Animal Spirits Podcast - Talk Your Book: Finding a Bottom in China

Episode Date: March 25, 2024

On this episode, Ben Carlson and Michael Batnick are joined by Jonathan Shelon, Chief Operating Officer of KraneShares to discuss: an economic update on China, China's buyer of last resort, what happened in Chinese real estate, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Crane Shares. Go to craneshares.com to learn more about their whole suite of investing in China. We got K-Webb, we got K-Pro, K-Buff, all these different options on investing in China, some that pay call option income, some that protect you to the downside. Learn more at craneshares.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, from. writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spurts with Michael and Ben. A rough couple of years for China, to put it lightly. Yes. I mean, I've always said that I'm not a big person on, like, contrarian indicators. Everyone's always looking for the Shushan boy all the time now. Credit it to you. You don't get involved in the nonsense, in the riff-ref. Because I feel like there's contrarian indicators all the time if you wanted to find

them, but there have been way more conversations lately saying, okay, I'm fine with emerging markets, but I'm China, I'm out. And I mean, it wasn't that long ago where everyone was saying, well, geez, China has all these big internet companies just like we do. What if that's the next really big growth area? they're in a massive drawdown now. What are we talking? 70 to 80 percent for a lot of these names. You know, I'm a contrarian at these levels. I mean, although I'm so contrarian that I bought it and I sold it recently. I tried to catch it by and said, eh, too much hassle. Okay. But I might be

back. Yeah. So my whole thinking is for the people who want to, I understand the fact that a lot of these emerging market countries just aren't like us in terms of how corporations are like this deity that we just worship and the stock market is everything, that they don't have that same mentality. But China is the second biggest economy in the world. There's a billion people there. I have a hard time not having any exposure to that size of an economy and that size of a consumer base. Yeah. They described the recent pain as their GFC. And if you look at a chart of K-Web, yeah, looks about right. Yeah. So long way from the top. Yeah. So anyway, interesting conversation. I've always been fascinated by China because I feel like I don't know. I don't understand anything about how the whole country operates. And I, it's...

Well, you're a world travel. You just get back from Milan. That's true. But doesn't it, I mean, doesn't it seem like they just kind of make up their economic growth and say, we were 3% this time. I don't know. So anyway, we learned a lot here. We talked to Jonathan Schellen, who we've talked to before from CraneShare. So here's our talk with Jonathan. We're joined today once again by Jonathan Schell, Jonathan is the chief operating officer. at Crane Shares. Jonathan, welcome to the show. Ben, thanks for having me. Okay. What am I, chop liver? Oh, sorry, Michael. You too, of course. Jeez. Lots to get to on China, which is one of the main focus areas at Crane Shares. Where do we even begin here? What is the, okay, I'll give you a softball. What's the most asked question you've got getting on China for the past

12 to 18 months? When is it going to start going up again? Okay. So what's your answer? Now. The answer is now. Look, it's interesting. When we talked about a year ago, we talked about a lot of the things that we were observing that were kind of in the red zone turning green. And last year, China started to enact a number of policies, monetary policies, that were going to help it get past the overhang of the things that happened during COVID. And our expectation was that sometime last year that China would unveil a

bazooka, right? There would be some kind of massive stimulus taking place, and it never came. And what we've come to learn is that China can't apply a bazooka like the U.S. did and spend 36% of GDP to push the economy forward. They're going to use something like a grand sniper rifle, and they're going to address individual issues very carefully with fiscal policy. And we're starting to really see that come together right now. Why can't China do the bazook? I thought that they could just push a button and make things happen there. They can, but here's the challenge.

China's consumer has almost $3 trillion in their bank account. What happens if you give somebody with $3 trillion a cash check? Like, what happens? What does that person do? Inflation. Well, inflation if they spend it. But they're not spending it. A lot of the Chinese consumers are still in bunker mentality from zero COVID.

So you can't just give somebody a check. They've got plenty of money. They have to solve problems individually. And the two issues in China that have been plaguing China have been in real estate, which we could talk about, but also in unemployment, you know, youth unemployment. So the Chinese consumer went the total opposite direction of America. We decided we're just going to speculate on everything. We're going to spend money like there's no tomorrow. No one is, you know, holding back here.

We're going crazy. They went the opposite way. They had like the Great Depression baby kind of thing where they had a really difficult period. And they said, no, we're keeping our cash way higher and we're being more conservative now. 100%. And think about this. Just think about even monetary policy. In the U.S., in, you know, April of 2020, our 10-year dropped to half a percent, 60 bips.

China's tenure dropped the two and a half percent. They never took it, you know, they never took their policy rates down to zero. And even now, only now, really, the 10 year in China has fallen below two and a half percent. So only now is China's easing policy accommodative. But guess what? China also doesn't have any inflation. We created a bunch of inflation in the last couple years. China doesn't have any. So now their job is to get the consumer to come out. And it is happening. It's certainly showing up in the earnings of some of the major consumer brands that have reported recently. So these Chinese internet stocks have been just an absolute nightmare. I'm looking at Alibaba. It's 78% off of its high in 2000. I mean, not long ago in 2020.

Well, kind of long ago. 78% off its high. I'm curious, are the businesses that bad? Or is it the stock price, and if it's just the stock, then what is causing these massive disconnects? Right. So the drawdowns in a lot of the major internet companies in China are down 50, 60, 70%, as you highlight Michael. What's interesting is if you look at the valuations and the fundamentals of these companies, they're very strong. Earnings have been fairly stable. Right now, PEs in this sector, Like, for K-Web, for example, our PE on a forward basis is like a 14. And these companies are growing. They're growing, growing a lot.

In fact, you know, there's been a bunch of earnings. I'll take Tencent, for example, and this is really interesting. As some of these Internet companies get larger and more mature, you know, Tencent had revenue growth that was up seven percent, you know, which missed by about a percent, but its EPS growth was up 44 percent. So there's a ton of operating leverage in these companies. companies and Tencent doubled its buybacks. So they've got a ton of cash. They've got a lot of upside opportunity, not just on the top line, but they're really cranking out a lot of efficiency

in the bottom line. So, you know, Tencent earnings up 44%. Maytwan just reported it was up, 70% it beat estimates. And I've got PDD, which is another top holding net income up 110%. So we're at that inflection point now where these companies are going to see top line growth and bottom line growth emerging in a way that we may not have seen in the last couple years. But the market's not dumb. And there's a reason why these stocks are being severely punished. What are investors worried about?

It's sentiment. There's negative sentiment in the U.S. But what's driving the negative sentiment? I mean, you know, turn on the news. You listen to CNBC. You know, it's interesting. Even look at our political climate. There are very few things that Democrats and Republicans can agree upon.

But the one thing they could agree on for sure is that China is bad. It doesn't matter who you're listening to, left or right. There's a negative sentiment around China for different reasons. And so that's part of the issue too. People think, oh, my God, China's terrible. It's our arch nemesis. It's become the boogeyman for America. in some ways.

So the trillion-dollar question is what would change the narrative? Because without, like, these stocks need to be re-rated higher, and it's not going to happen because they're cheap. Right. Look, what has happened is that over the last two years, managers and allocators have been massively underweight China. China is in the indexes, but people are effectively not holding it because even last year, EMX China was up 10 percent.

China was down. So this was been a source of alpha for investors for a couple of years now. What will get people to change their minds is when they start seeing China outperform and they'll be forced to buy because they're going to say, oh, geez, look how far I am behind the benchmark. Remember, China is, you know, 30 to 40 percent of broad EM. So if you miss it, you miss it. So do you think that China needs to see those homeland consumers become stock addicts like we are here where the stock market is just such a big part of what we do? or do you think it's just the rest of the world buying in? Like, how long would that take to actually turn them into that more stock market mentality?

I think you need a little bit of both. And we're starting to see a floor being placed under domestic stocks. And some of the larger, you know, banks and others are actually recommending the A share market. The A share market is the mainland market in China. So we're starting to see a recognition by the world that investing in A shares is compelling. These are cheap companies. they're growing quickly. Their valuations are ridiculous. I'll give you an example. We did a study recently and we published on it that we wanted to say how many two-year periods have there been

and we'll talk about the significance of two years, but how many two-year periods have there been where K-Web was up over 100%. You know, we've been running K-Web for over 10 years and we found that there have been 67 two-year periods like looking at daily entry points where you would have earned more than 100% in K-Web. And we asked ourselves, well, what, have been the valuations at those points versus where we are now. And the valuations at kind of the average valuations over those points before K-Web rallied and doubled in value was actually higher on a PE basis, peg ratio basis, price to sales, you name it, than where we are today. So this is a very compelling entry point. And like I said, I think

the reason people have ignored China is because it's performed poorly. The optics have been negative and sentiment has been poor. But if you are actually a market observer, a professional investor, you can no longer ignore the fundamentals, the valuations, and this deeply negative sentiment, it will turn. So the Chinese ETFs that U.S. investors have access to, they've bottomed in January. So, you know, you got to start somewhere. They stopped going down, temporarily at least. Yep. You spoke about maybe a floor under those stock prices. Eric Belchun has tweeted, the Chinese government has gone full B.OJ, purchased $45 billion

of ETFs in the past two months, the public of the market, already owns a fifth of all equity ETFs. They moved to buying small caps because it moved stocks more, purchases could reach $100 billion this year. So could they be the catalyst? Could they light the spark? And I guess if this doesn't work, then what? Right.

So the national team definitely stepped in at the bottom. And the national team is really, you know, it's hard to know precisely who or what, but it's viewed as, you know, an organization or a network that is instructed to buy at different points in time. And they clearly had an impact. Now, just keep in mind, this isn't the BOJ. The BOJ owns meaningful percentages of the top companies in Japan. China owns a chunk of locally listed ETFs. So it's really a different dollar value, if you will. And we've seen, you know, even with KWeb since that time, we've seen a 9, 10% rally off January bottoms. If you look at flows into and out of China, I mean, it's kind of wild how quickly people are thinking that China is becoming uninvestable, which, you know, the more you hear that, probably the more bullish you get, at least I'm guessing.

But does China care about the stock? prices? It seems like they were actively punishing these companies over the past couple of years. Yeah, I think that there was an acknowledgement. You know, what's interesting about the way China thinks about its economy and the markets is it needs FDI, foreign direct investment. It needs robust capital markets. China has the second largest equity market in the world, the second largest bond market in the world. These are very deep capital markets, and it needs global participation. However, China's willing to take measures that will be pro its citizens versus pro companies. So, for example, during COVID, when tutoring companies were charging a fortune for online tutoring,

China stepped in and said, you can't do that. And they regulated that away. I'm not sure if we had a similar situation in the U.S., if our government would step in and do things like that. No way. Yeah. So that is probably the main difference that China will create regulation that acknowledges, look, we've got 1.4 billion citizens. We need to make sure that they feel happy and that they're growing and that their personal

wealth is not impacted by something that's episodic. I mean, so being that that's the case, these stocks should trade at a discount based on fundamentals or whatever earnings. Like, of course, if the government has the ability to do that, they're not going to get premium valuations. And emerging markets have always traded out of valuation. I was just going to say, I was going to say the exact same thing. EM on average trades that, you know, pick a number, 20 percent lower valuation. But so relative to itself, it's cheap because that's what you should be looking at. Super cheap. We're at multi-year lows, no matter how you slice it. This has been

the most extreme drawdown. I describe what we saw in K-Web is like our GFC. These are horrific drawdowns. You know, we didn't have crane shares back in 2008. The company's been around for 10 years. So this has really been like our GFC in terms of China markets, which is also making it the opportunity. I'm always reminded by the fact, right? If you look over the last 12 years, the only thing that's worked is U.S. equities. It's outperformed everything. This notion of diversification is kind of irrelevant. In fact, you know, you guys could remember the opposite was true back from 2001 to 2012. Back then, everybody was like, increase international, increase EM, you get diversification, you get better returns. Bricks, that was the thing. That's it. I mean, and look,

we ran the numbers from 2001 to 2012 EM outperformed the S&P by an average of 11% a year and with massive consistency. And then in the last 12 years, the reverse happened. The S&P outperformed EM by 11% a year with massive consistency. The idea that that could happen right now on a go-forward basis is literally inconceivable. I can't imagine a single way, and I guess I would speak for probably most investors here, it's inconceivable to think that EM could outperform the S&P 500 over the next 10 years to that extent. Right.

And look, the other thing to keep in mind is over that period, currency returns worth 30% of it. That's the problem. The dollar has been a headwin for international stock. to. Three percent a year, strong dollar in the plus side over the last, you know, 11, 12 years, minus three percent. The other, you know, so the other side of it was, so a lot of symmetry in this EM, S&P type trade. And if you think about the conditions now, they, I'm not saying they're exact, but there's definitely some rhyming with what we saw in prior period. So we would say, we crane would say, look, you need to own EM, you need to diversify.

You need to have this exposure, and if you consider China's role within EM at, you know, 30, 40, 50 percent, depending on how you're slicing up the pie. You've got to have China exposure to. It is funny from it. You mentioned the diversification thing, and people are totally ready to abandon that and just say, okay, it's the S&P 500 to the NASDAQ. But even with the EM, people are now saying, well, geez, China's been so bad. I'm going to get rid of China exposure from my emerging markets, which just anything in history, anytime you have a huge period of overperformance or underperformance, If you go headlong into that on the either extremes, it's usually not a great idea. So from your perspective, so we've talked about KWeb before. Last time you're on, we talked about K-Lip. We settled on K-Lip, not K-Lip. Animal Spirit settled on K-Lap. No, no. Trainshares is not.

Yeah, no, we've decided to do something that Michael does not support. We call K-Web, K-Web, but we call Clip-Clip. That's right. Okay, that makes sense. Then you also have these new buffer ETFs, which so you're offering different ways to find exposure on this. Right. These buffer ETFs, so it's what, KPro and KBuff, where you're offering 190% buffered downside. Michael and I have talked about these buffered ETFs before. Maybe you can tell us how years works in terms of like the timing.

How long are these contracts for? What's the downside protection? How does the upside work? Sure. So one thing that's important to note, which is kind of remarkable. So I mentioned that KWeb's been around for 10 years. And over this period of time, a really meaningful options market has developed around KWeb. In fact, K-Web's a $5-6 billion ETF, so it's meaningful in size, call it top-decile in a U.M. But the options market for K-Web, it is a top-10 optionable ETF. Out of all 3,400 U.S. ETFs, K-Web is top 10 in open interest. So it is a massive options market that's developed around K-Web, and that's because there's a lot of institutional money.

There's a lot of smart investing and speculative investing around calls and puts in K-Web. Hey, this is a dumb question. Does the options activity show up in the total assets and management for KWeb or is it a separate thing? No, no. And that's what's so unique. The options ecosystem arises, you know, adjacent to the ETF. And we don't have anything to do with it. We can benefit from it as we are in building new strategies.

But we don't facilitate it other than having the ETF itself. So the market makers are the ones that are making money that has no, that has no direct monetary benefit. Oh, interesting. No, no, they may use K-Web to hedge, right? Like if I was an options market maker, I definitely participate with K-Web to help hedge positions, but we don't benefit from it financially directly. So what's interesting is so we launched K-Web as kind of one bookend of what we are calling now our volatility suite. So we have K-Web as 100% growth. We have K-Web as 100% income in this context as an at-the-money-covered call strategy. But as I'd mentioned right away, the question we keep getting is, geez, I love what you're saying about

valuations and fundamentals, and I know the potential, but I don't want to lose money. Yeah, I'm not all the way there. I like the idea, but yeah. And the other thing is, look, the optics, right? If you're a financial advisor and you have a China line item, you don't want to have to answer the question to your client, is this going to lose me money? So we developed K-Pro and K-Buff for a couple reasons. One, making sure that we have something in our volatility suite that protects on the downside. But two, also seeing that there's a lot of success with defined outcome strategies and structured products. And a lot of the banks, quite frankly, have built structured products on K-Web and sell

them to their clients. So we thought, geez, isn't a defined outcome ETF similar to a structured product on K-Web? And if we have clip, can't we do protection? And what's really interesting is that the volatility of K-Web and the implied volatility in K-Web options allow us to do things and deliver outcomes that would be very hard with an S&P or a NASDAQ or others. So we can produce very attractive terms, and I'm happy to talk about this. So you can get like bigger, bigger downside protection probably because there's so much volatility implied in the options. Right, because remember, the way that these work is that you buy puts, so you buy,

explicit downside protection, but you sell calls out of the money. So you sell upside after a certain point. So just to take K-buff, for example, when we launched K-buff, that offers a 10% downside buffer. So it's called a 90% buffer, but what it means is you could lose up to 10%. But the upside is 41.2%. Oh, so you lose nothing past 10%. So you can go down 10, anything past 10, you're protected. Right. And the way these work also, it's important to note is that there's, it's effectively a two-year period, right? So all of our both K-Pro and K-buff, they mature essentially on January 16, 2026. So you really need to hold them for the outcome period to achieve the outcome. They are marked to market. There's a daily nav so you could buy them and sell them anytime you want. But that outcome isn't delivered until the end. You need to hold the ETF. So what happens at the end? So at the end, and the way that we've structured these funds is that we just re-up. You know, you could obviously liquidate your position if you choose to do so, but we're going to reset or restrike, as they say, the call and the put.

We're going to offer for K-buff the same, you know, 10% downside protection, but we're going to have a new upside cap, participation cap, based on whatever the market conditions are at that time. And that's, you know, that's what's interesting about these. You could have a different upside depending on what the market conditions are. Is volatility high or low? Are interest rates high and low? And the level of interest rates are the things that have allowed a lot of these defined outcome strategies to work right now. And when you say interest rates, that's U.S. interest rates and obviously the other component is the volatility. So talk about how that actually works. Correct. So implied in option pricing, and I don't want to say, sound like a math geek here, but if you think about like the Black Shoals pricing model,

you know, interest rates, the risk-free rate is an important component of it, implied volatility is an important component, as is time horizon. So those are really central inputs into determining the value of an option, the price of an option. And the simplest way to think about it is if you have a two-year time horizon in an option and the risk-free rate is somewhere between four and five percent, you only have to set aside, you know, 90 to 92 cents today to deliver a dollar in two years. And that's whereas if rates were zero, you know, how much would you have to set aside today to deliver a dollar in two years, something closer to a dollar? So right now, the ability to provide less expensive protection is quite good

because of where rates are. There's obviously no free luncheon investment. When you talk about KPro with 100% downside protection, what is the tradeoff? Because, again, you're not getting this for free. So what are you not getting in exchange for this? Sure. So K-Pro has a two-year cap of 22.69 percent. So if some of the scenarios I talked about where K-Web doubles, you're not getting a doubling. You know, if K-Web goes up 100 percent over the next two years, you're getting 2269. So you're, in fact, if you think about the historical distribution of KWeb returns, what KPro is giving you is essentially a 25% band. You're getting only 25% of the outcomes that we've experienced in KWeb overall. We've cut out

75% of the distribution. But again, it's at maturity. So let's just say that there's some sort of announcement or whatever. There's a catalyst and KWeb doubles in six months. You're not getting your 22% over that six month period. You have to wait for the full two years. Absolutely not. Because remember along the way, the option dynamics affect the nav of the fund. And we have a great case study already. I mean, we launched the strategies last month. And what you'll find is that even though KWeb has been up 9% since we launched, and I knew this was going to happen. I said, the moment that we launched these strategies, that's going to be the bottom of Kweb. Well, it's kind of, I mean, it's just, it's poetic, right? Yeah, of course. People want protection. They want to dip their toes after an 80% drawdown, but they don't want to want to. risk it's like well come on the risk it's not to say that there's not risk of course there's always risk in investing but after an 80% drawdown it's been at least slightly de-risked right right but is there is there a way so let's say that you come into one of these strategies

later because it doesn't end until is there an easy way for people to understand like where is this in it's in the range of outcomes 100% and so best practice for defined outcomes and we follow this is on our website there is the initial outcome period result, and then there's also the current one. So you know exactly where you are with what's remaining in the cap. So just to put this in perspective, KBuff has gained about 4% since we launched it, whereas KWeb has gained 9, KPro has gained about 2% since we launched it, where KWeb has gained 9. So the nav is up for the ETFs, and what that means is that if you gained 4% in K-Buff, you don't have 41% left anymore. You have about 36, 37% left. But all that is on

our website. It's available and it's ticking daily. Are there plans to offer new other funds attached to these in the intervening months? Or just waiting until this period's over? So it's a really great question, Ben. Some of the industry practices to launch these at some regular frequency every six months every year. And we're certainly open to that. In other words, if market conditions change in a way that make it attractive to create, you know, K-buff 2.0 and K-Pro 2.0, we'll do that. Right now, you know, things have been pretty stable. It's only been a month. But you're absolutely right. If KWeb all of a sudden goes up 50 percent, we're going to want to launch a new series of these to take, to make sure that opportunity is there for investors, too.

Jonathan, can we just return to the real estate? I don't know if bubble is the right word, but if it was a bubble, it's certainly popped. What's the story with Chinese real estate? So real estate in China has done something that our U.S. real estate market hasn't done. Here, if you're a real estate investor, you recognize that every 10 or so years, you'll have a drawdown in real estate, and then you'll recover over some period of time. China had a 30-year period where real estate did nothing but go up. So a lot of household wealth was in real estate. estate and people were starting to buy second homes and third homes. And they have a way higher home ownership rate than we have even here, right? 100% because stock ownership is lower. Here

stock ownership is higher because of the advent of 401k and other types of plans and just the interest in stock investing. There, the primary savings market outside of your bank account is real estate. And so it was getting quite frothy. Prices were high, a lot of speculation. And again, this goes back to kind of the government's role. They were saying, look, this can't end well. So they started taking measures to clamp down on liquidity, restrict second and third home ownership, things like that. Now, that had a massive effect and not just an effect on the builders, but also had an effect on psyche, right? The wealth effect became quite negative. And this was also part of that bunker mentality I mentioned before.

A lot of your household wealth feels like it declined in a short period of time. Now, China has kind of in and said, we have to write this. So they've started offering support to construction companies. They've started to rescind some of the restrictions they had on second home ownership and are really trying to reestablish demand back in the space and allow builders to finish construction. So, you know, I think the pendulum swung way too far in one direction, then regulation swung it too far in the other. And now there's strong support in real estate, which I think will actually get the consumer spending again because they'll get, they'll see a floor in the real estate prices as well. What about the commercial side of things? Commercial real estate. So I guess just maybe to

clarify that question, I didn't realize that there were such a bad drawdown in residential real estate. I kind of thought it was more on the commercial side. So what's the story there? I think it's it's largely similar, right? I mean, you know, China, I mean, what's interesting about kind of brick and mortar, you know, China's, I mean, they are urbanizing, so there will be demand, just to be really clear about this. Over the longer term, China's going to continue to have people moving into cities, and there's going to be a greater demand for brick and mortar and residential and commercial construction. They're only about 70% urbanized. The U.S. by contrast, is over 90% urbanized.

So the trends towards real estate, both commercial and residential, are positive. But the other thing to keep in mind with China is a lot of sales happen online. So, for example, even right now, retail sales in China online are 2x that of the U.S. So, you know, I think all segments of real estate are suffering. China has acknowledged that real estate was a problem. and it also let some of the companies fail. I mean, this is also another point. You know, Evergrand didn't make it.

China didn't have a Lehman moment. They let Evergrand go. So what's the equivalent for U.S., for our listeners? What would be the equivalent of? Of Evergrand. Well, everyone on Twitter said it was Lehman Brothers. No, I'm saying like on the real estate side, like are they, is that a told brothers? Is it even bigger?

Yeah, it was one of their largest builders. throughout the country. So, you know, who's bigger than Toll Brothers, I would say, you know. So why did China let that go under? I mean, surely they must have, you know, decided what happens if we save it? What happens if we let it go? And they decide to let it go. Why do you think they did that? Well, I think it's actually a positive sign. I think they concluded that it wasn't Lehman. It didn't produce a Lehman moment. It wasn't systematically important to the entire real estate industry. And, you know, it was also sending a strong message to other real estate firms. You better manage your companies well, because if you mismanage them, there is no such thing as

too big to fail in the real estate segment. So when's the crane shares China real estate ETF coming? So what's really interesting, it's interesting that you say that. So we have something called KhyB, which is an Asia high yield bond strategy. And it's phenomenal. It's got, you know, double-digit distributed yields. And it's also been beaten up because of its investment in global, you know, Asia-based bonds, but heavy China bond portfolio. And this is going up or down the credit spectrum, right? These are higher yielding, lower-quality bonds. What does this thing kicking out? It's double digits right now. It's low double digits, so call it 10 to 12 percent. But very attractive yield. It's been beaten down. And

It's one of my favorite fixed income investments, because, again, similar to the equity market, there are parts of the bond market that have been really hurt by dislocations and things like real estate and other credits. So I think the hardest part about this whole thing is trying to pick a bottom in China is just that, sure, there could be a catalyst. The government could flip a switch and consumers, whatever, but it wasn't like there really was a catalyst for the U.S. outperforming. Like, there wasn't this big moment.

I mean, the great financial crisis was part of it, but there wasn't like, It was just, I think, U.S. stocks got really cheap compared to the rest of the world. Right. And the S&P had a really crappy decade plus. And then now they're outperforming and the tech stocks came in and kind of kept it going. But that's the hard answer for a lot of people is going to be. There probably won't be a catalyst for all this. It'll be, you know, the dollar will slowly fall over time or something in Chinese stocks.

And things will stop getting worse and they'll just get a little better. They might still be bad for a while, but they might just get less worse. And that's the hard answer for people is they might not be a catalyst for a while for if and when this happens. Right. And we're actually okay with a slow, gradual grind up. You know, last July, we had a little bit of a head fake. KWeb was up 17% in a month, and then the next month it was down, you know, nine or 10%. We would prefer to have more periods like the one that we're in now, where it's a gradual

uptrend supported by strong earnings of the companies that we own. And, you know, gradual increased buying, not just hedge fund saying this thing. things above its 50 or 100 day moving average and I'm going to plow in, we want to have just an increased recognition that China and emerging markets are very attractive as longer term investments and it's a good entry point. Jonathan, do you think that your flows are driven by who exactly? Do you have a more retail audience? Is it advisable? I'm sure it's a mix, but who are you talking to when you talk to your customers? So we talk to, we don't talk to retail, but retail does engage with our website and our research and content.

But most of our client discussions are with advisors at the wirehouses, independence, and also institutions. So globally, we talk to pension plans, endowments, foundations, family offices, sovereign wealth funds. And increasingly, as the funds get larger, there is more institutional involvement because they could buy the funds. But it's interesting because I would have told you five years ago, We wouldn't have nearly the concentration of institutional investors that we do today. But institutions in general, especially global institutions, have become much more thematic in their investment approaches. They're looking for alpha, not just stock picking alpha, but portfolio construction alpha. So if you have China Internet, China health care, EV and so on, it's really compelling for global investors.

For investors that are looking for an opportunity to potentially get in at the bottom, where do we send them? Which ETFs? Well, how do they find more information on crane shares? Oh, sure. www.cranchairs.com. With a K. With a K. Michael, he was about to give us what's ETFs to pick for the bottom here.

Yeah, I was like, well, look, here's the one thing. But here's the one thing I'll leave you with, because a lot of people, and I'm surprised you haven't asked it, but some people have said, if you believe that KWeb is going to be, you know, produce meaningful results, why would anybody buy K-Pro and K-Buff? Why would somebody cap their upside if they're going to make this investment? And it's interesting. One of the things that I did as soon as we launched these two ETFs is I bought them 50-50. And this is just really thinking about reward and risk. I limited my downside to 5% because I bought 0% downside strategy to 10% downside strategy. And I cap my upside between 22 and 41, so call it 30 to use round numbers. So I created a,

a very structured, six-to-one reward-to-risk opportunity. And I don't care, China, not China. I think the underlying is going to do great. But I was able to create a risk-reward profile that I really like that is hard to get in markets. So, you know, I think that there's this really unique thing that you can do with defined outcome strategies that would be hard to do with, you know, buying a regular ETF. Well said. All right, Jonathan, appreciate your time.

Thank you. All right. Speak soon, guys. Thanks. Okay, thanks to Jonathan and cranechairs.com. To learn more about all their different China ETSFs, email us, Animal Spirits at thecompoundNews.com.