"I Wish Upon You Ample Doses Of Pain And Suffering"

  It is said that Xi Jinping is not an economist. Fine. Neither was Ten Xiaoping. Still, at some stage, China will have to do "something" less its economy follows in the not so glorious steps of the Japanese economy.

  The real estate bubble is imploding and with it the Chinese banking system is under strain. At the same time, China needs to upgrade its economy in order to become a developed country. It won't be easy especially without some economic freedom. On the current trajectory of no children and young people "laying flat" under the strain of limited opportunities, it is hard to imagine that China can succeed in its transition. 

 That's too bad while overseas Chinese prove their abilities both in science and technology. 

 I unfortunately do not know what's the solution to this conundrum. What I see are the two halves of the world irremediably drifting apart towards confrontation. Can a compromise be found?  I am pessimistic but maybe, hopefully, wrong!

"I Wish Upon You Ample Doses Of Pain And Suffering"

By Eric Peters, CIO of One River Asset Management

“When Heaven is about to confer a great office on a man, it first exercises his mind with suffering, and his sinews and bones with toil,” whispered Xi to himself, contemplating the ancient wisdom of Mencius, born 100yrs after Confucius and considered Confucianism’s 2nd sage.

“It exposes his body to hunger, and subjects him to extreme poverty; it confounds his undertakings,” continued Xi, alone on a long walk. “By all these methods it stimulates his mind, hardens his nature, and supplies his incompetencies.”

Xi’s intelligence services had sent him TikTok videos of Jensen Huang, the founder/CEO of Nvidia, who spoke this week at Stanford University, in the heart of Silicon Valley. Jensen was born in Taiwan in 1963, his ancestors having escaped from the Communists all those years ago. His family made their way to Kentucky, where Jensen was mercilessly bullied by racists and worked at Denny’s where he washed dishes and cleaned toilets as he made his way through school.

And now this remarkable man who in a parallel universe would have grown up as a Chinese national, is worth $80bln and built the firm which is leading the West into an unknowable future of artificial intelligence.

“Greatness comes from character and character isn’t formed out of smart people – it’s formed out of people who suffered,” said Jensen Huang to the captivated Stanford students.

“I was fortunate that I grew up with my parents providing a condition for us to be successful on the one hand, but there were plenty of opportunities for setbacks and suffering,” continued Huang, his wisdom racing across social media. Xi sighed, increasingly confused, marveling at Jensen's wildly popular reception, while his directive to Chinese youth to “eat bitterness” had left them lying flat.

“I don’t know how to do it for all of you Stanford students, but I wish upon you ample doses of pain and suffering,” said Huang, as Xi felt a growing sickness rise from within.

We Should Thank God For The Communists

By Eric Peters, CIO of One River Asset Management

Thank God:

“Value investors think China is cheap, at some point it’ll turn,” said the CIO, decades spent in HK, investing globally, Asia focused. “Perhaps they’re right,” he said, a light shrug. “But markets require capitalism, and capitalism requires rule of law.” China is one of the most important wildcards to track to understand the global economy, markets, geopolitics. “Confucius believed in rule by law, with the word of a wise, moral, ethical leader being law. Mencius (Confucianism’s 2nd sage) agreed about morals and ethics but argued for rule of law.”

“Xi Jinping believes in rule by law; what he says is law,” continued the CIO. “Now that Xi has shown his hand as he tightens his grip on the Party, economy, markets, what could he possibly say going forward that would entice any thinking person to take real risk?” he asked. “For the first time in my career, the Hong Kong tycoons have accepted that it’s over,” he said. “They feel the US has it in for them, and they see China as un-investable now,” he said. “Their grandparents fled the mainland in ’49 and taught them to never trust the Communists.

“The Party hired Xi in 2012 to clean up the mess of successive governments,” said the same CIO. “Rampant corruption of Party members, excessive dependency on property and fixed asset investment, environmental degradation, wealth inequality.” Existential threats to the Communist Party. “Xi looked at this rot and took it apart. It was his chance to introduce rule of law. Had he done so, he would have created a China that could have overtaken the US. But just like in 1949 he caused China’s talent to flee. We should thank God for the Communists.”

“Xi saw the experiment with openness and wealth accumulation as dangerous to Party control,” he said. “He will subordinate everything to enhance state power in his quest to displace America as the world’s rule setter,” he said. “He’s telling you precisely what he’s going to do. Eat bitterness. And each day the surveillance state grows stronger.” AI will make it more so. “What we see as economic sickness, Xi sees a price worth paying, because at the other side of this challenge is China’s rightful place at the head of the table. That’s his objective.”

“Xi believes he can allocate capital to build China top down,” said the CIO. “He thinks he can create Nvidia by decree. But Jensen Huang’s grandparents fled China’s Communists in 1949. Jensen had a vision that accelerated compute would be the future. He suffered multiple failures, made numerous acquisitions over decades, took enormous risks.” 30yr overnight success. “TSMC likewise realized it needed to shrink the geometry to make it happen. ASML knew it needed to go beyond the current understanding of the physics of etching.”

“TSMC’s gross cash flows that they can invest back in capital expenditure eclipses the entire market cap of China’s semiconductor industry,” he said. “Taiwan has an ecosystem with engineers and suppliers who have worked together and know how to talk to each other and make things happen.” No way China catches up. Nor does Intel. “And Sam Altman wants trillions to build data centers and buy chips. Google wants the same.” Microsoft too. “They’re signaling that this is where the future value lies.”

“We’re entering a world where the value is in hard tech,” said the CIO. “Where doing important things are very difficult and capital intensive.” We have left a world of capital light opportunity - the software era is ending with the arrival of AI. “Google was built with $100mm and 1000 people. It’s the greatest business on earth,” he said. “Compare those two inputs to what Jensen had to build, it’s drastically different. And this will be more the norm for the people who build tremendous value. More dollars spent, more people, more risk, more time.”