lenS & thoughtS – Page 14

Music in AI age should focus on memorable experiences

Back in 2016, I saw this day coming – AI is creating music that is really good.

However, I like natural “things”.

How to have more human elements?

I would argue live concerts are more “human”.

The unique performance, the friends and family who join you, the broader audience, even the historical background, could make a concert a more meaningful experience than any song.

That piece of memory is unique – it’s hard to replicate the exact same “experience”. Even if the singer may perform similarly across concerts, the audience is different. And audience is part of the whole performance.

Some thoughts of Tariffs

I think tariffs is just another form of tax.

It’s shared by buyers and sellers and is a tax on consumption, especially lower-end consumption – as the outsourced/imported products should proportionally be more lower-end.

It’s actually a more onerous “tax” on low to mid income US people, assuming that high-end consumers care more about high-end products which are not produced in China etc.

And it does increase gov income. Instead of higher taxes on wealthier people, this form of “tax” is more shared across average consumers.

Separately, tariff will increase US mfg jobs.

However, who will do these jobs? With the current wave of AI, you could imagine more average “white collar” workers will be replaced by AI and maybe they shall go to manufacturing.

I think we should say all jobs are created equal – however, if you look back, when those manufacturers jobs were transferred out of the US, US was in the dominating position in the world. No one could force the US to get rid of “good jobs” and keep “bad jobs” back then – I could only imagine that those outsourced jobs were considered “worse”.

So now more people in the US will pick up those “bad jobs”. That’s not a very comforting vision for many average people in the US – probably more dangerous, more exposed to health issues, more repetitive (well white collar jobs can be repetitive). However, this should do good for US overall.

Where are talents?

If talents are born randomly, each year he or she could be anyone that is born anywhere in the world.

Even if China has 1/6 of global population, its newborn is less than that. In 2024, 132mn babies were born. In 2023, China has 9mn newborns.

That makes ~7% of global new born, less than half of the 17% population weight.

Investing in China: common fallacy

A common fallacy, especially in the past, is to find a US asset in the similar industry and use it as a reference for valuation.

Why this is less useful, especially in rmb assets?

To put it simply,

asset value = earnings power (e.g. EPS) x multiple (e.g. P/E)

Then we look at these two components:

1/ Industry dynamics can be vastly different.

Demand side can be very different – e.g. work from home has never been a thing in China vs. only ~24% of workers don’t WFH in 2022 in the US.

Supply sides can also be very different in terms of entry barriers, the level of competition etc.

There are just too many different things, thus the projection based on a US company’s past is usually not a good reference.

2/ valuation can be vastly different.

Partially, difference in multiple is reflecting terminal growth, etc., therefore it’s similar to the first point, which is about fundamentals.

Additionally, If you think about bond prices – US treasury yield vs. China gov bond yield, they are on two diverging roads.

What’s good though? Assets in China can produce less correlated return vs. US assets, therefore providing additional benefits to a portfolio.

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See others posts

Investing in China: regulation and justice

Enron – not alone

Recently finished the book The Smartest Guy In The Room.

Shockingly, you could find many of Enron’s problems in other industries in China during the go-go era (property):

1/ focus on doing projects/deals with early monetization. less focus on the real economics over the entire horizon

2/ lots of off balance sheet financing

3/ weak audit; can’t put a check on mgmt

4/ mgmt takes more early profits out, with potential conflict of interests in the form of SPV, etc.

It’s also similar in WeWork!

The same playbook. Remember that Adam Neumann owns some buildings WeWork leases.

Random thought on China’s role in US debt

Historically, China was a big buyer and still a big holder of US gov debt, which to some extent led to the ultra-low interest rate environment.

Nowadays, China is still helping keep the US interest rate low, indirectly. I think by not providing good return opportunities, China is forcing money to go to other places, indirectly providing more money (with low return alternative) in the global market for the US gov.

It’s not just impacting foreign capital interested in China, but Chinese money as well.

Alternatively, if China has attractive opportunities all over the place, it will compete for global money one way or another.

One thing US is envying.. inflation

China Oct CPI is out, core CPI excl. food and energy, there was 0% increase month over month, and only 0.2% increase year over year.

Almost all kinds of food price dropped MoM, with pork dipping 3.7% MoM (+14.2% yoy).

Including food and energy, Oct CPI dropped 0.3% MoM and increased 0.3% YoY.

In Sep, the core CPI YoY increase was at 0.1% while MoM is -0.1%.

Thoughts?

a) Powell would love US CPI / PCE look more like China’s… not exactly the same, otherwise that might indicate a problem with demand..

b) The end of Sep & early Oct China’s stock market rally didn’t move the needle / has limited impact so dar. Day to day consumption still looks weak.

c) Rental price dropping 0.1% MoM and 0.3% YoY.

If RMB depreciates

One thing that might happen after additional US tariff is a weaker RMB, which can make Chinese export more appealing.

This may diver export from US to other counties, which gives pressure to producers globally.

What to do if you have rmb?

– buy houses in China

especially given that rmb borrowing rate is low, and housing prices have declined for 3 years, if you have confidence in chinese macro, buying a property in good locations is not a bad choice.

– buy overseas companies that are making money overseas

then the earnings power is not priced in rmb, and the value of the company should be rather uncorrelated to rmb.

Xiaomi’s strength

Besides Xiaomi’s scale, supply chain capability, IoT strategy, etc., I think the most underestimated strength comes from its competitors.

For all those merchants or companies who are “bullying” consumers, they will find themselves outcompeted by Xiaomi’s products – simply better, cheaper.

Xiaomi is not copying. Xiaomi doesn’t enter a new category if it thinks the product is good enough. Xiaomi usually executes with better efficiency, offers more value, or adds some differentiation.

Another noticeable change for Xiaomi in recent years is its brand value. It used to be more associated with low to mid income consumers as its products offer value.

However, as its car business picking up, people find its brand attractiveness quickly expand into the premium segment. Those who won’t buy Xiaomi phone can buy SU7 or SU7 Ultra etc. – this greatly expanding Xiaomi’s consumer base.

It’s like Walmart + Sam’s Club in terms of capturing more consumers.

Xiaomi could be China’s Tesla.

After Trump was elected

High-level things that people/market celebrates:

1/ more M&A in the US

2/ certainty in taxes: Harris proposed raising corporate income tax, stock buyback tax, unrealized capital gains tax

3/ near-term possibility of ending wars globally

Rates / Treasury yields

bad for long-term bondholders – higher inflation, higher deficits (more supply). but long-term treasury can’t rise too much – it can hurt US domestic mfg etc. if rates are high.

Trump would want Fed to cut rates. Even if Fed cuts, long-term bond yield could be hard to come down.

Thus, we should see a steepened yield curve, which is good for banks! Banks are borrowing current (cheaper cost) and lending long-term (higher yield).

China

1/ less probability of near-term war on TW strait (less idealogical driven; deal maker)

2/ higher tariff, less export – China needs to rely more on domestic consumption

Industries

1/ obviously, IRA could be changed. Then bad for renewables like solar, etc. It’s such an interesting industry.. no real demand if no IRA?

2/ crypto obviously, can boom especially if a new pro-crypto SEC chair comes in power