Regarding the China AI price war, I see this as more evidence of the segmentation of global markets
Effectively there is now a US-centric world and a China-centric one, at least in economic terms
Chinese AI (behind the great firewall) uses 1 generation late chips, but because their inputs are subsidized and competition is brutal, a price war breaks out. Obviously catastrophic for industry profitability and shareholder value.
This also explains the lackluster performance of soft tech monopolies like Alibaba and Tencent - they cut into each others turf and lower prices, which is good for the consumer but not the investor.
The reverse (high monopoly rents) is true in the United States, and indeed much of the rest of the world like the EU, UK, Japan & Australia, perhaps save for countries that are heavily sanctioned like Russia, Iran & Venezuela.
So, for example, OpenAI has a de-facto monopoly on enterprise AI, just like NVIDIA has on chip design and TSMC on foundry. I know this is a gross oversimplification, but you get my point!
Given that the US still has imperial power and political control over most of world's GDP (although this is starting to slip, especially in places like India and SE Asia) I believe that the US and fellow travelers will be able to successfully shut out Chinese competition, certainly in the EU, UK, Japan and Australia & even Lat Am. You won't, for example, see Rosatom or CGN Nuclear develop a nuclear facility in Australia, or indeed even the UAE - there will be enormous political pressure applied to choose, say, a Korean or French vendor instead.
Looking at an old economy example - we see this in Steel, a legacy sunset industry that is now heavily protected in the US. US Steel and Cliffs have pricing power now (latest slump in HRC prices notwithstanding) precisely because of trade protection. Conversely steel producers in mainland China have no "moat", and their margins get eaten away by Australian (and Brazilian!) Iron Ore exporters.
So when does this change? To use the steel example, I believe the investor needs to wait until industry structure in China consolidates. That is, limiting supply is more important than expanding demand. For strategic, new tech industries (semis, AI, EVs etc) this is unthinkable for the CCP as technological development is an ideological priority over profits. It's the equivalent of opposing "drill baby drill" in Texas and instead asking for OPEC-style cartelization, not going to happen in 1970s Texas, or indeed today's one!
However certain sunset industries in China have begun to consolidate and reduce production with the CCPs blessing - thermal coal is a classic example, and the ESG-unconstrained investors who were able to buy 1088.HK & 1171.HK have made out very well indeed!
Given the prevailing pro-capital political atmosphere in the USA, indeed its unlikely to change whether Biden or Trump wins in November, I wouldn't dare to short the S&P500 or NASDAQ for any meaningful duration. Unless we see an AOC or Bernie Sanders type political figure gain significantly more political power I doubt anything will change, for better or worse.
I do agree that any "adjustment" in the S&P500 return, or indeed the US NIIP, is far more likely to come with a dollar devaluation. This is why I prefer to stay long US equity risk (S&P500 or NASDAQ, depending on your desired beta) and simultaneously long dollar bearish asset class, like Gold, EM equities, or even EM LC debt.
I appreciate that for a short-seller like yourself going long multiple asset classes will seem heretical, but it's the way I see the world working. Unfortunately shorting the S&P500 outright in my view is the widow maker trade, just like shorting JGBs prior to 2020 or indeed shorting the HKD.
Personally, I think the greatest shorting opportunities will be pairs trading the long side of commodities and shorting the companies that are sensitive to them, where profit and growth fall significantly from the inflation of specific commodities they need to buy to make finished products or transport them, and more so for companies that are not subsidized by defense and other government spending, and are not protected from tariffs.
And then you have the demand destruction equation and the vulnerability of demand for non-essential goods. Natural resources and productivity are real money, and are becoming more recognized as such when yields are not permitted to reflect the rate of inflation by the decree of governments. This is a feedback loop that no amount of capital controls can break without also breaking the system.
Short-selling is going to get SLAUGHTERED over the next 5 years. The S&P is headed over 10k by the end of the decade ... I cant imagine trying to run a short book.... There's literally nothing to short .... Zombie companies get propped up by money printing, tech companies have all the growth, the dollar will remain the strongest currency. You have every institution on the planet shoveling money into the US for the foreseeable future ... And I didnt even read Clements comments till now and he's right. lol
Certainly possible - and I also think Clements probably right. But I also think government finances and current politics are unsustainable. Something.has to give.....
I think it's propaganda that the current finances are unsustainable. The global economy is 100 trillion in GDP give or take and you have the US adding 1 trillion a year in deficit to that... 1% ... It's a drop in the bucket. In 200 years, I predict the situation will be far more extreme; you have to realize they're not going to let all their wealth evaporate without blowing the whole system up... Further, the overall level of private credit growth in the US peaked in 2008 (search FRED for "Total Credit to Private Non-Financial Sector") ... https://fred.stlouisfed.org/series/QUSPAM770A
Inflation doesn't create or destroy wealth; it merely redistributes. Real wealth is only created by goods and services.
Also, if they DO create an alternative to the dollar; that will likely INcrease the scarcity of the dollar; making it more valuable. Just my 2c.
edit: Also, as the monetary velocity continues to fall, that 1% deficit won't even cause inflation because it will all end up back in the stock market ultimately. IMO....
I also don't think we're necessarily headed to a pro-labor world ... That has never been the trend of history for thousands of years. Why exactly now when the most pro-capital industry ever possible (AI and robo) is in its infancy? .... GLD price increase is mostly about keeping people from being able to to use it... that's why it flatlines for long periods and SPIKES when it does move ... can't transact in it when you can't predict its value. I mean, I could be wrong on all this but just playing ball... your arguments in the article certainly would be salient counterpoints ...
While I agree with the need to get more serious about anti trust in the US, China isn’t really competitive. It is subsidized. It has the lowest consumption share of GDP in history and pumps all that money into “strategic” sectors. It’s China really that is Japan refusing to understand that the investment led model has come to an end. They need to transfer money to ordinary people. We need to do so in the states as well but China is far worse.
I think the news about Chinese AI discounts is not being considered at all by the US market at this point, and as you rightly point out, I believe could be a significant problem for the AI thesis of massive new profits. to date, there is no evidence that AI has improved the profitability of very many companies, other than NVDA, although it has certainly raised the costs of creating it. Shorting is very tough for almost everybody except the professional short-seller, but sitting on the sidelines and earning 5% is not that hard at all. perhaps that is the best trade for now (although I still like GLD/TLT)
Hi Russell
Regarding the China AI price war, I see this as more evidence of the segmentation of global markets
Effectively there is now a US-centric world and a China-centric one, at least in economic terms
Chinese AI (behind the great firewall) uses 1 generation late chips, but because their inputs are subsidized and competition is brutal, a price war breaks out. Obviously catastrophic for industry profitability and shareholder value.
This also explains the lackluster performance of soft tech monopolies like Alibaba and Tencent - they cut into each others turf and lower prices, which is good for the consumer but not the investor.
The reverse (high monopoly rents) is true in the United States, and indeed much of the rest of the world like the EU, UK, Japan & Australia, perhaps save for countries that are heavily sanctioned like Russia, Iran & Venezuela.
So, for example, OpenAI has a de-facto monopoly on enterprise AI, just like NVIDIA has on chip design and TSMC on foundry. I know this is a gross oversimplification, but you get my point!
Given that the US still has imperial power and political control over most of world's GDP (although this is starting to slip, especially in places like India and SE Asia) I believe that the US and fellow travelers will be able to successfully shut out Chinese competition, certainly in the EU, UK, Japan and Australia & even Lat Am. You won't, for example, see Rosatom or CGN Nuclear develop a nuclear facility in Australia, or indeed even the UAE - there will be enormous political pressure applied to choose, say, a Korean or French vendor instead.
Looking at an old economy example - we see this in Steel, a legacy sunset industry that is now heavily protected in the US. US Steel and Cliffs have pricing power now (latest slump in HRC prices notwithstanding) precisely because of trade protection. Conversely steel producers in mainland China have no "moat", and their margins get eaten away by Australian (and Brazilian!) Iron Ore exporters.
So when does this change? To use the steel example, I believe the investor needs to wait until industry structure in China consolidates. That is, limiting supply is more important than expanding demand. For strategic, new tech industries (semis, AI, EVs etc) this is unthinkable for the CCP as technological development is an ideological priority over profits. It's the equivalent of opposing "drill baby drill" in Texas and instead asking for OPEC-style cartelization, not going to happen in 1970s Texas, or indeed today's one!
However certain sunset industries in China have begun to consolidate and reduce production with the CCPs blessing - thermal coal is a classic example, and the ESG-unconstrained investors who were able to buy 1088.HK & 1171.HK have made out very well indeed!
Given the prevailing pro-capital political atmosphere in the USA, indeed its unlikely to change whether Biden or Trump wins in November, I wouldn't dare to short the S&P500 or NASDAQ for any meaningful duration. Unless we see an AOC or Bernie Sanders type political figure gain significantly more political power I doubt anything will change, for better or worse.
I do agree that any "adjustment" in the S&P500 return, or indeed the US NIIP, is far more likely to come with a dollar devaluation. This is why I prefer to stay long US equity risk (S&P500 or NASDAQ, depending on your desired beta) and simultaneously long dollar bearish asset class, like Gold, EM equities, or even EM LC debt.
I appreciate that for a short-seller like yourself going long multiple asset classes will seem heretical, but it's the way I see the world working. Unfortunately shorting the S&P500 outright in my view is the widow maker trade, just like shorting JGBs prior to 2020 or indeed shorting the HKD.
Thank you.
Personally, I think the greatest shorting opportunities will be pairs trading the long side of commodities and shorting the companies that are sensitive to them, where profit and growth fall significantly from the inflation of specific commodities they need to buy to make finished products or transport them, and more so for companies that are not subsidized by defense and other government spending, and are not protected from tariffs.
And then you have the demand destruction equation and the vulnerability of demand for non-essential goods. Natural resources and productivity are real money, and are becoming more recognized as such when yields are not permitted to reflect the rate of inflation by the decree of governments. This is a feedback loop that no amount of capital controls can break without also breaking the system.
Short-selling is going to get SLAUGHTERED over the next 5 years. The S&P is headed over 10k by the end of the decade ... I cant imagine trying to run a short book.... There's literally nothing to short .... Zombie companies get propped up by money printing, tech companies have all the growth, the dollar will remain the strongest currency. You have every institution on the planet shoveling money into the US for the foreseeable future ... And I didnt even read Clements comments till now and he's right. lol
Certainly possible - and I also think Clements probably right. But I also think government finances and current politics are unsustainable. Something.has to give.....
I think it's propaganda that the current finances are unsustainable. The global economy is 100 trillion in GDP give or take and you have the US adding 1 trillion a year in deficit to that... 1% ... It's a drop in the bucket. In 200 years, I predict the situation will be far more extreme; you have to realize they're not going to let all their wealth evaporate without blowing the whole system up... Further, the overall level of private credit growth in the US peaked in 2008 (search FRED for "Total Credit to Private Non-Financial Sector") ... https://fred.stlouisfed.org/series/QUSPAM770A
Inflation doesn't create or destroy wealth; it merely redistributes. Real wealth is only created by goods and services.
Also, if they DO create an alternative to the dollar; that will likely INcrease the scarcity of the dollar; making it more valuable. Just my 2c.
edit: Also, as the monetary velocity continues to fall, that 1% deficit won't even cause inflation because it will all end up back in the stock market ultimately. IMO....
I also don't think we're necessarily headed to a pro-labor world ... That has never been the trend of history for thousands of years. Why exactly now when the most pro-capital industry ever possible (AI and robo) is in its infancy? .... GLD price increase is mostly about keeping people from being able to to use it... that's why it flatlines for long periods and SPIKES when it does move ... can't transact in it when you can't predict its value. I mean, I could be wrong on all this but just playing ball... your arguments in the article certainly would be salient counterpoints ...
While I agree with the need to get more serious about anti trust in the US, China isn’t really competitive. It is subsidized. It has the lowest consumption share of GDP in history and pumps all that money into “strategic” sectors. It’s China really that is Japan refusing to understand that the investment led model has come to an end. They need to transfer money to ordinary people. We need to do so in the states as well but China is far worse.
I think the news about Chinese AI discounts is not being considered at all by the US market at this point, and as you rightly point out, I believe could be a significant problem for the AI thesis of massive new profits. to date, there is no evidence that AI has improved the profitability of very many companies, other than NVDA, although it has certainly raised the costs of creating it. Shorting is very tough for almost everybody except the professional short-seller, but sitting on the sidelines and earning 5% is not that hard at all. perhaps that is the best trade for now (although I still like GLD/TLT)
It seems like the cloud providers who don’t invest in LLMs (Oracle) will make money too but who knows. It’s crazy town right now.