just going to magically go well for Chinese tech stocks. So the headwind that I'm talking about, like will they, won't they potentially invade Taiwan, if there is somehow a resolution, and I know nothing about this, but if there is like a, hey, people get less worried, can that re-rate the stocks higher? Yes. And that's where I think the geopolitical, A, it could be the dollar. I mean, I do think if the dollar were to weaken, it just makes U.S. stocks, which are obviously dollar denominated, a little less attractive for foreign investors.

24:45And I'm telling you, foreign investors are up to their eyeballs in U.S. stocks. You know, the Treasury Department releases that data only annually. And it's, I mean, I can't wait to see it in 2024. Is that true for Chinese investors, too, that they're bringing all their money to U.S.? Out of Asia, there's a lot of money. Out of everywhere. I mean, I kind of say like, you know, guess how much MSCI Chile is up since the GFC low? 4 %? Close, 50. I mean, S &P is up 1 ,100. Chile is up 50. So if you're a trillion investor, like 50 % over 15 years, like, guess where your money? But so Brendan, this is the conversation that every investor is having.

25:40Like, this has gone on for a long time, but it's not just going to magically stop the continuing divergence of both valuations and returns and profits. there's got to be something. There's got to be something. Well, I think one, it's potentially the dollar. And the other thing would be the geopolitical overhang going that, you know, a Trump bargain with China allows people to come back into the space. And all the data shows, particularly US investors, have no exposure to China, very de minimis exposure to non-US equities in general. I mean, these EM fund families, these non-US focused fund families are all going out of business.

26:34I mean, literally. And I would just argue that trade probably looks a little long. But what's keeping people from buying? The decks have been cleared. Yeah. So just you need you need the thing that's kept people from coming back in, you know, which is, I think, the geopolitical. And I think that's a big deal, even for institutions. I think it is a big deal. Brendan, what do you say to people that are like, all right, fine. Let's just say that I do want to get some exposure to China because pessimism is so extreme that you just got to hold your nose and buy because this is how long-term investing is typically rewarded investors is buying what everybody absolutely hates.

27:19And then they're like, but I'll just buy the casino stocks. I'll just buy the US. I'll just buy, I'll just buy win. Well, I mean, A, I've said you are implicitly invested in China because of Apple and NVIDIA and ExxonMobil. These great US multinationals all have a lot of China revenue. So you're already there. You're already invested in China. It's just more of, is there an opportunity for the local companies? And I would argue yes. Yes. You know, one would be, you know, just take that idea of a smidge, you know, just like a little smidge. You know, A, you know, you have to volatility adjust this stuff so that way you don't get shaken out.

28:00So this is, you know, if your normal position is three, five percent, I'm like, make it a third of that. You know, like literally, like if this stuff is twice as volatile as the S &P 500, then buy half of it. And then two would be like, you know, for some people, you can use options around K-Web. You know, you can write calls and or hide it. Are we talking about Clip? Are we talking Clip? Brendan, I don't think we ever spoke to you about Clip. Did I win or is it still K-Lip? Oh, wait, what did I call it? I called it K-Lip. You guys call it Clip. I called it K-Lip. We call it Clip. Well, a lot of people call K-Web the K-Web.

28:35No, nobody calls it the K-Web. People do. There's a group out there. So Clip does that for you, right? It just writes a call. And that's giving you 4 % to 5 % monthly. But you can do that yourself if you don't want to outsource that to us. So those yields are still pretty high on your call writing strategy. Yeah, yeah. And so I'm curious on the fundamentals. So one of the things that Michael and I have been talking about on the U.S. tech stocks is, yes, they've had this amazing run, but the fundamentals have also matched. So how do the growth rates of these tech companies in China compare with the growth rates of, It doesn't even have to be NVIDIA because that's in another universe, it seems like, but just the other tech stocks.