Talk Your Book: Will China Win the Trade War?
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Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick 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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz 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 despondent 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, it's totally flipped. So we got into all really great stuff with Brendan from crane shares. I macro, would you say we, we, 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, um, which,

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 CraneShares. So here's our conversation with Brendan Ahern, CIO at CraneShares. Brendan, welcome back to the show. It's great to reconnect, Michael. Okay, we had you back on in December of 2024. The world looks a little bit different today than it did back then.

I think maybe there was, was there, was tariffs in the air? There must've been, must've 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, you had volatility because you'd have these kind of tweet bombs that would come out.

But for us with K-Web, actually, that period, 2016 up through 2020, was one of the great time periods for performance for K-Web and Chinese equities. And that was under the art of the deal, right? Despite all the trade war, tech war, actually performed really well.

So when we talked in December, remember, we were kind of grasping for what could cause international stocks to outperform. It was hard to come up with a good idea at that point. Sentiment was on the mat. 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? Is it too hard to tell at this point?

I don't think this is the end of American exceptionalism. I don't think it's the end of U.S. equities. I'm more talking about the cycle. I agree. That stuff, let's put that aside and debate the Roman Empire stuff later. But for now, has enough changed that you can see that, oh, actually, you know what? This change is better for ex-U.S. than things were before just a few months ago. I think, as we saw in Canada—

where 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 US 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, when the Fed does cut and the dollar declines because of just interest rate differentials, it'll give these non-US equities a little bit of a further tailwind. So, yeah, I think diversification is great again. I don't think it's some black and white situation. I think 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 valuations 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 US. A lot of that's geopolitical.

And that's why actually we're seeing the Hong Kong lines arguably intraday do better. That you take the same piece of news and you give it to an investor in Asia on, say, about Alibaba. Their reaction versus you give that same piece of information to U.S. investors about Alibaba is

That's probably just less enthusiastic, which is which is why we've kind of 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 maybe more balanced or at 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, has basically no debt, but they do have a US 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 US 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 U.S. dollar. It's a fixed income investor gets out their 12C calculator 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. 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, it's always negative. But how much of it is deserved?

Well, I would preface some of what's happened is deserved, that arguably you've had a number of policy errors from the Chinese government. And 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 the derating because of these growth stocks stopped growing as quickly. And so some of that's just been that rerating effect. And our belief is these stocks are just really, really cheap. You've got the second largest economy in the world stimulating.

Ownership levels are non-existent relative in the US, not so much outside of the US. And then we think 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. And yes, they're speaking about and obviously even, you know, President Trump, 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, Besant,

and the US trade representative are going to Switzerland to meet with their Chinese equivalent. And I think just to your point, Ben, China is far less geared to the US economy or for the US than I think people in DC 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 over abundance of construction supply and it crashed, crushed sentiment.

Where are we? Where are they, I should say, in the process? For real estate, it's location, location, location. So you're seeing the tier one cities, the rich cities, Beijing, Shanghai, Shenzhen, Guangdong, those cities are recovering. The lower tier cities, it's still a very, very bad, tough situation. And

you know, we in the US, our retirement savings are in the stock market. In China, it's in real estate. And so you've had a 50, 60% drawdown in your 401k or IRA. It really affects your consumption. And that's what's happened in these lower tier cities. And it explains why, you know, in September, you had this

big movement from the government, and they continue to add to policy support to the real estate sector. And 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 it's just, 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 bow 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 we just aren't. I think that's another way that people have kind of changed their tune on

So in this tech arms race, where would you pit things in terms of the technology sector in the US versus China? And I guess that can be either the biggest stocks or just sort of overall, however you 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 I think the deep seek puts a little crack in that huge valuation premium on US tech versus China tech. But I think definitely 16 years ago, these companies were counterfeiters, espionage,

But they've moved way beyond that. And what's coming in terms of flying drones, 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, but 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 K-Web and China, you know, China tech stocks are technical analysts who are like, you know, higher highs and higher lows is an uptrend.

And, yeah, there's vol 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, is there ever going to be a deal? Because I keep seeing people say, like, listen, I've toured the BYD 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. 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 is that BYD makes electric vehicle buses in California. They have a plan outside of Sacramento. They don't really publicize it, but they did a deal with the state of California to supply buses, EV buses. So it shows that you can do it. They can hire Americans. And we've allowed the South Koreans and the Japanese and

fiat and others to come. So why not do the same? Or at a minimum, allow them to do a JV with Ford and General Motors. 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 started down the path of buying property and they want to manufacture here. 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. It's like Canada. Canada doesn't make cars. GM and Ford make cars in Canada. Why not let the Chinese do it? Brendan, one of the interesting things about K-Web is

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

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. 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 people have found stock picking in the space really, really tough. And 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, 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 truth. I met an, you know, I was with an institutional investor yesterday. It was like, listen, I have a constant position in K-Web and that way, you know,

when K-Web goes on these runs, like we saw in January, coming out of January of 2024, in September and October of 2024, and more recently, January of 2025, because I have a position when K-Web goes up, I trim it. And then when you get this pullback,

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, right?

Like when everything says it's time to buy, that's probably when you want to be lightening up. And yeah, I mean, I think we can't control when people buy and sell our ETFs. And yeah, I kind of wish people would buy more on weakness than buying on strength. Well, you're never going to fix that.

Unfortunately, there's a lot of- That's hardwired into our DNA. Exactly. Behavioral finance. My other question about the Chinese consumer, I guess, is you mentioned that stocks and bonds and investing here is just so much more of a big deal and consuming is more of 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 the idea of international investors. They've been pouring a lot of money into here in recent years. That's one of the reasons US stocks have done so well. So if they start to pull out and invest more in their home country, is it a cultural thing? 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, A, the Chinese government is not socialist.

you know, they don't have the social safety net like we enjoy. So, you know, they have de minimis unemployment, de minimis healthcare 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're not shipping grandma and grandpa off to the old folks home, you're responsible for your family. And so you save a lot because you know you have these obligations for yourself and your family. And then I think it's something that 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 this uber saver. He

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, people who experienced the grape leaf forward and experienced extreme poverty there.

And, and you're not even a full generation removed from, from that experience, like something that I experienced, which was don't spend money, don't take out loans, just save and invest. And, um,

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 significantly.

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 is really, really true in China. There could be a giant disconnect. So maybe not super relevant for K-Web, but just curious, how is the Chinese economy doing? Well, no, I mean, just to answer your question, but we would argue K-Web is-

the transmission vehicle for domestic consumption in China, right? That the underlying companies, e-commerce benefit from. So that's part of why we're, you know, we're constructive. I mean, obviously we're, we have our bias, but, but you're- Wait, you're constructive 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,

Buildings are on fire. When I was there in January, I'm going back very soon. It's just not at all. There's a bias. I'm going to rich cities, Hong Kong, Shanghai. They're chugging along. Consumer confidence is low because of this downdraft and that's slowly improving.

What is their sentiment that you get from your contacts and being over there? What is their sentiment of the trade war? Are they kind of thinking like, why are we doing this? Are they nervous and anxious about it? Are they feeling like, what is the sentiment in China from that perspective? I mean, I think the Chinese government is playing tough because they've done the math and that they know we're more reliant on them than the other way around. And

But it will certainly affect, there are geographical areas that are 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, city and city.

That that will shut down because, you know, the tariffs just make it, you know, uneconomical. 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, I mean, you know, that's where unfortunately this is the most expensive history lesson and economics 101 lesson ever given, because if you just studied history to be like, oh, wow, Smoot-Hawley, Great Depression.

If you studied economics, they call them economic laws, comparative advantage. And so that's where it's really, 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 was recently in Europe and people were just, we've been your allies, we've been your friend and you're giving us the middle finger. How can we who are poorer

And buy as much from you, from us. It just doesn't make any sense. And in Europe, people were... It was a big topic of discussion. Let's end with this. We mentioned DeepSeek earlier a bit. How does the semiconductor chip war, all that stuff, factor into the future of

Chinese internet stocks? I mean, they've had to deal with the Biden export controls. There was clearly a lot of inventory front running. But I think 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 their claims, they were able just to use more chips. You know, Kabul, instead of using one NVIDIA, used 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 US investors, it's career risk as in, 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 US, 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 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 the one US investor that is involved besides the technical analysts are the hedge funds that a lot of prominent US hedge fund managers said. And why? Because they can hedge, they can trade. And so I think these big swings in volatility in KWeb, you can do what this one professional investor is 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 clip caleb yeah caleb

Well, that's where some of you are like, the Queb. I'm like, what? The Queb? And they're like, K-W-E-B? I'm like, K-Web? And they're like, yeah, the Queb. I'm like, what? So, K-Lip, I've not heard that, Michael. But we're just going to write calls to monetize that. Or we got KMQ where I'm like, hide the China, right? KMQ is the EM version of K-Web, and it includes the K-Web companies, but includes MercadoLibre and...

you know, other, other, you know, non-US companies 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, but,

But you can take advantage of it. And I think for those that, you know, I always say it's the Dan Economan. Are you thinking fast or are you thinking slow? If you'd spend the time and think slow, there's 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 mean 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 the Fed just paused, but you're probably going to have interest rate cuts later this year. Interest rate differentials determine FX, and that will weaken the dollar, which makes this huge tailwind helping US stocks just being dollar denominated becomes a headwind for these foreign investors. And certainly a lot of

A lot of US multinationals, they're foreign sales. Anyway, yeah, I'm in your camp. I think the dollar declined, it's come back a bit. Later on this year, I think it rolls over as well as just if you have from just being in DC, there are no fiscal conservatives in that zip code.

you know it's it's a bipartisan spending binge you know you know you know you know whatever effect doge has you know the the you know a lot of this budget spending is simply on rails and the prob you know i put the probability 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 that

Well, you know, 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, Craneshares.com. Appreciate it, Brendan. Always great seeing you. Yeah, likewise, Michael. And great to see you as well, Ben. Thank you again for the opportunity. Thank you to Brendan. Thank you to Craneshares. If you want to follow more of Brendan's work, go to ChinaLastNight.com. He writes a daily blog, updates you on all the macro and the micros going on across the globe.

Email us at animalspirits at thecompoundnews.com. Thank you for listening. We'll see you next time.