Animal Spirits Podcast - Talk Your Book: Will China Win the Trade War?

Episode Date: May 12, 2025

On this episode of Animal Spirits: Talk Your Book, ⁠⁠⁠Michael Batnick⁠⁠⁠ and ⁠⁠⁠Ben Carlson⁠⁠⁠ are joined by Brendan Ahern, CIO at KraneShares to discuss an update on China's economy, China real estate, the AI race with China, stock picking within China, consumerism outside the US, 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 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. See our disclosures here: ⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠ 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. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by cranechairs. Go to cranechairs.com. Learn more about their whole suite of products, including K-Web that we're going to be talking about today. That's cranechairs.com for more. 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, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Last time Brendan joined us was the end of 2024. And I don't know if he was desponded or if I'm just making that up. I can't quite remember. But the average American investor had absolutely thrown in the towel on international stocks. We were like, literally what would have to happen? What would have to happen for international stocks to outperform? And sometimes that's the way it goes.

Yes. No one predicted trade war and following dollar and all this other stuff. Deep Seek. Yeah. And people were negative on China too. And now I've seen the sentiment totally swinging the other direction of, wait a minute. Derek Thompson had a podcast asking the question, could this be the Chinese century? And it's totally.

it's totally flipped. So we got into all really great stuff with Brendan from crane shares. Micro and macro would you say? We zoomed in and we zoomed out. Yes. Yes. You really wanted to know. Our earnings driving these Chinese tech stocks or the sentiment or which is a legitimate question. So we talked about the trade war and the technology space in China and all this other good stuff. And Brendan's always great for this stuff from crane shares. So here's our conversation with Brendan O'Hern, CIO at Crane Shares. Brendan, welcome back to the show. It's great to reconnect, Michael.

Okay, we had you back in December of 2024. The world looks a little bit different today than it did back then. I think maybe there was, was tariffs in the air? There must have been. Must have been. But not, you know, certainly more than we expected. Maybe let's start with this. Rewind to Trump presidency.

1.0, his first term. How did Chinese stocks do during the first Trump administration? Shockingly well. I think, I think, A, you had volatility because you'd have these kind of tweet bombs that would come out. But for us with KWeb, actually that period, 2016, up through 2020, was one of the great time periods for performance for KWeb in China. Chinese equities. And that was under the art of the deal, right? You know, despite all the trade war, tech war, actually performed really well. So when we talked in December, I remember, we were kind of grasping for what could cause international stocks to outperform. Like, it was hard to come up with a good idea at that point. Sentiment was on the mat. It was, I said it was the lowest sentiment

I'd seen in my 20 years of investing for international stocks. Everyone hated them. And now things have shifted. The dollar is down. International stocks are doing well. The trade war has seemingly benefited international stocks way more than the U.S. Do you think that this has legs? There's too hard to tell at this point. I think, I don't think this is the end of American exceptionalism. I don't think it's the end of U.S. equities. But I'm more talking about the site. I agree. Like that stuff, let's put that aside and debate the Roman Empire stuff later. But for now, like, is this, has enough change that you can see that like, oh, actually, you know what, this change has, is better for XUS than things were before just a few months ago. I think, you know, as we saw in Canada, where, you know, Pierre, the leading candidate ends up losing to Carney because of national pride.

And it's about to happen again in Australia. I was in Europe last week. And there's a lot of national pride is back. And there's about 17 trillion of foreign assets, foreign ownership of U.S. stocks. And some element of that is going to come back to local markets, if it's Europe, if it's Asia. And then I think later on, you know, when the Fed does cut and the dollar declines because of just interest rate differentials, it'll give these non-U.S. equities a little bit of a further tailwind. So, yeah, I think, I think, you know, diversification is great again. I don't think it's some black and white situation. I think both, you know, markets in general can do well. But I think some of it will come back. And some of that's for national pride. Some of it's from value. and just opportunity.

All right. Let me ask you a basic dumb question. What drives the price of Chinese internet stocks? And the reason why I ask that is because I think maybe we take for granted that here in the United States, there's a confluence of factors. But ultimately, earnings are what drive stocks over any meaningful period of time. A stock is a share in a business. and if the business is doing well, the price will reflect that.

Does the same hold true in Chinese stocks? And if not, what does drive performance? I think in the short term, you have media-driven headlines, particularly for the names that are listed here in the U.S., a lot of that's geopolitical. And that's why actually we're seeing the Hong Kong lines, arguably intraday do better. take the same piece of news and you give it to an investor in in asia on say about alibaba their

reaction versus you give that same piece of information to a u.s investors about alibaba that's probably just less enthusiastic which is which is why we've kind of you know why we've migrated a lot of our exposures out of the u.s names into the hong kong lines is we actually think they'll they'll actually perform better. I mean, there's fungibility. So, right? Like, it's not like the two are totally disconnected. It's just intraday, given the same piece of information, the investors in Asia are more positive. And then the media narrative in the U.S. is always so negative on China versus what people outside of the U.S. consume, I think, is, you know, maybe more balanced or a minimum, less negative.

All right, but I get it. You're talking on a very short term, though. Does do these companies benefit from the growth of the businesses or not? Oh, they certainly do. But if you have a lack of ownership. So Alibaba, just as an example, I was like basically no debt. But they do have a U.S. dollar bond. and how is it that the bond has outperformed the stock by like 60% over the last four years?

Say that one more time? Alibaba's U.S. dollar bond has outperformed Alibaba's stock by like 60%. Whoa. Okay. Why? Wait, so how much of that is currency? No, it's a U.S. dollar. It's a, it's a U.S. dollar.

It's a, yeah, it's a fixed income investor gets out their 12C. and says, does Alibaba generate enough cash flow to pay back coupons and principal? And the answer is yes. I mean, they've got like $60 billion in cash. Unequivocally, yes. A stock investor sediment matters. And that's where I think there's a geopolitical narrative about China that is really negative. You know, if you get your news from Bloomberg or the Wall Street Journal or the financial times, the news on China is always negative.

I mean, I mean, it just, it's always negative. But is it, is it, how much of it is deserved? Well, I would, I would, I would preface some of what's happened is deserved that that arguably you've had a number of policy errors from the Chinese government. And there's, there's a rationale for why they made these decisions. internet regulation, zero COVID policy. That's what's happening in terms of real estate, which is the real issue in China today is the decline in real estate prices and the knock-on effects on consumer confidence and domestic consumption.

Those were policy errors, and you're seeing a pivot to rectify them. And so some of it is, you know, the derating because of the, you know, these growth, stocks stopped growing as quickly. And so some of that's just been that re-rating effect. And we, you know, our belief is, you know, these stocks are just really, really cheap. You've got the second largest economy in the world stimulating. Ownership levels are non-existent from in the, you know, relative in the U.S., not so much outside of the U.S. And then we think, you know, the fundamentals of the underlying companies are actually going to improve. So I agree with you on the idea that the financial media is generally negative about China.

But one of the surprising things to me about the trade war is I think that sentiment has kind of shifted in this way. I think a lot of people say, like, if there's going to be a steering contest, China has the ability to wait this out much longer than we do. Because the way that their system is set up, their government can essentially force the pain, I guess, on consumers and businesses much more easily than we can here. And a lot of people seem to think that, well, actually, China is way more important to us than we are to them. Do you agree with that sentiment? Yeah. I mean, I think that there's been a sea change over the last three, four months from the Wall Street Journal, you know, where they've been interviewing the CEO of Flexport, this logistics company. Yes.

They're speaking about. And obviously, even, you know, President Trump, you know, he meets with Tim Cook and, and, you know, he meets with Tim Cook. and you have an exemption on electronics. You know, you had the CEOs of Walmart, Target, and Home Depot meet with President Trump, and lo and behold, you know, dissent and the U.S. trade representative are going to Switzerland to meet with their Chinese equivalent. And I think, I think just to your point, Ben, you know, China is far less geared to the U.S. for the U.S. than I think people in D.C. really thought. I mean, that's why they've not

bowed at the knee because they're like, you're more exposed with two-thirds of your economy geared to consumption. And yeah, I mean, you know, the port of Seattle, it's empty. There's no boats. And in early June, the tariff run up, you know, the front running of tariffs, those inventories run out. And that becomes a very big problem for the U.S. consumer for the shelves. And yeah, I mean, it's, yeah, so I agree. I think there's been a turning. And I think that's why the two sides, hopefully for both of them, you know, are able to find, you know, to do a deal. You know, start with something small and, you know, build some momentum there.

You mentioned that everything China hinges on their. real estate. And there was obviously an overabundance of construction, supply, and it crashed, crushed sentiment. Where are we? Where are, or where are they, I should say, in the process? You know, for real estate, it's location, location, location. So you're seeing the, the tier one cities, the rich cities, you know, Beijing, Shanghai, Shenzang, Guang, you know, those cities are recovering. The lower tier cities, it's still a very, very bad, you know, tough situation. And, you know, we in the U.S., our retirement savings are in the stock market.

In China, it's in real estate. And so you've had a 50, 60 percent drawdown in your 401K or IRA. It really affects your consumption. And that's what's happened in these low. lower-tier cities. And it explains why, you know, in September you had this big movement from the government, you know, and they continue to add to policy support to the real estate sector. And, you know, it's slowly coming back, but it'll take time. I think the other big sea change in the sentiment towards China has been, I think for a number

of years, most people just assumed, well, China is just kind of stealing all of our IP and technology and they're not really creating anything themselves and they're it's just we we innovate here and then they steal it but now I feel like the deep seek thing really was kind of a shot across the bowel for a lot of people and then the other thing is people are just looking at like oh my gosh if you just look at all the infrastructure and everything that China builds it just it seems like they're living in the future in ways that that we just aren't I think that's another way that people have kind of changed their tune so in this tech arms race like where would you pit things in terms of the technology sector in the U.S. versus China.

And I guess that can be either the biggest stocks or just sort of overall, how we want to take that. I mean, Deep Seek forces you to do the valuation comparison of your stocks trading at 40 times sales versus something trading 14 times next year's earnings. And, you know, I think the Deep Seek, you know, puts a little crack in that huge valuation premium on U.S. tech versus China. tech. But I think, I think, yeah, I think definitely, you know, 16 years ago, these, these companies were counterfeiters, you know, espionage. But that's, they're moved way beyond that. And, you know, what's, what's coming in terms of flying drones, you know, autonomous vehicles, the robot thing is a real thing and just the quality of their electric vehicles and the breadth of brands,

the choice that they have in terms of not just EV hybrid gets kind of lost, they're arguably a lot further along than we are. But I like to think it doesn't have to be a war. It doesn't have to be, I win, you lose. And I think that can be maybe part of the art of the deal is, you know, can you bring a company like CATL, their big battery maker? who had said they were willing to build a factory in Michigan, and Biden said no. And, you know, could that be part of a deal? And I think that's part of big picture. And you step back, the one U.S. investor that loves KWeb and China, you know, China tech stocks

or technical analysts who are like, you know, higher highs and higher lows is an uptrend. And, yeah, there's VAL along with it. Michael's pulling up the chart right now. I can see him. No, I already had it up. So when are we going to get like the, is there ever going to be a deal to, because I keep seeing people say like, listen, I've toured the BID cars before and they're amazing and they're very affordable.

Why wouldn't we want to bring cheap electric vehicles here? And obviously, it's a political thing. It's like we don't want China to take over. Like, can you see a company like that ever being able to sell cars here? Is it just never going to happen? I mean, the little secret. it is that BID makes bus, electric vehicle buses in California. They have a plan outside of Sacramento. They don't really publicize it, but they didn't know that. They did a deal with the state

of California, the supply buses, EV buses. So it shows that you can do it. You know, they can hire Americans. And we've allowed the South Koreans and the Japanese and Fiat and others to come. So why why not do this, you know, why not do the same? You know, or at a minimum allow them to do a JV with Ford and General Motors. Right. Yeah. I mean, I mean, we actually are invested in a Chinese solar company that they want to build solar panels here in the U.S. and they've, you know, started down the path of buying property and they're going to, they want to manufacture here. You know, They want to get their stuff to their best customer, which is us. And that's something that they've moved to Mexico, like other South Korean and Japanese

automakers. You know, it's like Canada, you know, Canada that doesn't make cars. GM and Ford make cars in Canada. Why can't, why not let the Chinese do it? Brendan, one of the interesting things about Kweb is, and I'm sure part of you, likes this, part of you doesn't like this, is that it's on the list of ETFs, the top ETFs of dollar losses, which is an unusual and interesting list to be on because it shows that there's been a lot of money coming in despite the fact that it has been a rough and

volatile investment, which again, I'm sure there's parts of it that you like. I'm sure there's parts that you don't like. I obviously don't like people losing money, but you love the fact that there's still a lot of confidence behind that. How does that make you feel? I want to put words in your mouth. I mean, one, I think, you know, people have found stock picking in the space really, really tough. And, you know, so I think some of that movement is money coming out of people saying, wow, like, trying to pick the names is really hard. So I'm just going to buy the beta. But I think, unfortunately, you know, when you get the green light of like, oh, the coasts are clear, that's where the money has, you know, has come in historically.

It's interesting. I mean, you know, God's honest. I met in, you know, I was with an institutional investor yesterday. It was like, listen, I have a constant position in Kweb. And, and that way, you know, when KWB goes on these runs, you know, like we saw in January, you know, coming out of January of 2024, in September and October of 2024, in more recently January of 2025, you know, because I have a position when KWB goes up. you know, I trim it. And then when you get this pull back, you know, I'll add to it. And he's like, literally like, I've got the same position size.

I just, you know, and he's like, I'm simply buying low and selling high through actively rebalancing. And that is the argument we, you know, we continue to try to make with him as instead of waiting for some green light of like, oh, the coast is clear. Like when everything says it's time to buy, that's probably when you want to be lightening up. And yeah, yeah, I mean, I think, you know, we can't control when people buy and sell our ETFs. And, you know, yeah, I kind of wish, you know, people would buy more on weakness than buying on strength. Well, you're never going to fix that.

Unfortunately, there's a lot of hardwired into our DNA. Exactly. Behavioral finance. My other question about like the Chinese consumer, I guess, is you mentioned that like stocks and bonds and investing here is just so much more of a big deal and consuming is more a big deal. What would it take to get Chinese consumers to just spend more on retail and then get more involved in the stock market?

Because you mentioned like the idea of international investors, you know, they've been pouring a lot of money into here in recent years. That's one of the reasons U.S. stocks have done so well. So if they start to pull out and invest more of their home country, like is it a cultural thing? What is it, what would it take to get the consumer there to be more involved in the market and spend more money and consume like we do? Yeah, I mean, I mean, you know, the Chinese government is not socialist. You know, they, they don't have the social safety net like we enjoy. So, you know, they have de minimis unemployment, de minimis health care coverage,

de minimis social security. And so you save out of necessity because you're responsible for, you know, your well-being. And then culturally, you know, you're not shipping grandma and grandpa off to the old folks home. You know, you're responsible for your family. And so you save a lot because you know you have you have these obligations for yourself and your family. And then I think it's it's something that, you know, I've experienced my father was born in the late 1920s. And so he grew up in the Great Depression in World War II. And he was, you know, he was this Uber saver. He got married later in life. So my mom is a baby boomer. And, you know, she's experienced nothing but great times, you know, economically her whole life. So it's like, oh, you know, you can spend.

And, you know, that's a little bit of in China. You have your grandparents, the people who experienced the grape leaf forward and experienced extreme poverty. And you're not even a full generation removed from that experience, like something that I experienced, which was, don't spend money, don't take out loans, just save and invest. And, you know, I think that's an element as well. But it is also one thing Trump and Xi agree on, which is they do want to raise domestic consumption. And it's, you know, Trump wants it so that they buy more of our stuff. In China, they want to be less reliant on export-driven manufacturing, which is down to less than 20% of GDP. It was like 36% in 2009.

So it's maybe an area that when the sides meet, that they can have some mutual agreement. How is the Chinese economy doing? I know there's like really, I think Vanguard did a piece about this. The stock market is not the economy. It's really, really true in China. there could be a giant disconnect. So maybe not super relevant for Kweb, but just curious, how is the Chinese economy doing? Well, no, I mean, I mean, just to answer your question, but, you know, we would argue Kweb is

the transmission vehicle for domestic consumption in China, right? That the, there's underlying companies, e-commerce benefit from, so that's part of why we're, you know, we're constructive. I mean, obviously we have our bias, but, but, but, you know, the Chinese- attractive on K-Web? Yeah, exactly. Yes, you know, highly biased and self-serving. But, you know, I think, I think the economy, you know, in your head, you'd think, you know, buildings are on fire. You know, it's, and that, I mean, when I was there in January, I'm going back very soon. It's just not, it's just not at all. I mean, and yeah, I mean, there's a bias. I'm going to rich cities, you know, Hong Kong, Shanghai.

but it's just it's literally it's not it's not you know it's so they're chugging along it's just you know consumer confidence is low because of this down draft and you know that's slowly improving what is their sentiment that you get from from your contacts and being over there what is their sentiment of the of the trade war are they kind of thinking like why are we doing this or are they nervous and anxious about it or are they feeling like what is the sentiment in china from that perspective i mean i think the chinese governments is playing tough because they've done the math and that they know we're more reliant on them than the other way around. But it will certainly affect, there are geographical

areas. They're very much dependent upon export-driven manufacturing. Those geographical areas will suffer. They have this kind of Christmas town, Christmas tree lights, Christmas ornament, town, you know, city, and that will shut down because, you know, the tariffs will just make it, you know, un-economical. But a lot of China is not, not geared that way. And it'll be just fine. So I think, I think there's more of it's what tariffs are irrational. And, you know, you know, history, I mean, you know, that's where unfortunately, this is the most expensive history lesson an economics 101 lesson ever given. Because if you just studied history,

you'd be like, oh, wow, smooth holly, great depression. You know, if you studied economics, you know, they call them economic laws, you know, comparative advantage. And so that's where it's really, you know, I think it's, you know, I mean, I think it's really unfortunate that you're willing to play kind of Russian roulette with American investors,

savings to try to drive this issue. I mean, it makes no sense to me. And I think that's the view in China. And I mean, I was recently in Europe. And, you know, people were just, you know, we've been your allies. We've been your friend and you're giving us the middle finger. Like, like, you know, how can we who are poor and, you know, buy as much from you, from us? Like, you know, you. You know, it just, it just doesn't make any sense. And in Europe, people were, you know, it was a big topic of discussion. Let's, let's end with this. We mentioned deep seek earlier a bit. What, how does the semiconductor chip war, all that stuff, factor into the future of Chinese internet stocks? I mean, they've, they've had the deal with the Biden export controls.

You know, there was clearly a lot of inventory front running, but, you know, I think a lot of, a lot of those banned chips, they end up going through other countries and making their way, but it's forced local companies to step up their game. And that isn't going to happen overnight, but, you know, Deepseek, you know, if you believe, you know, their claims, they were able just to use. more chips. You know, Kabul, instead of using one Navidia, use 10 Huawei chips and the computing power works out. Okay. So let's put you on the spot here. Does the trade war help or hurt these Chinese tech companies? Or is it doesn't really matter at all? Where do you stand? I mean, for U.S. investors, it's career risk as a, you know, for professional investors to buy something with China in the name. And I think that's where that is not true outside of the U.S., which is why I spend so much time in Asia, in the Middle East, in Europe. I'm going to places

where institutional investors are not beholden to this media narrative or the geopolitical. And a lot of parts of this world are, you know, much more geared to the Chinese economy than to the U.S. economy and any commodity-producing country cares a lot more about China than the United States. And those investors will come back and arguably are coming back. But I think those, the one U.S. investor that is involved besides the technical analysts are the hedge funds that, you know, a lot of prominent U.S. hedge fund managers said, and why? Because they can hedge, they can trade. And so, you know, I think these, you know, these big swings in volatility in K-Web. You can do what this one, you know, professional investors doing, which is just a small

piece of his portfolio. He's letting it ride up and down. And, you know, but others, you know, we did do this call writing fund off K-Web called K-LIP. K-LIP. Yeah, K-Lip. Well, that's where somebody were like, the K-W-E-B. I'm like, K-Web. And they're like, yeah, the quab. I'm like, what? So, K-Lip, I've not heard that, Michael. But like, you know, we're just going to write calls to monetize that or you know we got kmq where i'm like you know hide the china right kmq is the em version of kweb and it includes the kweb companies but includes mccartre librae and you know other other you know non-u-s companies in in that space and you know you can hide the china and get the exposure and yeah you know it's it's again i don't think the volatility will go away

because of this geopolitical where it's really tough to have that China light item, you know, people throw stuff at you. But you can take advantage of it. And I think for those that, you know, I always say it's the Danne Kahneman. Are you thinking fast or you're thinking slow? If you'd spend the time and think slow, you know, there's a lot of, a lot of really good opportunities there. But even if, like, I always think that the narrative is usually, if the dollar is weak and that's what it seems like they're trying to do, whether they meet it or not. That's typically good for emerging markets, right? A lower dollar tends to be good for emerging markets. I think, yeah, I mean, I think, you know, the Fed, you know, just, just pause, but, you know, you're probably

going to have, you know, interest rate cuts later this year. Interest rate differentials determine FX, and that will weaken the dollar, which makes, you know, this huge tailwind, helping U.S. stocks just being dollar denominated becomes a headwin for these foreign investors. And certainly a lot of, a lot of, you know, U.S. multinationals, you know, they're foreign sales, right? It's, it's, so anyway, yeah, I'm in your camp. I don't, you know, I think the dollar declined. It's come back a bit, you know, later on this year, I think it rolls over as well as just, you know, if you have, you know, from just being in D.C., you know, there are no fiscal conservatives in that zip code.

You know, it's a bipartisan spending binge, you know, you know, you know, whatever effect Doge has, you know, the, you know, a lot of this budget spending is simply on rails. And the problem, you know, I put the probability that, you know, the budget deficit gets bigger at 100%, you know, this year, next year, you know, until you have some sort of existential crisis. and that will make people increasingly wary over time, I believe. Brendan, for people that want to learn more about the lip and the web, where do we send them? Yes, cranechairs.com. Appreciate it, Brendan.

Always great seeing you. Yeah, likewise, Michael. I'm great to see you as well, Ben. Thank you again for the opportunity. Thank you to Brendan. Thank you to Crane shares. If you want to follow more of when it's work, go to China Last Night.com. He writes a daily blog, updates you on all the macro.

the micros going on across the globe. Email us at Animal Spirits at thecompannews.com. Thank you for listening. We'll see you next time.