Summary: This week, I woke up in the dark for a 2:30AM hit on CNBC Worldwide Exchange. It was worth it to have a conversation with 2 old friends, host Brian Sullivan and guest Jim Pethokoukis from AEI. You can see the video clip by clicking here.
As the lead-in for our hit, Brian aired a clip of Ray Dalio (another old friend) saying the US and China are the only two elephants left in the room for the global economy, that they would stay in each other’s face for along time, and that investors should have investments in both for that reason. Knowing Ray, he meant for the long term.
The questions of the day were:
- whether China would be able to compete with the US tech sector over the long term (Yes.)
- whether investors would invest in China now (Not at this time.)
In answering the first question, I would caution people to skip the tribal chest thumping where we tell ourselves how special we are and how the other guy will never be our equal and to focus, instead, on facts. We do have some formidable assets, including the crowd of people who inhabit Silicon Valley. But, China has 4x more people than we do; the people in China are just as intelligent as we are; and they are working their butts off to transform China from a low-margin assembler of other people’s products to a global power in developing and producing high-tech, high-margin, branded products for the global market. We may not like some of the ways they are doing it–industrial policy, supporting state-owned companies, etc.–but that don’t mean it’s not going to happen. So, long-term investors will certainly want to own companies like Alibaba along the way.
The answer to the second question is not at this time. The trade war has been intensely politicized, has spread into other areas of conflict (Huawei, ZTE, global 5G deployment, and foreign policy), and is likely to get much worse before it gets better. Both countries are led by individuals who are under extreme political pressure to look like tough guys, which heightens the risk of further, dramatic policy surprises. When those surprises happen, global investors flee China and other emerging economies, the RMB falls against the dollar, liquidity tightens in China, and debt pressures on Chinese private companies mount. Event risk is simply too high today. And while there is event risk in the US as well, the US economy and the dollar are still the (relatively) safe places where investors run to hide when they get scared.
JR
