This Could be China's Future, Too

WSJ: At night, the Chongqing skyline illuminates with neon lights, reminiscent of the film “Blade Runner”</td>

I thought I was done with international travel, but I might make an exception for Chongqing:

China has long awed visitors with wonders such as the Great Wall and the terracotta warriors buried in an ancient tomb. Now visitors are being dazzled by Chongqing’s vision of a real-world cyberpunk city.

Until a few years ago, Chongqing was largely a trivia answer: the world’s most populous city by some measures, with 32 million people in a South Carolina-size area. World War II history buffs knew it as the Chinese Nationalists’ wartime capital.

Then viral videos of its impossible architecture changed its image. Suddenly, many Chinese and international travelers alike felt they had to visit.

Chongqing welcomed 120 million tourists who stayed overnight last year, up 17% from 2023. In the first half of this year, Chongqing’s border checkpoints handled a record number of foreign nationals—but only 330,000, so overseas visitors who make it here can still brag about visiting a hidden gem.

Chongqing's popularity is not imposed from the top but is a grass-roots phenomenon. Chongqing native Ryan Chen, aka the "Chinese Trump," is a popular social media influencer.



Don't make the mistake of thinking that because China's problems are vast, that it is declining. Its dynamism is larger than anything we can imagine, too.

Embracing the Suck

(SCMP photo)

Many trends start in Asia, but I hope this one doesn't gain purchase here.

Stressed adults rely on pacifiers to soothe themselves

Once a niche quirk, the silicone soothers are supposedly now big business on Chinese e-commerce giants like Taobao and JD.com, where they are priced anywhere from a budget-friendly 10 yuan ($1.40) to a luxury 500 yuan ($70).

They’re sold as sleep aids, stress relievers, even smoking-cessation tools — and shoppers are gobbling them up. Some online sellers move thousands each month, according to the South China Morning Post.

And the fans aren’t shy about why. “When I’m under pressure at work, I feel a sense of safety from childhood,” one Chinese buyer said, as reported by the outlet.

In the U.S. sucking on a pacifier is ripe for mockery, and I suspect that facing-the-public workplaces will ban the behavior. However, we have also seen frowned-upon practices become acceptable, as long as they don't cause harm to others. Nevertheless, I don't see pacifier-sucking being embraced, because many women will be turned off by guys who do and vice versa.

Just Nibbling

My entry points for four stocks

Since the stock market began dropping in February I've been nibbling at stocks that I formerly believed were too expensive relative to their growth prospects. Of course, I had not anticipated the stock market rout from the Trump tariffs announced yesterday, in which case I have bought too soon. (Analysts expect more declines as other countries, especially China, respond with "retaliatory" tariffs.)

I've invested less than 2% of my retirement monies so far and will close my eyes and buy more if declines continue. I am still confident that stock prices will be higher in a year, and though they were not bought at the bottom I will be glad I nibbled.

Containment 2.0

George F Kennan (Wilson Center)

In July, 1947, Foreign Affairs published “The Sources of Soviet Conduct” by "X," the pseudonym for George F. Kennan, who was stationed in Moscow by the State Department from 1944 to 1946. The article became the basis for Soviet "containment," the U.S. policy throughout the Cold War:

It is rather a question of the degree to which the United States can create among the peoples of the world generally the impression of a country which knows what it wants, which is coping successfully with the problems of its internal life and with the responsibilities of a World Power, and which has a spiritual vitality capable of holding its own among the major ideological currents of the time. To the extent that such an impression can be created and maintained, the aims of Russian Communism must appear sterile and quixotic, the hopes and enthusiasm of Moscow’s supporters must wane...

the United States has it in its power to increase enormously the strains under which Soviet policy must operate, to force upon the Kremlin a far greater degree of moderation and circumspection than it has had to observe in recent years, and in this way to promote tendencies which must eventually find their outlet in either the break-up or the gradual mellowing of Soviet power.

Containment was the guiding philosophy behind: 1) the Marshall Plan (1948-1951); 2) the formation of the North Atlantic Treaty Organization (NATO) in 1949; 3) the Korean War (1950-1953); and 4) the Vietnam War (1955-1975), with the U.S. taking the lead role from the French in 1964-1965.

Events that seemed to justify containment were 1) the Soviet atomic bomb (1949); 2) the creation of the People's Republic of China (1949); 3) the growth of communism in Latin America, of which the revolution in Cuba and the Cuban Missile crisis in 1962 were the most important historically.

The point of the above is not to rehash the history of the Cold War, but to point out that the Trump Administration's seemingly endless foreign policy disputes over tariffs, Ukraine, energy, technology transfers, etc, may be clearing the decks for a Cold War 2.0 with China under Containment 2.0. [bold added]

Soon after Donald Trump won the presidential election in November, Xi Jinping asked his aides to urgently analyze the Cold War rivalry between the United States and the Soviet Union.

His concern, according to people who consult with senior Chinese officials, was that as President Trump gears up for a showdown with Beijing, China could get isolated like Moscow during that era.

He’s not wrong to worry. Even though Trump may be the one who currently looks isolated on the world stage—picking trade fights with erstwhile allies like Mexico and Canada, alarming Europe over his handling of the war in Ukraine and vowing to annex Greenland and the Panama Canal—the truth is that China doesn’t hold a strong hand.

With a domestic economy in crisis, Xi is playing defense, hoping to salvage as much as possible of a global trade system that helped pull his country out of poverty. Across the Pacific, Trump is intent on rewiring that very trading system, which he and his advisers see as having benefited the rest of the world—and China most of all—at the U.S.’s expense.

It isn’t just trade. The competing agendas of the leaders of the world’s two largest economies are poised to lead to precisely what China is trying to avoid: a superpower clash not seen since the Cold War, an all-encompassing rivalry over economic, technological and overall geopolitical supremacy.

Seen in that light, President Trump is willing to take the hit for being called Putin's stooge in the matter of Ukraine. The U.S. cannot afford to have Russia and China allied against it in a contemporary version of Monolithic Communism, now regarded, to be sure, as over-exaggeration by historians decades later.

His critics say that he is crazy, stupid, impulsive, and narcissistic. Perhaps the question should be: is Donald Trump that smart?

Even the Nvidia Tree Doesn't Grow to the Sky

On November 30, 2022 OpenAI's ChatGPT provided to the general public an inkling of what Artificial Intelligence can do, and Nvidia stock. then $16.91, has never looked back. NVDA is the clear-cut leader in making the fastest chips that power AI models, and the largest hyper-scalers like Microsoft and Google regularly order tens of $billions of Nvidia's most advanced chips every year.

One week ago China's DeepSeek released two products, DeepSeek-R1-Zero and DeepSeek R1 (aka "Reasoner"), that showed that it is possible to produce AI that is nearly equal in performance to the most advanced models with lesser chips. The stock market reckoning occurred earlier today.

The tech-heavy Nasdaq fell 3.1%, driven by a 16.9% dive in Nvidia shares. Nvidia dominates the market in advanced AI chips. Its stock had surged more than 10-fold since early 2023—achieving a more than $3.3 trillion market valuation until Monday—as tech giants announced hefty outlays on AI.

Enter DeepSeek, which last week released a new R1 model that claims to be as advanced as OpenAI’s on math, code and reasoning tasks. Tech gurus who inspected the model agreed. One economist asked R1 how much Donald Trump’s proposed 25% tariffs will affect Canada’s GDP, and it spit back an answer close to that of a major bank’s estimate in 12 seconds. Along with the detailed steps R1 used to get to the answer.

More startling, DeepSeek required far fewer chips to train than other advanced AI models and thus cost only an estimated $5.6 million to develop. Other advanced models cost in the neighborhood of $1 billion. Venture capitalist Marc Andreessen called it “AI’s Sputnik moment,” and he may be right.

DeepSeek is challenging assumptions about the computing power and spending needed for AI advances. OpenAI, Oracle and SoftBank last week made headlines when they announced a joint venture, Stargate, to invest up to $500 billion in building out AI infrastructure. Microsoft plans to spend $80 billion on AI data centers this year.

If DeepSeek's numbers can be believed, its R1 costs less than one percent (1%) of other models. Even if this was an exaggeration, the cost differential is so vast that Nvidia's valuation fell $589 billion today.

Chips have progressed so rapidly that the industry grew lazy. Why program efficiently when you can "brute force" solutions through advancing hardware? DeepSeek proved that paying attention to software practices can be enormously productive.

Game on!

Happy Mother's Day

It's Mother's Day, but today we were moved by this father's love for his child and how it turned out 16 years later.

Today in 2008, Li Yang dug with bare hands for over 10 hours, rescued his buried daughter Li Jiaqin, from the rubble of Wenchuan earthquake汶川地震.

16 years later, daughter has made a transition from a student to a doctor.

A father's love is strong like a mountain父爱如山 pic.twitter.com/Vj3RK1JMjt

— China in Pictures (@tongbingxue) May 12, 2024

AAPL Bounces

Despite its recent difficulties, AAPL has outperformed
MSFT over the past five years. (WSJ)

Unlike its other mega-cap peers, Apple stock had barely moved in the past twelve months. It had not outlined an artificial-intelligence strategy, its iPhone sales had fallen in China, and the Justice Department had launched a broad antitrust action against Apple. Expectations had been set very low for Apple's quarter ended March 31, 2024.

Apple's report on May 2nd provided a pleasant surprise:

Apple stock rallied in afternoon trading, after results narrowly beat estimates and the company touted a new $110 billion buyback program.

Apple also signaled sales are likely to grow this quarter, when it reported earnings late Thursday.

Shares in Apple stood more than 6% higher in recent trading, mirroring a late-Thursday rally. The stock hasn't risen more than 5% in a single session since late 2022, FactSet data shows.

Here is how the results stacked up against analysts' consensus expectations from FactSet:

Revenue of $90.8 billion vs. expected $90.4 billion

Net income of $23.6 billion vs. expected $23.3 billion

GAAP earnings of $1.53 per share vs. expected $1.51 per share

Apple approved an additional $110 billion in share repurchases, and raised its quarterly dividend by a penny to 25 cents.

Apple may have already hit its bottom this year. I'm holding on.

Henry Kissinger (1923-2023)

Henry Kissinger dated glamorous
celebrities like Jill St. John (NY Post)

When there were only three channels on TV, when every city had two newspapers, when print magazines (Time, Newsweek, U.S. News, Life, Look, etc.) each had millions of subscribers, Henry Kissinger headlined all of them. He was the rock star of the Nixon Administration long before "rock star" became a term of approbation in fields other than music.

Henry Kissinger's Harvard professorship lent an aura of intellectual respectability to Nixon's foreign policy, defusing some of the critics' attacks. His "shuttle diplomacy" brokered the U.S. withdrawal from Vietnam, peace between Israel and Egypt during the Yom Kippur war, and the historic opening of ties with Mao Tse-Tung's China.

It only added to his stature when he dated some of the most glamorous women in the world.

Henry Kissinger has his detractors from the left (bombing of Cambodia) and the right (detente with the Soviet Union). Nevertheless, it is clear that much of today's geopolitical landscape is the result of actions he took 50 years ago. R.I.P.

The U.S. and China Come to the Table

40 years after the "walk in the woods", Presidents Xi and
Biden walk around the Filoli Gardens in Woodside, CA (ABC)

When China adopted a hybrid version of capitalism, it was nearly a foregone conclusion that China would eventually become the world's dominant power. Although its per-capita GDP was "only" USD $13,000--a fraction of the United States' $75,000--China's GDP of $17.7 trillion was rapidly approaching the U.S.' $23.3 trillion in 2021. China was marching inexorably toward number one.

Not so fast. As Presidents Xi and Biden met today at nearby Filoli Gardens, China is struggling with a number of worrisome economic issues. [bold added]

China’s economy is beset by multiple challenges, from a deflating property bubble and unmanageable local government debts to slumping confidence and deflation. The U.S., meanwhile, has just recorded its strongest quarter in nearly two years while inflation subsides. China’s gross domestic product, which was 75% the size of the U.S.’s in 2021, had slipped to 64% in the third quarter, roughly where it was in 2017...

China’s growth, which averaged 10% a year from 1980 to 2012, was always bound to slow around now because of an aging population, less rural-to-urban migration and diminishing opportunities to catch up to wealthier countries.

But the slowdown has been sharper than expected. The World Bank now expects China’s annual growth in the next two years to average 4.5%, roughly a percentage point slower than it projected a decade ago. The International Monetary Fund sees growth averaging just 3.9% over the next five years...

During the global financial crisis of 2007-09 China launched a massive stimulus program aimed at infrastructure, housing and later, technology. Local governments and developers financed this investment by borrowing from banks and the Chinese public, using new financing vehicles to get around borrowing restrictions imposed by Beijing...

Whereas the U.S. has too few houses and infrastructure, China now has too much of both. Millions of apartments are vacant. Guizhou, a relatively poor province, is home to 23 of the world’s 100 highest bridges. High-speed railway track is growing more than twice as quickly as passengers, according to Rogoff and Yang.

Much of the debt to finance that investment, issued by developers and local governments to ordinary Chinese or Chinese banks, is in danger of default. The IMF estimates 30% of local government debt is nonviable. Collapsing revenue from land sales and business taxes have saddled local governments with yawning deficits. An August Rhodium report co-authored by Wright concluded that China has much less fiscal space than widely believed to finance industrial policy, defense and its Belt and Road Initiative of foreign infrastructure loans...

China’s declining population is a slow-moving problem that suddenly accelerated in the past two years. In 2017 the fertility rate, the number of children a woman could expect to bear over her lifetime, was around 1.6, below the 2.1 needed to maintain a stable population...

Chinese authorities are ideologically opposed to boosting consumption, such as through more generous healthcare and retirement benefits, which would reduce the need to save. Meanwhile, Xi has worsened confidence through “a series of profound policy choices…that are now coming back to hobble the Chinese economy and its recovery,” said Barry Naughton, an expert on Chinese industrial policy at the University of California San Diego.

Starting in 2020, the Communist Party unleashed a regulatory crackdown on private businesses in online commerce, online education and gaming, ostensibly to clamp down on privacy and anticompetitive abuses but mostly to cement its control over the private sector.

Despite these recently surfaced weaknesses, China still has immense power, particularly in manufacturing. It can easily disrupt supply chains of major industries around the world if it so chooses. And China's quest to expand territory, most notably to annex Taiwan, will threaten political and economic stability for decades.

The interesting aspect of this civilizational contest between China and the West is that, for the first time in memory, time is not on China's side. Its aging, shrinking population will force China to turn inward, while immigration and open markets are likely to continue growth for the U.S. and its allies.

Of course, President Xi is aware of these demographic realities. The near-term danger is that he may be tempted to accelerate his expansionist plans before the West gets stronger and China gets weaker.

Let's hope that President Biden can offer him deals that will help the Chinese people and their economy while at the same time defusing the prospect of military conflict.

The Autocrat's Fatal Flaw

Xi Jinping in March, 2023 when he was elected
President for his third term (NPR)

Xi Jinping's "successor's dilemma": [bold added]

Autocrats tend to prefer installing successors whom they trust to uphold their legacy and protect their interests in retirement. But leaders-in-waiting must start building their own power base ahead of time, if they are to avoid being deposed or rendered ineffectual after taking office. Once a clear successor emerges, the political elite will naturally start realigning their loyalties—a process that can undermine the incumbent leader, who may come to fear that the heir apparent is plotting to usurp power.

Authoritarian leaders also have to expect grave consequences should they lose power involuntarily. Even autocrats who retire on their own terms have few guarantees for their safety, other than their ability to maintain leverage over their successors. In a 2010 study, political scientists Alexandre Debs and H.E. Goemans reviewed the fate of more than 1,800 political leaders worldwide, categorized by regime type, from the late 1910s to the early 2000s. Some 41% of the 1,059 autocrats suffered exile, imprisonment or death within a year of leaving office, compared with just 7% of 763 democratic leaders.

Not since Mao has power been so consolidated in one man. Xi Jinping, who will turn 70 next month, has avoided naming a successor and possible rival.

As we've noted before, China faces a demographic time bomb. Many of its youth are disaffected, and China's neighbors, fearful of its imperial ambitions, are arming themselves. By not naming his successor, or by not formulating a reliable method for choosing one, Xi Jinping ironically has fostered the very instability that may endanger his goal of a China that is first among nations.

Chinese Young Adults: the World is not Their Oyster

Beijing job fair last August (WSJ photo)

We've noted before how China's one-child policy may have triggered a population bust that will affect geopolitics for the rest of the century. The policy was officially rescinded in 2015, but by then it was too late; births are below replacement level, and the population shrank in 2022.

With jobs going wanting young Chinese adults should expect the world to be their oyster, but they would be mistaken. [bold added]

Last year, Chinese unemployment for those between the ages of 16 and 24 reached 20%—a record high and more than double what it was in 2018. The job shortage is particularly acute for graduates with advanced degrees, people who had expected the most from the job market because their families had sunk up to a third of their income into their education. During last autumn’s hiring season, around 45% of recent college graduates in China received no job offers, according to one published survey.

The problem isn’t that there aren’t enough jobs in China. Rather, it is the acute mismatch between the education and skills of those entering the job market and the jobs that need to be filled.

The manufacturing sector in China is experiencing a severe labor shortage: Four out of five Chinese manufacturers report that their workforces are falling 10% to 30% short of their needs, and the education ministry forecasts a shortage of 30 million manufacturing workers by 2025.

The following description of Chinese young adults is familiar to observers of their counterparts in the U.S.:

A great chasm has emerged between expectations and reality. The glut of diplomas has caused the average starting salary of college graduates to fall below that of workers in the gig economy, such as delivery people. Real estate, finance and IT receive more job applications than they can begin to absorb, and the major online recruiting site Zhaopin.com reports that 90% of applications go to sectors that provide less than 50% of the jobs. Young job seekers face disappointment after disappointment.

The consequences of reduced expectations among unemployed youth are profound. Members of the young generation increasingly are putting off getting married and starting a family, breaking the traditions of a Confucian society. In 2021, there were only 7.6 million new marriages registered, a 38% drop from 2015. Meanwhile the birthrate has fallen to the lowest the country has ever seen.

Discontent among the new generation also represents a threat to the nation’s social stability. In the past, Chinese families, even in the bottom rung, felt content even as income disparities grew, because people believed that their children would have a better life. The erosion of such beliefs poses the risk of unrest.

China has ambitious goals and immense resources, but its visible and growing weaknesses may well make it, as Mao said of the United States, a paper tiger.

AI: Where Export Sanctions Are Working

NVIDIA's H100 chip is 814 sq mm (CNET)

Chinese developers of artificial intelligence have been hampered by U.S. export sanctions: [bold added]

Chinese companies are cut off from Nvidia’s A100 chips, the most popular within the industry for AI development, and the next generation version, the H100 released in March, which offers more computational power.

Nvidia created downgraded versions of its chips for the Chinese market, called the A800 and H800, respectively, to meet sanction requirements. Both modified chips reduce the capacity of a chip to communicate with others.

The products provide an effective alternative for developing small-scale AI models, such as those used in the recommendation algorithm driving ByteDance’s short-video app TikTok. But the handicap throttles the development of larger AI models, which require the coordination of hundreds or thousands of chips.

Through software workarounds, clustering of NVIDIA's less powerful H800's, and designing their own chips, the Chinese hope to keep pace with AI development elsewhere.

Given the speed of technological advancement, small leads become larger over time if one side lacks the tools. The sanctions are not completely leakproof, but they appear to be having their intended effect.

It Won't be a Chinese Century

1975: "Practicing family planning is conducive
to protecting the health of mothers and children"

China's one-child policy may have provided economic benefits over three decades, but it has turned out to be a long-term disaster: [bold added]

The Chinese family is about to undergo a radical and historically unprecedented transition. Extended kinship networks will atrophy nationwide, and the widespread experience of close blood relatives will disappear altogether for many. This is a delayed but inescapable consequence of China’s birth trends from the era of the notorious one-child policy (1980-2015). The withering of the Chinese family will make for new and unfamiliar problems, both for China’s people and its state. Policy makers in China and abroad have scarcely begun to think about the ramifications...

A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.

By a grim twist of fate, China’s withering of the family is set to collide with a tsunami of new social need from the country’s huge elderly population, whose ranks will more than double between 2020 and 2050.... By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women. Thus exigency may overturn basic familial arrangements that have long been taken for granted. The focus of the family in China will necessarily turn from the rearing of the young to the care of the old...

Owing to the surfeit of baby boys under the one-child policy and declining cohort sizes, growing numbers of men in decades ahead will enter old age without spouses or children—the traditional sources of support for the elderly. By our projections, by 2050, 18% of China’s men in their 60s will have no living descendants, twice the fraction today.

The thinning of family trees has significant societal implications:

China’s coming family revolution could easily conduce to a rise in personal risk aversion. Risk aversion may in turn dampen mobility, including migration. Migration is a risky act that requires knowledge of opportunities and trusted people who can help obtain them. Without the ability to stay on a cousin’s couch, so to speak, migration will become riskier, harder, and, almost certainly, rarer. Less migration means less urbanization, which means less growth—and possibly still more pessimism and risk aversion.

The change in Chinese family structure also promises political reverberations. If the waning of the family requires China to build a huge social welfare state over the coming generation, as we surmise it will, Beijing would have that much less wherewithal for influencing events abroad through economic diplomacy and defense policy.

Further, our simulations suggest that by 2050 at least half of China’s overall pool of male military-age manpower will be made up of only children. Any encounter by China’s security forces involving significant loss of life will presage lineage extinction for many Chinese families.

If China's hegemonic ambitions can be contained over the next decade, then the inexorable reality of its demographics will cause expansionist looking outward to become contractionist turning inward.

China is and will continue to be a great power, but it won't be a Chinese century.

In America This Will Be Off-Menu

And my dish: pic.twitter.com/mljWNV8fbe

— China in Pictures (@tongbingxue) December 28, 2022

Woke Feelings Are More Important Than 900 Children

The offending tiles (Palo Alto Online)

Summer camp for 900 kids was cancelled because staffers quit over two tile swastikas that are at least 109 years old. [bold added]

the resignations are linked to three tiles built into the home of the farm’s founders in 1929. Two of the tiles include a stylized version of a swastika. The 12-inch by 12-inch tiles, the letter said, were bought by Frank and Josephine Duveneck while traveling through Asia on their honeymoon in 1913.

According to the letter, the tiles bear Buddhist swastikas and a lotus and are embedded into the wall of the historic Duveneck house on the property. The swastika, believed to be more than 7,000 years old, was a sacred symbol in Hinduism, Buddhism, Jainism, and Odinism long before it was adopted as an emblem for the Nazis in 1920, according to the Holocaust Encyclopedia.

It's easy to take shots at the young staffers, who prioritize their feelings over the welfare of hundreds of children. This woke generation doesn't bother to look outside its bubble at other cultures or even try to understand historical contexts, accusations by the way which they freely level at the so-called dominant white culture.

We'll just close by looking at the couple who built Hidden Villa.

Born into Boston aristocracy, both Josephine Whitney and Frank Duveneck came to California to escape their "overbearing families." They bought a thousand acres ("Hidden Villa") in what is now Los Altos Hills and finished their house in 1930.

From the beginning of the Great Depression the Duvenecks opened Hidden Villa to minorities and the disadvantaged:

Hidden Villa became a center for social, educational, environmental, and humanitarian activities. It summer it was a youth camp, to which the Duvenecks brought minority and disadvantaged children, and minority counselors, which given the mostly white demographics of the San Francisco Peninsula, was particularly unusual and innovative.

It had the first youth hostel on the Pacific Slope. World War II refugees and Japanese-American victims of the World War II "relocation" - internment - were released to Hidden Villa. Gatherings included church outings, interracial parties, and fundraisings. Minority groups were welcome. The hostel accommodated a Moslem group which met to instruct children in Moslem faith and rituals. Native Americans met for dancing and feasts.

In the late 1950's Hidden Villa Camp was incorporated as a non-profit. Hidden Villa charged fees, but they were reasonable, although the Duvenecks generally paid the taxes, utilities, maintenance, and capital improvement costs.

The Duvenecks would undoubtedly weep if they knew that the Buddhist tile that symbolized the importance of Asian culture to them would cause such upset in the lives of hundreds of children this summer.

Apple Rolls Along

Through yesterday's close AAPL is up 42%, vs the NASDAQ'S 12%, over the past 12 months.
It's down 2% to $160 this morning.

Despite strong revenue and earnings for the quarter ended March 31, 2022, Apple said that supply-chain shortages and strict China lockdowns will affects its performance for the rest of 2022.

Apple Inc. cautioned Thursday that the resurgence of Covid-19 in China threatens to hinder sales by as much as $8 billion in the current quarter—a setback after seeing supply-chain improvements during the first three months of the year.

The guidance from the iPhone maker came Thursday shortly after the company posted one of the best quarters in its 46-year history...

The challenges come after a blockbuster quarter. Apple’s revenue for the recent period rose 9% to $97.3 billion, far exceeding analyst expectations for $94 billion. Earnings per share rose to $1.52 from $1.40 a year earlier—beating estimates for $1.42 a share and setting a record for Apple’s fiscal second quarter.

Apple has continued to grow despite COVID-19, the ups and downs of U.S.-China relations, supply-chain issues, and the supposed limitations of being a hardware company. As we noted almost two years ago,

Apple's market capitalization when Tim Cook officially took over in October, 2011, was $344 billion. The company is valued six times [on 4/29/22 it's 7.6x] as much today. As we've observed, naming Tim Cook as his successor was Steve Job's wisest decision.

We're a holder of AAPL more for Tim Cook and his management team than for any one product, yes, even the iPhone.

The Xi Jinping Put: Still Operational

It appears that President Xi has allowed
Evergrande to live a while longer (WSJ).

A good part of the stock market swoon in September has been due to the possible insolvency of China Evergrande Group, one of the world's largest real estate companies.

How big is Evergrande?
Evergrande had nearly $78 billion in revenue last year and hundreds of projects in more than 200 Chinese cities. For years it used borrowed money and presold apartments to aggressively amass land and develop projects. Along the way the company paid out billions of dollars in dividends to shareholders, including the equivalent of more than $5 billion over the past three years to founder, top shareholder and Chairman Hui Ka Yan.

Why is Evergrande facing a crisis?
Problems started to emerge last year when pandemic lockdowns hurt property sales for months, and they snowballed into concerns about a cash crunch last fall. Meanwhile, China’s efforts to crack down on borrowing by real-estate developers via limits known as the “three red lines” kept the company from taking on new debt. Cash is so short the company this summer started paying some suppliers with unfinished apartments instead of money. Its struggles sparked protests at its headquarters in Shenzhen.

How much does Evergrande owe?
The company had the equivalent of around $88 billion in outstanding debt at the end of June, about 42% coming due in less than a year. Its total debt burden is the most of any publicly traded real-estate management or development company globally, according to S&P Global Market Intelligence. Research firm Capital Economics estimates Evergrande also has sold an estimated 1.4 million apartments, worth $200 billion, that it hasn’t yet completed.

In past years investors outside China wouldn't have been too worried about the collapse of an Evergrande because of the belief that the Chinese government would back the debt obligations of large Chinese companies. (This is the Chinese version of the Fed put, a market understanding based on past Fed behavior, that the U.S. government would stop losses from becoming too deep and widespread and possibly jeopardize the entire financial system.)

In the latter half of the month there have been signs that the "Xi put" is operational, with some steps being taken to shore up Evergrande which nevertheless did miss debt payments in September.

The U.S. stock markets continued to drop in late September because of higher interest rates (the cause of the drop in late 2018), supply shortages, and inflation. The Chinese economic slowdown is part of the reason for pessimism, but at least for now a financial crisis is off the table.

Some investors have seized on these government signals as an opportunity to bargain-hunt Chinese bonds and stocks. Too soon and too rich for my blood.

1949 Redux: Who Lost China?

Chiang Kai-Shek And Mao Zedong (NY Books)

72 years ago the United States suffered a "geopolitical disaster" that makes Afghanistan look like a stubbed toe.

The current parallels to "Who Lost China?" are obvious: in 1949 the intelligence and diplomatic agencies showed that they had totally misjudged the situation on the ground, and the widespread corruption of the U.S.-supported Nationalist government made the success of "our side" impossible.

Wikipedia: [bold added]

During World War II, Franklin D. Roosevelt had assumed that China, under Chiang Kai-shek's leadership, would become a great power after the war, along with the U.S., the United Kingdom, and the Soviet Union.

John Paton Davies Jr. was among the "China Hands" who were blamed for the loss of China. While they predicted a Communist victory, they did not advocate one. Davies later wrote that he and the Foreign Service officers in China reported to Washington that material support to Chiang Kai-shek during the war against Japan would not transform the inefficient and corrupt Nationalist government, adding that Roosevelt's poor choice of personal emissaries to China contributed to the failure of his policy. Historian Arthur Waldron argues that the president mistakenly thought of China as a great power securely held by Chiang Kai-shek, whose hold on power was actually tenuous. Davies predicted that after the war China would become a power vacuum, tempting to Moscow, which the Nationalists could not deal with. In that sense, says Waldron, "the collapse of China into communism was aided by the incompetence of Roosevelt's policy."

In August 1949, Secretary of State Dean Acheson issued the China White Paper, a compilation of official documents to defend the administration's record and argue that there was little that the United States could have done to prevent Communist victory.

In 1949, the fall of the Kuomintang government was widely viewed within the United States as a catastrophe...At the time, Acheson's China White Paper with its catalog of $2 billion worth of American aid provided to China since 1946 was widely mocked as a lame excuse for allowing what was widely seen as a geopolitical disaster which allowed the formation of a Sino-Soviet bloc with the potential to dominate Eurasia.

One '50's parallel that I hope doesn't repeat: the subsequent "witch hunt" by Congress, particularly Sen. Joseph McCarthy, searching for those "who lost China." The accusations went far beyond incompetence to treason and ruined some individuals who were only marginally involved.

In my humble opinion, the backlash against the Afghan debacle won't abate, the reckoning will come, and the establishment should pray the investigation is as finely targeted as the American rules of engagement in Afghanistan.

China Markets: a Rough Ride

The MSCI China ETF is down 16.28% year-to-date while the S&P 500 is up 17.18%

Yesterday's blowout earnings reports of tech giants Apple, Microsoft, and Alphabet/Google captured the headlines, but your humble blogger suspects that the most significant financial news was the deepening slide in China's stock market.

A selloff in Chinese technology stocks accelerated on Tuesday, as investors unnerved by China’s widening crackdown on Internet companies and other industries sold down their holdings of many popular stocks.

The Hang Seng Tech Index in Hong Kong, which includes stocks such as Tencent Holdings Ltd. TCEHY -2.13% and Alibaba Group Holding Ltd. BABA -2.97% , tumbled 8%, registering its third day of declines. The city’s flagship Hang Seng Index dropped 4.2%.

In mainland China, the CSI 300 benchmark retreated 3.5%. The Chinese yuan weakened against the dollar, with the offshore currency trading beyond 6.50 yuan per dollar, versus a previous close of 6.4834, according to FactSet.

Observers outside China universally attribute the contraction to regulators' attempt to rein in the private sector.

“National security considerations trump everything else,” including growth, in Mr. Xi’s administration, said Diana Choyleva, chief economist at Enodo Economics in London.

With the recent slew of actions, business is being brought to heel by the Chinese government and the Communist Party, said George Magnus, an economist who is a research associate at Oxford University’s China Centre.

“It’s about systemically trying to establish the authority of the state, or of the party, over the private sector—which effectively has been at the cutting edge of China’s economic eruption for the last 20 or 30 years,” he said. “To the extent it stifles the private sector, and private-sector innovation, I think it will cost China in years to come.”

President Xi Jinping: His "Thought on Socialism with
Chinese Characteristics for the New Era"
are written into the Constitution (BBC),

Despite the tremendous growth opportunity, your humble blogger has steadfastly avoided investing in Chinese stocks. While there are honest Chinese business persons--and I personally know some--there are too many Chinese businesses that will break agreements, steal trade secrets, and falsify their financial statements.

This year another risk has been made plain for everyone to see: the Chinese government's assertion of its supremacy over a private sector over which it was losing control. China's rise to the top rank of global power rested upon the explosion of entrepreneurship, wealth, and technology triggered by the loosening of command socialism. It is clear that the government thinks deregulation has gone too far.

The government prefers to have a compliant private sector, even at the expense of innovation. While the Party is reasserting its power, the world's economies and markets, not just China's, will be in for a rough ride.

[Update: 10:30 a.m. PDT - bold added]

Fighting the Fed, or Washington, is usually a losing game—but betting against Beijing’s fast-moving, often opaque regulatory apparatus in Xi Jinping’s new era of centralized control is suicidal...

The country’s opaque authoritarian system allows swift and forceful action, but that also means investors face greater uncertainty—and very little recourse when policy winds blow against them. Instead of trying to argue their case in courts or the media, Chinese tech companies often thank regulators after being punished.

TikTok: It's Like Reading Your Mind

TikTok is one of the fastest growing social-media networks in history. Developers post 15-second videos on any subject, and TikTok deduces the types of videos that the users prefer and steers them onto the next. TikTok has close to one billion users and is enormously influential among young people.

The Wall Street Journal determined how TikTok's algorithm works by creating artificial users ("bots") that did not reveal their interests, e.g., yoga, sadness, forestry, to TikTok. To be clear, TikTok did not ask for user data, spy on text messages, etc. The algorithm found out users' preference from just one thing:

How long you linger over a piece of content. Every second you hesitate or rewatch, the app is tracking you...

Tiktok fully learned many of our accounts' interests in less than two hours. Some it figured out in less than 40 minutes.

Your humble blogger enjoyed TikTok last year until President Trump accused the company of spying for China and tried to force its sale to a U.S. entity. I immediately deleted the app because the benefit of laughing at 15-second vignettes wasn't worth the possible risks. The sale fell through, no proof of perfidy emerged, and President Biden reversed the Trump restrictions. TikTok hasn't been cleared, however, and is still under investigation by various U.S. government agencies.

Now I only watch TikTok videos about once a month when someone sends a link. The vast majority of videos that I have seen are mildly enjoyable and some are astonishingly creative. However, they are not necessary to life and happiness.

Below is one of the most popular (2 billion views...really?) TikTok videos:

@zachking

They rejected my application to Hogwarts but I still found a way to be a wizard. 🧹##illusion ##magic ##harrypotter

♬ Zach Kings Magic Broomstick - Zach King