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Captain America: A Brave New ETF World · Trillions

0:05
Speaker 1: Welcome to Trillions.
0:06
Speaker 2: I'm Joel Webber and I'm Eric Belchunis.
0:12
Speaker 1: This is going to be a fun episode, Eric.
0:13
Speaker 2: Yeah, I've been wanting to do this one for a
0:15
Speaker 2: while a.
0:15
Speaker 1: While, and we had to jump through them some hoops
0:17
Speaker 1: to make it happen. But it seems like a great
0:21
Speaker 1: moment to put the spotlight on the United States of America.
0:25
Speaker 1: We have President Trump back in the Oval Office. He
0:28
Speaker 1: has signed so many executive orders so far, but underlying
0:32
Speaker 1: it all is sort of like, you know, this attempt
0:34
Speaker 1: to kind of reassert American dominance. When you think about
0:39
Speaker 1: the equity market in particular, USA is always number one.
0:43
Speaker 3: Right er.
0:43
Speaker 2: Yeah, And you know, on our team, we have this
0:45
Speaker 2: persistent chat and we've actually it's come down to basically
0:49
Speaker 2: like mocking Europe. It's it's like they're the you know,
0:54
Speaker 2: we just had a full leaders at the Super Bowl.
0:55
Speaker 2: It's like they're the Cleveland Browns or the like, they're
0:57
Speaker 2: just a bad team that just can never get going.
1:00
Speaker 2: And then the index that we specifically are just marvel
1:04
Speaker 2: at is the Nasdaq one hundred. We call it the
1:06
Speaker 2: eighth Wonder of the World. It just keeps on freight
1:10
Speaker 2: training everything year in, year out. This is the cues,
1:13
Speaker 2: and it kind of captures like that American innovation tech
1:18
Speaker 2: thing even better than the S and P five hundred
1:20
Speaker 2: and so when you compare the cues to like investing
1:23
Speaker 2: in Europe, it's just so night and day. But at
1:27
Speaker 2: some point it's so much cheaper pete price to earnings
1:31
Speaker 2: ratio wise in Europe, everybody's like, oh, it's got to
1:35
Speaker 2: go back, but it never goes back. It might go
1:37
Speaker 2: back for two months, but then people come right back
1:39
Speaker 2: to the queues. And so I just think that the
1:42
Speaker 2: US stock market in particular, that the Nasdaq stocks and
1:46
Speaker 2: the mag seven are almost like abnormally unusually great where
1:53
Speaker 2: they deserve some kind of a scientific breakdown to analyze
1:57
Speaker 2: what's really behind all this because it almost breaks your
2:00
Speaker 2: brain a little bit.
2:01
Speaker 1: Well you know who's not a scientist, me or you,
2:04
Speaker 1: But it turns out we work with one. His name
2:06
Speaker 1: is Steve how he's a quantitative research at Bloomberg. He
2:08
Speaker 1: has a PhD. You started talking to him a while
2:11
Speaker 1: ago about America and it's greatness, right, would you learn?
2:15
Speaker 2: Yeah, because you know, we were looking at tech and
2:17
Speaker 2: innovation in other countries and it's just not. They have
2:20
Speaker 2: it there, but no one cares. Why is it rewarded
2:23
Speaker 2: in the US and not in other countries? And we
2:26
Speaker 2: had an interesting conversation about the culture here, the regulations,
2:31
Speaker 2: the mindset, this sort of like you can do it
2:34
Speaker 2: and who cares if you fall in your butt? Like
2:37
Speaker 2: that doesn't exist everywhere else. Like a lot of people
2:39
Speaker 2: are just like get in line and hammer, you know
2:41
Speaker 2: what I mean? Like America is a special place, and
2:45
Speaker 2: we don't do everything great. We're not number one and
2:47
Speaker 2: a lot of things, Joel, but when it comes to
2:48
Speaker 2: like the stock market, man.
2:50
Speaker 1: We kick ass.
2:51
Speaker 2: The US has four percent of the world's population, twenty
2:55
Speaker 2: percent of the world's GDP, and our stock market is
2:58
Speaker 2: fifty five percent of the whole world. Right, you got
3:02
Speaker 2: to go. I think number two is something like Japan,
3:05
Speaker 2: where Europe is a continent, is like eight percent or
3:07
Speaker 2: something like that.
3:08
Speaker 1: So joining us on this episode, Steve, how quantitative researcher
3:12
Speaker 1: have Bloomberg in disease? This time on Trillions Captain America. Steve,
3:21
Speaker 1: welcome on Trillions.
3:22
Speaker 3: Thank you very much for having me finally, and Eric, yeah,
3:24
Speaker 3: good to see you.
3:25
Speaker 1: So, Steve, Bloomberg is a big place. I work in
3:29
Speaker 1: the news group. Eric works in Bloomberg Intelligence. What is
3:32
Speaker 1: Bloomberg indsease and what's your day job?
3:35
Speaker 3: So Bloomberg Indisses is part of Bloomberg's data team now
3:39
Speaker 3: and I am a quant researcher for Bloomberg Indices. And
3:42
Speaker 3: we create investible indices or portfolios which can be then
3:47
Speaker 3: licensed by as a managers and as owners to track right.
3:52
Speaker 3: We create investment products and inducees that we license, and
3:56
Speaker 3: then once in a while, if we come up with
3:58
Speaker 3: something that we've seen that we think interesting that's worth
4:01
Speaker 3: expanding a bit more than we then run long form
4:04
Speaker 3: white paper.
4:05
Speaker 1: Okay, so he's written some white papers. Did you read them?
4:08
Speaker 2: Yeah, I mean I skimmed them.
4:10
Speaker 1: Okay, all right, we're gonna we're gonna learn a little
4:13
Speaker 1: bit of.
4:13
Speaker 3: The pricing power. But you she said, was very good.
4:16
Speaker 2: Yeah. And the innovation, I mean, they're they're they're very good.
4:20
Speaker 2: And the Index group is obviously mentally in the same
4:24
Speaker 2: ballpark as us because we write passive.
4:26
Speaker 1: But he sells stuff.
4:28
Speaker 2: True. Yeah, you're on the revenue side of the building.
4:30
Speaker 1: Yeah, it's important. There's a disclaimer there, which is, you know,
4:32
Speaker 1: we're not going to turn on the We're not going
4:34
Speaker 1: to talk our own business.
4:35
Speaker 2: No, No, I'm part of the terminal value add.
4:39
Speaker 1: So Steve, just big picture what makes America fundamentally with
4:44
Speaker 1: the research that you do, the data that you see,
4:46
Speaker 1: why is American innovation greater than anywhere else in the world?
4:51
Speaker 3: So h if you so went real this white pipe
4:54
Speaker 3: of because you know, we created a index to try
4:56
Speaker 3: to capture innovation as a factor systematically, right, you know
4:59
Speaker 3: out there there's new people talk about we try to innovation.
5:03
Speaker 3: How do you actually do it? Right? There's the r ETF,
5:05
Speaker 3: which is an activetf F you know would selects them
5:09
Speaker 3: and you know it does what it does right. And
5:11
Speaker 3: then there's accuse, which is actually, when you think about it,
5:14
Speaker 3: not intentionally innovation index, just as all the companies that
5:17
Speaker 3: happens to be listed on the NAS Exchange, which of
5:20
Speaker 3: course has agglomeration effect, right, everybody sort of congregates that.
5:24
Speaker 3: But so it's not intentional. So how do you actually
5:25
Speaker 3: do it? So we start to actually look into some
5:28
Speaker 3: systematic accounting attributes. So R and D is a natural
5:31
Speaker 3: place to look, right, Companies spend and report R and
5:34
Speaker 3: D not or always consistently, and they may sort of
5:36
Speaker 3: attribute things a little bit differently, but generally the direction
5:39
Speaker 3: is correct. And people previously have looked at R and
5:42
Speaker 3: D intensity, you know, so normalized by sales so they
5:45
Speaker 3: can compare companies in the cross section. That's one way
5:48
Speaker 3: to do it, but we found actually was even better.
5:50
Speaker 3: It's actually to look at persistence of R and D spending, right,
5:53
Speaker 3: companies that grow their R and D spending three consecutive
5:56
Speaker 3: years year and year right, so, and by screening for
6:00
Speaker 3: these such as gets expensive. Yes, that gets expensive, but
6:04
Speaker 3: but more than that, it also means that there's a
6:05
Speaker 3: highly grow of persistence that needs to be funded by
6:08
Speaker 3: internally generated cash flow. On top of it, you probably
6:12
Speaker 3: soft indicative of the skills that you have the confidence
6:15
Speaker 3: in your own ability to convert right R and D activities,
6:18
Speaker 3: which is inherently very expensive and on certain into valuable
6:23
Speaker 3: intentionibal capital.
6:25
Speaker 2: I want to go even deeper and just okay, you
6:28
Speaker 2: grew up in I grew up in America. I basically
6:32
Speaker 2: was raised outside. I went down played with people like
6:35
Speaker 2: droll down the street. We got into football games in
6:37
Speaker 2: the backyard. Then I entered little league games, had to
6:41
Speaker 2: get along with teammates from all over the place. There
6:44
Speaker 2: was also a feeling of optimism in the in my
6:49
Speaker 2: upbringing at all times pretty much it was like anything's possible.
6:53
Speaker 2: And then you go to high school and college and
6:56
Speaker 2: you're frequently grouped with people to work on tasks and
7:00
Speaker 2: as a team try new things, and.
7:04
Speaker 1: I break breakdown problems.
7:06
Speaker 2: Breakdown problems, and there's also credit from being the one
7:11
Speaker 2: that does the good thing, like there's a number one
7:13
Speaker 2: winner kind of celebrated here. Not to mention the bankruptcy
7:18
Speaker 2: laws and the regulatory environment, it just seems like, I'm
7:23
Speaker 2: not sure how you replicate that.
7:24
Speaker 3: I think recently there was a very good interview that
7:28
Speaker 3: Jeff Bezos gave at the Old Book. You know, he
7:31
Speaker 3: mentioned that one of the biggest, you know, I think
7:34
Speaker 3: reasons why America manages to have such a vibrant tach
7:37
Speaker 3: sector innovative industry is because of the presence of a
7:41
Speaker 3: risk capital market, which is different from a banking market,
7:43
Speaker 3: right financial markets. You know, if you think about landing
7:45
Speaker 3: right banks land Europe has a very good banking industry,
7:49
Speaker 3: but the ability to have risk capital venture right to
7:53
Speaker 3: invest in things that has one hundred chunds or even
7:56
Speaker 3: less to work out. That's gonna when it pays off,
7:59
Speaker 3: pays out one to to one hundred and one to
8:00
Speaker 3: one thousand. That is the type of risk taking that
8:04
Speaker 3: comes with I think both culturally and also past dependence. Right,
8:09
Speaker 3: some of it has to do with cultural this idea
8:11
Speaker 3: of being encouraged as a child to try things and
8:14
Speaker 3: not be told that you likely will not succeed, but
8:16
Speaker 3: to be told just try it. Right. Then, there was
8:19
Speaker 3: also the fact that Americas happened to have succeeded in
8:22
Speaker 3: the tech industry, a bunch of people succeeded by concentrated
8:26
Speaker 3: entrepreneurship and equity appreciating, giving them the confidence of saying, yeah,
8:32
Speaker 3: I can take a risk investing in in venture.
8:36
Speaker 2: But if you take venture capitalists could invest in the
8:38
Speaker 2: European I mean they're not like just legally allowed to
8:43
Speaker 2: invest in the US like they they if they thought
8:45
Speaker 2: Europe was the better odds to get that like Unicorn,
8:47
Speaker 2: they would go there, right.
8:48
Speaker 3: So, like, well, part of it I think to be
8:51
Speaker 3: fair to Europe is that Europe. When I recently, I've
8:54
Speaker 3: taken a few trips business trips to Europe to try
8:55
Speaker 3: to understand how to actually get European clients to buy stocks,
8:59
Speaker 3: and one we've noticed that there's just such a huge
9:02
Speaker 3: amount of fragmentation of markets. It's impossible to get a
9:04
Speaker 3: huge market right because everyone little country still has its
9:07
Speaker 3: own language, you know, own regulation and just customs, and
9:12
Speaker 3: it's impossible to scale what product. So if you're an airbnb, right,
9:16
Speaker 3: you can have the entire US market. If you succeed here,
9:19
Speaker 3: you become this behemoth and then go overseas. Everybody is lightweight,
9:22
Speaker 3: you know. So I think it's a combination of issues.
9:25
Speaker 3: I think cultural, you know, sort of is certainly at
9:30
Speaker 3: the core of it, but you know, there are other
9:32
Speaker 3: sort of institutional factors.
9:40
Speaker 2: This idea of international also is something Bogel I wrote
9:44
Speaker 2: a piece about a month ago, and I was like,
9:46
Speaker 2: Bogel was kind of right about international. In ninety three
9:49
Speaker 2: is the first time he had written, you don't really
9:52
Speaker 2: need international. The US has all the capitalism you need.
9:56
Speaker 2: If you had followed his advice, man you would have
9:59
Speaker 2: really benefitted by not going international. So a lot of
10:02
Speaker 2: people that I know, advisors and portfolio managers, they're always
10:07
Speaker 2: in this dilemma of whether to rotate internationally, but it
10:11
Speaker 2: just doesn't ever pan out. And I think that's part
10:14
Speaker 2: of why this matters now is that we got big
10:16
Speaker 2: valuations here, low valuations in Europe. But does Europe have
10:21
Speaker 2: to go up just because it's due?
10:23
Speaker 3: Well, so, the one thing is that if you recall
10:26
Speaker 3: a post dot com bubble in the early few thousands,
10:28
Speaker 3: you know that was a period when a bunch of
10:31
Speaker 3: sort of things that we are not used to. How
10:33
Speaker 3: did it happen?
10:34
Speaker 1: Right?
10:34
Speaker 3: International, I'll perform the US right, Europe, I'll perform the
10:37
Speaker 3: US EM I'll perform the US value, I'll perform growth right,
10:42
Speaker 3: and bones actually outperform stocks, you know, for many years
10:46
Speaker 3: until things sort of then resumed. It's long run trajectory
10:50
Speaker 3: and you have to triumph of the optimists. But you
10:53
Speaker 3: know there are conditions in which you know.
10:55
Speaker 2: I think the point you're making, though, which is is
10:57
Speaker 2: a good control. Bogo really had very deep wisdom, and
11:02
Speaker 2: he knew US would have bad years. He was going
11:05
Speaker 2: to stay invested. I think if you add international and
11:07
Speaker 2: bonds and this other stuff, when they go up and
11:10
Speaker 2: the US goes down, it gives you comfort and like
11:12
Speaker 2: it helps you hang in there. So if you have
11:15
Speaker 2: a behave, if you're somebody who can't have the intestinal
11:18
Speaker 2: fortitude to just stick to the US. But the returns
11:21
Speaker 2: I'm talking about are actually inclusive of those bubbles bursting
11:24
Speaker 2: two thousand and eight, two thousand and one, International way lags.
11:28
Speaker 2: But you're right, there's these sections of time that could
11:31
Speaker 2: be years where you're going to underperform. But I think
11:34
Speaker 2: in Bogel's case, he was like, I'm committed to the
11:37
Speaker 2: S and P five hundred. I don't need the feeling
11:41
Speaker 2: that something else in my portfolio is up, which is
11:43
Speaker 2: a level of wisdom that's hard to get to.
11:45
Speaker 3: Yeah, I mean, part of it is exactly because the
11:47
Speaker 3: US is such a huge economy with such a tremendous
11:49
Speaker 3: complexity that there is everything that's happening right inside of
11:53
Speaker 3: individual countries that's only exposed to oil or banking on
11:56
Speaker 3: and so on and stuff forth. So this national boundary
11:58
Speaker 3: division was always obitring the US place. I never really
12:01
Speaker 3: like the comparison or two lines of a Europe US
12:03
Speaker 3: up performing Europe because it's not the Apple Store comparison.
12:06
Speaker 3: If you actually compared sort of sector weights adjusted or
12:10
Speaker 3: equity duration adjusted, you will find that the difference, what
12:13
Speaker 3: there is, a premium difference, is not as big as
12:16
Speaker 3: one might have thought.
12:17
Speaker 1: Or see if I want to bring it back to
12:18
Speaker 1: your your paper and how you think about building in
12:22
Speaker 1: disease that can help capture investment. Right, So you brought
12:28
Speaker 1: up persistent R and D being the data point that
12:32
Speaker 1: is like kind of the north start for the style investing.
12:35
Speaker 1: How do you go about getting that data? By the way,
12:37
Speaker 1: it's all you know, the companies are doing this, but
12:40
Speaker 1: like what do you see when you look at those numbers?
12:43
Speaker 3: So companies, first of all, that they increase, they are
12:46
Speaker 3: required to you know, sort of disclose their R and
12:49
Speaker 3: D and you know spending expenditures and you know for
12:52
Speaker 3: a long time depending on or coman treatment. If R
12:55
Speaker 3: and D spending is immediately allowed to be expensed, they
12:58
Speaker 3: are actually incentivized, you know, to expand and so they
13:00
Speaker 3: can reduce their textbook you know income. But more broadly,
13:05
Speaker 3: we're just looking for, you know, in a systematic fashion,
13:08
Speaker 3: metrics that can most succinctly, sort of in the sufficient
13:11
Speaker 3: sufficient statistic way identify companies accurately that fit the profile
13:15
Speaker 3: we're looking for. So in this case, we're looking for
13:17
Speaker 3: innovative companies. You know, what is one metric that really
13:20
Speaker 3: captures companies? You know ability to innovate, and we zoomed
13:23
Speaker 3: in on the R and D spending metric in particular.
13:27
Speaker 3: We found that more than the intensity is the persistence
13:32
Speaker 3: of R and D spending that really allows you to
13:35
Speaker 3: sort of screen down to the companies that are genuinely innovative.
13:39
Speaker 1: Well, it's an example of the company that goes that
13:41
Speaker 1: big on R and D but maybe isn't as persistent,
13:44
Speaker 1: and what's that? What's that when that's more persistent?
13:46
Speaker 3: So like, I don't want to go into an individual company,
13:49
Speaker 3: but more more more likely I think it's one thing
13:51
Speaker 3: is like if you look at, for example, the art
13:53
Speaker 3: portfolio versus the you know, sort of the queues or
13:56
Speaker 3: or in this case, the Bloomberg be invent Index, which
14:00
Speaker 3: which is which we created and it's comfortable to the cues.
14:04
Speaker 3: And here I do want you I want to give
14:05
Speaker 3: credit to my colleague Garl Panzea who who you know,
14:09
Speaker 3: helped create this this metric. Uh, is that if you
14:13
Speaker 3: go back to compare the rc ETF you know membership,
14:16
Speaker 3: the companies in there spend a tremendous amount of money
14:18
Speaker 3: on R and D. Right, and if you normalize by
14:20
Speaker 3: net sales, the average ratio is perhaps higher in fact
14:23
Speaker 3: than the companies that are contained in this portfolio. But
14:26
Speaker 3: if you compare the performance over time sort of you know,
14:30
Speaker 3: this index is tremendously outperformed the art portfolio over time.
14:34
Speaker 3: Now why is that. It's because the companies that held
14:36
Speaker 3: in her profile in the portfolio tend not to be
14:40
Speaker 3: consistently profitable. As a result, they don't consistently spend the
14:43
Speaker 3: R and D. They sort of one of those things.
14:45
Speaker 3: They spent one year when they have profits, the next
14:47
Speaker 3: year they spend less, and so on and so forth.
14:49
Speaker 3: So the average is high, but the persistence is not
14:51
Speaker 3: very high. And as we all know, so those of
14:54
Speaker 3: us who are trying to innovate, it's one of those
14:56
Speaker 3: things where you can't really just you have to get it, sticks,
14:59
Speaker 3: stick to it. You have really you know, persevere through,
15:02
Speaker 3: you know, uh, and that's how you menually make the discovery.
15:05
Speaker 3: And in fact, if you compare the US you know
15:10
Speaker 3: index and why he has performed Europe. You know, going
15:13
Speaker 3: back to our discussion earlier, the biggest difference between US
15:17
Speaker 3: and Europe is not even the level, right, is actually
15:20
Speaker 3: the percentage of companies that have persistence a high degree
15:24
Speaker 3: of persistence. And we started the millennium actually with the
15:28
Speaker 3: US and Europe being at similar levels of intensity and
15:32
Speaker 3: percent of companies that have uh, sort of three consecutive
15:35
Speaker 3: years R and the growth. And it was over the
15:37
Speaker 3: last twenty years that difference really diverged, right Uh. And
15:41
Speaker 3: you can so in the in the paper, you have
15:42
Speaker 3: these sort of tables. You can check out these numbers.
15:45
Speaker 2: That's why, in my opinion, it's not just R and
15:47
Speaker 2: D spending. It's a U S thing. And and I
15:54
Speaker 2: talk to people on Twitter life and they say, well,
15:56
Speaker 2: you can get growth here. You just it's hard to
15:58
Speaker 2: get growth other places. Sometimes there's these speculative bubbles like
16:01
Speaker 2: in China, but pound for pound, you're just you're just
16:04
Speaker 2: going to get more growth here in some of these
16:06
Speaker 2: big companies that are in the US, they're just growing.
16:08
Speaker 1: But Steve's going to bring it back to persistent R
16:11
Speaker 1: and D being that thing.
16:11
Speaker 2: And if you go, yeah, but that that that exists
16:14
Speaker 2: in Europe too, but nobody cares.
16:16
Speaker 3: Like that, not to nearly the same extent right over.
16:19
Speaker 2: The last time in percent increase, that's right.
16:22
Speaker 3: The share of companies that sort of really remained persistent
16:25
Speaker 3: in R and D spending just dropped, right, and bisector
16:28
Speaker 3: of the sector, you can compare them, Whereas in the
16:31
Speaker 3: US tech sector is you know, sort of over fifty percent.
16:34
Speaker 3: You know, in Europe you're talking about half that and
16:36
Speaker 3: actually peaked in twenty thirteen, and actually it is even
16:40
Speaker 3: smaller today. In other words, I think it's a kind
16:43
Speaker 3: of a in the American the case is kind of
16:45
Speaker 3: a virtual cycle, right when you have these innovative companies,
16:48
Speaker 3: and I show in the paper that when they invest
16:50
Speaker 3: persistently R and D, it produces intensible capital which then
16:54
Speaker 3: becomes truly valuable, right, and it spins out cash flow.
16:57
Speaker 3: Right if Apple invents the iPhone, invents the AirPods, if
17:00
Speaker 3: becomes a six of a product, and that cash flow
17:02
Speaker 3: funds R and D. Because R and D is inherently
17:05
Speaker 3: a very opaque, asymmetric information activity, right, you don't really
17:08
Speaker 3: want to erase external financing to fund it because nobody's
17:12
Speaker 3: going to know how you're spending it. So you want
17:14
Speaker 3: to use internally generated cash flow, which is why what's
17:17
Speaker 3: nice about this metrip we created is that we don't
17:20
Speaker 3: need explicitly even screen for cash flow because these companies
17:23
Speaker 3: that persistently invest in R and D automatically are profitable
17:27
Speaker 3: and general cash flow and they invest in themselves. So
17:30
Speaker 3: which is why today you're seeing the AI race is
17:33
Speaker 3: all the hyperscalers that are investing capacs by the hundreds
17:36
Speaker 3: of billions themselves. They're not boring, right, So what.
17:40
Speaker 1: You're describing is effectively a flywheel, right, this is the
17:43
Speaker 1: R and D flywheel that that's what makes me.
17:46
Speaker 2: Let's say we decided to go into Europe. Europe had
17:48
Speaker 2: an ice run for six months like two years ago.
17:51
Speaker 2: Is that flywheel going to start there and keep getting rewarded?
17:54
Speaker 2: In other words, are the European companies going to spend
17:57
Speaker 2: it as well, our work as hard as in the US,
18:01
Speaker 2: where that R and D is rewarded with these intangible
18:04
Speaker 2: brands and you know, huge, great products that we have.
18:07
Speaker 3: Yeah, I think that's probably a challenge. I mean, France,
18:09
Speaker 3: I think just announced one hundred billion euro projects try
18:12
Speaker 3: to replicate or to to emulate America Stargate AI project.
18:16
Speaker 3: I think their challenge there is I think again, all
18:19
Speaker 3: these factors that are not pointing in the right direction, right,
18:21
Speaker 3: so they don't have a you know, sort of unified
18:24
Speaker 3: single market. The language is not English. It's hard for
18:27
Speaker 3: them to draw talent. They have a lot of you know,
18:29
Speaker 3: so well trained French engineers from their cause, but you know,
18:33
Speaker 3: sort of it's hard for them to I think, get
18:35
Speaker 3: your scale. You talk about the work culture, they don't
18:37
Speaker 3: have as much. I think the text code probably makes it,
18:40
Speaker 3: you know, such the people are not as incentivized to
18:43
Speaker 3: work those long hours, sleep on the factory floors and
18:45
Speaker 3: so on. I mean I'm generalizing here. I mean they
18:47
Speaker 3: are really genuinely creative, ingenious, hardworking people in Europe. Like
18:52
Speaker 3: there's the Mistraw model, AI model that's really I think
18:55
Speaker 3: the state of the art. But I think, what if
18:57
Speaker 3: you're sort of, so to speak, generalizing there is think
19:00
Speaker 3: those factors that work against them?
19:02
Speaker 1: Okay, So I used to take meetings a number of
19:06
Speaker 1: years ago with Huawei. Do you know what Huawei? The
19:09
Speaker 1: stat that they would point to persist in R and D. Yeah,
19:12
Speaker 1: and it was a big number, and they would like
19:15
Speaker 1: show it how much bigger they spent, how much more
19:18
Speaker 1: money they spent on R and D than American companies.
19:21
Speaker 1: So let's bring China into this. China spins a ton
19:24
Speaker 1: on R and D. What is that? How does that
19:27
Speaker 1: challenge your assumptions.
19:28
Speaker 3: In so so you got cleary. You know, so this
19:31
Speaker 3: episode is a cuptain in America, right, and the last
19:33
Speaker 3: time years, America is far and away the biggest, most
19:37
Speaker 3: successful you know, spender and creative innovation.
19:41
Speaker 1: By the way, see you're Captain America. That's that was
19:44
Speaker 1: That was the joke.
19:45
Speaker 2: Yeah, that was the nickname you got.
19:48
Speaker 3: That's funny, even though I'm not.
19:52
Speaker 2: I know it adds to the humans run with it.
19:54
Speaker 3: So so so if you look in the paper and
19:56
Speaker 3: Fogus figure travel, like I was sort of doing a
19:58
Speaker 3: tabulation of like what percentage of the companies you know,
20:02
Speaker 3: in various national stock markets that are persistent R and
20:06
Speaker 3: D spenders and what market share they take up in
20:08
Speaker 3: the overall stock market. America is you know, obviously number one,
20:12
Speaker 3: right in terms of both accounts, but number two is China.
20:15
Speaker 1: Right.
20:15
Speaker 3: They started a decade negligibly low, right close to zero
20:19
Speaker 3: asserted they started the millennium right in the early two
20:22
Speaker 3: thousand when China was much so further behind in terms
20:25
Speaker 3: of economy development. But they caught up in a very
20:28
Speaker 3: spectacular fashion. So if you look at the chart of
20:30
Speaker 3: you know, sort of that pay figure twelve, that that
20:34
Speaker 3: ascend and rise in R and D expenditures and the
20:38
Speaker 3: degree of persistence, you know, almost catching up with America,
20:43
Speaker 3: you know, a sector bisector.
20:44
Speaker 1: Right when we started talking about this, there was this
20:56
Speaker 1: great email exchange that led into an eventful weekend. I
20:59
Speaker 1: just want to like look back on that for a second.
21:03
Speaker 1: The email that you sent was a couple of weeks ago,
21:06
Speaker 1: January twenty fourth, and you said there should be a
21:10
Speaker 1: fun one with all the hysteria about Chinese AI kneecapping
21:13
Speaker 1: American AI. And then on Monday that was Deep Seek Monday,
21:17
Speaker 1: when everybody woke up and was like, what is Deep Seek?
21:20
Speaker 1: So you sent that email and I was like, you know,
21:22
Speaker 1: it's great to have that time set stamp because now
21:25
Speaker 1: we're going to go back and revisit it. How does
21:27
Speaker 1: your thesis hold up from before the Deep Seek Monday
21:31
Speaker 1: to the after Deep Seek week.
21:35
Speaker 3: So within the context of what we are talking about today,
21:37
Speaker 3: you know, innovation systematic, you know, innovation factor. I think
21:41
Speaker 3: it is actually ties in perfectly and we'll see later
21:44
Speaker 3: why this entire phenomenon actually ties in very naturally to
21:48
Speaker 3: what we were talking about, the American culture. American culture
21:50
Speaker 3: of innovation. And two the ex time we have this
21:53
Speaker 3: great geopolitical rivalry between US and China. What people don't,
21:56
Speaker 3: I think often appreciate, fully appreciated in America, is that
21:59
Speaker 3: China is really copies itself in America's mirror image. Right. China,
22:05
Speaker 3: my generation represents a generation where we grew up looking
22:09
Speaker 3: up to America when we when we first grew up,
22:12
Speaker 3: we used to say thing of the world as the West, right,
22:14
Speaker 3: the outside world, that the abroad, and then we realized
22:17
Speaker 3: not all Western countries are born equal.
22:19
Speaker 1: Right.
22:20
Speaker 3: There is Europe, which is the Old World, and then
22:23
Speaker 3: there's America, in particular the Silicon Valley. And gradually we
22:27
Speaker 3: have had millions of Chinese students coming over the study
22:30
Speaker 3: in America. They acquired that American sort of can do spirit,
22:34
Speaker 3: the entrepreneurship, the ability to reinvent the wheel and not
22:38
Speaker 3: be afraid, not be laughed in your face. And that's
22:40
Speaker 3: why shan Zen is China's Silicon Valley. And that's why
22:44
Speaker 3: you as increasingly seeing sort of Chinese Chinese innovation success,
22:48
Speaker 3: which we will talk about how China sort of succeeded
22:52
Speaker 3: sort of by copying America, not just you know, in
22:55
Speaker 3: terms of literally the blueprints, but also more importantly in
22:58
Speaker 3: a cultural sense. And that's the reason why I think
23:01
Speaker 3: China has Actually it's one of those things where you
23:04
Speaker 3: you know, you can't really catch up overnight, right, you
23:06
Speaker 3: have to sort of practice and practice and practice, just
23:09
Speaker 3: with any sport, right for you to hashman to get
23:12
Speaker 3: get to get onto the game, actually shoot with a
23:15
Speaker 3: high degree of percentage, you know. So I think that's
23:18
Speaker 3: what we are looking at. So America still has a
23:20
Speaker 3: tremendous lead, but China presents a formidable challenge.
23:24
Speaker 1: So let's bring it back to AI specifically. US has
23:27
Speaker 1: obviously been at the lead of this. The deep seek
23:30
Speaker 1: moment sort of suddenly suggests maybe there's different ways to
23:34
Speaker 1: go about making better AI models. How does that sit
23:36
Speaker 1: with your research?
23:39
Speaker 3: So to the extent, you know, so my research is
23:41
Speaker 3: well identifying you know, innovative companies, you know, and we
23:45
Speaker 3: indeed actually sort of find the same cuss out of
23:48
Speaker 3: companies that are succeeding here in America through our index
23:51
Speaker 3: and people can look at the membership. And we have
23:53
Speaker 3: also using applied the same methodology to China identified you know,
23:57
Speaker 3: sort of similarly creative and you know it come in
24:00
Speaker 3: China that are doing well. That with respect to Deep Seak,
24:04
Speaker 3: I think it's actually a very good illustration that, you know,
24:07
Speaker 3: innovation is one of those things where you're sort of
24:09
Speaker 3: paddling upstream, right, you are always sort of persevering and
24:12
Speaker 3: so that so you can make progress and you otherwise
24:14
Speaker 3: you'd be caught up. The Deep Sick moment is really
24:17
Speaker 3: nothing special other than the fact that we are continuing,
24:19
Speaker 3: continuing along the scaling law. Right, you know, sort of
24:21
Speaker 3: costs of compute has always gotten cheaper. When you guys
24:25
Speaker 3: were first entering, you know, the workforce and computers were
24:28
Speaker 3: much slower, right today computers are tiny and on the
24:31
Speaker 3: phone on the phone much faster. And then there's nothing
24:33
Speaker 3: special about it other than the fact that you have
24:34
Speaker 3: happened to have come from China and further innovation will
24:38
Speaker 3: take place in America. What Deep Sick actually has actually
24:41
Speaker 3: done was not even necessarily novel in the sense of
24:44
Speaker 3: the invented brand new techniques. Those techniques have actually been
24:47
Speaker 3: already published by Google right a year and a half ago.
24:50
Speaker 3: Google didn't manage to actually make it sort of commercially
24:53
Speaker 3: work as well as Deep Sick did, but generally the
24:56
Speaker 3: idea is that one thing we've learned. Hardware advantage is
25:00
Speaker 3: one thing, but you know, human capital is still ultimately
25:04
Speaker 3: the most valuable.
25:07
Speaker 2: At the beginning, I mentioned that the US stock market
25:09
Speaker 2: is fifty five percent of the global market cap. Do
25:13
Speaker 2: you see that, you know, growing to sixty seventy. I mean,
25:17
Speaker 2: given how small we make up four percent of the population,
25:20
Speaker 2: that is a big disparity. Obviously, where do you see
25:23
Speaker 2: that number going. Do you see the money consistently rewarding
25:27
Speaker 2: the US like the flywheel, or do you think that
25:30
Speaker 2: the valuations will just get too wide and you just
25:33
Speaker 2: have to go to Europe for like, just because it's cheap.
25:36
Speaker 3: Well, I think I think of it in the two
25:38
Speaker 3: waysn't fundamentally, I don't think it's an accident. Right, stock
25:41
Speaker 3: market is not magic? Right America? I think, even though
25:44
Speaker 3: has such a tiny population, is one of the world's
25:47
Speaker 3: unique immigration country. Right is the immigration system is a
25:50
Speaker 3: funnel the hye B system, which was much talked about
25:53
Speaker 3: a few weeks ago. Essentially it's a funnel to funnel
25:55
Speaker 3: for the world's I think, sort of finest talents. Right, So,
26:00
Speaker 3: even though you know the population is very big, you
26:02
Speaker 3: manage to attract the world's brightest, most best educated population
26:07
Speaker 3: that's been excited by other countries' expense. Right, so, whilst
26:10
Speaker 3: that doesn't change, I see in America having a structural advantage.
26:14
Speaker 3: Now where that change, we don't know. Right there are
26:16
Speaker 3: seemed to be some political winds shifting and with respect
26:20
Speaker 3: to whether or not so we can have a stock
26:22
Speaker 3: market bubble crash, and that's always possible. But this is
26:25
Speaker 3: what happens afterwards when America continue to have that structural
26:28
Speaker 3: advantage with respected the rest of the world. That remains
26:31
Speaker 3: to be seen over the next few years.
26:33
Speaker 1: Steve Hown, this has been fascinating. Thanks so much for
26:36
Speaker 1: joining us on Trillions.
26:37
Speaker 3: Thank you very much for having.
26:43
Speaker 1: Thanks for listening to Trillions. Until next time. You can
26:46
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
26:52
Speaker 1: or wherever else you'd like to listen. We'd love to
26:54
Speaker 1: hear from you. We're on Twitter, I'm at Joel Weber Show,
26:58
Speaker 1: He's at Eric Baltuno's. This episode of Trillions was produced
27:02
Speaker 1: by Magnus Hendrickson. Bye