After a volatile past few months in the markets, the headlines suggest that the US-China trade negotiations continue. Whether a compromise takes place now or sometime down the road, the timing of eventual resolution is unknowable. As I wrote to my investors last month, I still believe that both parties will find common ground. The data is clear – trade wars are bad all around. Trade barriers are also bad for political careers on both sides.
But don’t let the trade war narrative distract you from the big opportunity. After studying China, Chinese companies, and having visited China in the past 18 months, I believe its highly likely that the Chinese economic snowball will continue to roll downhill. In the past, China has built a tremendous infrastructure to fuel future growth. The transportation infrastructure is excellent. The mobile infrastructure is catching up fast to western standards. After being a copy-cat nation, China is on pace to spend more on R&D in 2020 than the U.S. Chinese startup companies are on par or leading in new technologies such as artificial intelligence, autonomous driving, and new-age Computing. More Chinese students prefer to go back after graduation, suggesting that the opportunity set is greater. There is a sense of excitement and optimism about the future.
It’s no wonder that the Chinese consumer is loosening its wallet. Most third party Chinese economic statistics suggest incomes are rising fast and the propensity to spend more and save less is rising faster. Is that surprising? Optimism permits indulgence. And most Chinese consumers are hungry for Western products and brands. The proliferation of mobile infrastructure and the rise of Chinese E-commerce giants are accelerating this spend by increasing product availability. Whether it’s fashion apparel, food products, or electronics, the desire to consume western products is insatiable.
The simple byproduct of this consumption binge is the rise of U.S. imports into China in the future. At the same time, the arbitrage in labor costs is shrinking. Chinese wages and property prices have risen faster than anywhere in the world. Therefore, production facilities for clothing, sneakers, household products, and industrial goods are leaving China for cheaper grounds in other south Asian economies. These trends came to life several years ago and are now accelerating. Labor costs in neighboring countries are 50% cheaper. As production moves out of China, this naturally lowers Chinese imports into the U.S. The net result is a lower deficit.
The awakening of the Chinese consumer is good for the U.S. These trends will chip away at our trade deficit over the next two decades. Two decades is a very long time and doesn’t make for eyeball grabbing headlines, but it is a realistic time-frame to unwind the imbalance created over several decades. Don’t let the trade war or business headlines distract you from what is truly happening on the ground in China. The biggest investment opportunities of the next decade are outside the U.S. and many of them are Made in China.
This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.
This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework