SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
About - Our podcast looks to help improve investing IQ. We share 15-30 minutes on finance, market and investment ideas. We bring experience and empathy to the complex process of financial wellness. Every journey is unique, so we look for ways our insights can help listeners. Also, we want to have fun😎
Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
China's Economic Landscape for Investors
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Unlock the secrets behind China's economic strategies and arm yourself with essential insights for cautious investing. Join me, Steve Davenport, alongside Colm Miller, as we dissect the enigmatic world of China's economic policies and the challenges investors face in navigating these murky waters. Our conversation promises a thorough examination of the complex landscape, exploring how China's recent focus on bolstering local retail investor confidence through its stock and property markets may leave foreign investors in the lurch. We engage in a candid discussion about whether the optimism being fostered among domestic players truly addresses the deeper issues within China's economy or merely glosses over them.
Our episode takes a critical look at the intricacies of investing in Chinese markets, where even the most seasoned investors can be caught in value traps, as evidenced by the case of Alibaba. We scrutinize the viability of integrating Chinese assets into a balanced portfolio, given the labyrinthine regulatory environment and the controversial Variable Interest Entity (VIE) structure. Our dialogue also delves into how geopolitical events, like a potential Trump victory, might influence market trends, and whether economic stimuli or tariffs are effective long-term solutions. With a focus on informed and cautious investment strategies, our conversation aims to equip you with the knowledge needed to navigate today's volatile global markets with confidence.
Straight Talk for All - Nonsense for None
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Welcome everyone to Skeptic's Guide to Investing.
Speaker 1:I'm Steve Davenport and I'm here with Colm Miller, and today we're going to talk to you about China, the latest stimulus package, what's happening, what are they trying to achieve, and will they do it in a way that is going to be long-lasting?
Speaker 1:I think that China has a mystery attached to it, partly because we're not sure if the data that we're getting is completely accurate. Second, we're not sure if you know how the government is moving things in public versus behind the scenes, and it's a very mysterious factor around the world because there just isn't this veil of secrecy around things and in some ways, as investors, we like to get behind the veil and look and see if there is an opportunity we're missing or if maybe that lack of information is a warning sign and we should stay away. So today I'm going to talk to Clem about the latest stimulus package and get his ideas on what's working and what's not and hopefully provide some ideas on how investors might manage the exposure to China in the future, to hopefully participate when it makes sense and to avoid also if that makes sense. So, clem, after your travels to Japan, did you gain any more insights or observations, being so close to China?
Speaker 2:Well, I don't know that being in Japan helped me a lot with China, but I've certainly been following the events in China, as I always do. I think what I would like to do in this call is really proceed along the theme of our entire podcast series, which is Skeptic's Guide series, which is skeptics guide, and honestly, I'm a pretty have been, uh, since late 2020, uh, a pretty big skeptic of uh, of China, uh, and you know I'll go into that. But let me, let me talk about this stimulus, right, china has a history of, every once in a while, uh rolling out a big stimulus plan and you know, sometimes there, uh, there's a lot of smoke and not a lot of fire behind these things, a lot of talk and not much action, and there's a view that the Chinese can just simply jawbone the market up. So part of that is the fact that their audience, at least from an investment standpoint, their audience isn't really foreign investors. Their audience is local retail investors. And so when they talk about stimulus and when they talk, when the government talks about stimulus and when the government there talks about trying to help investors, they're not talking about you and me and anybody in the U S. They're talking about local retail Chinese investors and they want to boost them up. They want to boost up their optimism. They want to put a little bit of money in their, in their accounts and their investment accounts. That's who their focus is on retail investors and the retail stock market.
Speaker 2:The so-called A-shares market in China is really one of the few ways in which local Chinese can invest, the other one being the property market, which is the other focus of a lot of angst in terms of the property market not doing well in China. The Chinese government is using the property market, using the retail market, to try to boost local retail investor optimism. So that's what this latest series of announcements is about. It's not trying to provide any greater comfort to foreign investors foreign investors. So let me add to that by saying that when foreign investors invest in China, they're not particularly interested in lots of small Chinese companies, including a lot of small Chinese companies that may be sort of startups or recent IPOs or whatnot. I'm talking about small companies. They're more interested in the larger companies, the ones that dominate the indexes, like Alibaba and Tencent and Maituan. That's who they're interested in and, to the extent they can invest in them, the electric vehicle companies, et cetera. Some of the more-.
Speaker 1:Yeah, I mean I've heard a lot recently about the EVHYD company and how it's going to-. I mean, I guess I'm a little surprised when you say after 2020,. You've kind of taken a view that you're not sure about China's information or how they were. And I've always been skeptical about China. I've always been like the actions of COVID didn't suddenly open a door or shine a light on something that I mean. I was told a long time ago when I was in college and Jack Welch was talking about the prospects of investing in the trains of China, that China's going to need trains and therefore, if GE can get a share of that marketplace, it's just tremendous. But he said we just don't know what's going to happen and when they're going to close the door and open the door and how it's going to work. So I mean, do you think something recently has changed in China to make you more skeptical, or you think you've always been?
Speaker 2:skeptical. Well, it depends how you would characterize the time frame since late 2020. The timeframe since late 2020. I mean, I guess before 2020, for a few years there it was easy and I've sort of bought into this idea of a new economy in China, one based around technology and e-commerce and so on, sort of the Alibaba Tencent driven economy. I bought into that prior to 2020, late 2020. And then what happened is you had, you know, jack Ma being Disappeared, yeah, being temporarily disappeared. Well, temporarily, like over a year, disappeared. You had, all of a sudden, the Chinese government cracking down on all the internet platforms. Uh, you had this, uh, uh, this philosophical notion put out there called common prosperity, right, uh, which is another way of saying socialism, right, common prosperity, a little bit of a positive spin on it, and so so, as soon as all that stuff started happening, my view of China turned around 180, and I became quite negative about it, and a lot of investors did, and stock prices plunged and it was so it wasn't really COVID.
Speaker 1:It was more of the actions recently, yeah it was. It was actions of the companies, not how they're treating correct, not how they did things in the labs of no no, there was.
Speaker 2:There's sort of a disconnect there.
Speaker 2:You know, in 2020, uh, the chinese market was doing okay until what happened with Jack Ma, but you had this sort of plunge in the Chinese market in 21, in 22, 23, and even 24 until a couple days ago, and even that one's been reversed couple of days ago and even that one's been reversed.
Speaker 2:And this has all been about skepticism about the Chinese government's policies towards its own private sector and towards foreign investors as well. And they see, the Chinese government sees, even if we don't well, and you know, they see the Chinese government sees, even if we don't, uh or many investors in outside don't? They see there being a difference between the Chinese economy and uh investment markets available for foreign investment. So they want to help, you know, to a certain degree, chinese residents. They want to boost the Chinese economy, but what they realize and what we don't hear is that China can boost its own economy if it wants, but it may not have much of an impact on foreign investment prospects, foreign investor prospects. So you know, you could have a revived Chinese economy and it may not impact the the Alibaba and Tencent and Maituan and so on, share prices, all that much, uh, because what's driving them are what's driving those share prices are uh concerns about state intervention in those uh, in those companies uh, which we've seen a lot of recently.
Speaker 1:I mean, I kind of have to disagree with you a little bit in terms of China. I do believe that they understand themselves as part of a world community and as part of that world community they need to do things that are going to be good for investors and people, to engage with China in a way that's going to be. I think they want more involvement of US companies and global companies, but I think that the trust level just isn't there and I wouldn't say that they don't want investing from anything but retail. I'd put it as they want to expand beyond retail, but they just haven't been able to convince these global companies that they are truly going to not lose some of their information and technology by sharing with operations in China. I think that they opened up to China, to other outside investors, and they're now going on the cycle back towards closing it down a bit, because I think they just aren't ready.
Speaker 1:I think they're trying to evolve as an economy and I think they've reached a point of resistance where people don't know if evolving anymore is going to expose too much of China and too much of their system to things that could derail it, and I think it's a constant yin and yang between the two, constant yin and yang between the two. But I can't believe that the central government is sitting there saying we really want to take care of these retail Joes on the market and we're going to do what we can to help them, but these large corporations, like you know, all these other, you know we're not as interested in them succeeding in their businesses. I think it has to be. You know they believe in the US economy as a big part of how they're driven and therefore they need to figure out how to make Huawei an acceptable vendor for us and our networks, or else they're giving up a big share of potential.
Speaker 2:You know market right uh, national security is what's driving china right now, chinese policy, and it's driving uh, a lot of different aspects of it. Um, just to bring up one is you've got china's uh, so-called cyber security law and the cyber security law. You know you would think that has a lot to do with, you know, preventing cyber intrusions, but it's much more than that. It's all about trying to control data within China, and it even extends to detaining foreigners and any foreigner that may have had some access to something sensitive. You know they are subject to potential detention. In fact, coming in from Japan at the airport in Newark, there were signs at the airport more than one saying if you've been to China and have been detained, please let us know now. When have you ever seen a sign like that? So that was, that was uh. So we're concerned about what they're doing in terms of their uh, their national security laws. Uh, us government is.
Speaker 2:Now I'd make another point too is that it's very easy for even the smartest investors to get taken in to. A certain had a big investment in alibaba and uh, and he eventually well, he pretty quickly sold it. Actually, uh, after realizing that it was a value trap. You know, he thought, wow, I'm getting something really great at a great value. Typical Buffett monger sort of thinking, but in reality it's a value trap. He very quickly sold it and said it was one of his biggest investment mistakes.
Speaker 1:The value just kept getting more valuable. What? The value just kept getting more valuable.
Speaker 2:No, it kept declining in value. There are plenty of more valuable, more enticing prospects out there than to invest in China. In fact, one of the things that drives me a little bit nuts is that if you're in a so-called balanced allocation and you've got some percentage in emerging markets with China being such a large portion of emerging markets, with China being such a large portion of emerging markets you know if you're in such a thing, you're investing in China, and you know why, right. Why are you investing in China? Why should China be part of a of a balanced allocation? Yeah, sure, you know, just mathematically, if you add up all the market caps. Sure, right, but in terms of investability, I mean, there's a question there as to how investable China is. So I'm not sure one should be in a so-called balanced allocation if it involves taking on a few percent in China.
Speaker 1:I think that we believe that the economy is going to have different variables that are going to create a lower correlation. I mean, I don't necessarily buy the standard we need to own emerging markets for every investor, because I think that in some ways our philosophy of investing is about names and companies and we want to get the best companies. And if the best company existed, and Alibaba, were it for a marketplace type of, you would want to be able to hold it. But I guess I would say that where are you buying the shares? Are they offshore? Are they onshore? How are they being treated with voting rights and non-voting?
Speaker 2:Well, that's a very interesting point that you've raised. But before I address that, I just want to say that I agree with you. I look at individual stocks and you can invest indirectly in China right by buying US and other companies that have business operations in China, that sell stuff to China, so you don't have to be invested in a Chinese company in order to benefit from China, or from any other emerging market for that matter. But I also wanted to you know along those same lines you were talking about you talking about the vehicles, so to speak, for investing in China and they have this crazy thing maybe you've heard of it called the VIE.
Speaker 2:The Variable Interest Entity that are listed in Hong Kong are actually there, isn't actually a legal share involved. There's this contract that's involved and that's what you're investing in is. You're investing in this contract between the company and an issuer of that variable interest entity it's like a P-note kind of thing, but it's a variable interest entity and then, when that Hong Kong company shares are then listed then in the US as ADRs, so you got an ADR wrapper around this Hong Kong VIE, so you got an ADR wrapper around this Hong Kong VIE. And if at some point there is a legal dispute or the Chinese government says, hey, these VIEs are legally invalid. Well then, us investors are going to get screwed, so to speak.
Speaker 1:So to speak. If the value goes to zero, then yes, that's, that's, so to speak.
Speaker 2:Right. I guess, yeah, I mean there's there, there's a lot of risk there and you know one of the you know there just saying, oh, they're having a stimulus, let's invest right. Or you know, gdp is 4.6, I guess came out today versus an expected 4.2, I guess Should we? You know, maybe now's the time to invest right. You know, maybe now's the time to invest right. You know they miss the entire structural question of the common prosperity and the VIEs and so on. You know the stuff that's really important and not whether there's this, you know, sort of empty promise of prosperity.
Speaker 1:Well, I mean, we all love to find reasons, right? I mean, I thought yesterday the most interesting thing was Druckenmiller, who came out and said I think the market's going up the last two months because it's a reaffirmation of Trump victory, that the areas of crypto and other things that are doing well are doing well because people are discounting a Trump victory. And I thought it was. You know, I find all these commentators and strategists who make these leaps, like it feels like we're making bigger and bigger leaps every time. We want to get on the news cycle. We need to say something more outrageous every time, and I think that, like there's a lot going on in the world economy that I'm not sure the overall stock market is reacting to something that is you know, right now. I'd say, statistically it's a tie and so I'm not sure how it can be.
Speaker 1:You know, we can make these conclusions and I'm not sure that we should listen to simple almost if it's too short and too good to be true.
Speaker 1:It is issue stimulus and it's good to 20% on your portfolio, okay, I mean, I'm not sure that any of the fundamental issues have really been resolved and I think it's interesting that when we look at what Trump did with taxes and tariffs, and Biden continued it. I don't see the tariffs going away anytime soon, so I'm not sure that access to the US economy the greatest in the world is really going to change that much in the future. So I look at the stimulus as just one factor that they're trying to make investors and create a wealth effect by making you feel that the government's behind these stocks. Therefore, you should invest in them. I think, as outsiders, we should take a high level view and say, okay, things may be getting better, but in general, we still get these underlying issues that are not going to change, and I think that's why we are skeptical is because we take a secondary look and try to evaluate things more comprehensively.
Speaker 2:Yeah, and we with you, and we haven't even mentioned the potentially looming conflict over Taiwan.
Speaker 1:Correct. I think that my big thing is, I can see China getting involved. If this, you know, if things continue with the Houthi and the Hezbollah and you know, and things in the Middle East, and it starts to affect that Red Sea access to oil, china's going to get involved. Involved, that's when you know, if Israel strikes the you know some of the infrastructure for oil in Iran, I see there's, you know, if this conflict gets bigger, the next biggest thing is going to be US and China are on different sides of this conflict and that leads to, you know, potentially, I mean, we've moved our battleship, one of our battleship groups, to the Middle East and now we're lighter in that battleship group or carrier group in Asia. So, yes, I think that China is playing, you know, a longer term game and I feel like there's several instances where this investment could definitely flow the other way.
Speaker 1:Personally, we were invested in three companies that had exposure to the Chinese market and have been doing poorly Estee Lauder, starbucks and Nike and all three we're currently questioning about removing because we think that this China problem and China drag on these stocks is not going to go away soon. It's going to get worse. Could we be wrong? Absolutely. Stimulus could overwhelm and everything in China could get better. But I believe that the real estate problems are too deep and that the other problems are significant. So I still believe that the risk of conflict is high and if the risk of conflict is high it's not a good market for those companies. But that's one opinion, one guy's view and one skeptic's view. I mean, you might have a reason, clem, to believe that suddenly things in China have changed significantly. I'm still skeptical, I'm still holding back and I'm still lobbying against companies.
Speaker 2:Well, yeah, I mean, you know, I'm not saying that things have changed for the better, right, I think things are not changed.
Speaker 1:Well, stimulus does help, Clem.
Speaker 2:It's not a panacea, but it is not. It's not going to help US and foreign investors.
Speaker 1:I agree it helps some investors, but it's not the panacea that makes us go from being on the negative side to being on the positive side.
Speaker 2:Absolutely not. It's more of the same. There's been stimulus promises in the past and actual stimulus programs in the past, and you know it's either provided no relief or temporary relief. You know this is a lot of jawboning enthusiasm and perhaps a little more economic stability in the face of some of its issues, like tariffs, as you mentioned, or the Taiwan situation, but it's not something that should give US investors a lot of comfort.
Speaker 1:I mean, I don't think that many people are changing their view based on the stimulus. I feel like, in general, there's a broadening out and we're looking at where at least personally in our portfolios we're looking at where we think there's going to be the move on from the MAG-7 right. What are we going to go to next in terms of where's the? You know, and I think there's some good value in mining. I think that gold prices are telling you something and so, yeah, all the metals and I so which is?
Speaker 2:which is a blue spider, gold, the. But I'll tell you one area that I've been invested in for, you know, quite a few months. Well, even longer than that, our insurance insurance companies. Insurance companies have been doing really well over the last I don't know six months to a year or maybe closer to a year, and a lot of them have low short interest ratios. If you look at their, you know they're profitable. If you look at their, you know not that I'm a technical investor, but if you look at their share price patterns, you see them basically straight line left to right up and you and not fast but straight line, nevertheless pretty stable growth.
Speaker 1:So we like Berkshire and Chubb.
Speaker 2:Yeah, I got Chubb, I have Berkshire, I have Hartford, I've got Allstate and a few more that I can't recall right now. No, I think that I mean we're not recommending these for individuals. And a few more that I can't recall right now?
Speaker 1:No, I think that I mean we're not recommending these for individuals.
Speaker 1:We're just saying that there are definitely places and times to be more interested in this space and in the financial service. I think insurance offers some pretty good value and I think, especially when you get a company like Berkshire where you've got holdings that are insurance holdings in different stocks that have done very well. I mean, the question I have about insurance and maybe you can help me with this, glenn is why does Berkshire keep selling Bank of America, keeps on Bank of America. If banking is going to benefit from lower rates, why is it so intent on getting its Bank of America share down? It sold again yesterday when it popped up above 10%. So I think that these questions, like most of our questions, are really to help people color their views in ways that we think are going to benefit them. Overall, I think China has some tremendous companies, but I do feel that the government intervention in the past few years has sent a signal to us that it's not all it's chalked up to be and you should proceed with caution.
Speaker 2:Is that safe to say?
Speaker 1:Tom.
Speaker 2:I would say, basically, don't proceed. Okay, but yeah, if you're going to have a China position, if you feel you must, right then.
Speaker 1:Yeah, there's a lot of institutional investors who say I can't know everything. Therefore, I've got to take a broad brush and have an index exposure to things that I don't want to actively own Right.
Speaker 2:Right, well, that's like saying, well, I don't really understand it, but I'll invest in it in an ETF. And that's dangerous, that's really really dangerous, right, well, that's like saying well. I don't really understand it, but I'll invest in an ETF.
Speaker 1:And that's dangerous. That's really really dangerous. Right, I don't understand it. The AI algorithms are and how those AI algorithms are going to lead to more power usage and chip use. Let's be honest, the typical investor understands a bit about the story of these companies, but unfortunately, I think a lot of people are just waiting for that first line stimulus or waiting for that first line of AI investing, and then they just go on and buy.
Speaker 2:I think, unfortunately, we need to be a little more rigorous and a little more skeptical. I agree, I think you and I have been, even though we're both believers in AI. I think you know you and I have been, have been, you know, even though we're both believers in AI, I think we're, we're, skeptical about all the enthusiasm that has poured into AI, and you know, I think you know we. We approach things, you know everything from a skeptical standpoint.
Speaker 1:That's the idea. Skeptic's guide to investing. So how do we want to wrap up China? In a bow or in a I would just say Are we?
Speaker 2:hanging it out to dry. Yeah, I would just say that this is not.
Speaker 1:I thought about having today's this is not your mother's China.
Speaker 2:I thought about having today's discussion about China simply because I was seeing in the news, seeing more of the same. More of the same in terms of jawboning and promises of stimulus that really don't overcome the basic structural problems associated with interventionist policies.
Speaker 1:No, I'm with you, clint. I agree with you completely. I think that there is a time for investors to get enthusiastic, and while China got cheap, I don't think it truly was a value. It was more a representation of the changing characteristics of the market, and therefore I think people aren't willing to take the chance there until things get better in terms of how they treat companies and how they treat individuals. And so I would say that you know our inclination is to be skeptical of China, and I think it's still the right, the right call. So, people, we enjoy you listening, we appreciate you. Please like and share. Tell other people about Skeptic's Guide to Investing. We're Clem and I are very happy to be here trying to help you with your investing ideas and help you with concepts around understanding the complexity of markets and the complexity of companies in those markets. So thanks again for listening and we'll be back again soon.
