The Market Huddle
Bull in a China Shop (Guest: Leonid Mironov)
Sat May 18 2024ChinaEconomic DevelopmentTrade RelationsReal EstateEV ManufacturingAdvanced TechnologyCommodity MarketsMarket Performance
Description
This episode covers various topics related to China's successes and failures, including its economic development, trade relations, real estate issues, EV manufacturing, advanced technology, commodity markets, and market performance. The guest, Leonid Mironav from Pacad Asset Management, shares insights based on his experiences and observations. Key points include China's focus on domestic development, its growing market share globally, advancements in EV manufacturing, challenges in the real estate sector, and the potential impact of AI on electricity needs. The episode also discusses commodity trends, investment opportunities, market manipulation, and personal stories.
Insights
China's Transition to High-Income Economy
The guest is optimistic about China's future economic development, believing they will transition into a high-income economy through growing domestic industries and consumption.
Shift in Chinese Trade Relations
Trade with Belt and Road Initiative countries has surpassed trade with the West, indicating a shift in Chinese trade relations.
Impact of Pandemic on Chinese Consumption
Chinese consumers did not return to pre-pandemic consumption levels due to various factors like broken employment relations and lack of handouts.
Real Estate Issues and Governance in China
Chinese governance is not as centralized as commonly believed, with significant powers held by provincial governments. The balance of power between central and provincial governments in China is crucial, especially in the context of real estate issues.
Advancements in EV Manufacturing and Technology
China's success in EV manufacturing was driven by industrial policy and focused leadership, particularly Wang Yang's early recognition of electric vehicle potential. Chinese EV success involved cheap financing, technology transfers from the West, and learning from Tesla's processes like gigacasting for more efficient production.
China's Presence in the Global Car Market
CATL (Contemporary Amperex Technology Limited) is a leading company in EV batteries with global presence and advanced technology. Lioto's high-quality vehicles challenge stereotypes about Chinese car manufacturing and offer competitive pricing.
Challenges and Opportunities in the Auto Industry
Partnerships and acquisitions between Chinese and international firms are increasing due to new recommendations from NDRC. Existing auto manufacturers face challenges with price competition, capacity utilization, and restructuring historical obligations. China is further along in autonomous driving development compared to the US, with smart infrastructure aiding navigation.
AI's Impact on Electricity Needs and Commodity Markets
The increasing electricity needs due to AI advancements pose challenges alongside the shift to EVs, impacting electricity production and commodity usage. Copper and aluminum markets are discussed, with observations on their price movements and supply-demand dynamics.
Copper Market Trends and Mining Operations
Copper market trends are similar to aluminum but less followed, with potential for substitution into other metals in the future. Chinese corporate producers have been investing in expanding copper production and acquiring quality assets overseas. Political and labor issues affect mining operations like Las Bambas in Peru.
Market Performance and Investment Opportunities
The S&P 500 has reached a new high on a cash index basis, with futures also showing strength. Emerging markets may shine when the US dollar weakens and signs of economic recovery appear. Investors should consider new market patterns rather than relying on old playbooks. Commodities like copper are on an upward trend, signaling potential for further growth.
Chapters
- China's Successes and Failures
- Career Journey and Economic Outlook
- Chinese Trade Relations and Global Market Share
- Impact of Pandemic on Chinese Consumption and Reforms
- Power Dynamics and Real Estate Issues in China
- Real Estate and Electric Vehicle (EV) Manufacturing in China
- Chinese Companies in the Global Car Market
- Partnerships and Market Challenges in the Auto Industry
- Advanced Technology and Energy Solutions in China
- Electricity Needs, Power Grids, and Commodity Markets
- Copper Market Trends and Mining Operations
- Price Movements and Investment Opportunities in Commodities
- China's Advancements and Market Potential
- Commodity Markets and Energy Solutions
- Rise in Natural Gas Prices and Precious Metals
- Market Performance and Volatility
- Market Manipulation and Trading Reflections
- Global Economy and Investment Opportunities
- Commodity Trends and Market Volatility
- GameStop Stock and Market Manipulation
- Personal Stories and Closing Remarks
Summary
Transcript
China's Successes and Failures
00:04 - 07:12
- Leonid Mironav from Pacad Asset Management discusses China's successes and failures
- Leonid Mironav shares his background of being born in Moscow and moving to the UK for safety reasons
- He attended University of St. Andrews and later pursued a graduate degree in Japan on a scholarship
- The program was conducted in English at the International University of Japan located in the Japanese Alps
- Japan offers unique skiing experiences with abundant snowfall compared to Europe
Career Journey and Economic Outlook
06:54 - 14:29
- The speaker considered taking a job with Ishikawa Jima Harima heavy industries in Tokyo to sell nuclear reactors but decided against it due to the work conditions and pay
- In the 1990s, Russia saw a surge in public limited companies becoming tradable overnight, leading to opportunities for trading shares directly with smaller companies
- The speaker worked at UBS on the sell side where they could make deals with management and physically list shares on exchanges, providing a personal franchise-like experience
- The speaker later joined a hedge fund in Hong Kong that was spun out from Frontpoint during the financial crisis, led by Steve Eisman among others
- The speaker is optimistic about China's future economic development, believing they will transition into a high-income economy through growing domestic industries and consumption
- China's focus is on domestic development and integration into the global economy rather than conflicts with the West
Impact of Pandemic on Chinese Consumption and Reforms
21:27 - 28:37
- Chinese consumers did not return to pre-pandemic consumption levels due to various factors like broken employment relations and lack of handouts
- Lockdowns in China led to a shift in priorities towards value consumption over auspicious consumption
- President G's handling of the pandemic was criticized for applying a playbook that did not work well for the second wave of the virus
- The lack of public services, especially in bigger Chinese cities, has been an issue that the pandemic accelerated reforms for
- Hukou reform in China is being discussed as a way to provide equal access to services for all residents, with some major cities already removing Hukou requirements
Power Dynamics and Real Estate Issues in China
28:10 - 35:29
- Chinese governance is not as centralized as commonly believed, with significant powers held by provincial governments
- Local governments in China have historically raised funds through land sales and local financing vehicles to provide services like hospitals and schools
- The balance of power between central and provincial governments in China is crucial, especially in the context of real estate issues
- Xi Jinping aims to concentrate more power in Beijing, potentially through long-term bond issuance to fund central initiatives
- Xi Jinping was chosen for his mandate to address corruption in China, which he tackled with a heavy-handed approach
Real Estate and Electric Vehicle (EV) Manufacturing in China
35:11 - 42:02
- Xi Jinping recognized real estate sector issues in 2014-2015 but only took action later when he had enough power
- China implemented the three red lines policy to limit real estate funding and control its role in the economy
- Deflating the real estate bubble is affecting Chinese headline growth, leading to policies like purchasing homes for social housing
- China's success in EV manufacturing was driven by industrial policy and focused leadership, particularly Wang Yang's early recognition of electric vehicle potential
- Chinese EV success involved cheap financing, technology transfers from the West, and learning from Tesla's processes like gigacasting for more efficient production
Chinese Companies in the Global Car Market
41:57 - 49:02
- China focuses on making money from final products like batteries and grid storage, not just raw materials
- CATL (Contemporary Amperex Technology Limited) is a leading company in EV batteries with global presence and advanced technology
- CATL is preferred over other Chinese EV companies due to its broad market reach and innovative licensing strategies
- Lioto's high-quality vehicles challenge stereotypes about Chinese car manufacturing and offer competitive pricing
Partnerships and Market Challenges in the Auto Industry
48:37 - 56:20
- Europe is considering allowing Chinese car companies to participate in the global car market
- Partnerships and acquisitions between Chinese and international firms are increasing due to new recommendations from NDRC
- Chinese companies are setting up production facilities in the EU to navigate competition and social impact
- Existing auto manufacturers face challenges with price competition, capacity utilization, and restructuring historical obligations
- Elon Musk's company may struggle with value proposition for Chinese buyers due to competition and delayed model releases
- China is further along in autonomous driving development compared to the US, with smart infrastructure aiding navigation
Advanced Technology and Energy Solutions in China
55:53 - 1:02:52
- Chinese cars are equipped with advanced technology like lidars and sensors for autonomous driving, unlike Tesla vehicles
- China is ahead in implementing grid-to-vehicle and vehicle-to-grid transfer for electricity stabilizing services using electric vehicles as grid-level storage
- Thrifting in EVs involves using less important materials like copper and nickel, leading to reduced demand for these commodities
- AI's increasing demand on the grid poses challenges alongside the shift to EVs, impacting electricity production and commodity usage
Electricity Needs, Power Grids, and Commodity Markets
1:02:29 - 1:09:06
- The speaker is skeptical about the transformative impact of AI, believing it will mainly increase productivity and energy demands
- The speaker discusses the increasing electricity needs due to AI advancements and the potential strain on power grids
- There is a conversation about the challenges in making power grids smarter and the reliance on China for sourcing necessary infrastructure
- The efficiency and cleanliness of coal power plants in China are highlighted, with a mention of carbon capture technology
- Copper and aluminum markets are discussed, with observations on their price movements and supply-demand dynamics
Copper Market Trends and Mining Operations
1:08:49 - 1:15:58
- Copper market trends are similar to aluminum but less followed, with potential for substitution into other metals in the future
- Chinese corporate producers have been investing in expanding copper production and acquiring quality assets overseas
- Optimism regarding exposure to copper due to Chinese companies timing their capacity expansions well with the pickup in prices
- Discussion on political and labor issues affecting mining operations like Las Bambas in Peru
- Gas market influenced by weather-related factors and LNG facility developments, with a positive long-term outlook outside the US
- Concerns about crude oil supply-demand balance leading to potential shortages by 2030 due to quality of life improvements in emerging countries
Price Movements and Investment Opportunities in Commodities
1:15:30 - 1:22:44
- Producers are facing a negative price shock due to oversupply and low demand
- There are concerns about uranium market shortages despite lack of public transactions reflecting it
- Potential for uranium supply increase from various countries if financing is available
- Copper is favored as a commodity to buy and hold for both short-term and long-term investments
- Aluminum production is influenced by electricity prices, with different impacts based on location
- Chinese industrial sector, including electric vehicles, is expected to see significant growth and technological advancements
China's Advancements and Market Potential
1:22:22 - 1:29:19
- China has advanced in quality and product curve, producing high-quality products like iPhones at reasonable prices
- China is excelling in various industries, including industrial equipment and technological advancements like water purification
- Quantitative funds are prevalent in China, with a significant number of listed companies surpassing those in the US
- China is undergoing a period of cleaning up its stock market, potentially leading to lasting advantages in the number of stocks available for trading
- The interviewee expresses gratitude towards their partner for enabling personal and professional growth over many years
- For more insights on EVs and following the interviewee's work, they can be found on Twitter, LinkedIn, or contacted via email
Commodity Markets and Energy Solutions
1:28:56 - 1:36:19
- The podcast discusses the recent performance of commodity markets, yields, and inflation numbers
- There is a debate on whether recent inflationary numbers are sustainable or just a temporary surge
- The hosts are monitoring flash surveys and manufacturing PMIs to gauge economic strength in the upcoming weeks
- Energy markets, including oil, gasoline, and natural gas, are showing signs of life after consolidation periods
- There is optimism about the long-term potential of natural gas as an energy solution
Rise in Natural Gas Prices and Precious Metals
1:35:55 - 1:43:26
- Natural gas winter prices are higher than spot prices, suggesting a general rise in the space
- NAC-AS producers show consolidation after a bullish run, potentially signaling a breakout
- Precious metals like silver and platinum are showing strong performance, with silver attempting decade-high close and platinum breaking out of a year-long range
- Charts can be more reliable indicators for timing investments in precious metals than fundamental analysis
- Commodity index is breaking out to two-year highs, even without oil's contribution, indicating overall strength in the commodity market
Market Performance and Volatility
1:42:57 - 1:50:07
- The S&P 500 has reached a new high on a cash index basis, with futures also showing strength
- Market is in a new accumulation cycle and has brushed off economic news hurdles
- Volatility levels are at year lows, with six-month and one-year volatility also at fresh lows
- Despite concerns about the market, there is a sense of complacency and cheap options for insurance
- Strategies discussed include buying puts or replacing longs with cheap calls to participate in the market upside
Market Manipulation and Trading Reflections
1:49:51 - 1:56:55
- Discussion on the potential market impact if Trump gets convicted and is unable to run for office
- Analysis of volatility in the markets related to options trading and contract pricing
- Comparison between Euro stock and S&P performance, highlighting surprising similarities
- Observations on Nikkei's steeper correction and concerns about its current heavy performance
- Consideration of emerging markets as a long-term investment theme and potential shift away from US assets
Global Economy and Investment Opportunities
1:56:28 - 2:03:24
- Higher interest rates may impact the global economy, leading to a business cycle
- Emerging markets may shine when the US dollar weakens and signs of economic recovery appear
- Investors should consider new market patterns rather than relying on old playbooks
- US dollar debt in emerging markets may be lower when adjusted for GDP
- Doctor Copper's performance suggests economic strength despite bond purchases
- Commodities like copper are on an upward trend, signaling potential for further growth
Commodity Trends and Market Volatility
2:02:56 - 2:10:14
- Uranium prices are rising despite spot prices not moving much
- Grains like wheat, corn, and soybean are showing positive trends
- Rare earths market is up ticking after a bear market
- Discussion on bond yields and potential scenarios for rate cuts
- Meme stocks like GameStop are briefly mentioned in the after show
GameStop Stock and Market Manipulation
2:09:53 - 2:17:06
- Discussion about the volatile trading of GameStop stock, which rose to $80 and then dropped back down
- Reflections on market manipulation and separating 'idiots' who need to lose money
- Conversation about a debaucherous Mexico trip involving trading and partying on a boat
Personal Stories and Closing Remarks
2:16:45 - 2:19:17
- The speaker used to participate in a tradition called May 2-4 polar bears involving diving into cold water
- The speaker recently had laser eye surgery and is still experiencing blurry vision
- The speaker plans to take their surfing career to the next level after recovering from the surgery
- There is a mention of an invitation to go surfing in Puerto Rico with someone named Kuppie
- The conversation ends with a plan to close the show and return in a couple of weeks