Invest Like the Best with Patrick O'Shaughnessy
· Dan Wang
Soon after, the Party started taking the scalps of companies beyond Alibaba, including online education and e-commerce firms, with antitrust actions across the entire sector. That part is real as well. Then there’s a third component of these risks that investors have a hard time putting to bed: the suite of geopolitical issues particular to China. American investors aren’t even buying Alibaba directly—they’re buying from a Cayman Islands entity that has contractual relationships with ByteDance. Are we really sure we’re getting something real here? It’s hard to lay that fear to rest. China has capital controls, and that has deterred a lot of investment, including portfolio flows from many investors. Probably the biggest geopolitical puzzle for most people is that Beijing is very clear it intends to seize the island nation of Taiwan one day. If it does so, it’s likely to face very hard sanctions from the U.S. government and probably all Western governments. We saw what happened in 2021 when Russia decided to move on Ukraine: a lot of central bank reserves in Russia were frozen, American portfolio managers could no longer invest in Russia, and even McDonald’s Corporation had to leave Russia because of sanctions. Can anyone really be sure that a few years from now—or even a few months from now—Beijing won’t initiate some sort of action against Taiwan? This is not really my expectation that they will do something. But none of us can be sure that they won't do something. And so long as that fear is present, I think that goes some length to explaining why it becomes pretty unappetizing.
· Patrick O'Shaughnessy, Dan Wang
[00:00:00] S0: ByteDance trades for 10 times. Recast. Three times— [00:00:00] S1: Yeah, whatever. A pension or you're a university endowment. Do you really want to hold this? No thanks. And then the U.S. government Treasury comes asking, “What are you doing?” [00:00:00] S0: Thinking about potential future equilibrium states between the two superpowers—let's just assume these are the two big important powers. One of the things that’s always caught my attention in the U.S., maybe the reason it’s become less interested in global affairs, is how self-sufficient it is. There’s actually not a huge percent of the economy that’s reliant on the outside. Pretty self-sufficient in lots of ways in terms of major goods. Understanding that, is one of the future scenarios that these two just sort of exist as separate universes from each other? Is that one? What are the other equilibrium states that you could imagine 20 or 30 years from now between the two countries?
· Dan Wang
[00:00:00] S1: Equilibrium is a really important concept here because it implies that no state really feels the need to shift in a big way. I think the scary thing might be that something upsets the equilibrium—where one country feels under threat in some way. First, I think I only partially agree with you that the U.S. feels very self-sufficient at the moment. You're right: by a lot of simple conventional measures, imports are something like 12% of U.S. GDP, and that's not a huge amount. But in a crisis, it turns out that the U.S. actually really needs that 12%. I think a lot about the early days of COVID, which speaks to another difference between China and America. In the early days of COVID, the U.S. struggled to produce anything as simple as masks and cotton swabs. I was living in China, and one of the most instructive little moments I remember was going up to a factory manager around Shanghai. This factory manager marveled to me that American manufacturers didn’t get their act together to produce really important goods. In this Chinese guy’s formulation, too many American companies asked themselves whether making masks and cotton swabs was part of their core competence. And for very few companies, that’s their core competence—so they didn’t make it. Chinese companies say that making money is their core competence; therefore, they go make what the market demands, which then was masks and cotton swabs. So I was grabbing masks made by Foxconn, which normally makes iPhones, and by JD.com, one of China’s biggest e-commerce retailers. They just decided to retool a lot of their factory lines to produce what the market needed. Then there was some complacency and lack of hustle among American manufacturers to actually produce these things. In the early days of the pandemic, a lot of consumer goods were in shortage. Furniture was in shortage. Random fruits ran out depending on which part of Mexico had a COVID outbreak at that time. And generally speaking, the American manufacturing base has not covered itself in glory over the last 20 years. It’s not just Boeing, Intel, Tesla, Detroit—broadly, there’s all sorts of rust and inability to move. If we take a look at China’s energy imports, they’re importing less and less, in part because they’ve scaled up so much solar capacity within China.
· Dan Wang, Patrick O'Shaughnessy
By the end of this year, China is expected to add 500 gigawatts of solar capacity. The U.S. is expected to add about 50 gigawatts—just one order of magnitude less. There are 33 nuclear plants under construction in China right now, and zero under construction in the U.S. The Chinese have been much more successful in shifting their consumers toward buying electric vehicles. By the end of this year, one out of every two cars sold in China will be electric. They’ve been able to blunt this dependence on foreign energy. It’s not growing so much, and perhaps it will decline soon enough. There are all sorts of ways in which they’re also very serious about food self-sufficiency. They’re also very serious about semiconductor self-sufficiency. And so this is again where I see, if the U.S. and China are in competition, China’s been much better at patching up its own problems than the U.S. has. [00:00:00] S0: The factory story—the retooling to make masks and cotton swabs—sounds like a very high-agency thing. Which society do you think is higher agency?
· Patrick O'Shaughnessy, Dan Wang
[00:00:00] S0: The factory story—the retooling to make masks and cotton swabs—sounds like a very high-agency thing. Which society do you think is higher agency? [00:00:00] S1: I think it’s China. I think China is a high-agency, high-T society. Once they decide to build infrastructure, it comes out and it gleams. Once California decides to build infrastructure, it’s 17 years—and it’s going to be 20 years—before anyone is able to get close to riding high-speed rail. There are various ways to measure something like social trust in China. By a lot of conventional measures—like, if you lose your wallet in the park nearby, will someone return it to you?—that share is rather low. But I was thinking of this definition of social trust from the scholar Francis Fukuyama, who said something like: social trust is the measure of spontaneous coordination—of people able to get together quickly, make decisions quickly, and act quickly. At least in the early days of COVID, that’s something China really had. Manufacturers were working well together; tech companies made it clear where fever clinics were on mapping services; and the government stepped up in a big way as well. The U.S., at least in 2020, really did not do any of these things. [00:00:00] S0: We haven’t touched at all on the lawyerly tendencies of U.S. society. You talk about engineering in China and the U.S. being run by lawyers. What are the pros and cons of that? Very different orientation.
· Dan Wang
[00:00:00] S1: The pros of the lawyerly society are a guarantee of my favorite value in America, which is pluralism—that there is some measure of robust debate that is guaranteed in the U.S. One of the things that really thrills me about having moved back to the U.S. over the last two and a half years is that there’s always energy among Americans to try to diagnose their problems and improve on them. Two weeks ago, I went from New York to Washington, D.C., to speak at the Abundance Conference in D.C., and that is just one strand of recognition that America has lost a lot of crucial abilities to build homes, transit, and all sorts of infrastructure—and that we need to get a lot better. I think that folks in New York—and you’re one of these rallying points—are helping people understand the world as it is a little bit better, to really try to improve a lot of different things. I’m plugged into several conversations at the Hoover Institution, and there’s a tremendous sense that a lot of things in the U.S. are not working and need to get better. The problem is that the U.S. is not very good at execution. Even though we’ve realized for a long while that the manufacturing base is deeply broken in this country, the U.S. has not really been able to fix it in any compelling way. There are complaints among the American left about what should be done. There are complaints among the American right about what should be done. It’s very strange to be in this political system where elections usually have razor-thin margins, and then one side takes over, seriously overreaches, and then the other side wins by thin margins and overreaches again. I think the fundamental problem among lawyers is that they are, for the most part, protectors of the rich. That is essential in some ways, because you can’t build companies worth $4 trillion—like Nvidia—without substantial legal protections. We need a lot of lawyers in place for Nvidia to feel comfortable about doing everything that it’s doing. But I think the society won't work well if it is mostly about serving the rich. So in New York City, where we're chatting now, the rich don't really have to worry too much about affordable housing. The rich have access to these skinny skyscrapers that you can see on the skyline. The rich don't really have to deal with the problems of the subways, which are just, again, screechingly loud.