When considering risk, it is always very easy to become gloomy and negative, which is why some of the most perspicacious advisors nevertheless fulfil the old maxim of “If you’re so clever why aren’t you rich?” They see risk and seek to avoid it. However, risk can not be avoided entirely and in a system it is simply transferred. If it is transferred from those least able to deal with it to those most able, that is a good thing. Too often in recent years however, the opposite has happened. Thus for example, long term investors have been forced by regulators to shun short term volatility (and its associated returns) in favour of not only liquidity (which they can embrace) but also low quality, which they should not. Currently, there is almost $5trn sitting in Money Market Funds earning more for the fund providers than for the investors, while long term investors are actually paying companies to borrow money at negative interest rates in order to preserve capital ratios.
The idea behind the Wednesday Wanderer’s Wonderings (WWW) is to consider some of the medium and longer term opportunities as well as the risks out there. Currently back in Hong Kong but sat in quarantine for two weeks, not even allowed outside the apartment, it is easy to focus on negative issues, but let’s try and get a bit Taoist about it all and consider not just the clouds of the Yin but also the brightness of the Yang.
When thinking about medium term risks, we believe that there has been a meaningful shift in the last few months, away from the issue of illiquidity in ‘alternative assets’ (our previous main concern) and towards Geo-Politics. In particular the escalation of the New Cold War between the US and China. However, rather than focus only on the undoubted negativities that could arise from this, we can also address some of the potential ‘brightness’.
The origin of the New Cold War was probably the announcement by the Chinese of Made in China 2025 back in 2015 https://en.wikipedia.org/wiki/Made_in_China_2025. While it attracted little international attention at the time, by 2018 it was starting to be noticed in official US circles. In particular, the Council for Foreign Relations, (CFR) a highly influential US Think Tank, started describing it as a threat to the United States and this was always a much more important issue to the US (and to us) than the trade disputes and tariffs. The recent ratcheting up of tensions is thus merely accelerating this competition. However, with our focus on the Yang, we suggest thinking of this as a new Sputnik moment, a reference to the moment in 1959 when the US sat up and took notice of the Soviet Union as a technological rival. The CFR described it as such last year, proposing a significant boost in R&D by the US in order to keep up with the Chinese. https://www.cfr.org/report/keeping-our-edge/
For all the bluster in the report about US supremacy and China stealing IP, the reality is that the attacks on Huwaei over its 5G products are not about protecting a US competitor, since there is no credible competitor. To the extent that the Chinese stole IP it is in the same way that everyone does, the US included and certainly the same way that the US stole IP from the UK when it was the emerging challenger to the British Empire. The US is waking up to the fact that, like the Soviet Union did 60 years ago, China has not only caught up but is leading in much of the new technology such as AI, Robotics, 5G and others. We can see from the annual list of the world’s fastest 500 supercomputers, https://www.top500.org/list/2019/06/?page=1 that while the two fastest computers are still in the US, China is not only 3rd and 4th but has almost 50% of the top 500, over twice as many as the US.
The sensible, indeed the only, long term solution is to make a better product. This should be good for growth since it is likely in our view that this New Cold War can and will divert resources away from the Hot Wars that the Pentagon has been conducting ever since the fall of the Soviet Union We used to talk about a peace dividend, but US military spending has been running in the trillions, largely funding the 800 military bases around the world and all the munitions they expend
In a sense the market already understands this, which is why the big tech companies’ shares are soaring. Eric Schmitt, former CEO of Google has moved to Washington at places like the National Security Commission on Artificial Intelligence where essentially he has been pushing for greater government funding for AI. https://www.nscai.gov/home and in their latest report echoes the CFR proposals to use AI to not only facilitate exiting lockdown but also to ‘compete’ with China.
“Faced with this challenging reality, the United States must determine ways to utilize AI to reset the economic playing field, mitigate vulnerabilities exposed by this crisis, and work to prevent competitors led by China from exploiting the current economic disruption to provide them long-term advantages in key technologies.”
National Security Commission on Artificial Intelligence
To flip back to the Yin for a moment, as blog The Intercept report, https://theintercept.com/2020/05/08/andrew-cuomo-eric-schmidt-coronavirus-tech-shock-doctrine/ the Black Mirror world we were being promised by Silicon Valley in the before Covid (BC) era in terms of convenience has now simply been rebranded as now necessary for our safety.
But to keep the positive view of things for now, we think it worth considering the irony that not only will the US be seeking to copy the Chinese in terms of state sponsored investment in new, less military focussed, technology, but that, as previously discussed, the EU may seek to carve out a role for itself as a facilitator of the type of physical as well as technological infrastructure – high speed trains, high speed broadband, integrated green energy platforms etc – in the manner of the CCP. Made in US 2025, or for that matter Made in Europe 2025 as a response to Made in China 2025 would signal a role for competition to drive innovation in technology and investment in infrastructure. Which is a good thing, Very Yang.
