China's Economic Transformation: Louis-Vincent Gave discusses China's rapid infrastructure development and its impact on global trade, highlighting China's superior public infrastructure and urban planning compared to Western countries.
Investment Strategy: The conversation emphasizes the importance of understanding China's unique economic model, which involves deregulation and liberalization of labor, land, and commodities, as key drivers of its growth story.
Market Dynamics: Gave explains the "Hunger Games" model of capitalism in China, where intense competition among numerous companies leads to innovation and cost reduction, particularly in sectors like electric vehicles.
Equity Market Insights: Despite China's economic growth, its equity markets have underperformed due to policy decisions prioritizing currency and bond stability over stock market performance, contrasting with Western approaches.
Innovation Challenges: The discussion explores cultural differences in innovation, noting that while China excels in optimizing existing technologies, it faces challenges in pioneering new, paradigm-shifting innovations.
Geopolitical Implications: China's Belt and Road Initiative is framed as a modern imperial strategy focused on infrastructure development to secure commodity imports, with potential future geopolitical challenges in securing trade routes.
Energy and Future Growth: The potential shift to nuclear energy, particularly thorium-based, could redefine China's energy independence and economic dominance, with significant implications for global energy markets.
Western Complacency: The conversation critiques Western complacency in energy policy, warning that China's advancements in nuclear technology could shift the global balance of power if the West fails to adapt.
Transcript
[Music] This is Macrovoices, the free weekly financial podcast targeting professional finance, high- netw worth individuals, family offices, and other sophisticated investors. Macrovoices is all about the brightest minds in the world of finance and macroeconomics telling it like it is. Bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Szna. Macrovoices episode 495 was produced on August 28th, 2025. I'm Eric Townsend. It's the dog days of summer, so this will be our annual holiday episode. International Playboy Patrick Szna is off summering in the mid, so there won't be any postgame chart deck this week. We've got a terrific feature interview with Louis Vincent Gav lined up for you instead. This one was pre-recorded several weeks ago, so we won't have any perspective on current market events in the feature interview, but trust me, you're not going to want to miss this interview. Louis is going to give us his long-term perspective on China's role in the global economy. not the US- ccentric perspective that we've been led to by Western financial media, but a truly independent objective analysis of both China's extraordinary infrastructure superiority goals and what they're ultimately going to mean to the balance of global trade and also China's very real challenges securing sufficient foreign investment capital to fuel their amazing growth story in the face of current geopolitical developments, then you're really going to want to tune in next week when we're going to begin a countdown of our top five regular macro guests culminating in a feature interview with our all-time listener favorite macro personality in Macrovoic's episode 500 airing October 2nd. The names of all five finalists will be kept secret until their episode airs. But wait, there's even more. We chose the top macro guests based on their listener download counts in aggregate for all their past macrovoices appearances. But to our own shock and surprise, the one single most downloaded macrovoices episode of all time didn't even feature one of our regular macro guests. And it wasn't even a macrooriented interview, per se. Now I know what you longtime regular listeners are thinking. That's got to be Dr. Chris Martinson calling the COVID pandemic in Macrovoic's episode 204 back on January 30th, 2020. See, in my head, there's a whole bunch of you who have those statistics all memorized. Well, wrong answer. It was actually somebody else. And we had no idea that that interview got more downloads than any other Macrovoices episode ever until we set out to research this countdown. You'll find out who it was and what the topic was when we bring that guest back for an update on their all-time best-selling interview in Macrovoic's episode 501, which will air on October 9th. But for now, sit back, relax, and enjoy some really insightful, timeless perspective on China's role in the global economy from Gavcow co-founder Louis Vincent Gaff. Coming up next. [Music] And now with this week's special guest, here's your host, Eric Townsend. Joining me now is Gavcal co-founder, Louisie Vincent Gav. Louie, this is an interview that I've wanted to do with you for years now. We usually talk about the macro events of the day and so forth, but I want to zoom out for this interview and go to the big picture topic of China and its role in the global economy both historically and looking forward. Now, Louie, something you and I share in common is we both have permanent resident status in Hong Kong. When I first moved there in 2009, I figured it was going to take me a year before I would fully understand Hong Kong and Chinese culture. My actual experience was after 2 years I was maybe ready to start asking intelligent questions. It's much bigger than I ever imagined. So I want to start from the very beginning. Let's imagine that I don't know you but I spot you at the airport and I say you're Louis Gav. Hey, how about if we share a taxi into the city cuz I'd love to ask you about what it is that investors get wrong about China. What I need to know if I'm coming here to understand this. And the first thing you tell me is nobody takes a cab to the airport. We're going to get take airport express. Let me show you how to how to get a little bit more in touch with with modern society here because we don't do that taxi cab crap in Hong Kong. So, we're sitting on Airport Express and I say, "Louie, I don't know Tell me what the what it is that Westerners get wrong about understanding China, Chinese culture, and particularly Chinese economics from an investor perspective." >> First of all, thanks again for having me, Eric. I I always love catching up. To your point on cabs versus taking the subway, I think I can't remember who said this. It's a good quote because I like it that the mark of a of a rich country of a rich developed country isn't that poor people have cars, but that rich people ride the subway. >> I couldn't agree more. >> And to your point today, where do you feel more comfortable indeed riding the subway? Is it Hong Kong? Is it Singapore? or is it Shanghai or is it New York, London or Paris? Not that there's anything wrong with the New York, London or Paris subways, but they're definitely not as pleasant an experience as you get in Hong Kong. So, first things first, what any visitor, firsttime visitor to a Shanghai or Beijing or Hong Kong can't avoid seeing is how superior the public infrastructure has become. Whether you look at your public transport, whether you look at your shopping malls, take any kind of public infrastructure, the parks, the it's uh it is mind-blowingly superior. So you you have to ponder, I think, if you're intellectually honest, you have to take a step back and say, okay, how can they do this and we can't given how far ahead we were 30 or 40 years ago? How, you know, how did we mess this up in the west? How did we get to the point where China's life expectancy is now higher than the United States when 30 years ago it was 20 years below? I think these are questions that we should all be looking in the mirror and say, "Okay, how did this happen?" And hang on a second, Louis, I just want to point something out because a lot of our Western listeners may not realize that in the United States, when you think about it, what is public transportation? It's designed for the poor people. Everybody's expected to have a car if you can possibly afford one. And if you can't afford one, we got to do something to take care of the poor people. So, let's give them public transit. It's a completely different equation in Asia. Public transit is designed to solve everybody's problem. And only about 2% of Hong Kong residents actually own a motor vehicle. And it's a status thing. It's not about practical need. It's, you know, you want to be a rich guy, you got to have a fancy sports car. But it's not about practical use. I don't think that really exists in the west. >> I think that's a very fair point and that to be perfectly blunt that has a lot to do with China's geographic makeup. If you look at, you know, China today, it's roughly the same land mass as the United States. It has four times the population of the United States, but contrary to the United States, the population isn't really that spread out. Uh 94% of the Chinese population lives on less than half of China's terri sorry 94% of China's population lives on less than half of China's territory. Most of China's uninhabitable the Tibetan plateau, the Gobi Desert, the Takamakan desert. It's very hard places to live. So the way you have to conceive of China is imagine the United States. Imagine four times the population and everybody living along the east coast. So with that you get of course big uh urban planning challenges. If all these people were to have cars the whole place would be one big big traffic jam. So you could say to a sense necessity is the mother of all inventions and all that. China has no choice but to have great public transport. It it doesn't have the option that the US had of everybody has a car. Everybody lives in a 5,000 ft house in the suburbs. Everybody can have a 1500 foot garage where you can add have cars and kayaks and bikes and whatever else. So the geographical makeup of the place means that the consumption patterns de facto end up being very very different. The other, of course, obvious takeaway from this very different geographical makeup is that in China, you're simply not going to see uh what you often see in the United States or in Europe, i.e. families with 6, 7, 8, nine kids. These simply don't exist in China. They don't exist because the lack of space being what it is. And that is, by the way, you know, a lot of people talk about China's terrible demographics, and maybe we'll talk about that a little bit later, but this is uh something that you find all across East Asia. It's the same story in Japan. It's the same story in Korea, same story in Taiwan, Singapore, Hong Kong. The population density is such that you end up with a very different demographic profile which de facto has a big impact on economic activity if only because my favorite my very favorite quote ever is a quote from Jean Boden a French humanist philosopher from the 16th century who would say the only wealth is man. You know, today we have to acknowledge that all across East Asia, all the countries I named, we are producing fewer and fewer men and women. Therefore, if you're going to keep getting growth in that part of the world, the productivity of these people has to continue improving constantly. This means massive investments in education. This means massive investments in machinery. This means massive investment in robotics. All of which is happening in front of our very eyes. Everyone talks about the dramatic transformation that you've seen in China in the past few decades. You know, if you look at the past four decades, China's lifted 700 million or so people out of abject poverty and frankly into a middle class type lifestyle. It's undeniably unprecedented in the history of humanity. My guess is it will never be repeated. It is an amazing amazing story which frankly deserves all of our attention. It deserves books, you know, how did it happen? How could they do it? etc. But the other enormous transformation that people talk less about in China is how China in the space of one generation has gone from graduating 350,000 university students a year to uh to graduating 12 13 million university students a year. It's a transformation in China's human capital that is simply absolutely daunting. Uh so it's part of my excitement and my enthusiasm for China is how quickly the place transforms itself, how quickly it moves up the value chain, how quickly China goes from being again a complete backwater to now all of a sudden being the biggest car exporter in the world or the biggest nuclear energy power in the world or being the biggest producer of highspeed trains in the all pretty complicated businesses. And this China has done all this in in a generation. It's an it's a massively exciting story. And again, I think one that uh that you know, the more you dig in, the less bored you become. >> Let's dig in a little bit more because that obviously begs a really important question, which is how the heck did they pull this off? Now, I would imagine if there was, you know, somebody from the CCP here, they would say, well, you know, this proves that uh unbridled US capitalism is not really the the greatest thing ever as Americans like to believe. And maybe government central planning is a better idea than people gave him credit for. Now, that's not necessarily my view, but I think we've got to at least acknowledge that's probably their view. Do they have a point? >> To be honest, no. Well, first I would say I wish we had unbridled US capitalism. I'm not sure that we do, but I guess that that would veer us into a whole other debate. So, I'll I'll just leave that here. And I would say that when you look at at China's growth of the past decades, I think first we have to acknowledge that it that it comes in different waves. But the first and most important point to acknowledge is, you know, that economic growth happens very often when you move from being very very stupid to just plain stupid and to just maybe not so stupid. And as you make that move, then all of a sudden growth appears. Partly because of course the default mode of every entrepreneur, the default mode of every businessman is to fight and try his best to uh to produce more uh with less. So what do I mean by all this? When you look at China, I think it's important to acknowledge where the starting point was 45 years ago. When Mao dies, you had a guy who was for all intents and purposes a massive control freak. He wanted to control everything down to the point where, you know, he would the party would dictate where you would work. The party would even dictate what you would wear. Yeah. To down to the clothes on your back. And so Deng Xiaoing comes to power and Deng Xiaoing realizes here we are, we have 20% of the world population and we don't even have 5% of global GDP. On the world stage, China is a pygmy. Nobody takes us seriously. And so from there, Deng Xiaoing says, "You know what? I'm going to try something. I'm going to try liberalizing labor. I'm going to tell the Chinese uh the overseas Chinese in Hong Kong, in Singapore, in Indonesia, and wherever else, you guys can come back in and exploit my workers. You can set up factories here, whether it be a toy factory, a plastic flower factory, you name it. And you can exploit my workers and keep some of the profits and workers can come from anywhere and join your factory. And that was the creation of the special economic zones like Shenzen, um, Wenjo and others. And in so doing, as soon as China started to liberate labor, the place took off. And then since then each time China has struggled ch the leadership the CCP has basically embraced another liberalization. So in the late '7s early 80s again you liberalize labor and the first guys who make big money in China are the guys who go and set up factories there. Then uh you hit a wall in the late '9s with the Asian crisis and with the need to reform the S so before China is allowed into the WTO. And so China liberalizes land and all of a sudden you see private property developers come in and the place absolutely booms and then the next wave of big money in China is made around land development and property development. So having liberalized labor, having liberalized land, starting in the mid200s, they also liberalize commodities uh and you start to see private sector coal mines and private sector copper mines and you start to liberalize basically the the underground in China and you start to see commodity traders set up in China. And then of course uh having liberalized land, having liberalized commodities, having liberalized labor, you come to the final frontier which is the liberalization of capital. Now here things get very very tricky because I'm sure you've seen Scarface, you know, the the idea that uh first you get the money, then you get the power, and then you get the women. when it comes to uh to liberalizing capital, the Chinese Communist Party is well aware that if you massively liberalize capital, you're in essence give up the very core of your power, i.e. the control of money. And so I think what you've seen is, you know, some people would say it's three steps forward, two steps back. Some people would say it's two steps forward, three steps back. But really since the attempt to create a bond market to internationalize the remn and everything else since 2011 since that attempt to liberalize the world of capitalist started in 2011 it's been a constant struggle at the very top of the Chinese Communist Party to know how far they would go in the liberalization of of capital. And I think part of the struggle has been amplified that much more since China's of course is always looking over its shoulder at the United States and they look at what's happened in the United States with the liberalization of capital and they see Lehman Brothers and they see the bus banks and the need to keep interest rates at zero and everything else and and therefore it scares them. And so I think the story of the past 10 years is really this sort of tugofwar on the liberalization of capital and perhaps helps explain why Chinese growth that used to be 8 9 10% a year is now down to to four or five. But the bottom line and I'm sorry this is such a long-winded answer but the story of of Chinese growth is first and foremost a story of deregulation. Deregulation of labor, deregulation of land. It's a story of growing economic freedom. It's not a story of growing of a government that was really stupid from 1950 to 1978 and then all of a sudden got smart. >> Louise, something I've noticed is that we Westerners are so conditioned to really believe in democracy. And and please don't anyone get me wrong. I definitely believe in democracy. But look, if you're competing with someone, you've got to understand the strengths and weaknesses of your opponent. And one of the things that is different about China is that their government is not constrained by an election cycle. And frankly, they're laughing at us. You know, they watch us, which you got one president and all of a sudden the the national priority is build a border wall. Four years later, different president, the top priority is tear down the border wall. We may go back to the first president who's puts the next priority on building the border wall again. four years later, who knows what's happens. They just look at this as incredible inefficiency. And I think even some of the Chinese people scratch their heads and say supposedly I think they would like democracy better to have more of a say in their government. But getting to this crazy election cyclecentric decisionmaking process where nobody ever thinks strategically beyond an 8-year presidential, you know, cycle is probably not the best way to run a country long term. Tell us a little bit about how China makes its longerterm plans. Who does the decision-making? Is it is it the Communist Party? Is it somebody else? How does it work? And and how does that translate to some of the strengths that we've seen in their ability to compete with the West? >> Before I answer that question, cuz it's super important question, let me just say that the strength of democracy isn't in picking leaders and it's not in picking the right policies. The strength of democracy is in getting rid of the bad ones. It's when you get bad leaders, uh when you get bad policies, you can get rid of them with minimal bloodshed and no destruction of properties, right? That really is democracy's massive comparative advantage. And so having said this, in China, how does policy get made? It's that again I think has changed a lot over the past 30 years. My answer 10 years ago would be very different than the answer today. You know 10 years ago you had uh or 12 13 years ago you had a poly bureau you know nine and then seven all males all engineers all basically sharing a vision of an economy a very Marxist vision of an economy that's like a big machine and that if only you got better information you know you could at the right time you know push on the right button or pull on the right lever and and hereby adjust things. Uh I think that was the view 13 14 years ago. Obviously uh in the past decade we've had massive consolidation of of power around Cinene Ping and with that consolidation of power you could say that the the the policy risk has been enhanced. the policy risk has been enhanced because instead of having management by committee which was what what we had again 12 13 years ago instead of having management by committee which sort of you would hope probably takes out more extreme measures. Uh now what you have is management you know one guy holds all the keys to power and this has created I think a very different modus operandi within the Chinese uh halls of power where the first thing a a CEO of a stateowned company or a uh a head of a regulator or a minister or something or other or a party chief kind of province the first thing they think about when they come into the office now is I don't want to upset the top guy. So I you know I I can't afford to uh to upset Cining and so if if Cin Ping tells me this is the path we're going down I'm definitely not questioning it and I'm doing everything I can to be seen to be going down this path. uh so I highlight this because now that the policy risk is greater having said this how does policy work in China and I think this is where perhaps there's a misconception in the western world and let's take electric cars as an example um what happens in in China is the government decides 10 years ago electric cars are the future we need to go down the path of electric cars and so they make a big speech CJing makes a speech saying, "You know what, guys? Electric cars are the future." And that's pretty much all he does. From there, from that speech, what happens is that every automaker, every provincial government, every major city now decides, "Oh, I need to produce electric cars." And so, every local bank will now be funding electric cars in their own district. And before you know it, you have 40, 50, 60 companies all around China producing electric cars. Every local government, every major city will want to have its own electric car champion. And and these electric car champions again will be funded through the domestic savings captured by the local banking system. At this point, you enter what I would call the Hunger Games phase of Chinese capitalism. You've got 40, 50, 60 guys that are more or less with an open checkbook. And that competes with each other like crazy. Then from the 40, you go down to 20, eventually down to 10, eventually down to five. And the end result is that you end up uh with an ecosystem where all of a sudden you can buy electric cars for less than $10,000 and where most people in China can now afford uh an electric car. This is thus very different from say what we would have in in France or in the US where we say okay electric cars are the future. I'm going to give subsidies to Tesla to produce uh electric cars. So in the US, what you end up with is the government subsidizes Tesla and Tesla ends up with a market cap of $800 billion producing $50,000 cars and you end up with very few electric cars on the road. Meanwhile, in China, you know, you end up with a BYYD, who's obviously the leader now in the space, but BYD because it's had to fight the Hunger Games, comes out of it pretty lean, pretty beat up with a market cap that's a tenth of Tesla's at $80 billion, but it's producing sub $10,000 cars. And again, everybody in China now drives electric cars. And so I think the perception we have in of in the western world that we have of in China is oh the government chooses its champions subsidizes them and and that's unfair etc. But it's actually very different. It's a very hunger game again model of capitalism where everybody is competing crushing each other's margins until you get the survivor. And in the end, that's obviously a terrible outcome for shareholders because a lot of these companies get wiped out along the way, etc. It's a terrible outcome for shareholders. But if the goal was to get a bunch of electric cars on the road, then you've actually achieved that goal. Uh meanwhile in the US what you've achieved through the government subsidies is that Tesla gets to be part of the Mac 7 and that uh you don't have that many electric cars on the road but you have the most profitable and biggest uh electric car company in the world and and I think in the US that is seen as winning because in the US the tendency is to view things through the lens of the stock market. It's like, oh, if our stocks are doing better, then we're winning. But then when you compare, say, Shanghai to San Francisco or Beijing to New York, if you came off the plane and didn't care about stock market performance, you would think Shanghai was winning, not San Francisco. >> Louie, in the investment community that we live in, Jim Rogers did a really good job decades ago of predicting this miracle of growth in China that we're talking about today. And you know, he was very very outspoken at the time in advocating investment in Chinese equity markets. Well, China might have gotten much richer, but holders of Chinese equities sure haven't. So, what's going on here? Why have Chinese equities been such a dud for the market when Jim's predictions definitely came true? The miracle of Chinese growth, the education of the Chinese people that you talked about, it's all demonstrabably true. But I don't think anybody got rich in this Chinese stock market along the way. Part of that is the the hunger game model of development that that I highlighted which actually brings me to to an important point is that the correlation between GDP growth and stock market returns in most emerging markets is is extremely weak. I know and we assume you know we see the growth it's exciting and we think oh I'm going to participate in that growth through the equity markets but but in emerging markets that's not a a one forone relationship it's not a one for one relationship what whatsoever and you know you could just look at the past and it's not just by the way in uh in emerging markets if you look at the past decade US GDP growth has actually looks like it's gone down structurally from 3% down to 2% % but over that period US equity returns have been have been fabulous right that correlation between GDP and and uh GDP growth economic growth and um uh and shareholder returns is isn't always there so so that's a I think a first important point but if you'll allow me to get theoretical for just one second uh I don't know if you've ever uh heard of a guy called Harry Brown he was the um he ran for libertarian candidates to be US president back in the 80s. And he had a great idea. He highlighted that what he called the permanent portfolio where you would do a quarter in local equities, a quarter in local cash, a quarter in gold, and a quarter in bonds. The idea being that whatever economic environment you're hit with, there'll be one quarter that thrives and one quarter that doesn't do as well. But you rebalance every quarter or once a year and over time what Harry Brown called the permanent portfolio delivers very satisfactory returns. So if and if you look at pretty much any country you care to pick Switzerland, France, UK, US, China, you get returns of between three and 5% a year with uh and the best part with never more than a 10% draw down and very very low volatility. Now why am I highlighting this? If you think of the permanent portfolio in the United States over the past 10 years, equities have basically almost gone 3x and over the past decade gold has basically risen 50%. But at the same token in real terms, if you were in cash, you've lost 20% in real terms. And if you were in US treasuries, you've roughly lost the same uh over the past decade. In the US, your permanent portfolio has lost 20% on the bond side. So your permanent portfolio in the US over the past decade has returned 3% uh on average. You made money on gold, you made money on equities, you lost on cash, and you lost on bonds. Now look at what happened in China. You do the same exercise in China. And this is where it gets fascinating is over the past decade on your permanent portfolio in China, you also made money on gold just like you would have had everywhere else. You actually did make money over the past decade on Chinese stocks. You actually did make money on Chinese bonds and you actually did make money on Chinese cash. So much so that your permanent portfolio is actually grew in China. While you made 3% on your permanent portfolio in the US, you made 5% on the permanent portfolio in China. Now, why do I illustrate this? I think that when it comes to policy, there's basically three markets. You got your currency market, you've got your bond market, and you've got your equity market. In the US, policy makers will sacrifice bonds and currencies every day of the week for equities. And they'll do that because 70% of Americans own equities. So whenever the stock market is down 20% or pick your number, it might be 25. But we all know there's a Fed put. We all know that if stocks fall enough, the Fed will step in and sacrifice the long-term returns of bonds and the long-term returns of the US dollar to save the equities. And we know that because they've done it time and time again. Now, I'm going to adjust uh the old quote. I'm sure you know the Churchill's quotes of uh you know they sacrificed honor to get peaced and they ended up with neither or Ben Franklin's quotes of if you sacrifice liberty for security you end up with neither. Let me suggest this. If you sacrifice your currency for growth eventually you get neither. Now I would argue that for the past 15 years in the US we have been sacrificing currency and obviously bond markets to get growth in equities and we have equity markets are up 3x and in China they did not in China they don't care that much to policy makers they don't care that much about equities the thing that matters the most is first currency then bonds then equities are the variable of adjustment that uh that end up bearing the brunt of the economic cycle which frankly is how it should be. I want a policy maker who holds firm on the currency, holds firm on the bond markets and then lets the equity markets adjust where they may. Now the reality is that in China in you know in the past decade we've been paying for the excesses of the previous decade there were we all know about the Chinese real estate bubble the excess infrastructure spending etc. Now, western policymakers would have paid for these excesses through a debasement of the currency and through a debasement of the bond markets. In China, the equity holders were made to pay for these excesses, which is I think the right order of things. And the reason in China you can have the equity holders pay for things is that only roughly 10% of the population own equities. 100% own remnant and indirectly through banks. You know almost 100% of people own bonds. So why should 100% of people pay for 10% who own equities? No. No. No. It makes much more sense to have the 10% bear the brunt of the adjustment. And that's what we've had in China for the past decade. >> Louie, as you described earlier in this interview, China has clearly done an unprecedented job of catching up with the West. And they've done it in such a short time. It's amazing. But in order to grow from here, growth requires innovation. And innovation is different from catching up. Something I've noticed about Chinese culture and really Asian culture in general from having lived there for a few years is I think they're just way better than we are in the West at optimizing systems, making them efficient, particularly designing them to handle lots and lots of people very efficiently in a time-sensitive way. They're just way better at that in my opinion than anything I've seen in the West. But innovation requires throwing out the rules and just forgetting about the way we're used to doing things and doing it in a completely different way. Something I've noticed about Asian culture is throwing out the rules is definitely not allowed. You know, you're not allowed to ignore the rules that exist in society for everybody's safety, the way you can get away with in the West. And I think it may be less natural for that culture to really throw the rules away and think about doing something in a completely new and different way. So can China deliver on innovation to the extent necessary to not just catch up with or keep up with the west but to really move ahead and and compete in the sense of leadership. >> So that's a very tough question. I'll be I'll be honest and I think my own thinking on this is has evolved the past few years. If you had asked me this two or three years ago, I would have said probably not. I would have said two or three years ago that you know the Silicon Valley great comparative advantage is that everybody there in Silicon Valley believes that you know you ask for forgiveness not permission which in essence is one of the comparative advantages of the west. I've written a number of pieces over the years highlighting how you have really two feelings that bind societies together. Uh you can have societies based on guilt which is what we have in I would say Judeo-Christian societies. You you make a mistake, you say I'm sorry, people forgive you and you move on. Uh this is why you know a lot of entrepreneurs have had several bankruptcies but they're able to pick themselves off the floor etc. And then you have societies based on shame. And societies based on shame tend to be much more socially cohesive. They tend to have a lot lot less crime. And you know most of the Asian societies are are based on shame. The idea that I don't want anything that brings shame onto myself onto my family onto my group onto my school. And to your to the point you just highlighted, this sort of cultural difference between societies based on guilt and society based on shame, you would think would be a massive break to to technological progress to to risk takingaking to entrepreneurship and whatever else. Um, and frankly that's what I would have argued 2 three years ago. Having said that, one of the things I have to acknowledge is that if you look at the past two, three years, and I think most people are missing this right now because nobody's traveling to China anymore. Obviously, no one went during the co years and once COVID ended, you know, Russia invaded Ukraine and China sided with Russia and so the whole world decided, oh, well, China's uninvestable. I'm not going to waste my time going there anymore. And in any event, returns on equities there have been dismal. Even if returns on bonds have been terrific and returns on the remn have been very solid, I'm not going to waste my time going there anymore. So most people haven't traveled in China for the past few years. And as they haven't traveled there, I think they're really missing out on how quickly China is jumping ahead in industry after industry. Whether it be fintech, whether it be e-commerce, whether it be uh obviously electric cars, whether it be power delivery, whether it be transports, highspeed rail, the transformation. I didn't go to China for almost 3 years because of the co restrictions. And when I went back, I was blown away by just how much it had changed in 3 years. The idea that China can't deliver innovation. Let me put it to you this way. BYD released a car a couple months ago that it's a hybrid car. It costs $14,000. It's a sedan. It's basically looks like a Tesla Model 3, but it's a hybrid car. And the car goes 2,000 km on uh one tank of gas. It is by now the most gas efficient, fuel efficient, gas car in the world by a factor of over 50%. And again, at a price of $14,000, this is all of a sudden a revolutionary car. It's a car like there are no others in the world. I look at the Xiaomi phones that are by all measures far superior to anything Samsung or Apple is producing. >> Well, hang on, Louis. I want to push back a little bit on that because the things you're saying are things I would have predicted. The fact that China could look at something that somebody else invented like Tesla and say we can do a much much better job of designing and building electric cars than Tesla did and we're going to do it and we're going to do it cheaper and better and everything. No surprise whatsoever to me. Uh you take something else like smartphones and you say we could develop better ones, cheaper f, you know, they're really smart. They have incredible engineering capabilities, but that's taking something like the electric car or the smartphone that somebody else invented and doing a much better job re-engineering it in a better way. Where's the example where it's China who said, "Wait a minute, we should not be using gas cars. We should be using electric cars or we should say, forget about flip phones, let's invent smartphones instead." Where did China invent the paradigm changing thing that led the rest of the world to recognize the old way of doing things didn't make sense? >> That's a fair that's a fair criticism. And you know, you could say, well, there's still enough lowhanging fruit optimizing other stuff. >> I think there's more money to be made in optimizing other people's ideas. It's not meant as a criticism. I It's >> No, no, no. It's I get it. And for now, for China, maybe that's good enough. That generates enough growth. If you can produce better cars at a cheaper price point, you don't need to invent the flying car, even though they do have the prototypes for the flying cars. I'm sure you've seen the videos on the X-Fang, the one that's produced in Shenzen, the Xfank flying car, which, you know, looks pretty cool. Or, frankly, the BYD uh car that goes in the water, the amphibious car. You can continue to add things at the margin without completely upending everything. But if we look back, what are the great inventions of the past 20 years? You could say, well, you know, one of them is of course the smartphone that's changed the world. You could argue potentially it's the electric car. Although, how much is the electric car really changed the world? I'm not convinced it has changed it all that much. you know, it's it takes us from A to B at the same speed perhaps with a little less pollution, but that's not even a given given the uh all the mining that you need to do of cobalt and lithium and whatever else. Yes, China didn't invent a smartphone. China is, you have talked in the past of China's molten salt reactors. Uh so, China's working on those and you could say, well, that's just an again an adaptation of what's being done before. >> They're doing a better job of it, by the way. and they've really got their act together. But it is another example of a technology invented in the United States that the United States failed badly to commercialize the way it should have. China is running with it with great success. But I think this goes back to what you said before about permission versus forgiveness because one thing I'm absolutely certain of is that Chinese engineers and technologists are not one iota less smart than westerners. I I think they may be smarter, but the thing is the consequences of just doing something without getting permission first in that culture are rather different than they are in Silicon Valley. And I think that's probably what holds them back. It's not the talent of the engineers and scientists. It's the fact that having daring to just do what you believe in even though you don't have permission and it's not the policy. Uh it's not consistent with the strategy Xiinping has laid down and all of the people below him are following. you've got a better idea, so you're just going to go off on your own and do it. There's a lot of consequence to that in China that doesn't exist in Silicon Valley. >> I'd agree with that. And again going back to what China's comparative advantages are which I think we are seeing in real time is of course the critical size of the market and the ability to rapidly uh adapt and improve on products so that you end up today with China being the global leader in fintech being the global leader in yeah we mentioned electric cars it's very quickly you can adapt exist existing technologies and that's where China's comparative advantage lies perhaps much more so to your point than in coming up with new inventions but coming up with new inventions again you look at the past 25 years frankly apart from the smartphone you know again a terrific invention world changing what what has really been world changing in the past 25 years you know really big and world changing inventions are pretty few and far between >> Louis I couldn't possibly agree more with that point. But let's move out to the bigger picture now and talk about clearly the overall trend here is China has made incredible progress in the last several decades. So does that mean that they're now a threat to the rest of the world because this growth could overrun other economies and if not the rest of the world is it a threat to its near neighbors you know Taiwan, Philippines, Vietnam, India so forth? This is a question I often get and I think the first thing we have to talk to to acknowledge is it hasn't been thus far. China unlike other big powerful countries hasn't gone around and invaded other places hasn't gone around and shipped lots of weapons uh signed military alliances that set up military bases uh in lots of places. So you know the answer the obvious answer would be not this far. uh of course who knows what the future holds because the big shift in China over the past decade is that China has started to look abroad. I think you know in the years if you go back to Mao then Ding Xiaoping then uh then Jong Zen and Hu Jin Tao when these guys became president China was such a mess it was so far behind economically to the rest of the world that you know these Chinese leaders frankly had very little time for the abroad. It was all eyes uh on what was going on domestically, all hands on deck and whatever happened abroad, it wasn't really China's problem. Then of course as China develops this changes partly of course because the more China grows the more China needs commodities from the rest of the world unlike the United States which happens to be energy self-sufficient which happens to be food self-sufficient which happens to be pretty much self-sufficient in in any major commodity you care to think of. China basically needs to import almost every commodity it it potentially needs except for rare earths, but everything else China needs to import. So So as China grows, it has no choice but to all of a sudden build relationships with with foreign countries who who can provide these commodities. Now as we all know part of the challenge in the world is that a lot of the commodities are produced in places where the politics can be dicey. Whether you look at the Middle East, whether you look at Africa, whether you look at some parts of Southeast Asia. Now you know if you go back to Cinping's arrival in in uh to power, his very first speech, he starts talking about the one belt, one road. He starts talking about the Silk Road fund. He basically starts talking about how China is going to help countries whether your Kazakhstans or your Kenyas or your Indonesias. He's going to help these countries build infrastructure. He's going to help fund it. Um in a in a move that frankly smacks of imperialism. Now, when I say imperialism, I don't mean that China is going to go out and invade Kazakhstan or invade Indonesia, but that the history of every empire is first and foremost a road building exercise. You build the roads and you build the roads to bring in commodities cheaper and to push out finished goods, higher value added finished goods to the outer realms of the empire. That's why in Europe we say all roads lead to Rome. That's why the Persians say Darius was a trader. Uh the history of every empire is how do I get commodities in cheap and push out the higher value added goods to the outer realms of the empire. And of course this has been Cinping's strategy for the past decade. One built one road silk road fund etc. It's all about building the roads to bring in the commodities and push out the finished goods which they are doing today. selling the cars, selling the tractor, selling the telecom switches all across emerging markets. Now, you know, when you go to a country and you say, "Hey, I'm going to build a road for you or I'm going to build a dam for you or I'm going to build a canal for you or an airport." That country is usually very happy. You know, why not? Everybody loves getting infrastructure. The challenge then becomes you're going to start moving goods along that road or along that canal. And the challenge becomes if the goods moving along that road or that canal start getting pillaged by briggins because the local country can't keep the peace then before you know it you have to send troops along that road to make sure that the goods can circulate. This is again the history of every empire. It's the history of the United States. That's how the United States today ends up with 800 military bases and I haven't misqued this. 800 US military bases around the world because when you're an empire that's that's what you do and so that's to be honest the real challenge for China today I think they're still in the road building phase of the empire which is all happy days good everybody likes you the problem becomes if and when the trade along those routes no longer becomes secure how do you secure it do you send troops when you do you start building local resentments you start building, people get upset, people stop attacking your troops. That's option one. Option two is you pay off the briggins. You say, "Hey, tell you what, stop attacking my caravan and I'll cut you in on some of the profits of this trade." And to be honest, I think this is the path that China will go because it's it tends to be less costly in the first place. And now in the western world, we don't have that option cuz, you know, we can't pay Briggins. But China doesn't have the same ethical or uh institutional constraints that that we do. Or the third option is you say, "Okay, well, the strategy didn't work and and I'm going to fold back." Now >> Louie, I agree emphatically with the essence of what you just said about China and its need to import commodities from the rest of the world. But I want to push back on that in a very strong way, in a very specific way, which is all of that was true in the age of oil, which we're still living in. I'm going to make the argument that in the coming age of nuclear, China is at least 15 years ahead of the West already on both conventional and advanced nuclear technologies. They have enough thorium under their own soil to power the entire planet for the next thousand years. They're doing everything necessary right now to build a thorium nuclear fuel supply chain as well as to develop thorium molten salt reactor technology which they're going to use to power a new fleet of container ships and for a whole bunch of other things. They've been a little bit uh shy to say exactly which other things, but I can very easily imagine China developing an energy dominance and therefore an economic dominance over the rest of the world. And a lot of people don't seem to understand me when I've said this before. I'm not criticizing China or putting them down. They're doing everything exactly right. I'm envious of their policies and their achievements. I wish we could get our act together in the West and keep up at least enough to compete. But what's going on is the West doesn't get it. We are stuck in nonsensical nuclear energy policy that's based on irrational emotions left over from the 1970s that never made sense then. And I'm very concerned that everything you just said is all about to change. And although yeah, there's a lot of commodities that don't have anything to do with oil and energy. You know, most of your argument I think was an energy argument. And it's not going to happen overnight, but in the next 20 years, I think you're going to see a energy dominance in China that's entirely fueled by locally sourced thorium, and they're not going to need one drop of oil from the Middle East. >> You, you know, my long-term held belief that economic activity is energy transformed. You know, when you look at the commodities world, there's energy and there's everything else. Uh, and everything else really doesn't matter all that much. almost everything else can be replaced. If you live in a world, the world that you describe was a world in which China essentially has almost zero cost of energy, you can replace a lot of commodities through the application of more energy. The world you describe, Eric, it's not a world I disagree with, by the way, to be very clear, but the world that you describe is actually a world in which China's threat to the rest of the world goes down dramatically because China's one of China's big sense of insecurity today, perhaps its single biggest sense of insecurity is its energy dependency visav the rest of the world. And you know historically when you're dependent on energy that's and you want to be a geopolitical superpower those are two conflicting you know hopes. You can't be a geopolitical superpower and be energy dependent as Japan found out in the 1930s. And so a world in which China does gain energy independence I think is de facto a much much more peaceful world. one in which we don't have to worry about China being a threat to its neighbors, one in which we don't have to worry about China being a threat to the rest of the world. It's also, to be honest, the world you described is a world that is extremely exciting. Right? Again, if you start off with the premise that economic activity is energy transformed, if we manage to dramatically reduce the cost of energy for a fifth of the global population and perhaps more because China will export that technology, then that's that's tremendously tremendously bullish for for everybody. Now, to your point on the Western world is sort of asleep at the wheel and doesn't have to worry about pushing forward on nuclear, I think the explanation for that is simple enough, right? When you have $2 natural gas price in the US, you essentially have almost free energy. So the shell revolution which to me has been one of the biggest macro developments of the past decade. The shell revolution was a huge boon to the United States and has allowed the United States to cruise comfortably and not worry too much about what was coming up in the rear because if you have a much cheaper cost of any of energy from everybody else then you're winning and the US sure as hell has been winning for the past decade. But yeah, you could have a a genuine paradigm shift. >> Smart winners understand why they're winning and they make sure they have a plan to continue winning. And my criticism is I think we couldn't be screwing this thing up worse. We we're so complacent with our energy policy. >> I think on this smart winners understand why they're winning. I think Americans are mixing up the symptoms with the causes. And that they see the massive outperformance of the NASDAQ. They see the massive outperformance of the MAX 7. And the conclusion most Americans take is, oh, our stock market is doing better than everybody else's. Our tech stocks are doing better. Therefore, the US boom must be because we're crushing it in tech. I look at it completely differently. I think you had a huge boom in energy which collapsed the cost of of energy in the US led to much weaker inflation than you otherwise would have led to a stronger dollar than you otherwise would have. This allowed the Fed to keep interest rates lower for much longer, created excess liquidity that ended up going into technology and allowed Apple to rerate from 10 times earnings to 35 times earnings and allowed Microsoft to rerate from 20 times earnings to 38 times earnings. But it wasn't, you know, it this is a symptom of the energy boom uh rather than the cause of the US outperformance. And yes, to your point, if you think the US continues to have a massive comparative advantage on energy relative to everybody else, then you stick with US stocks. If like you and I, you tend to believe that this comparative advantage of the United States of Energy is actually on borrowed time and that at some point in the next 5 years, the scales will fall from the world, the rest of the world's eyes, then you will have a massive rotation into Chinese assets. >> Well, Louie, on that note, we should probably wrap this up in the interest of time. I can't thank you enough again for a terrific interview. Before I let you go, please tell our listeners a little bit more about what you do at Gavcow, the books that you've written, and where they can follow your work. >> Yeah. So, again, thanks again for having me. Always love catching up. I've really enjoyed this conversation. We do uh three things at GFCAL. We publish research for institutional investors out of our Hong Kong and Beijing offices. Uh the website is gfcow.com. G-vek. We have a private wealth arm both out of Mauritius and out of Belleview, Washington depending on whether you're US investor or non- US investor. Uh and then we have an asset management arm mostly doing Asian equities, Asian fixed income. And you can find all that again on our website. And that concludes our 2025 Macrovoices summer special. No postgame chart deck this week since my usual co-host was last seen gallivanting about the Med on a sailing yacht. We'll be back next week to start our countdown toward episode number 500, beginning next week with our number five all-time top Macrovoices guest. Until then, all of us at Macrovoices hope you enjoy the last few days of summer. [Music] That concludes this edition of Macrovoices. Be sure to tune in each week to hear feature interviews with the brightest minds in finance and macroeconomics. Macrovoices is made possible by sponsorship from bigpicturetrading.com, the internet's premier source of online education for traders. Please visit bigpicturetrading.com for more information. Please register your free account at macrovoices.com. Once registered, you'll receive our free weekly research roundup email containing links to supporting documents from our featured guests and the very best free financial content our volunteer research team could find on the internet each week. You'll also gain access to our free listener discussion forums and research library. And the more registered users we have, the more we'll be able to recruit high-profile feature interview guests for future programs. So, please register your free account today at macrovoices.com if you haven't already. You can subscribe to Macrovoices on iTunes to have Macrovoices automatically delivered to your mobile device each week free of charge. You can email questions for the program to mailbag@macrovoices.com and we'll answer your questions on the air from time to time in our mailbag segment. Macrovoices is presented forformational and entertainment purposes only. The information presented on macrovoices should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions. The views and opinions expressed on Macrovoices are those of the participants and do not necessarily reflect those of the show's hosts or sponsors. Macrovoices, its producers, sponsors, and hosts Eric Townsend and Patrick Serzna shall not be liable for losses resulting from investment decisions based on information or viewpoints presented on Macrovoices. Macrovoices is made possible by sponsorship from bigpicturetrading.com and by funding from Fourth Turning Capital Management LLC. For more information, visit macrovoices.com. [Music]
MacroVoices #495 Louis-Vincent Gave: Understanding China's Structural Growth Drivers
Summary
Transcript
[Music] This is Macrovoices, the free weekly financial podcast targeting professional finance, high- netw worth individuals, family offices, and other sophisticated investors. Macrovoices is all about the brightest minds in the world of finance and macroeconomics telling it like it is. Bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Szna. Macrovoices episode 495 was produced on August 28th, 2025. I'm Eric Townsend. It's the dog days of summer, so this will be our annual holiday episode. International Playboy Patrick Szna is off summering in the mid, so there won't be any postgame chart deck this week. We've got a terrific feature interview with Louis Vincent Gav lined up for you instead. This one was pre-recorded several weeks ago, so we won't have any perspective on current market events in the feature interview, but trust me, you're not going to want to miss this interview. Louis is going to give us his long-term perspective on China's role in the global economy. not the US- ccentric perspective that we've been led to by Western financial media, but a truly independent objective analysis of both China's extraordinary infrastructure superiority goals and what they're ultimately going to mean to the balance of global trade and also China's very real challenges securing sufficient foreign investment capital to fuel their amazing growth story in the face of current geopolitical developments, then you're really going to want to tune in next week when we're going to begin a countdown of our top five regular macro guests culminating in a feature interview with our all-time listener favorite macro personality in Macrovoic's episode 500 airing October 2nd. The names of all five finalists will be kept secret until their episode airs. But wait, there's even more. We chose the top macro guests based on their listener download counts in aggregate for all their past macrovoices appearances. But to our own shock and surprise, the one single most downloaded macrovoices episode of all time didn't even feature one of our regular macro guests. And it wasn't even a macrooriented interview, per se. Now I know what you longtime regular listeners are thinking. That's got to be Dr. Chris Martinson calling the COVID pandemic in Macrovoic's episode 204 back on January 30th, 2020. See, in my head, there's a whole bunch of you who have those statistics all memorized. Well, wrong answer. It was actually somebody else. And we had no idea that that interview got more downloads than any other Macrovoices episode ever until we set out to research this countdown. You'll find out who it was and what the topic was when we bring that guest back for an update on their all-time best-selling interview in Macrovoic's episode 501, which will air on October 9th. But for now, sit back, relax, and enjoy some really insightful, timeless perspective on China's role in the global economy from Gavcow co-founder Louis Vincent Gaff. Coming up next. [Music] And now with this week's special guest, here's your host, Eric Townsend. Joining me now is Gavcal co-founder, Louisie Vincent Gav. Louie, this is an interview that I've wanted to do with you for years now. We usually talk about the macro events of the day and so forth, but I want to zoom out for this interview and go to the big picture topic of China and its role in the global economy both historically and looking forward. Now, Louie, something you and I share in common is we both have permanent resident status in Hong Kong. When I first moved there in 2009, I figured it was going to take me a year before I would fully understand Hong Kong and Chinese culture. My actual experience was after 2 years I was maybe ready to start asking intelligent questions. It's much bigger than I ever imagined. So I want to start from the very beginning. Let's imagine that I don't know you but I spot you at the airport and I say you're Louis Gav. Hey, how about if we share a taxi into the city cuz I'd love to ask you about what it is that investors get wrong about China. What I need to know if I'm coming here to understand this. And the first thing you tell me is nobody takes a cab to the airport. We're going to get take airport express. Let me show you how to how to get a little bit more in touch with with modern society here because we don't do that taxi cab crap in Hong Kong. So, we're sitting on Airport Express and I say, "Louie, I don't know Tell me what the what it is that Westerners get wrong about understanding China, Chinese culture, and particularly Chinese economics from an investor perspective." >> First of all, thanks again for having me, Eric. I I always love catching up. To your point on cabs versus taking the subway, I think I can't remember who said this. It's a good quote because I like it that the mark of a of a rich country of a rich developed country isn't that poor people have cars, but that rich people ride the subway. >> I couldn't agree more. >> And to your point today, where do you feel more comfortable indeed riding the subway? Is it Hong Kong? Is it Singapore? or is it Shanghai or is it New York, London or Paris? Not that there's anything wrong with the New York, London or Paris subways, but they're definitely not as pleasant an experience as you get in Hong Kong. So, first things first, what any visitor, firsttime visitor to a Shanghai or Beijing or Hong Kong can't avoid seeing is how superior the public infrastructure has become. Whether you look at your public transport, whether you look at your shopping malls, take any kind of public infrastructure, the parks, the it's uh it is mind-blowingly superior. So you you have to ponder, I think, if you're intellectually honest, you have to take a step back and say, okay, how can they do this and we can't given how far ahead we were 30 or 40 years ago? How, you know, how did we mess this up in the west? How did we get to the point where China's life expectancy is now higher than the United States when 30 years ago it was 20 years below? I think these are questions that we should all be looking in the mirror and say, "Okay, how did this happen?" And hang on a second, Louis, I just want to point something out because a lot of our Western listeners may not realize that in the United States, when you think about it, what is public transportation? It's designed for the poor people. Everybody's expected to have a car if you can possibly afford one. And if you can't afford one, we got to do something to take care of the poor people. So, let's give them public transit. It's a completely different equation in Asia. Public transit is designed to solve everybody's problem. And only about 2% of Hong Kong residents actually own a motor vehicle. And it's a status thing. It's not about practical need. It's, you know, you want to be a rich guy, you got to have a fancy sports car. But it's not about practical use. I don't think that really exists in the west. >> I think that's a very fair point and that to be perfectly blunt that has a lot to do with China's geographic makeup. If you look at, you know, China today, it's roughly the same land mass as the United States. It has four times the population of the United States, but contrary to the United States, the population isn't really that spread out. Uh 94% of the Chinese population lives on less than half of China's terri sorry 94% of China's population lives on less than half of China's territory. Most of China's uninhabitable the Tibetan plateau, the Gobi Desert, the Takamakan desert. It's very hard places to live. So the way you have to conceive of China is imagine the United States. Imagine four times the population and everybody living along the east coast. So with that you get of course big uh urban planning challenges. If all these people were to have cars the whole place would be one big big traffic jam. So you could say to a sense necessity is the mother of all inventions and all that. China has no choice but to have great public transport. It it doesn't have the option that the US had of everybody has a car. Everybody lives in a 5,000 ft house in the suburbs. Everybody can have a 1500 foot garage where you can add have cars and kayaks and bikes and whatever else. So the geographical makeup of the place means that the consumption patterns de facto end up being very very different. The other, of course, obvious takeaway from this very different geographical makeup is that in China, you're simply not going to see uh what you often see in the United States or in Europe, i.e. families with 6, 7, 8, nine kids. These simply don't exist in China. They don't exist because the lack of space being what it is. And that is, by the way, you know, a lot of people talk about China's terrible demographics, and maybe we'll talk about that a little bit later, but this is uh something that you find all across East Asia. It's the same story in Japan. It's the same story in Korea, same story in Taiwan, Singapore, Hong Kong. The population density is such that you end up with a very different demographic profile which de facto has a big impact on economic activity if only because my favorite my very favorite quote ever is a quote from Jean Boden a French humanist philosopher from the 16th century who would say the only wealth is man. You know, today we have to acknowledge that all across East Asia, all the countries I named, we are producing fewer and fewer men and women. Therefore, if you're going to keep getting growth in that part of the world, the productivity of these people has to continue improving constantly. This means massive investments in education. This means massive investments in machinery. This means massive investment in robotics. All of which is happening in front of our very eyes. Everyone talks about the dramatic transformation that you've seen in China in the past few decades. You know, if you look at the past four decades, China's lifted 700 million or so people out of abject poverty and frankly into a middle class type lifestyle. It's undeniably unprecedented in the history of humanity. My guess is it will never be repeated. It is an amazing amazing story which frankly deserves all of our attention. It deserves books, you know, how did it happen? How could they do it? etc. But the other enormous transformation that people talk less about in China is how China in the space of one generation has gone from graduating 350,000 university students a year to uh to graduating 12 13 million university students a year. It's a transformation in China's human capital that is simply absolutely daunting. Uh so it's part of my excitement and my enthusiasm for China is how quickly the place transforms itself, how quickly it moves up the value chain, how quickly China goes from being again a complete backwater to now all of a sudden being the biggest car exporter in the world or the biggest nuclear energy power in the world or being the biggest producer of highspeed trains in the all pretty complicated businesses. And this China has done all this in in a generation. It's an it's a massively exciting story. And again, I think one that uh that you know, the more you dig in, the less bored you become. >> Let's dig in a little bit more because that obviously begs a really important question, which is how the heck did they pull this off? Now, I would imagine if there was, you know, somebody from the CCP here, they would say, well, you know, this proves that uh unbridled US capitalism is not really the the greatest thing ever as Americans like to believe. And maybe government central planning is a better idea than people gave him credit for. Now, that's not necessarily my view, but I think we've got to at least acknowledge that's probably their view. Do they have a point? >> To be honest, no. Well, first I would say I wish we had unbridled US capitalism. I'm not sure that we do, but I guess that that would veer us into a whole other debate. So, I'll I'll just leave that here. And I would say that when you look at at China's growth of the past decades, I think first we have to acknowledge that it that it comes in different waves. But the first and most important point to acknowledge is, you know, that economic growth happens very often when you move from being very very stupid to just plain stupid and to just maybe not so stupid. And as you make that move, then all of a sudden growth appears. Partly because of course the default mode of every entrepreneur, the default mode of every businessman is to fight and try his best to uh to produce more uh with less. So what do I mean by all this? When you look at China, I think it's important to acknowledge where the starting point was 45 years ago. When Mao dies, you had a guy who was for all intents and purposes a massive control freak. He wanted to control everything down to the point where, you know, he would the party would dictate where you would work. The party would even dictate what you would wear. Yeah. To down to the clothes on your back. And so Deng Xiaoing comes to power and Deng Xiaoing realizes here we are, we have 20% of the world population and we don't even have 5% of global GDP. On the world stage, China is a pygmy. Nobody takes us seriously. And so from there, Deng Xiaoing says, "You know what? I'm going to try something. I'm going to try liberalizing labor. I'm going to tell the Chinese uh the overseas Chinese in Hong Kong, in Singapore, in Indonesia, and wherever else, you guys can come back in and exploit my workers. You can set up factories here, whether it be a toy factory, a plastic flower factory, you name it. And you can exploit my workers and keep some of the profits and workers can come from anywhere and join your factory. And that was the creation of the special economic zones like Shenzen, um, Wenjo and others. And in so doing, as soon as China started to liberate labor, the place took off. And then since then each time China has struggled ch the leadership the CCP has basically embraced another liberalization. So in the late '7s early 80s again you liberalize labor and the first guys who make big money in China are the guys who go and set up factories there. Then uh you hit a wall in the late '9s with the Asian crisis and with the need to reform the S so before China is allowed into the WTO. And so China liberalizes land and all of a sudden you see private property developers come in and the place absolutely booms and then the next wave of big money in China is made around land development and property development. So having liberalized labor, having liberalized land, starting in the mid200s, they also liberalize commodities uh and you start to see private sector coal mines and private sector copper mines and you start to liberalize basically the the underground in China and you start to see commodity traders set up in China. And then of course uh having liberalized land, having liberalized commodities, having liberalized labor, you come to the final frontier which is the liberalization of capital. Now here things get very very tricky because I'm sure you've seen Scarface, you know, the the idea that uh first you get the money, then you get the power, and then you get the women. when it comes to uh to liberalizing capital, the Chinese Communist Party is well aware that if you massively liberalize capital, you're in essence give up the very core of your power, i.e. the control of money. And so I think what you've seen is, you know, some people would say it's three steps forward, two steps back. Some people would say it's two steps forward, three steps back. But really since the attempt to create a bond market to internationalize the remn and everything else since 2011 since that attempt to liberalize the world of capitalist started in 2011 it's been a constant struggle at the very top of the Chinese Communist Party to know how far they would go in the liberalization of of capital. And I think part of the struggle has been amplified that much more since China's of course is always looking over its shoulder at the United States and they look at what's happened in the United States with the liberalization of capital and they see Lehman Brothers and they see the bus banks and the need to keep interest rates at zero and everything else and and therefore it scares them. And so I think the story of the past 10 years is really this sort of tugofwar on the liberalization of capital and perhaps helps explain why Chinese growth that used to be 8 9 10% a year is now down to to four or five. But the bottom line and I'm sorry this is such a long-winded answer but the story of of Chinese growth is first and foremost a story of deregulation. Deregulation of labor, deregulation of land. It's a story of growing economic freedom. It's not a story of growing of a government that was really stupid from 1950 to 1978 and then all of a sudden got smart. >> Louise, something I've noticed is that we Westerners are so conditioned to really believe in democracy. And and please don't anyone get me wrong. I definitely believe in democracy. But look, if you're competing with someone, you've got to understand the strengths and weaknesses of your opponent. And one of the things that is different about China is that their government is not constrained by an election cycle. And frankly, they're laughing at us. You know, they watch us, which you got one president and all of a sudden the the national priority is build a border wall. Four years later, different president, the top priority is tear down the border wall. We may go back to the first president who's puts the next priority on building the border wall again. four years later, who knows what's happens. They just look at this as incredible inefficiency. And I think even some of the Chinese people scratch their heads and say supposedly I think they would like democracy better to have more of a say in their government. But getting to this crazy election cyclecentric decisionmaking process where nobody ever thinks strategically beyond an 8-year presidential, you know, cycle is probably not the best way to run a country long term. Tell us a little bit about how China makes its longerterm plans. Who does the decision-making? Is it is it the Communist Party? Is it somebody else? How does it work? And and how does that translate to some of the strengths that we've seen in their ability to compete with the West? >> Before I answer that question, cuz it's super important question, let me just say that the strength of democracy isn't in picking leaders and it's not in picking the right policies. The strength of democracy is in getting rid of the bad ones. It's when you get bad leaders, uh when you get bad policies, you can get rid of them with minimal bloodshed and no destruction of properties, right? That really is democracy's massive comparative advantage. And so having said this, in China, how does policy get made? It's that again I think has changed a lot over the past 30 years. My answer 10 years ago would be very different than the answer today. You know 10 years ago you had uh or 12 13 years ago you had a poly bureau you know nine and then seven all males all engineers all basically sharing a vision of an economy a very Marxist vision of an economy that's like a big machine and that if only you got better information you know you could at the right time you know push on the right button or pull on the right lever and and hereby adjust things. Uh I think that was the view 13 14 years ago. Obviously uh in the past decade we've had massive consolidation of of power around Cinene Ping and with that consolidation of power you could say that the the the policy risk has been enhanced. the policy risk has been enhanced because instead of having management by committee which was what what we had again 12 13 years ago instead of having management by committee which sort of you would hope probably takes out more extreme measures. Uh now what you have is management you know one guy holds all the keys to power and this has created I think a very different modus operandi within the Chinese uh halls of power where the first thing a a CEO of a stateowned company or a uh a head of a regulator or a minister or something or other or a party chief kind of province the first thing they think about when they come into the office now is I don't want to upset the top guy. So I you know I I can't afford to uh to upset Cining and so if if Cin Ping tells me this is the path we're going down I'm definitely not questioning it and I'm doing everything I can to be seen to be going down this path. uh so I highlight this because now that the policy risk is greater having said this how does policy work in China and I think this is where perhaps there's a misconception in the western world and let's take electric cars as an example um what happens in in China is the government decides 10 years ago electric cars are the future we need to go down the path of electric cars and so they make a big speech CJing makes a speech saying, "You know what, guys? Electric cars are the future." And that's pretty much all he does. From there, from that speech, what happens is that every automaker, every provincial government, every major city now decides, "Oh, I need to produce electric cars." And so, every local bank will now be funding electric cars in their own district. And before you know it, you have 40, 50, 60 companies all around China producing electric cars. Every local government, every major city will want to have its own electric car champion. And and these electric car champions again will be funded through the domestic savings captured by the local banking system. At this point, you enter what I would call the Hunger Games phase of Chinese capitalism. You've got 40, 50, 60 guys that are more or less with an open checkbook. And that competes with each other like crazy. Then from the 40, you go down to 20, eventually down to 10, eventually down to five. And the end result is that you end up uh with an ecosystem where all of a sudden you can buy electric cars for less than $10,000 and where most people in China can now afford uh an electric car. This is thus very different from say what we would have in in France or in the US where we say okay electric cars are the future. I'm going to give subsidies to Tesla to produce uh electric cars. So in the US, what you end up with is the government subsidizes Tesla and Tesla ends up with a market cap of $800 billion producing $50,000 cars and you end up with very few electric cars on the road. Meanwhile, in China, you know, you end up with a BYYD, who's obviously the leader now in the space, but BYD because it's had to fight the Hunger Games, comes out of it pretty lean, pretty beat up with a market cap that's a tenth of Tesla's at $80 billion, but it's producing sub $10,000 cars. And again, everybody in China now drives electric cars. And so I think the perception we have in of in the western world that we have of in China is oh the government chooses its champions subsidizes them and and that's unfair etc. But it's actually very different. It's a very hunger game again model of capitalism where everybody is competing crushing each other's margins until you get the survivor. And in the end, that's obviously a terrible outcome for shareholders because a lot of these companies get wiped out along the way, etc. It's a terrible outcome for shareholders. But if the goal was to get a bunch of electric cars on the road, then you've actually achieved that goal. Uh meanwhile in the US what you've achieved through the government subsidies is that Tesla gets to be part of the Mac 7 and that uh you don't have that many electric cars on the road but you have the most profitable and biggest uh electric car company in the world and and I think in the US that is seen as winning because in the US the tendency is to view things through the lens of the stock market. It's like, oh, if our stocks are doing better, then we're winning. But then when you compare, say, Shanghai to San Francisco or Beijing to New York, if you came off the plane and didn't care about stock market performance, you would think Shanghai was winning, not San Francisco. >> Louie, in the investment community that we live in, Jim Rogers did a really good job decades ago of predicting this miracle of growth in China that we're talking about today. And you know, he was very very outspoken at the time in advocating investment in Chinese equity markets. Well, China might have gotten much richer, but holders of Chinese equities sure haven't. So, what's going on here? Why have Chinese equities been such a dud for the market when Jim's predictions definitely came true? The miracle of Chinese growth, the education of the Chinese people that you talked about, it's all demonstrabably true. But I don't think anybody got rich in this Chinese stock market along the way. Part of that is the the hunger game model of development that that I highlighted which actually brings me to to an important point is that the correlation between GDP growth and stock market returns in most emerging markets is is extremely weak. I know and we assume you know we see the growth it's exciting and we think oh I'm going to participate in that growth through the equity markets but but in emerging markets that's not a a one forone relationship it's not a one for one relationship what whatsoever and you know you could just look at the past and it's not just by the way in uh in emerging markets if you look at the past decade US GDP growth has actually looks like it's gone down structurally from 3% down to 2% % but over that period US equity returns have been have been fabulous right that correlation between GDP and and uh GDP growth economic growth and um uh and shareholder returns is isn't always there so so that's a I think a first important point but if you'll allow me to get theoretical for just one second uh I don't know if you've ever uh heard of a guy called Harry Brown he was the um he ran for libertarian candidates to be US president back in the 80s. And he had a great idea. He highlighted that what he called the permanent portfolio where you would do a quarter in local equities, a quarter in local cash, a quarter in gold, and a quarter in bonds. The idea being that whatever economic environment you're hit with, there'll be one quarter that thrives and one quarter that doesn't do as well. But you rebalance every quarter or once a year and over time what Harry Brown called the permanent portfolio delivers very satisfactory returns. So if and if you look at pretty much any country you care to pick Switzerland, France, UK, US, China, you get returns of between three and 5% a year with uh and the best part with never more than a 10% draw down and very very low volatility. Now why am I highlighting this? If you think of the permanent portfolio in the United States over the past 10 years, equities have basically almost gone 3x and over the past decade gold has basically risen 50%. But at the same token in real terms, if you were in cash, you've lost 20% in real terms. And if you were in US treasuries, you've roughly lost the same uh over the past decade. In the US, your permanent portfolio has lost 20% on the bond side. So your permanent portfolio in the US over the past decade has returned 3% uh on average. You made money on gold, you made money on equities, you lost on cash, and you lost on bonds. Now look at what happened in China. You do the same exercise in China. And this is where it gets fascinating is over the past decade on your permanent portfolio in China, you also made money on gold just like you would have had everywhere else. You actually did make money over the past decade on Chinese stocks. You actually did make money on Chinese bonds and you actually did make money on Chinese cash. So much so that your permanent portfolio is actually grew in China. While you made 3% on your permanent portfolio in the US, you made 5% on the permanent portfolio in China. Now, why do I illustrate this? I think that when it comes to policy, there's basically three markets. You got your currency market, you've got your bond market, and you've got your equity market. In the US, policy makers will sacrifice bonds and currencies every day of the week for equities. And they'll do that because 70% of Americans own equities. So whenever the stock market is down 20% or pick your number, it might be 25. But we all know there's a Fed put. We all know that if stocks fall enough, the Fed will step in and sacrifice the long-term returns of bonds and the long-term returns of the US dollar to save the equities. And we know that because they've done it time and time again. Now, I'm going to adjust uh the old quote. I'm sure you know the Churchill's quotes of uh you know they sacrificed honor to get peaced and they ended up with neither or Ben Franklin's quotes of if you sacrifice liberty for security you end up with neither. Let me suggest this. If you sacrifice your currency for growth eventually you get neither. Now I would argue that for the past 15 years in the US we have been sacrificing currency and obviously bond markets to get growth in equities and we have equity markets are up 3x and in China they did not in China they don't care that much to policy makers they don't care that much about equities the thing that matters the most is first currency then bonds then equities are the variable of adjustment that uh that end up bearing the brunt of the economic cycle which frankly is how it should be. I want a policy maker who holds firm on the currency, holds firm on the bond markets and then lets the equity markets adjust where they may. Now the reality is that in China in you know in the past decade we've been paying for the excesses of the previous decade there were we all know about the Chinese real estate bubble the excess infrastructure spending etc. Now, western policymakers would have paid for these excesses through a debasement of the currency and through a debasement of the bond markets. In China, the equity holders were made to pay for these excesses, which is I think the right order of things. And the reason in China you can have the equity holders pay for things is that only roughly 10% of the population own equities. 100% own remnant and indirectly through banks. You know almost 100% of people own bonds. So why should 100% of people pay for 10% who own equities? No. No. No. It makes much more sense to have the 10% bear the brunt of the adjustment. And that's what we've had in China for the past decade. >> Louie, as you described earlier in this interview, China has clearly done an unprecedented job of catching up with the West. And they've done it in such a short time. It's amazing. But in order to grow from here, growth requires innovation. And innovation is different from catching up. Something I've noticed about Chinese culture and really Asian culture in general from having lived there for a few years is I think they're just way better than we are in the West at optimizing systems, making them efficient, particularly designing them to handle lots and lots of people very efficiently in a time-sensitive way. They're just way better at that in my opinion than anything I've seen in the West. But innovation requires throwing out the rules and just forgetting about the way we're used to doing things and doing it in a completely different way. Something I've noticed about Asian culture is throwing out the rules is definitely not allowed. You know, you're not allowed to ignore the rules that exist in society for everybody's safety, the way you can get away with in the West. And I think it may be less natural for that culture to really throw the rules away and think about doing something in a completely new and different way. So can China deliver on innovation to the extent necessary to not just catch up with or keep up with the west but to really move ahead and and compete in the sense of leadership. >> So that's a very tough question. I'll be I'll be honest and I think my own thinking on this is has evolved the past few years. If you had asked me this two or three years ago, I would have said probably not. I would have said two or three years ago that you know the Silicon Valley great comparative advantage is that everybody there in Silicon Valley believes that you know you ask for forgiveness not permission which in essence is one of the comparative advantages of the west. I've written a number of pieces over the years highlighting how you have really two feelings that bind societies together. Uh you can have societies based on guilt which is what we have in I would say Judeo-Christian societies. You you make a mistake, you say I'm sorry, people forgive you and you move on. Uh this is why you know a lot of entrepreneurs have had several bankruptcies but they're able to pick themselves off the floor etc. And then you have societies based on shame. And societies based on shame tend to be much more socially cohesive. They tend to have a lot lot less crime. And you know most of the Asian societies are are based on shame. The idea that I don't want anything that brings shame onto myself onto my family onto my group onto my school. And to your to the point you just highlighted, this sort of cultural difference between societies based on guilt and society based on shame, you would think would be a massive break to to technological progress to to risk takingaking to entrepreneurship and whatever else. Um, and frankly that's what I would have argued 2 three years ago. Having said that, one of the things I have to acknowledge is that if you look at the past two, three years, and I think most people are missing this right now because nobody's traveling to China anymore. Obviously, no one went during the co years and once COVID ended, you know, Russia invaded Ukraine and China sided with Russia and so the whole world decided, oh, well, China's uninvestable. I'm not going to waste my time going there anymore. And in any event, returns on equities there have been dismal. Even if returns on bonds have been terrific and returns on the remn have been very solid, I'm not going to waste my time going there anymore. So most people haven't traveled in China for the past few years. And as they haven't traveled there, I think they're really missing out on how quickly China is jumping ahead in industry after industry. Whether it be fintech, whether it be e-commerce, whether it be uh obviously electric cars, whether it be power delivery, whether it be transports, highspeed rail, the transformation. I didn't go to China for almost 3 years because of the co restrictions. And when I went back, I was blown away by just how much it had changed in 3 years. The idea that China can't deliver innovation. Let me put it to you this way. BYD released a car a couple months ago that it's a hybrid car. It costs $14,000. It's a sedan. It's basically looks like a Tesla Model 3, but it's a hybrid car. And the car goes 2,000 km on uh one tank of gas. It is by now the most gas efficient, fuel efficient, gas car in the world by a factor of over 50%. And again, at a price of $14,000, this is all of a sudden a revolutionary car. It's a car like there are no others in the world. I look at the Xiaomi phones that are by all measures far superior to anything Samsung or Apple is producing. >> Well, hang on, Louis. I want to push back a little bit on that because the things you're saying are things I would have predicted. The fact that China could look at something that somebody else invented like Tesla and say we can do a much much better job of designing and building electric cars than Tesla did and we're going to do it and we're going to do it cheaper and better and everything. No surprise whatsoever to me. Uh you take something else like smartphones and you say we could develop better ones, cheaper f, you know, they're really smart. They have incredible engineering capabilities, but that's taking something like the electric car or the smartphone that somebody else invented and doing a much better job re-engineering it in a better way. Where's the example where it's China who said, "Wait a minute, we should not be using gas cars. We should be using electric cars or we should say, forget about flip phones, let's invent smartphones instead." Where did China invent the paradigm changing thing that led the rest of the world to recognize the old way of doing things didn't make sense? >> That's a fair that's a fair criticism. And you know, you could say, well, there's still enough lowhanging fruit optimizing other stuff. >> I think there's more money to be made in optimizing other people's ideas. It's not meant as a criticism. I It's >> No, no, no. It's I get it. And for now, for China, maybe that's good enough. That generates enough growth. If you can produce better cars at a cheaper price point, you don't need to invent the flying car, even though they do have the prototypes for the flying cars. I'm sure you've seen the videos on the X-Fang, the one that's produced in Shenzen, the Xfank flying car, which, you know, looks pretty cool. Or, frankly, the BYD uh car that goes in the water, the amphibious car. You can continue to add things at the margin without completely upending everything. But if we look back, what are the great inventions of the past 20 years? You could say, well, you know, one of them is of course the smartphone that's changed the world. You could argue potentially it's the electric car. Although, how much is the electric car really changed the world? I'm not convinced it has changed it all that much. you know, it's it takes us from A to B at the same speed perhaps with a little less pollution, but that's not even a given given the uh all the mining that you need to do of cobalt and lithium and whatever else. Yes, China didn't invent a smartphone. China is, you have talked in the past of China's molten salt reactors. Uh so, China's working on those and you could say, well, that's just an again an adaptation of what's being done before. >> They're doing a better job of it, by the way. and they've really got their act together. But it is another example of a technology invented in the United States that the United States failed badly to commercialize the way it should have. China is running with it with great success. But I think this goes back to what you said before about permission versus forgiveness because one thing I'm absolutely certain of is that Chinese engineers and technologists are not one iota less smart than westerners. I I think they may be smarter, but the thing is the consequences of just doing something without getting permission first in that culture are rather different than they are in Silicon Valley. And I think that's probably what holds them back. It's not the talent of the engineers and scientists. It's the fact that having daring to just do what you believe in even though you don't have permission and it's not the policy. Uh it's not consistent with the strategy Xiinping has laid down and all of the people below him are following. you've got a better idea, so you're just going to go off on your own and do it. There's a lot of consequence to that in China that doesn't exist in Silicon Valley. >> I'd agree with that. And again going back to what China's comparative advantages are which I think we are seeing in real time is of course the critical size of the market and the ability to rapidly uh adapt and improve on products so that you end up today with China being the global leader in fintech being the global leader in yeah we mentioned electric cars it's very quickly you can adapt exist existing technologies and that's where China's comparative advantage lies perhaps much more so to your point than in coming up with new inventions but coming up with new inventions again you look at the past 25 years frankly apart from the smartphone you know again a terrific invention world changing what what has really been world changing in the past 25 years you know really big and world changing inventions are pretty few and far between >> Louis I couldn't possibly agree more with that point. But let's move out to the bigger picture now and talk about clearly the overall trend here is China has made incredible progress in the last several decades. So does that mean that they're now a threat to the rest of the world because this growth could overrun other economies and if not the rest of the world is it a threat to its near neighbors you know Taiwan, Philippines, Vietnam, India so forth? This is a question I often get and I think the first thing we have to talk to to acknowledge is it hasn't been thus far. China unlike other big powerful countries hasn't gone around and invaded other places hasn't gone around and shipped lots of weapons uh signed military alliances that set up military bases uh in lots of places. So you know the answer the obvious answer would be not this far. uh of course who knows what the future holds because the big shift in China over the past decade is that China has started to look abroad. I think you know in the years if you go back to Mao then Ding Xiaoping then uh then Jong Zen and Hu Jin Tao when these guys became president China was such a mess it was so far behind economically to the rest of the world that you know these Chinese leaders frankly had very little time for the abroad. It was all eyes uh on what was going on domestically, all hands on deck and whatever happened abroad, it wasn't really China's problem. Then of course as China develops this changes partly of course because the more China grows the more China needs commodities from the rest of the world unlike the United States which happens to be energy self-sufficient which happens to be food self-sufficient which happens to be pretty much self-sufficient in in any major commodity you care to think of. China basically needs to import almost every commodity it it potentially needs except for rare earths, but everything else China needs to import. So So as China grows, it has no choice but to all of a sudden build relationships with with foreign countries who who can provide these commodities. Now as we all know part of the challenge in the world is that a lot of the commodities are produced in places where the politics can be dicey. Whether you look at the Middle East, whether you look at Africa, whether you look at some parts of Southeast Asia. Now you know if you go back to Cinping's arrival in in uh to power, his very first speech, he starts talking about the one belt, one road. He starts talking about the Silk Road fund. He basically starts talking about how China is going to help countries whether your Kazakhstans or your Kenyas or your Indonesias. He's going to help these countries build infrastructure. He's going to help fund it. Um in a in a move that frankly smacks of imperialism. Now, when I say imperialism, I don't mean that China is going to go out and invade Kazakhstan or invade Indonesia, but that the history of every empire is first and foremost a road building exercise. You build the roads and you build the roads to bring in commodities cheaper and to push out finished goods, higher value added finished goods to the outer realms of the empire. That's why in Europe we say all roads lead to Rome. That's why the Persians say Darius was a trader. Uh the history of every empire is how do I get commodities in cheap and push out the higher value added goods to the outer realms of the empire. And of course this has been Cinping's strategy for the past decade. One built one road silk road fund etc. It's all about building the roads to bring in the commodities and push out the finished goods which they are doing today. selling the cars, selling the tractor, selling the telecom switches all across emerging markets. Now, you know, when you go to a country and you say, "Hey, I'm going to build a road for you or I'm going to build a dam for you or I'm going to build a canal for you or an airport." That country is usually very happy. You know, why not? Everybody loves getting infrastructure. The challenge then becomes you're going to start moving goods along that road or along that canal. And the challenge becomes if the goods moving along that road or that canal start getting pillaged by briggins because the local country can't keep the peace then before you know it you have to send troops along that road to make sure that the goods can circulate. This is again the history of every empire. It's the history of the United States. That's how the United States today ends up with 800 military bases and I haven't misqued this. 800 US military bases around the world because when you're an empire that's that's what you do and so that's to be honest the real challenge for China today I think they're still in the road building phase of the empire which is all happy days good everybody likes you the problem becomes if and when the trade along those routes no longer becomes secure how do you secure it do you send troops when you do you start building local resentments you start building, people get upset, people stop attacking your troops. That's option one. Option two is you pay off the briggins. You say, "Hey, tell you what, stop attacking my caravan and I'll cut you in on some of the profits of this trade." And to be honest, I think this is the path that China will go because it's it tends to be less costly in the first place. And now in the western world, we don't have that option cuz, you know, we can't pay Briggins. But China doesn't have the same ethical or uh institutional constraints that that we do. Or the third option is you say, "Okay, well, the strategy didn't work and and I'm going to fold back." Now >> Louie, I agree emphatically with the essence of what you just said about China and its need to import commodities from the rest of the world. But I want to push back on that in a very strong way, in a very specific way, which is all of that was true in the age of oil, which we're still living in. I'm going to make the argument that in the coming age of nuclear, China is at least 15 years ahead of the West already on both conventional and advanced nuclear technologies. They have enough thorium under their own soil to power the entire planet for the next thousand years. They're doing everything necessary right now to build a thorium nuclear fuel supply chain as well as to develop thorium molten salt reactor technology which they're going to use to power a new fleet of container ships and for a whole bunch of other things. They've been a little bit uh shy to say exactly which other things, but I can very easily imagine China developing an energy dominance and therefore an economic dominance over the rest of the world. And a lot of people don't seem to understand me when I've said this before. I'm not criticizing China or putting them down. They're doing everything exactly right. I'm envious of their policies and their achievements. I wish we could get our act together in the West and keep up at least enough to compete. But what's going on is the West doesn't get it. We are stuck in nonsensical nuclear energy policy that's based on irrational emotions left over from the 1970s that never made sense then. And I'm very concerned that everything you just said is all about to change. And although yeah, there's a lot of commodities that don't have anything to do with oil and energy. You know, most of your argument I think was an energy argument. And it's not going to happen overnight, but in the next 20 years, I think you're going to see a energy dominance in China that's entirely fueled by locally sourced thorium, and they're not going to need one drop of oil from the Middle East. >> You, you know, my long-term held belief that economic activity is energy transformed. You know, when you look at the commodities world, there's energy and there's everything else. Uh, and everything else really doesn't matter all that much. almost everything else can be replaced. If you live in a world, the world that you describe was a world in which China essentially has almost zero cost of energy, you can replace a lot of commodities through the application of more energy. The world you describe, Eric, it's not a world I disagree with, by the way, to be very clear, but the world that you describe is actually a world in which China's threat to the rest of the world goes down dramatically because China's one of China's big sense of insecurity today, perhaps its single biggest sense of insecurity is its energy dependency visav the rest of the world. And you know historically when you're dependent on energy that's and you want to be a geopolitical superpower those are two conflicting you know hopes. You can't be a geopolitical superpower and be energy dependent as Japan found out in the 1930s. And so a world in which China does gain energy independence I think is de facto a much much more peaceful world. one in which we don't have to worry about China being a threat to its neighbors, one in which we don't have to worry about China being a threat to the rest of the world. It's also, to be honest, the world you described is a world that is extremely exciting. Right? Again, if you start off with the premise that economic activity is energy transformed, if we manage to dramatically reduce the cost of energy for a fifth of the global population and perhaps more because China will export that technology, then that's that's tremendously tremendously bullish for for everybody. Now, to your point on the Western world is sort of asleep at the wheel and doesn't have to worry about pushing forward on nuclear, I think the explanation for that is simple enough, right? When you have $2 natural gas price in the US, you essentially have almost free energy. So the shell revolution which to me has been one of the biggest macro developments of the past decade. The shell revolution was a huge boon to the United States and has allowed the United States to cruise comfortably and not worry too much about what was coming up in the rear because if you have a much cheaper cost of any of energy from everybody else then you're winning and the US sure as hell has been winning for the past decade. But yeah, you could have a a genuine paradigm shift. >> Smart winners understand why they're winning and they make sure they have a plan to continue winning. And my criticism is I think we couldn't be screwing this thing up worse. We we're so complacent with our energy policy. >> I think on this smart winners understand why they're winning. I think Americans are mixing up the symptoms with the causes. And that they see the massive outperformance of the NASDAQ. They see the massive outperformance of the MAX 7. And the conclusion most Americans take is, oh, our stock market is doing better than everybody else's. Our tech stocks are doing better. Therefore, the US boom must be because we're crushing it in tech. I look at it completely differently. I think you had a huge boom in energy which collapsed the cost of of energy in the US led to much weaker inflation than you otherwise would have led to a stronger dollar than you otherwise would have. This allowed the Fed to keep interest rates lower for much longer, created excess liquidity that ended up going into technology and allowed Apple to rerate from 10 times earnings to 35 times earnings and allowed Microsoft to rerate from 20 times earnings to 38 times earnings. But it wasn't, you know, it this is a symptom of the energy boom uh rather than the cause of the US outperformance. And yes, to your point, if you think the US continues to have a massive comparative advantage on energy relative to everybody else, then you stick with US stocks. If like you and I, you tend to believe that this comparative advantage of the United States of Energy is actually on borrowed time and that at some point in the next 5 years, the scales will fall from the world, the rest of the world's eyes, then you will have a massive rotation into Chinese assets. >> Well, Louie, on that note, we should probably wrap this up in the interest of time. I can't thank you enough again for a terrific interview. Before I let you go, please tell our listeners a little bit more about what you do at Gavcow, the books that you've written, and where they can follow your work. >> Yeah. So, again, thanks again for having me. Always love catching up. I've really enjoyed this conversation. We do uh three things at GFCAL. We publish research for institutional investors out of our Hong Kong and Beijing offices. Uh the website is gfcow.com. G-vek. We have a private wealth arm both out of Mauritius and out of Belleview, Washington depending on whether you're US investor or non- US investor. Uh and then we have an asset management arm mostly doing Asian equities, Asian fixed income. And you can find all that again on our website. And that concludes our 2025 Macrovoices summer special. No postgame chart deck this week since my usual co-host was last seen gallivanting about the Med on a sailing yacht. We'll be back next week to start our countdown toward episode number 500, beginning next week with our number five all-time top Macrovoices guest. Until then, all of us at Macrovoices hope you enjoy the last few days of summer. [Music] That concludes this edition of Macrovoices. Be sure to tune in each week to hear feature interviews with the brightest minds in finance and macroeconomics. Macrovoices is made possible by sponsorship from bigpicturetrading.com, the internet's premier source of online education for traders. Please visit bigpicturetrading.com for more information. Please register your free account at macrovoices.com. Once registered, you'll receive our free weekly research roundup email containing links to supporting documents from our featured guests and the very best free financial content our volunteer research team could find on the internet each week. You'll also gain access to our free listener discussion forums and research library. And the more registered users we have, the more we'll be able to recruit high-profile feature interview guests for future programs. So, please register your free account today at macrovoices.com if you haven't already. You can subscribe to Macrovoices on iTunes to have Macrovoices automatically delivered to your mobile device each week free of charge. You can email questions for the program to mailbag@macrovoices.com and we'll answer your questions on the air from time to time in our mailbag segment. Macrovoices is presented forformational and entertainment purposes only. The information presented on macrovoices should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions. The views and opinions expressed on Macrovoices are those of the participants and do not necessarily reflect those of the show's hosts or sponsors. Macrovoices, its producers, sponsors, and hosts Eric Townsend and Patrick Serzna shall not be liable for losses resulting from investment decisions based on information or viewpoints presented on Macrovoices. Macrovoices is made possible by sponsorship from bigpicturetrading.com and by funding from Fourth Turning Capital Management LLC. For more information, visit macrovoices.com. [Music]