Steve Hsu: My guest today is Louis Gave of the firm Gavekal. Did I pronounce everything correctly?

Louis-Vincent Gave: All good. Glad to be here. Thanks. Thanks a bunch for having me, Professor.

Steve Hsu: My pleasure, my pleasure. I was just telling Louis that I've been a consumer of the research that his firm produces, mainly about emerging markets and China for, I want to say almost 10 years. I've probably, probably been reading your stuff for about that long and have always admired the analytical clarity of you and your team.

And I, I really I had actually tried to get you on the podcast for some time and, but I didn't have good contact info from you. And I actually got it from someone else who had interviewed me about China from another firm. So an institutional investor. So anyway, that's how I finally got you on the show.

Louis-Vincent Gave: Sorry about that, but glad I'm here now.

Steve Hsu: Yeah. It's great to have you. Now you have, I've heard you talk a little bit about your background in the past, and I would kind of classify it as a colorful background. Let me just say a few things for the audience and then we can just digress a little bit into your recollections of your childhood and growing up.

You attended Duke University. You also learned Mandarin at Nanjing University. You served in the French military, in the infantry even, as a lieutenant.

Louis-Vincent Gave: I'm French.

Steve Hsu: And you're originally French. and you, you worked at Banque Paribas for some years before starting your own firm, which is based in Hong Kong.

Steve Hsu: Yeah, so let's fill in those gaps. So, so you were probably, I'm guessing you were raised in France, and how did you end up in college in the United States?

Louis-Vincent Gave: So yeah, no, I was born in France. Both my parents are French. when I was a junior in high school, they sent me To the U.S. For three months to sort of learn English. and so I went off and I came back and I was enthused with the U.S. And I told my parents. Look, I want to study in the U.S. And my dad said, Well, look I'll pay for it if, but on these conditions, it's got to be a top 10 school. it's got to be on the East Coast because the West Coast is too far from France. And it can't be in a, in a big city because, you know, back in the early nineties you know, well, if you were living in Europe, you had this vision of American cities as being quite dangerous.

I guess things go in cycles because then they become super safe. And now we're back to being dangerous again. So, so, and it can't be in a city. So that's sort of narrowed it down, right? There weren't a lot of them. Schools that ticked all those boxes. so I applied to the schools that dick did take these boxes and I got into Duke and I'm really grateful that I did because I had a wonderful four years there.

I've made some to this day. Some of my best friends. And yeah, it opened up my eyes to a whole other part of the world. And, you know, when I got to Duke, I had the opportunity to study Chinese, which I picked up and that opened up my eyes further to a whole other part of the world.

Steve Hsu: Now, when you were that age, what, what did you want to do in life? Did you have an idea of what your career trajectory was going to be?

Louis-Vincent Gave: Yeah, actually, I wanted to be an army officer. I come from a family where basically everybody's an army officer. My dad was the one exception. my grandpa, my grandparents, great grandparents, uncles, everybody being army officers. and Maybe not forever, but at least for a while. And I thought, okay, well, you know, this is a fun career.

so, that was always my sort of objective. And when I graduated from Duke, I went back to France. I went to officer school in France. and when I graduated, actually, um. So, you know, I went into my battalion and very quickly, I was sort of pushed to go into NATO. you know, because France was in the process of rejoining NATO.

So, I was told, Oh, look, you can, you can go live in Brussels and, you know, be part of this. And this is all very exciting. And I thought, well, hold on I want to be in the army to run around, run around the mountains with a rifle. I don't really want to be stuck in a desk job, or at least if I'm going to be stuck in a desk job.

I'd rather make some better money because there's a lot of great things in the army, but money is definitely not one of them. And so after a while I decided, okay, if I'm going to be shoved into a desk job because I speak English, because my Chinese, et cetera, then I'd rather do something else.

Steve Hsu: In the military? And how long did it take you to decide that the military was not going to be your full, lifetime career?

Louis-Vincent Gave: To be honest, I was there for, for two years. And I was planning to stay longer here. The thing was, I was playing to stay longer. But while I was there, I found that all the young officers, the lieutenants, the captains were full of life, full of beans, having a great time. And when I looked at the senior officers, you know, the colonels, the majors.

They all seem quite grumpy and quite resentful because I think that the job of a young officer is super fun. You're the leading man. You're, you know, again, you're running around the fields with a rifle. and the job of a senior officer all too often is both very political and very, um.

It's a lot of paperwork. and you get to move from, you know, crappy town to crappy town and get paid very little money and your wife's upset with you and all these things. So as I was in the army, I realized maybe this isn't a great long term career plan. and I was there at a time when the French army had started to professionalize, because we used to have a conscript army up until the early nineties.

And that, that was probably the one. Electoral promise that Chirac kept was to do away with the military service, which I think ended up being a disaster, but that's a whole other topic. so he got away with conscription. So basically the army was professionalizing.

And as a result, we were, the French army was a little bit like The Mexican army, we just had too many officers because we were, you know, we, we, like, we were meant to have all these soldiers and we didn't have them anymore. so the army was actually happy. If you, if you told them, look, I've got a job offer somewhere else.

They're like, go, you know, good luck to you. you know, even if they paid for your training, even if they were just happy to see you go, they had too many of us anyway.

Steve Hsu: It worked out, it worked out very well for you then, because it might have been the case that you were locked into a long commitment and wanted out, but they, they kind of let you out when you wanted out.

Louis-Vincent Gave: Exactly. No, no, it worked out great. And you know, part of you know, the head of HR at Paribas, where I got my first job, came from my battalion, which, you know, helped. and so, yeah, so it was all, it was, it was good.

Steve Hsu: Now, one last question

Louis-Vincent Gave: to this day, and I tell them, sorry, I want to add this. I, I, I tell this to my boys who have absolutely no interest in the army, but I tell them, look, I, I learned more.

In the army, in terms of relationship with people, in terms of relationship with staff and I, the army basically made me the man I am, I think much more so than college, actually. so when I think of the money spent for college and the money, you know, well, I guess the money I didn't make in the army, but it was, it's, it's a valuable experience that I would definitely recommend to any young men or women, not quite sure what they want to do.

Which is where I was at 21. I wasn't exactly sure what I wanted to be. What do I want to do? It gives you time to think, and it gives you time to mature into, I think, a better human being, actually.

Steve Hsu: Yeah, I'm not surprised by that. I mean, I think the leadership skills working with a team, working with a team that might be under life and death situations, you know, obviously that's got to be a very special experience that you're not going to find that in very many other places.

Louis-Vincent Gave: Yeah, no, no, it was, and you, you get to meet terrific people. you get, you get to meet also real dimwits, you know, you get to meet, you get to meet the gambit. My grandfather was also like, he did his whole life in the army. We would, we would always say, you know, look, not everybody in. It's stupid in the army, but that's definitely where all the stupid people go.

And, you know, when I was, when I was a cap, when I was in, sorry, when I was in at officer school, our training captain would always tell us and he was right. And it served me very well in my whole life. He would always tell me, look, what is self-evident to you? There's a 95 percent chance that it's not self evident to anybody too, to most of the people that are going to serve under you.

so your instructions have to be super clear. you can repeat them three times because, you know, the reality. If you're a smart kid and you go to a good high school and then, which it was my, you know, I'd like to think I was a smart kid and I went to a very good high school. And from there I went to Duke.

Like, I haven't always been around smart people my whole life. I'd always been around, you know, people who were ambitious, driven and obviously high IQs, high EQs, all these things. but that's not how life is in the rest of the world. That's not, you know, and you know, if you live in a fairly sheltered environment, you don't, perhaps you don't get confronted to the fact that actually there's a much broader gambit of experiences and of skills and that it takes all this gambit to get things done.

and the army really teaches you that because in the army, I met some of the smartest people I've ever met, but also some of the dumbest. And then you got to get all these people to work together.

Steve Hsu: Yeah, you know, the slightly weaker version of that experience is, is playing on sports teams because you meet a somewhat wider intellectual spectrum of Kids and, you know, you, you do things under stress, like compete against other teams. So, you know, for those of you who can't find the military as part of your career path to join a sports team and compete.

Louis-Vincent Gave: That's true. That's a very fair point. That's a very fair point. And I'm a big believer in team sports for kids as well. Actually, I've pushed, I have four kids and I've pushed all four of them to pick a team sport. Now there's one I like more. So I try to push them into that one. But if they want to pick another one, I don't really care as long as they play a team sport.

Steve Hsu: Yeah, maybe at the end, if we have a little free time, we'll talk about rugby. I know you're a rugby guy. I'm an American football guy. So, yeah, well, we can talk about that at the

Louis-Vincent Gave: There we go. Oh, there's this, there's similarities. Um,

Steve Hsu: we get off the topic. How do you feel about the bullpup design for an assault rifle?

Better or worse than the traditional? You used a bullpup in France.

Louis-Vincent Gave: we use the FAMAS, the Fusil Automatique de la Manufacture d'Armes de Saint Étienne, which is a great rifle because you can shoot one bullet at a time, three bullets at a time or unlimited. so, you know, you can go full automatic. And to this day, I still think it's one of the best rifles out there.

You know, if you're a halfway decent shot, you can, you can hit a plate 250 yards away. so I don't know what's what's your take, what's

Steve Hsu: Well, you know,

Louis-Vincent Gave: rifle out there? And by the way, and, and if I'm us. It works in different conditions. It works in the desert. It works in the jungles. You know, with the French army, we have a history of being, you know, all up and down, up and down in Africa, different environments, et cetera.

So we need a rifle. That's, that's that's resilient and robust, you know,

Steve Hsu: Yeah, I don't know. I don't know nearly as much as you. I mean, I have an AR, but and that's the kind of rifle that I grew up shooting, you know, with the, with the, with the, the magazine in front, but as a kid, I'll tell you this funny story, which, you know, maybe isn't surprising for a physicist is that when I was a little kid and I was learning about muzzle velocity and, you know, because I was, I was into guns when I was growing up.

I grew up in Iowa. So I did a lot of hunting and stuff. And I learned that, like, you want to have this longer barrel so you can have a higher muzzle velocity, more power in the bullet. And I said, why don't we put the magazine as far back as we can? Because then you have a shorter overall length of the weapon, but you can still get the full muzzle velocity.

And that's, that's what a bullpup is. But I've never shot a bullpup. And I hear a lot of Americans are against bullpups. But, you know, Israelis use them, and French use them for a long time, British. Chinese even.

Louis-Vincent Gave: why, why are they, why are they, why are Americans against them?

Steve Hsu: You know, if you watch, it's so funny on YouTube. There's so much content now on YouTube. You can watch guys trying out all kinds of guns and stuff like Tavor's. And, and usually they're complaining, well, number one, like the active mechanism is a little too close to your head. Like they're a little worried about that.

And also I think they, I don't know. I feel like having the weight back makes the gun easier to reposition. So it seems ergonomically better. I feel like an A. R. The top is a little front heavy. Actually, when I carry, you know, when you carry it, you're kind of supporting the weight up front.

So I like bull pups, but a lot of Americans don't. It's strange.

Louis-Vincent Gave: I, so, I've actually never shot an AR. so, I don't know. I'm actually not a huge weapons guy. I love being in the army. but I don't even own guns today, to be honest. Um,

Steve Hsu: It's probably not easy in Hong Kong

Louis-Vincent Gave: Yeah, you can't. you, you, you can't. Well, yeah, I mean, you can. You can join a gun club, but they keep the gun club.

You know, it's, it's, it's really, really tightly controlled,

Steve Hsu: In Michigan. If you're in Michigan, if you're 18, you can walk into a store and walk out with an AR. So, that's America for you.

Louis-Vincent Gave: different, different, different cultures. but yeah, so, you know, in the past 25 years I've lived in Hong Kong. So the whole gun culture has sort of passed me by a little bit.

Steve Hsu: Right. So, let's jump ahead and talk about your founding Gavekal. And the opportunity maybe was, you thought there was a lot of opportunity in emerging markets. It wasn't covered sufficiently. Maybe tell that story a little bit.

Louis-Vincent Gave: Yeah, for sure. so I was working at Paribas. and so I started at Paribas in Paris, and I was very lucky because they, sort of typical French bank fashion, bought a Pan Asian broker. It took them 18 months to Close the deal and the deal closed on June 1st, 1997. So I was sent over with my boss to do the integration.

My boss was the head of research for France and he became head of research for Asia and he was sent over to do the integration. So I go with him, you know, because he's like, Oh, you speak English, you speak Chinese, come over with me. And I, you know, I was gagging to go, of course. then. I saw you laugh, but maybe some of your auditors won't know that July 1st, so a month after the transaction closed July 1st, 1997 is when the Thai bought devalues, which kicks off the Asian crisis and the Asian crisis if you didn't live through it, was, was really quite something. I remember calling my dad as, as it was unfolding, they were, we had like six weeks where the Indonesian Rupiah was falling 10 to 15 percent every day. Now this is a currency, not a stock. You know, the stock market was also falling 15 percent a day. A lot of the stocks were falling.

We're opening the limit down. Close and then start again the next day. Limit downs close. cause there were sort of limits you could hit 10 or 15 percent typically. And if you felt that much, the stock was close for the day and then you'd start again the next day. and anyway, so the currency itself was down 10 to 15 percent a day.

I think I'm quoting from memory. I think the Indonesian Rupiah ended up going down 92%. over the period while it was from 2, 300. To 19, 000, whatever that makes you're the physicist, you can probably calculate it in your head. but you know, the Thai bot is going down to two thirds, the Malaysian ring it, and the Korean one.

It was an absolute, absolute bloodbath. And, the equity in a lot of these companies were completely wiped out because most people had debt in US dollars. So anyway, Asia's this bloodbath which, you know, when you're starting off your career is actually a blessing. Because first, you don't have too many responsibilities.

So, you know, as your business is bleeding everywhere, that's not your fault. And you didn't make any bad decisions. You just got here. and so that was number one. Number two, it's a blessing because you realize how quickly things can unravel. And so for me, it was a great formative experience. But long story short, as Asia imploded, most investment banks shut down, you know, like decided, all right, this place is a disaster zone.

Let's cut our costs. Back out and leave. And so the research budgets of every major firm by 2000, 2001. We're basically down to nothing. and this is just when China entered the WTO. Now, remember, at that point, China is a nobody like nobody really cares. but if you're living there. You know, and you're seeing what's happening.

It's pretty obvious. This is gonna be a really big deal. You know, they're making the right investments. They're investing in their infrastructure. you can see all the foreign companies are opening plants there. Then, then you see, you know that with the WTO, it's going to go into hyperdrive.

So the road seemed well traced and yet nobody was there. Really talking about it. So, you know, my father, Anatole, my business partner, Anatole Koleski, myself thought, okay, this is, you know, there's, there's a niche here in the market, in essence. China's going to be really important. Nobody's looking at it.

We can be the, we can be the guys who explain China to Westerners in essence since the investment banks don't even seem interested in doing it anymore. And we got lucky because yeah, it was the right wave to serve, you know, for roughly 10, 12 years, China did become a really, really big thing in the global economy.

now it isn't the case anymore for a number of reasons. and there's other exciting stories out there. but yeah, it was a case of, you know, right place, right time. And so, yeah, we set up in Hong Kong and, you know, back in 2001 to the post Asian crisis, Hong Kong was a super cheap place to operate from.

very light regulatory touch. Very easy to start a business. Very easy to run a business. and yeah, I just, just worked out.

Steve Hsu: Would you still say that now? So, even after the handover, is it still an easy place to run a business?

Louis-Vincent Gave: Well, I would say that everywhere in the world today it is harder to run a business than 20 years ago. Almost, almost. you know, in terms of regulations, you know, if you compare, if you're in London, if you're in New York, if you're in Paris, everybody complains that today is harder than 20 years ago. And in that respect, the same is true of Hong Kong, but Hong Kong is still easier than New York, London, Paris, et cetera.

And it's easier on many fronts. First, it's easier on taxation. Hong Kong still has, you know, for me, the, the, the, the best system where you, you, fill out your taxes on a postcard. It's, you know, how much, how much did you earn? you know, a couple deductions for charity, et cetera, and medical expenses and yeah.

education expenses. taxable income, send us 16%. Boom. I mean, it literally fits, fits on, fits on a postcard and, you know, same, same income tax rate for corporations as for individuals. So there's no reason to try to, you know, do things here or do things there. It is very simple. So that part has not changed.

Hong Kong is still, you know, not a tax haven, but it's literally a tax paradise because it makes things easy to run. when, when you compare it to the U.S. where there's deductions for this, deductions for that, and it's it's, it's so complicated in the U.S. that you need, like, a P. H., a guy who's taken a P.

H. D. to do your taxes it's,

Steve Hsu: funny, funny story. Bill Gates went to Harvard originally to study math and one of his roommates, he had actually been really good at math in high school, and one of his roommates turned out to be better at Harvard, a guy called Andy Brederman. And that guy scared Gates out of the math major and into the CS major.

And people ask, what happened to Andy Brederman? Tax attorney.

Louis-Vincent Gave: And he's an attorney. I, I, you know what? I, I, I believe it. I think if you take all the, all the tax, the people who, who prepare taxes in, in the U.S. I think it's the sixth law. It'd be the sixth largest employer in the U.S.

Steve Hsu: Yeah, it's insane.

Louis-Vincent Gave: And, and, you know, and most of these people, here's, you know, when you think of it, it's such a poor misallocation of resources, right?

Most of these people, like you just said, like super smart guys at Harvard. like I'm sure, I'm sure he's paid very well and he does very well, but what a poor use of resources as a society, right? That we got a guy who's a genius. Who's doing people's taxes? I mean, that's just stupid.

Steve Hsu: I kind of knew, I kind of knew one of the bubbles had been reached around 2006-2007 because I was having sushi with a former physics guy who was in finance, a derivatives guy. We're sitting there eating this whatever 200 sushi dinner thing and two little dudes are sitting next to us talking about some derivatives contract which was being executed purely for tax purposes.

And it's just like, well, this is, this is too much, like too much brain power is going into this right now. So,

Louis-Vincent Gave: absolutely. Absolutely. So, on that front, Hong Kong is still great. Like nobody bothers with these schemes of like, Oh, maybe if I finance a movie, I can write this off, et cetera. And then you end up producing a terrible movie. There's none of that. So that's good. there's on, um. On the labor laws. I still think Hong Kong is terrific.

You can hire people easily. You can, you know, fire people which is if the tax code is America's comparative disadvantage, the labor laws are France's comparative disadvantage.

Steve Hsu: because you can't fire anybody,

Louis-Vincent Gave: know, you can't, you can't fire anybody. Like, I think the tax code in the US is like 17, 000 pages or something. The labor code is 30, 000 pages.

you can't, you can't do anything. Um. So, that in Hong Kong, that's still a paradise for that, no doubt. and then you get into the financial regulation where Hong Kong, like everybody else, has had to tighten meaningfully and, but I think that's everywhere around the world. So it's still a good place.

It's still a good place overall.

Steve Hsu: So, so you've been a keen observer of China and other emerging markets from your perch in Hong Kong. and let's just get into it.

So if I follow the Western media today, they tell me China is collapsing. If I turn on Gavekal, I learned, wait a minute, their monthly trade surplus is 80 billion. It's, it's, on an annualized run rate, it's a trillion dollar trade surplus. If I turn into Steve Hsu, tune into Steve Hsu's podcast, who's interviewing technologists and scientists. I learned that in space, semiconductors, jet engines, electric vehicles, solar panels, they're at parity or beyond parity with the West now in all those areas. So who has the story right?

Louis-Vincent Gave: Well, Steve Hsu definitely has the story, right? But let me, let me just say so, one of my favorite philosophers, a Christian philosopher of the 16th century, a guy called Jean Boudin, who would say the only wealth is man. The only wealth is people. Now when I studied in China in the early nineties, China was graduating 300, 000 university students a year.

Today, China graduates this year. Sorry. Last year, I graduated 11. 5 million, and this year is going to graduate about 12. 3 million people. That's a 30 X in one generation in terms of going, going to your point about, you know, the progress made on seeing my conductors, the progress made on space on computers, et cetera.

China now graduates more engineers every year. Then there are in the United States. Then there are engineers in the United States. Now we could debate all day. Yes, but the Chinese universities don't have the same levels as the U.S. universities. And we're comparing apples and oranges, et cetera.

But the point I'd make is that 30 years ago, you were graduating 300, 000 guys. And even if there are 12 million guys, you're not graduating. I'm not at the same level. As your 12, 000, 000 guys from the University of Michigan or the, you know, Harvard that you mentioned or Duke or et cetera that's still a whole lot better than plowing fields with behind a horse.

Right? So, so sorry.

Steve Hsu: sorry. I was gonna say I've been a professor for 30 years. And so I've seen the whole arc of what you describe where at the beginning, if you wanted to get a world class science education at least at the graduate level, you had to leave China and come out here. There was no world class.

research labs in China. Fast forward to today, there are many Chinese universities with top flight departments across the board in STEM subjects and about twice the fraction of kids of that 11 million that you described, the percentage of their doing STEM is twice as high as in the United States. So overall, you just get this enormous tidal wave of human capital that's feeding into their system and their K through 12 grads are pretty good.

So basically now they can get all the way up to world class frontier, you know, research level training at their domestic universities, which even 10 years ago, they couldn't do that. But now they can't so that all the stuff is compounding. You can just see it in how young the teams are over there that are doing this world class work, whether it's in jet engines or satellites or computers.

So that that human capital thing is for real. It's not going to go away for decades.

Louis-Vincent Gave: So on this, sorry, I completely agree with you, but if, if I was the US or perhaps one worrying statistic is if you take the, the, the very best Chinese universities, your beta, your ing hu, your Udan Yonan das they used to send. A lot of university graduates go to the U S. So you do the undergrads there and then to your point, you'd come to Michigan to do a master's or a PhD in, you know, physics or chemistry or whatever.

Those numbers have been in free fall. Now, initially, you thought, okay, it's COVID, you know, like nobody's moving. It's hard to, to, to get out of the country, et cetera. But even post COVID, there's been no rebound. Now you could say, well, it's the economic difficulties in China, or, or it's actually, I can now do a very good PhD in chemistry at Tsinghua.

Which I think is actually what it is. I don't need to spend all this money to go to, to, to go. If I'm a top top guy, I don't need to spend all this money to go to Michigan. I can go to Chihuahua. Um,

Steve Hsu: You know, Louis, you, you went through the pain of having to learn Mandarin, right? So imagine how painful it would have been for you at 22 to say, Oh, my God, the only place I can do my PhD in material science is at Tsinghua, and now I have to be fully fluent. I got to read all my textbooks in Mandarin.

I got to talk. I got to network with my job recruiter in Mandarin. I got to do everything in Mandarin. There are plenty of people in China that are great scientists, but their English isn't that great. So why would they come here, right? It's such a burden for them to come here that they can, if there is an ecosystem for them to develop their skills and to practice what they learned in school, in China, they're obviously going to favor that once, once the system is mature.

Louis-Vincent Gave: So, and, and so I think to your point, I think we've reached that point in China now. And I think that that's a change that we. Perhaps underestimate it. We in the Western world underestimate because we just take it for granted that we have the best universities in the world. Of course, if you're smart, you want to go to Harvard.

And of course, once you're in Harvard, you're never going to move back to China because why would you? And that would because in fairness, that was 100 years for Harvard. First, at least the post World War two environment that was the case and I don't know if it still is. I don't know if it's still the case in the past 5, 6

Steve Hsu: I think it's, it's just tipping down. So, and, and, and obviously for the bulk of students who aren't necessarily, they don't necessarily have the choice of going to Stanford or Tsinghua, but it's some other good Chinese university and then some other, you know, reasonably good U.S. university. I think more, they're much more likely to stay in China now than they were, certainly, than they were even a few years ago.

Louis-Vincent Gave: So, I think that's to answer your question that that's, you know, the 1st point I wanted to highlight because again, I think it's, um. You know, perhaps people aren't aware of it in the Western world. Now, the second point I'd make, you know, on the whole old China's imploding and is, you know, what I find, what I find fascinating is in my career.

So I'm 50 years old, but in my career, basically. Every time you've had a real estate bust, you had a big economic implosion. Banks, you know, went belly up and you had big rises in unemployment and big deflationary bust in your economy. And that was the case for Japan in the early nineties. And that was a case we mentioned it in well, that was a case in Sweden in 92 in Canada in 94.

It was a case all across Southeast Asia in 97. Obviously the U S in 2008 is still fresh in a lot of people's minds. Well, frankly, Southern Europe in 2011, 2012 real estate has now been consolidating in China for five years before five years. For a number of reasons, you know, obviously trees don't grow in the sky, but also the government actively wanted to take down real estate.

They took down real estate. affordability has gone from, you know, being. The most expensive in 20 years to the cheapest in 20 years over the past five years partly because mortgage rates have halved partly because real estate prices have gone down about 20-30 percent and at the same time over that same five year period, incomes have come up 20-30%.

So, you know, you do your affordability ratio all of a sudden it looks much better. and so China has managed to do a real estate consolidation, which has, you know, hurt growth, which has, you know, killed the sort of raw, raw feeling the Chinese economy had, but the Chinese economy has not imploded.

You know, the show's kept on the road. You haven't had armies of unemployed showing up in cities looking for work. Nobody's gone hungry. you haven't had a fentanyl crisis. You know, it's like the economy has been adjusting for the past four or five years to a different economy in fairness, but I think we have the knee jerk reaction in the Western world. Oh, there's been a real estate bubble.

The real estate bubble is imploding. Therefore, it's all gonna go to pot. Therefore, everything's gonna explode because that's what happened to us. How could it not happen to them? right. I mean, we were just projecting our own experiences onto China.

Steve Hsu: Could we, could we talk a little bit about the structural differences here? So I think I've heard you mention that, roughly speaking, the kind of bad debt overhang is on the order of $2 trillion. Is that fair? And they're working that through the system. Would love to hear your opinion about, you know, whether they, whether they still have a lot to work through or they're kind of getting near the end of it.

But because for various reasons, like people tend to have a huge amount of equity in the property that they own in China. the banks are basically under state control, right? So the, the, the, the, the regulators can let them work their way through the debt problem over a number of years, they spread it out over five or six years.

I think those are the main reasons why the way it worked itself out in China are different from the United States.

Louis-Vincent Gave: Yeah. So, you know, on the one hand, you think 2 trillion, that sounds like a lot of money, which it is. On the other hand, it's 6 percent of outstanding bank loans. So to your point then it becomes, how do the regulators want to treat these bad loans? you know, can we sweep them under the rug, work them out over the next five, six years, 10 years, which is by the way, what China's done cycle after cycle.

They did this with the SOE consolidation of, of, of the nineties. They did this with a lot of the manufacturing debt of 2007-2008. Now the numbers keep getting bigger, so they can't do this forever. But at 6 percent of bank loans, they can still sort of extend and pretend for all intents and purposes.

Now, this doesn't mean that you should run out and buy. Chinese real estate you know, the sector is consolidating. and the whole business model of the property developers has been torn to pieces because the, the whole business model of property developers was always, you know, get money up front.

You know, you, you buy a plot of land, you, you get a nice office in town. You, you put up some nice you know, plans, people, then people put a deposit. Um. And with that deposit, you leverage the deposit and you borrow to build the building. Today, because so many property developers have gone bust, nobody wants to put the deposit down.

And because nobody puts the deposit down, you know, the model doesn't work. And so it's funny because In 2008, in the U.S. in essence, you had a run on the banks. You know, a lot of people didn't feel comfortable lending to banks anymore, especially if banks didn't feel comfortable lending to each other.

In China, it's a run on the property developers. Nobody wants to keep their money at a property developer. And I think that, you know, the government could come in any time and stop this by creating a sort of FDIC of property developers saying, you know, once you put your money at a with the developer, there's a government guarantee and the developer has to pay an insurance company just like in the 1930s in the U.S. You created the FDIC to deal with all the bank runs. The government could do that, but doesn't because I think deep down it wants the consolidation in real estate. Deep down the government, you know, they wanted this outcome. You know, they, they wanted, they never liked the property developers. they always thought they were sort of pariahs and, you know, Donald Trump like characters.

Steve Hsu: Well, I would say that, you know, a lot of the property development activity, although it made certain people rich, it wasn't necessarily developing the technological or industrial capability of the country very much. And secondly, it led to all kinds of problems with local governments raising money by just selling off property.

And that sort of caused all kinds of, you know, local problems, less control from the center. And I guess now that some of those local governments are in financial trouble right now. So,

Louis-Vincent Gave: well, it's and I think that's really to your point. That's really why the government ended up cracking down on real estate. If you go back a few years, there were just too many local governments saying, Oh, you know, the Chinese saying is the. The mountain is tall and the emperor's far away. and there were too many local guys ruling their fiefdom with massive local corruption, of course, because, you know, the, the, the easiest way to get rich in China for the longest time was to convince a mayor to repurpose some agricultural land or common land into private property developer land.

And sell that to your private property developer buddy who, you know, would then give you a fat envelope. so it was really at the source of much corruption and, and the corruption in China did end up being a real, real problem. You know, post the big stimulus of 2008, there was simply, you know, too many mayor's son wrapping their Ferraris around trees,

Steve Hsu: yes,

Louis-Vincent Gave: 2 a.

m. But, but, you know, there were, there were literally a number of these events and it does look really bad for the party. And, you know, the anti corruption. I think a lot of people in the Western world envisage China, you know, as this dictator where you have this sort of remote ruling class follows policies that are sometimes hard to explain.

and that ends up being very self-serving, etcetera. In a sense sometimes almost an image that makes it look like North Korea. Now, China is not a democracy. No doubt about it. But it's also not North Korea. and the Chinese leadership actually spends a lot of time doing surveys of what people think and what people and more importantly, what people complain about.

And so if people complain about high property prices, they actually tackle that issue. If people complain about corruption, then they will tackle that issue. And so it's not an unresponsive dictatorship where it's like, Oh, I made it to the top. Now I'm just gonna get fed. I'm gonna get fed grapes and, you know, go hang out on a yacht in central pay.

it's it's, it's, it's, it's not exactly like that. And so anyway, they did tackle the real estate developers. They're still tackling them. Frankly, they're not helping them out. so this has had an impact on growth. No doubt about it. Thanks. but again, the Chinese economy is not imploded.

Steve Hsu: Yeah. So, would you say they're toward the end of this real estate, solving this real estate problem? Or are they still right at the beginning? What, how many more years of this do you think we're going to have?

Louis-Vincent Gave: I think that China's one in a transition phase and looks, you know, Xi Jinping's been very vocal about, you know, wanting to obviously push technology really hard. We talked about all this, the kids moving into the stem, et cetera about how. Wealth creation has to come from, you know, beefing up tech, beefing up industry, beefing up manufacturing, beefing up China's exports.

and in the past five years, China's done remarkably well in that space. Actually when you think of it, China's had to endure a couple things. Well, it's hard to endure a real estate bust. It's hard to endure. A yen at 1: 50. You know, Japan. Japan is one of the biggest industrial powerhouses in the world, and it's got a currency that is just stupidly stupidly undervalued.

You know, I was in Japan a few months ago. you go. It used to be that if you wanted to go out for dinner in Tokyo, you had to get a second mortgage on your house. It was so expensive. now Tokyo is the most the cheapest

Steve Hsu: It's like a developing country. I

Louis-Vincent Gave: I mean, you go for lunch in Tokyo, like a really nice lunch, it's going to cost you 15 bucks.

Um,

Steve Hsu: think quality adjusted, the, the, you know, eating out, dining out in say Tokyo or anywhere in Japan is like gotta be the best deal in the world right now because you have the highest quality levels and the prices are way down because of the yen. And if you're an American, it's,

Louis-Vincent Gave: no doubt about it. No doubt about it. No doubt about it. Look in New York today for 20 bucks. You don't get, you don't get a sandwich. I mean, you don't. And you get a really good meal in, in, in Tokyo, which is sort of for anybody who spent time in Asia is mind blowing because it always used to be like Tokyo.

Oh, shoot. I'm going to go there and everything's going to be so expensive. so it's such a,

Steve Hsu: I think you wanted to say that the, the manufacturers and high tech companies in China are competing against a very weak yen, yet they're taking market share have huge trade surpluses, and so it's obviously For anybody else to try to compete with a Japan is, is extremely hard, and the fact that they can do it tells you something, right?

Louis-Vincent Gave: Exactly. So when you think of it, they've had to deal with a super cheap yen, the real estate bust we mentioned. And on top of that, the American restrictions on, yeah, war, but you know, semiconductor restrictions and whatever else. And with that, from nowhere five years ago, China became The biggest car exporter in the world.

Like if you had told me the yen would be at one 50, I would say every car in the world is going to be produced in Japan. We're moving into a world where every car in the world is going to be produced in China. Because not only are they good at producing cheap internal combustion engine cars, they've basically, at this point, cornered the electric car market.

and, and Europe is waking up to this because Europe was saying, Oh, you know, by 2030, we want every new car sold to be electric and they're realizing. Hold on. If we do that, that means that we want every new car sold to be Chinese. and, you know, which, you know, creates issues. so, but beyond electric cars, you got railways, you got power plants, turbines.

I mean, you name it, you know, five years ago. You mentioned that China's trade surplus has gone from 25 billion a month to 75 or 80 billion a month. and again, that's not because you and I decided to buy three times as many pairs of socks or three times as many, you know, plastic toys. you know, in the past five years, China started exporting a bunch of stuff.

They never exported before. You know, right now China's in negotiations with Saudi Arabia to sell Saudi Arabia nuclear power plants.

Now, as a Frenchman, I look at this and I wonder what the hell just happened here. Like selling nuclear power plants is our business. You know, that's what, that's what we do in France.

That's like one of our key comparative advantages. And China comes in and undercuts us by two thirds. sorry, they come in at two thirds of our price. So undercut by one third. it's, it's mind blowing. and, you know, building cars, building nuclear power plants, building railroads.

That's complicated stuff, right? I mean, it's again, it's not plastic toys anymore.

Steve Hsu: You know, when I, when I, when I talk to Americans a lot of the most anti China people, they want to say, okay, this is all stolen, you guys stole all this IP and technology, and I'm sure some of that happened, but even if you stole stuff without a very powerful human capital, And tech infrastructure basis.

You're not going to be able to compete across all these different industries going forward. If, if all they did was steal and you stop them from stealing, you're going to get back ahead of them, but it looks the other way. It looks like they're getting ahead of us now. So very different from how it's perceived here.

Louis-Vincent Gave: All right, so I hate the stealing of IP argument, to be honest I it's sort of one of my bugbears. I always say, okay, look, China has become the biggest EV producer in the world. Like, what did they steal from whom?

Steve Hsu: Yeah,

Louis-Vincent Gave: Like, you know,

Steve Hsu: Yeah, Tesla buys their batteries from them, right? So,

Louis-Vincent Gave: yeah, Tesla buys it, but it's like, who do they steal and from whom to do this?

Now you could say they stole it from Tesla, but actually Tesla early on in its life said, I'm putting everything up there on the web, everything we've done. And anybody can look at it because we want the world to move to an electric car format. like, you know, who did, who did they steal to do this?

You know, nuclear power plants, they build their own nuclear program from scratch. Like this is, you know, everybody, it's really hard to steal nuclear stuff because of all the national security around it, et cetera. So like, if, if we want to say China stole. The nuclear secrets. then that means that we've got some serious espionage, like espionage leaks going on in our own countries.

Uh,

Steve Hsu: To be honest, when I talk to people like that, I don't want to fight that battle. I'll just say, look, let's suppose they stole everything, but they have very competent people making use of what they stole and going forward, just crying about it is not going to solve your problem because they're innovating new stuff as with EVs, as you pointed out, right?

So, or, or LIDAR or something.

Louis-Vincent Gave: and it goes back to what we were saying a little while ago. It's like, look, if China produces more engineers every year than there are engineers in the U.S. how can we not expect To eventually be bypassed. I mean, it's to say, oh, they're just stealing stuff. It's like, so what are all these people doing?

Like, you know, these literally millions of engineers that are getting churned out every year.

Steve Hsu: If you're, if you're a technologist like a Silicon Valley guy or an academic scientist and you've just been over there and you've interacted with people, you realize that they're sharp, you realize they're comparable. The graduates from their schools are comparable to the grad or better than the graduates from Western schools.

So you pretty quickly realize it's real.

Louis-Vincent Gave: the graduates, so my younger, my my, I've got a young niece who's currently doing a PhD in biomedical engineering at Imperial College in London. She's really bright. She's the hope of our family, et cetera. You know, we all believe she's, we all believe she's going to cure cancer.

she's, she's terrific. but half of the people doing Imperial are Chinese, like half of the people at Imperial College, which is like a STEM based school in the U.S. , are Chinese. And the half that's not Chinese is Indian. By the way, when we count, oh, you know, all the STEM people, like China, produce more than there are in the U.S. , etc. We also have to count the ones being produced in the U.S. , a lot of them are going to go back to China anyway.

We have undervalued STEM in our schooling system, not at the university level, but from a much earlier age so that when kids come in at university, most don't even look at STEM.

They're just like blow right past the only thing that kids still look at is computer sciences.

Steve Hsu: exactly.

Louis-Vincent Gave: How many, how many of our kids still do chemistry or physics or, you know, you mentioned material sciences or all these things like nobody does.

Steve Hsu: Don't, don't get me started on this because you know, most U.S. universities actually, they used to have an Algebra II requirement, so this is like high school level Algebra that you had to have mastery of that to get your bachelor's degree, and they dropped that because so few students, or so many students on campus were having trouble passing that kind of remedial math class, they just waived the requirement now, so, so it is really a problem here in the United States.

you know, this would not be the case at Duke, but at many public universities, it really is an issue. It's an impediment to graduation to require them to have some basic knowledge of math and science. So,

Louis-Vincent Gave: remember, remember, they steal our

Steve Hsu: Yeah, exactly. Um,

Louis-Vincent Gave: We can't, we can't pass math, but they come and steal our secrets.

Steve Hsu: So let me ask you something that's been puzzling me for a long time.

So when you compare the size of the PRC economy and the U.S. economy, there are two commonly used ways of doing it. One is PPP adjusted. The other one is nominal based on exchange rates. But I've always thought that even the nominal num So the PPP thing, let's not get into that right now, but the nominal thing, I've always understood that the way the Chinese government reports what it categorizes toward the nominal GDP number is qualitatively different from the way the U.S. does it. So in other words, services provided by the state, which people don't pay for, are not included in that number, even though it is a form of economic activity for the country. Maybe you could just comment on how you think about the relative sizes of the two economies.

Louis-Vincent Gave: So we could go down this well, this rabbit hole, and that'd be a three hour conversation. There's, there's, there's so many branches we can go down to try to narrow it down. Let's stick to nominal GDP. Forget the purchasing parity adjustment, because that opens up different cans of worms as well.

Stick to nominal GDP. If we stick to nominal GDP, the U. The S. economy is still about a third bigger than the Chinese economy. Now here's where it gets interesting. If you think of the GDP as having, you know primaries or agriculture and mining manufacturing industry et cetera.

So, the secondary sector and then your tertiary sector being your services industry. So if you break it down this way, even though the Chinese economy is a third smaller than the U.S. industry, your secondary sector is 60 percent bigger than your than the U.S. So today's Chinese manufacturing and industry in China is 60 percent bigger than the U.S. already. And that gap is growing for all the reasons we highlighted the stem kids. The fact that industry is an ecosystem. I mean, you're, you're from Michigan. I don't need to tell you this, right? You're like, you, you've got one factory and it's here because it's next to the other factory that does this, which is next to the other factory that does that.

And they'll feed into each other. And and like, once you've managed to get that ecosystem going, it can grow quite fast and it grows on itself. And, if you don't have that ecosystem now, the other thing about manufacturing, of course, is you need the engineers, you need the STEM kids, and you need the workers who are trained to be workers in an industry that trains the next set of workers right? Like the 40 year old trains the 20 year old who comes in and who passes on skill. And to some extent, this is what the U.S. has lost. Right? and the industrialization, which is so that's not that easy to replicate.

You've seen this with T. S. M. C. You know, the U.S. is giving huge subsidies. To TSMC, to move their, their, their fabs to the U S and TSMC keep saying, we can't find the workers. We, we literally can't find the, the, the guys who, you know,

Steve Hsu: My wife's family

Louis-Vincent Gave: in Taiwan, they've been,

Steve Hsu: my wife's family is from Taiwan. So I hear all the inside stuff about how frustrated these Taiwanese companies are trying to get American workers to perform the way that people are used to performing, you know, in Taiwan, in the same jobs.

Louis-Vincent Gave: Foxconn, Foxconn's another example. I remember when Trump got elected, Foxconn said, Oh, we're going to open a big plant in Wisconsin. We're going to open one in Indiana. Five years later, there's not a,

Steve Hsu: Right? So, so I think, I think.

Louis-Vincent Gave: the workers.

Steve Hsu: I think you're emphasizing that as far as manufacturing and doing physical things, the Chinese economy is really qualitatively like almost 2x in some sense, larger than the U.S. But what I'm,

Louis-Vincent Gave: so then it's, I was going to come to that point. So now you come to the, to the services, you come to, to the services industry. And the Chinese economy is like 20 percent of the U.S. Economy. So the service industry in China is when you look through the GDP numbers now, you could say the service industry in the U.S. Is disproportionately big because you know, it's as a European coming to the U.S. You're always it's always dumb founding how great the U.S. Is it commercializing things? You know, you go to, I'm always, you know, you go to an American football game where you're mentioning sports, you know, you, you can't turn around without being offered something to buy without being made to spend money.

in a way that doesn't happen in the European stadium. So the service industry in the U.S. Is so great at, you know, pushing things on the consumer, et cetera. The financial industry is obviously a really big part of GDP. The healthcare industry is a really big part of GDP. All of which we don't really have in China.

so the service industry in China, so on the one hand, you could say, oh, the U S service industry is too big but it seems to work for the U S. So who's to say that it's too big,

Steve Hsu: I ask you about that though? Because it seems like in terms of consumer purchasing the efficiency of, oh, if I want to buy something and get it delivered to my house, or I want to shop efficiently and find the right air conditioner for my apartment that fits my window. It doesn't seem like the consumer has any less efficiency or range of choice in China than in the U.S. So,

Louis-Vincent Gave: No, yeah, that, that part is good. No, no, that part is good in China. You can, you know, you go on Taobao, you find anything you want, it gets delivered through e-commerce, in fact, you know, China is the one country outside of the U S that has built a proper internet slash tech ecosystem. You know, it's really you would think India would have it given that they have so many engineers.

but you know, the backend infrastructure in India isn't that great. Right. The, the roads, the logistics, et cetera,

Steve Hsu: So to account for this fact that I think you said that if you just look at the service sector, it's China's service sector by this kind of

Louis-Vincent Gave: it's minuscule.

Steve Hsu: percent of the U.S. Yet. It seems like any kind of transaction that I actually want to involve myself in in China, whether it's training stock or buying an air conditioner or car.

It seems like it's just as developed and just as efficient as Yes. have in the U.S. So what, what is that five to one ratio there that you're talking about?

Louis-Vincent Gave: So I think first it's a poor country. And I don't know if you're familiar, I could send you pieces on this. There was a French economist called after you, who talked about the acceleration phenomena and the idea that income is distributed along a bell shaped curve. Right? typically in a country.

So you know, if in China, the average income is 10, 000. Everybody makes between almost everybody makes between five and 15. You'll have a small tail of people who make less than five and a small tail of people who make more than 15. Now, the reason this matters is there's thresholds for consumption. So at 2, 000, everybody buys a smartphone.

1, 000. Everybody buys a TV. 2, 000. Everybody buys a smartphone. 10, 000. They buy a car. And the more like everything below 15 is all about goods. Everything post 15 is all about services. Once you start making more than 15, 000, you spend more money on education, you spend more money on health care, you spend more money on,on financial services.

You start buying mutual funds or open a brokerage account. Now, again, so you think of your bell shaped curve. What's happening in China today is that everybody is still in that bucket of things. So to your point, Oh, I make a little more money. I'm going to buy an air conditioner. Ooh, I make a little more money.

I'm going to buy a microwave or I'm going to buy a car. and by the way, that curve, this is why it's the acceleration phenomena as it moves to the right. You know, as incomes grow over time, the area that, you know, China was a great example for this. You know, in 2000, China was selling roughly 2 million cars a year.

By 2007, it was selling 18 million cars a year because the curve had shifted where the area of people earning 10, 000. So all of a sudden it doesn't, if the curve shifts 20 percent to the right, your demand for cars doesn't go up 20%. It goes up 7x. so, you know, a lot of the services the Americans spend money on again, health care, finance, education, which, by the way, are really big bills in the U.S. You know, I don't need to tell you the cost of a U.S. education. Nor nor the cost of U.S. health care. things that in China are essentially free.

Now you could say they're not free for everybody. yeah. The government has to pay some of it, et cetera. But to your point, that doesn't really get reflected really well in the national statistics.

So

Steve Hsu: so that was the, that was the point someone had made to me specifically that if you're getting your health care kind of free from or quasi free from the government system, when they report numbers that would otherwise be folded into GDP as, you know, the health care that I personally purchased in the U.S. That number is just absent in the accounting, even though there is a doctor providing that service to the person in China, and similarly, yeah, go ahead, similarly with

Louis-Vincent Gave: And if you look, I think, and I think if you look at the U.S. healthcare is, is, is what it's now 18 percent of U.S. GDP or something. I'm quoting from memory, but it's a big number. so 18, you've got a two,

Steve Hsu: right, and,

Louis-Vincent Gave: an education instead of it.

Steve Hsu: college going percentage, so the percentage of high school graduates who leave high school and go to college in China is now about 60%, so it's similar to the U.S. level, so it doesn't seem like they're actually lacking educational services in China, but somehow the accounting makes it such that it appears that part of their economy is much, much smaller than in the United States.

So that somebody made this point to me and I was just curious whether what, how big is that distortion in the comparison?

Louis-Vincent Gave: oh, that's definitely, it's definitely a big one. And your US and your US college student pays 50 grand a year, 60 grand a year. you're Your, you know, your Chinese college student pays.

Steve Hsu: 2000 or something?

Louis-Vincent Gave: honest. Yeah. Well, no, no, like 2000 renminbi. it's, it's, you know, it's a rounding error.

and so yeah, so I, so you are in essence comparing apples and oranges, but there is also the element of as China, you know, as incomes continue to grow now, granted, they might not be growing as fast as they did 10 years ago, 20 years ago, but they are still growing. So as incomes grow, you are still going to see more money being spent on tourism, more money being spent on entertainment, more money being spent on education, on healthcare.

because yes, you can go to public healthcare, but the reality is, you know, rich people don't want to do that. They now want to, no, but it's true. You know, like if you have a chance to, to go to a private clinic, you're going Pick that over the

Steve Hsu: No, it's fair. Totally fair.

Louis-Vincent Gave: and so money starts to get spent there for now.

It's a small minority of people, but. You know, in five years time, that number will be up to five X, 10 X and so I highlight this because this is also China's challenge. You know, we mentioned earlier how China's graduating. You know, it's gonna be graduating at 12. 3 million kids this year. 11. 7 last year.

These are kids who want jobs, you know, in an air conditioned office with a phone and a laptop, they don't want to be, you know, pouring concrete or or beating pavements with a sledgehammer. and the problem for the government is it's not like there's 12, 000, 000 guys working in the service industry in China today that are going to be retiring at the end of this year to make room for the 2012, 000, 000 kids coming in.

So, you know, if you look at the government. 20 years ago, the challenge was you had 20 million guys leave the farm for the city every year. Guys and girls leave, leave the cities for the cities every year. Leave the farm for the cities. And so what they did with these guys, it's okay. Well, we need to build a road here and we need to build a power plant here and a subway line over there.

Now, transforming a farmer into a bricklayer, that's, that's actually not that hard, right? But now, you know, technically what you'd want is somebody to say, Okay, we need an insurance company here and a sports marketing business there and a private hospital here. But the government can't really do that.

Right? It's not like the government can say, Oh, let's build a sports marketing business here. You know, that just doesn't work. that's got to come from the bottom up. and here, the only thing the government can do is create the right conditions for that to occur. But it'll need to happen because if you're going to graduate 12 million kids a year, you need to find jobs for

Steve Hsu: Yeah, my guess is that this reported very high youth unemployment number is just because so many kids go to college now in China. It was such a rapid transition from very few going to, you know, 60 percent of the kids going to college. Now, all of those kids expect to have white collar. You know, knowledge worker type jobs, and there just aren't that many available in the economy for them right now.

So some of them are going to have to just bite down, bite the bullet and do something which is a little bit less glamorous than what they thought they were going to college for.

Louis-Vincent Gave: them. So there's that, but also remember that all these kids are the fruits of two generations of one child policy. so they have four grandparents, two parents, no cousins, no brothers and sisters, so they actually also have the option. Of staying at home. And a lot of them like waiting for the right job.

because, you know, if you have five kids, you tell the kids, you're not staying at home. You guys are out of here. you know, make, go, go make your way, which was always the way in China, by the way. Right. And that's why, for years, all these guys were leaving the farm, because if you were one of five kids, On a farm you know, if you divide the land five ways, you're left with, you know, not a lot of land.

It's not economical. and so, you know, for years and years and years, people in China really had no choice but to leave. Sometimes they left for the Chinese cities, but sometimes they left much further afield. They went all across Southeast Asia to the Americas to, you know, to Australia. There really wasn't much choice.

but now there is actually. There is no sort of gun to their head, like they can stay at home, and a lot of them do.

Steve Hsu: So this is, this is something that is going to have to work itself through the system, and it may take some period of time really for the equilibrate properly.

Louis-Vincent Gave: So did you ever read a book came out just after the 2008 crisis called Outliers by Malcolm

Steve Hsu: Sure. Yeah.

Louis-Vincent Gave: yeah, it was a fun read. And one of the points he makes, you know, he looks at the, you know, odd things that occur, like, you know, how all the hockey players are born in November and December and how and how all the tech guys, you take Bill Gates, Steve Jobs, Scott McNeely Paul Allen, Steve Wozniak, like all of them like the sort of the first wave of the big tech founders, the guys who did Microsoft, Apple, Sun Microsystem, Oracle all these guys were all born within 12 months of each other.

Steve Hsu: Mm hmm. Mm

Louis-Vincent Gave: And the, the, the point Malcolm Gladwell makes is like, it was basically the first PC sort of came out when these guys were 20 years old. and so if you were already 25 or 28, chances are you were married. And so you stayed at your job at IBM or at general electric or wherever. And, you know, these guys, they fiddle around the computer, et cetera.

But I actually think Gladwell missed the bigger point. Because I think if you were 24, 25, you were still born married. The bigger point was that all these guys were also college dropouts. Like literally, like almost all of them. Bill Gates, Steve Jobs, et cetera. And they were in college. They dropped out in 74 75 when the US was going through a terrible, really bad recession.

Now, when I went to college, I went to Duke and, you know, the deal was pretty simple. You keep your head down, you do your work, you get good grades. Then maybe you get recruited by Morgan Stanley or by McKenzie or by Goldman Sachs. And then, you know, you work hard while you're there. And then at the end of it all, you know, you'll have the Hamptons house and, you know, and, and the sports car, you know, if you keep your head down and just.

Do well, there was no real reason to really go out of your way.

Steve Hsu: Take risks.

Louis-Vincent Gave: you take risks. Like, why would you, right? This is like if I just stay on the rails, everything's good. but in 74 75, that wasn't an option. If you were at Harvard in 74 75, you'd like, well, what the hell? Like, I'm going to stay here.

There's no job with IBM at the end of this, and there's no job with G at the end of this. I might as well try my thing. and so I think that's what's going to happen in China.

Steve Hsu: So you see a lot of entrepreneurs coming out of this group of kids right now that are dealing with this high unemployment rate?

Louis-Vincent Gave: I think you will. You know, one one of the jokes we tell each other in Asia is that the tragedy of Asia is that Japan's a profoundly socialist country on which capitalism was imposed, and China's a profoundly capitalist country on which socialism was imposed, and that both are Both are drifting back to their natural order of things.

And if you've spent time in Japan or China, it rings true. It rings true. Like China is a profoundly capitalist place.

Steve Hsu: Agree with you 100%. The Japanese are much more collectivistic than the Chinese, and even more orderly and rule obeying, and the Chinese are much more likely to be natural entrepreneurs than Japanese, actually.

Louis-Vincent Gave: yeah. And by the way look at, look at historically, we mentioned how, you know, through the 19th and 20th century, a lot of Chinese people had no choice, but to export themselves. They ended up running. All the businesses in Southeast Asia, like, you know, you go to Indonesia, you go to Thailand, you go to Vietnam like all, all the business, like leaders, empires, et cetera, it was, it was all Chinese.

Like China, it is a deeply entrepreneurial culture. Chinese culture is a deeply entrepreneurial culture.

Steve Hsu: Yep. I wanted to switch gears a little bit and come back to this trade surplus. So China's running this ginormous trade surplus right now. Looks like it's set to continue for some time. The U.S. is always a deficit country. How do you see the flow of money? How is the US going to fund its debt obligations?

What did the treasury auctions look like lately? Do you have any, I know you have some views on how this is going to shake out.

Louis-Vincent Gave: Well, lately they've been looking ugly. the, the, the, the simple answer is your last question of how have the treasury auctions been looking? And the answer is they've been looking ugly because look, the US is now 4% of the global population. It's 60 percent of global budget deficits.

If you include sorry, 40 percent of global budget deficits and 60 percent of global current account deficits. So you had all the world's budget deficits. You had all the world's current account deficits. And so the U.S. Needs to constantly attract foreign capital, which, you know, historically had never had any problem doing, but never in those quantities.

What is really quite unusual about the current cycle is that you have a US economy that's growing by eight and a half percent nominal GDP where you have full and full employment, like you want a job in the US today, you've got a job. and basically at the peak of its boom, the US is running Budget deficits of 8 percent of GDP.

That's completely, you know, unprecedented relative to any other period in history. and I think it's starting to make the market more and more uncomfortable because again, the numbers are getting bigger and bigger and

Steve Hsu: The surplus countries that could recycle. There flows back into the U.S. Seems to be countries that the U.S. Is directly antagonizing, like China, Saudi Arabia. I mean, they're, you know, like, what's happening in Gaza with the U.S. backing those activities. It's going to make the Saudis less and less likely to want to show up at the Treasury auction by a bunch of us, right?

So how do you see all

Louis-Vincent Gave: you saw, you saw last week, you saw last week what I think was a massive event. The central bank of Saudi Arabia signed a swap line with the PBOC, the Chinese central bank. Now, why the hell would they do that? Yeah. You know why, why they've got a pegged currency to the dollar. and they've got what they sell for in dollars, right?

Oil. So why would they need a swap line with China? you know, signing a swap line with China is in essence saying we're going to need rem and B. Why would Saudi need Remin before? Is Saudi's trying, starting to signal that they might deeg to the US dollar that they might start signing long-term deals with China for oil in, in Remin BI don't know the answer.

What I know is they announced this, this currency swap. And to me that seems like one of the most important monetary developments of, of the recent years. and surprisingly, like nobody's really commenting on it. And, you know, I've been trying to get my head around it. It's a momentous event.

Steve Hsu: I think those developments are super interesting and in fact, I think it's becoming more and more plausible that Saudi could get security guarantees from Russia and China just as it has now from the U.S. because their military technologies and presence are, are going to be sufficient to guarantee Saudi security eventually so that they, they could shift over to a different patron than the United States.

Louis-Vincent Gave: I think it's a bit, I think it's not so much security guarantees, but for me, one of the biggest developments of of the past year again, that we didn't really mention much in the Western world is, is how China got Iran and Saudi Arabia around the table to shake hands and make a peace deal. You know, in essence, this was like the Camp David Accord.

Yeah. except it wasn't broken by the U.S. It was broken by China. And you know what? China basically said to both Saudi and Iran, Look, I'm your biggest trading partner. Both of you like you now sell more to me than to anybody else. And I want to do more business with you. and I want to invest in your country.

But I'm not gonna do that if you guys are gonna go to war with each other, because if you go to war with each other, I'm gonna lose on both sides. so, you know, yeah. If you guys get along, we can do a lot of great stuff together. Now the reality is Iran. The only reason Iran survives is at this point, China.

And economically, you know, Saudi Arabia tries to crush it. The U.S. Tried to crush it, but given that it's got China's backing now, it's, it's, you know, it's, it's, it's not gonna, it's not gonna get crushed. So I think Saudi Arabia, realizing this, says, okay you China can always put pressure on Iran to do what they want.

So I might as well get it. And if you're Saudi, you only have one enemy. It's Iran.

Steve Hsu: hmm.

Louis-Vincent Gave: You're not worried about Israel. Israel's never going to come and attack Saudi Arabia. So your only enemy is, and you're no longer worried about Russia or the Soviet Union, like you were in the past. So your only enemy is Iran. So, you know, if you can cut a deal with China to cut a deal with Iran, that takes care of your biggest problem.

And I think that's what we've seen.

Steve Hsu: I think you've mentioned that instead of recycling its surpluses into dollars or treasuries, it looks like China might be building up oil reserves or energy reserves with those surpluses. Is that part of the picture here?

Louis-Vincent Gave: I think it is. I think it is. It's very tough to know what exactly China's doing with its reserves. But there is something indeed, you know, China's got a trade surplus, like we mentioned 75-80 billion a month. But, China's actually not only not buying treasuries, but letting its existing treasuries expire.

So it's, it's basically using fewer and fewer treasuries out there. sorry, stocking fewer and fewer treasuries. Now, if you're China, you know why? Okay. Would you have treasuries in the first place? Well, you bought treasuries to cushion the, you know, your, your potential hits on, on commodities, right? Or if, if ever tomorrow you know, you either can't get access to dollars or commodity prices go through the roof for whatever reason, then you sell your treasuries and you buy the commodities you need, but if you're China and especially following the Western world's grabbing of Russia's treasuries, if you're China, you think, hold on.

I've been accumulating treasuries in case I needed oil. That was really the main thing. So maybe I just accumulated oil. Like, you know, why the intermediate step where I make myself dependent on the willingness and ability of the U.S. to deliver me my money when tomorrow, you know, they've shown that they can take it away in a heartbeat.

So I think the nationalization of Russia's reserves was the biggest foreign policy goal. you know, since you know, since the probably the start of the Iraq war. You know, I think we cut our nose to spite our faces. We Western policymakers wanted to be seen to be doing something to punish Russia.

and what we did is we said, okay, let's tell the biggest commodity producer in the world that they can't use U.S. dollars. And I think we thought like this, they won't be able to sell their commodities and we never stopped to think, well, they'll sell them in another currency, which is exactly what's happened.

And I think any five year old would have figured that one out, but, somehow we rode right past it.

Steve Hsu: So, I remember, I think, five or ten years ago, China didn't even have a strategic oil reserve, and have they, have they publicly declared how big that's going to be, and how far along they are in filling it up?

Louis-Vincent Gave: No, and China's very, that's like, complete top state secrets and and so I think there's, there's a lot of reserve accumulation at the importer level, you know, the, the, the Sinopecs of, of this world. I think they've been building more and more sort of storage capacity but they're definitely building strategic petroleum reserves.

If, if you look at, you know, the official consumption numbers, the official production numbers and the import numbers. China's probably been importing a million barrels per day too much, somewhere between half and a million barrels per day, too much for the past couple of years, which again, I think if you're China makes perfect sense.

You've got too many dollars. You don't know what to do with them. and at the same time, you're living in a world with much more geopolitical uncertainty. You've got the U.S. that you feel is out to get you. You've got a war between Russia and Ukraine. I mean, tomorrow, for all you know, and I don't think it's gonna happen. But if you're China, you know, you plan for the worst. You hope for the best. You plan for the worst. Tomorrow, again from China's point of view, but what if Russia sort of devolves into a massive civil war. You know, Putin dies, is killed, falls. You had a sort of glimpse of it with you know, the Wagner groups marched on to Moscow.

Yeah. You're like, I thought I woke up that Sunday morning. I thought, Oh my God, you know, I don't know enough oil. If like, if, if Russia starts to collapse into a civil war, you know, it's like, or, you know, what price oil. So if you're from China and you think, okay, Okay. Maybe that's only a 5 percent possibility.

If it does, it's going to completely screw my economy. Why wouldn't you stock oil? if you've got too many dollars that you know what to do with.

Steve Hsu: I think it's a no brainer. They had to at some point build a strategic reserve. It was kind of just their development outpaced their, you know,

Louis-Vincent Gave: Yes. Their ability to do so.

Steve Hsu: What's interesting, though, is when they get to the point where they've reached a reasonable level for that petroleum reserve.

There we are. Will, yeah, will they continue to just stock up oil as a store of value or something because they don't want to own treasuries? That, that, and when they get to that point, it becomes a more kind of interesting question. It's like not for free anymore, right?

Louis-Vincent Gave: Your point, look, there is a cost of building an SPR, right? You, you know, have to pay for the storage and it costs money. You don't want to just do it forever.

So yeah, at that point, what will they do with the extra dollars? My guess is they'll, it'll be a pass the parcel game. They'll be buying assets. you know, there'll be buying copper mines in Africa. There'll be buying you know, fields in Argentina to, to, to grow food. You know, whatever asset comes up for sale, they'll, they'll pick up because on a 20 year view, owning a copper mine in Zaire or in Zambia or in Mozambique might be a smarter trade than owning a U.S. treasury anyway.

Steve Hsu: So to the, to the trillion dollar question, not to put you on the spot here, but this turbulence we see in the treasury auctions, at what point does it really become a real fundamental problem for the U.S. to, to fund its deficits? Mm hmm.

Louis-Vincent Gave: So I think before it becomes a problem, the, you know, you still have one more bullet and that the Fed can come in. And monetize a lot of the debt, like once once the U.S. Government starts hitting real funding issues, the Fed will step in and then the U.S. Dollar will go down and initially that first drop in the U.

The U.S. Dollar will feel great because the U.S. is always overvalued. We were discussing how cheap Japan is and you know how China's got a 75 billion trade surplus. You know, initially it'll feel good, you know, and a lot of sort of industrial linked states, you know, your Michigan's your Indiana's your your Pennsylvania's where by and large, the Rust Belt states where the elections are decided very often anyway, they're, they're sort of increasingly the swing states you know, all these states will feel great.

So, initially, it'll feel fine. Eventually, though, that will catch up with higher inflation, weaker currency. You know, debt printing you'll get higher inflation unless, of course, the U.S. starts to tighten its fiscal belt. But, you know, right now, there seems to be little appetite for that. So what seems more likely to me is that, you know, at some point in the next couple of years or maybe even much earlier than that, the Fed steps back in, monetizes the debt and then oftentimes You know, from there the dollar goes down and that creates the next boom.

But on the, on the, during that boom, if the U S doesn't tighten its fiscal belt, then you start running into

Steve Hsu: So that Fed stepped in to monetize the debt. So I guess their balance sheet is like 11 trillion right now or something like this 12 trillion. What does the Fed actually have on its balance sheets?

Louis-Vincent Gave: Oh from the top of my head. No, I think it's a bit lower than that. I think are you, I think you're a 9

Steve Hsu: Oh, 9 trillion. Okay.

Louis-Vincent Gave: from the top of my head. I'll have to check. I can't remember from the top of

Steve Hsu: At what point do macro guys like yourself start to say, wait a minute, flashing red light. There's a serious problem here.

Louis-Vincent Gave: You know, most, I think a lot of macro guys, you have a framework and then you wait for the momentum to, to, to start confirming your, your framework. and I think a lot of people have always talked about the problem of our debt. and so far, you know, the U S treasuries have sold off, no doubt. The next leg should be the U.S. dollar. Now you could tell me, well, it started the U.S. dollar has been weak the past three, four weeks, but I think you need to see a little more sort of downside momentum, key levels being broken. And then, then the macro guys come in and, and, and start, you know, piling on the trade. But we're not there.

Steve Hsu: Okay. That's my main worry. You know, I've worked all my life building up some, you know net worth for my kids mostly because I don't really spend the money, but the worst, the main thing I have to navigate is this sort of, I don't know, next 10 years of 20 years of de dollarization so that, you know, my nest egg preserves its real value for my kids.

That's, that's my main worry in terms of, in terms of financial strategy.

Louis-Vincent Gave: Well, it sounds like you've got the AR 15. So that's a step.

Steve Hsu: [unclear]

Louis-Vincent Gave: Canned goods and weapons. They never depreciate. Those are always worth always worth saving. No, look, jokes, jokes aside. I think what you highlight and I'm sorry to be flippant about this because this is a real issue the, the, the, the issue you highlight.

I didn't mean to sound flippant. It's a real problem because for the past 30, 40 years, you could count on fixed income to, to, to protect a good bit of your wealth. And, you know, for the past two, three years, that hasn't been the case. And that's been a brutal wake up call for, for a lot of investors, that, well, you know, how much capital could be destroyed.

We've just had a really horrible bear market and, you know, CNBC talks all day about stocks. and you know, when you're at the gym or whatever, and you're looking at the TV, you get the stock tickers go by, et cetera. But, but, you know. Long dated bonds, like they've just wiped out 15 trillion of capital.

You know, the bond bear market has wiped out 15 trillion of capital. That's, that's proper money. Has been serious capital destruction for a lot of savers and a lot of savers who were, you know, conservative savers. we didn't want to go out there on the risk curve and take too much risk, et cetera, and they've been absolutely butchered.

Anyway, going back to your question, it does raise the question indeed, like so far, the pain has been on the fixed income. Do we leave it at that? And it's good that the pain's been taken. And now we're reset and we can start again. Option one or option two. That was the first step. And the next step is the dollar.

And the next step is the dollar because the U.S. government remains incontinent. and I think the options of option two are indeed there. So from there, you know, how do you protect portfolios? and yeah. So, you know, one of the things I like a lot, Latin American debts, you get high real rates, you have governments that are actually polar opposite of ours.

It's always the same story. You don't make your father's mistake, you make your grandfather's mistakes. you know, in Latin America, they had inflation not that long ago. So as soon as inflation appears in the system, the central banks, you know, bang and ministries are financed tight and fiscal policy because they know the long term consequences.

Meanwhile, in our countries, ours, whether France or America as when inflation reappeared, you know, all our policymakers were clapping like seals. They're like yay inflation, you know, we want it higher for longer You know, we're gonna we're gonna like, you know, keep this thing going and and you're wondering You're trying to destroy people's wealth here.

You know, what's what's going on? and the reality is they were and they really still are actually they really keep following crazy fiscal policies because They feel that's how they're going to get reelected. they're buying your votes with your money. And, and so to your point they, you know, how do you protect yourself against that?

Well, I think Latin American debt is one of them. I think real assets, you know, gold, et cetera, historically have proven to be, to be not bad. You know, commodities are a way to protect yourself, but deep down. You know, if you, if you go through the periods of big inflation you got absolutely crushed in bonds equities, you made okay, actually. Because you know, you know, if, if you don't pay up too much for the equity, you can still do okay.

So I would say, you know, to answer your question: buy value stocks, buy commodities, you can also have some growth stocks in there as well. Of course. Buy Latin America debt and buy some gold and that may not hit it out of the park, but it should allow you to cushion the portfolio.

Steve Hsu: That was a great answer to my question. I think the main problem I have is that, you know, for most of my life you could buy the 60-40 portfolio and just go to sleep and now you actually have to think and figure things out to actually stay ahead of things.

Louis-Vincent Gave: no, I think that's exactly right. That's exactly right. But you know what? You don't, you don't get to pick the period you live in.

Steve Hsu: Nope. Nope. So, Louis, I've kept you for a long time. This has been a fantastic conversation. It's a dream come true for me to finally be able to talk to you and I hope we can stay in

Louis-Vincent Gave: very much enjoyed it.

Steve Hsu: Yeah,

Louis-Vincent Gave: Absolutely. I very much enjoyed this conversation. Thanks. Thanks a bunch for

Steve Hsu: I will, I'll maybe look you up if I'm in Hong Kong someday.

Louis-Vincent Gave: Oh, please do, please do or Beijing. We have an office up in

Steve Hsu: Oh, great. Okay.

Louis-Vincent Gave: either one. And I spent some time

Steve Hsu: I'm going to be in, I think I'm going to be in China this summer. So hopefully we can meet in person at some point.

Louis-Vincent Gave: I'm actually, I'm actually in Beijing. I'm actually in Beijing next week.

Steve Hsu: Great. All right.