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