Trey Lockerbie (03:17):
Okay, let me get this right. First of all, you’re one of my favorite Twitter follows so it’s [crosstalk 00:03:21] very entertaining, but you’re talking about living in Vietnam, selling a script or optioning a script to Fox, working in asset management, birth period, and then developing your own FinTech company, that’s what that is?

Trung Phan (03:33):
No, not my own. I would be… We study trillion [crosstalk 00:03:36] right, that would be that episode. No, I worked for… the name of the FinTech firm is called Kensho. It basically did AI analytics for the financial… It was like an AI meets Bloomberg kind of pitch.

Trey Lockerbie (03:47):
So you’ve started writing for The Hustle, and somehow along the way, you found yourself interviewing Stan Druckenmiller, how did that happen? How did that story evolve? How did you find yourself interviewing Stanley?

Trung Phan (03:58):
So one of my colleagues at this FinTech firm I worked for, he also left and he started another FinTech company called Toggle AI. One of the founders of the company previously worked at Stan’s family office. So Stan is an investor in the company and he had been like… He knew I worked at The Hustle and they’re targeting… They also did analytics in the investing space and they’re looking to increase their brand name amongst the retail crowd. And they’re like, “Hey man, we see some really stupid things going on in your Twitter account, would you be interested? And along, obviously with The Hustles audiences under 35s, investors, entrepreneurs, so would you be interested in interviewing Stan Druckenmiller?” And I go, “What kind of question is that?” I was like, “Yes, of course. Tell me when, where, where do I have to fly to? What kind of equipment am I bringing?”

Trung Phan (04:39):
So that happened in May. And he had become very concerned about the money printing that had gone on with the FED since the pandemic started. And I think he wanted to take the opportunity to find as many outlets as possible to tell the story. And the match with Toggle AI was again, the younger audience, which is where The Hustle and apparently my Twitter account is, a lot of the comments I’m seeing. But yeah, that’s how the meeting with Stan happened. And he was super gracious with his time and his answers. And he’d obviously done this before, he just knew how to insert his lessons within really entertaining stories.

Trey Lockerbie (05:12):
Well, I thought you did a great job. I thought the questions were fantastic and-

Trung Phan (05:15):
Appreciate that, man.

Trey Lockerbie (05:16):
… it was a great interview. What were some of your biggest takeaways from that interviewer? Or maybe some of the biggest learnings from him?

Trung Phan (05:23):
I asked him, “What to you makes a great investor?” He just obviously had said this before, but I really just loved how he framed it. He just said, “What is taught about diversification is necessarily agree with.” In his career, he wanted to find that’s that he could go all-in on, and famously, the example that he brought up was, of course, breaking of the pound, when he and George Soros shorted the pound. He shorted it up to 10 billion and then making a billion on the trade. And the way he framed it was that, he had gone into George’s office and said, “Hey, we got this really good opportunity, I think we shorted it. And put 100% of the fund in it.” And then the exact word he used was that George looked at him with great disdain.

Trung Phan (05:58):
He’s like, “Why aren’t we putting 200% of our like… Why aren’t we getting even more? Why aren’t we just loving this to the moon, to put as much as possible?” And that’s what ended up happening. And I don’t know if you’re familiar with Frederick [Necker 00:06:09], he’s a [Fin-Twick 00:06:11] personality. So Necker value, great Substack. I know Frederick from Twitter, and he took the interview actually and wrote a really long post on it. And he said, “Okay, The Hustle and Trung interviewed Stanley and they got this great answer, but I just want to peel apart the onion a bit because I think it’s easy for someone to say, obviously in hindsight, find a single bet you can go all-in with high conviction,” but he laid it out, he was like, “Why did Stanley have such high conviction?” He basically made a pyramid to explain why Stanley had such high conviction Stanley.

Trung Phan (06:42):
But Stanley, during my interview with him was able to speak on some of the reasons why, but because of the nature of the interview and the questions, he didn’t go super in-depth into it. But what Fredrick laid out was essentially like… so at the very bottom there was obviously, incredible research by the Quantum fund team. They’d been looking at the exchange rate mechanism between the pound and the Deutschmark at the time, they’d been studying it. And something did realize that there was this mismatch between the economic policy and obviously the political wherewithal. Is like… I’m sure a lot of your listeners are familiar with why the ERM was created and why the opportunity came about, but for anybody this not, I’ll just do a quick TLDR, which may or may not be 100% accurate. So essentially England had joined this exchange rate mechanism to agree, to keep the exchange rates with various European currencies within a band.

Trung Phan (07:28):
And that was ostensibly supposed to help trade, so there are not wild foreign currency fluctuations. But the German economy was… this was after the fall of the Berlin wall when East and West Germany combined and created very, very significant inflationary pressures and typically a central bank to deal with inflationary pressures or raised interest rates. As these pressures are building and based on Germany’s history with inflation, hyperinflation in the 1920s was what led to the rise of Nazism. It’s actually in the constitution that they just have to control this. But conversely, inflationary pressures are happening in Germany, in England, England was going through a recession. And how do you combat recession? The Central Bank’s move obviously is to cut interest rates. So there’s this band that is keeping this exchange rate at a certain level, but they’re going in different directions. And this is where Stan’s research came into play.

Trung Phan (08:15):
And so there’s Stan research, they actually identified a very specific thing too, is like the floating rate on UK mortgages… UK mortgages had floating rates. So if England was to step up their interest rates if Germany was to increase, it was a direct tax on the UK population, so it would’ve been very politically unpopular. So that’s the research, that’s the bottom layer. The second layer was Soros, a Hungarian, knew a lot of the political players. And so he knew their personalities and he understood, for example, the German central banker, he knew the direction he was going to go. He knew these people very intimately or at least knew about them very well just from being a European hedge fund manager. And then the third step was essential, they had done all this research Soros knew the players.

Trung Phan (08:57):
And then Druckenmiller goes in and he said… and it’s been very clearly established his idea, but as we mentioned, it was the sizing that Soros does. He says, “Go for the jugular.” That was the difference. To summarize, Frederick said, “Why did Stan have all this conviction?” And it’s for these various reasons. But having said that, there are these types of opportunities. Bill Ackman famously a year ago with the credit trade that he made right before, I guess the pandemic hit the States. You can have these levels of conviction, but yeah, that was the number one mean lesson that I took away. It’s like, “Don’t try to be super diversified, do the right things to have this level of conviction when you do go all in.” But having said that, he also said that, in his mind, having this level of conviction actually reduces risk.

Trung Phan (09:36):
The exact quote he had was, “I put all my eggs in one basket, but then I watched the basket very closely.” I think that’s a Mark Twain quote. And his comment on top of that was that if you have all this underlying research, you know all the people involved, it’s actually a less risky trade because your mind isn’t being pulled in all these different directions. I have a portfolio of 25 different stocks just because I’m an idiot stock picker that is underperforming in the market. But if I just had one trade that I knew back and forth, that’s a lower risk trade in his estimation.

Trey Lockerbie (10:02):
Let’s dig in on this one a little bit because I think it’s such an interesting topic to discuss. I think that when you’re just starting out in investing, you do get that diversification advice quite a bit. And I think there’s a distinct difference and strategy there because… easiest, I think definition or breakdown of what I’ve heard is simply, to grow wealth, you have to be concentrated and to maintain wealth, you have to be diversified, which I think is a good distinction. It’s so interesting to me though, because while I agree with that, I’m juxtaposing in my mind with a quote from Howard Marks. And he basically said that his father had a story about a gambler who one day here’s about this race with only one horse in it. So he goes and he bets all the rent money on this one horse and halfway around the track, the horse jumps over the fence and runs away. And you always have to factor in some risk. And it sounds like, with these bets they were taking, they had so much conviction that they saw really no risk.

Trung Phan (10:55):
It was also very asymmetrical. I forgot to add that. The other part of it, why it was such in their eyes, a no-brainer trade was because of the band. They knew that the currency could only go only so much. And in their mind, it was a very asymmetrical trade because their downside was very covered based on the agreement of the mechanism. Invest to the point where you can go to sleep at night because if you’re not, you’re just ruining your life.

Trey Lockerbie (11:18):
That’s such a great point. Another pretty famous concentrated bet that I don’t think a lot of people talk about that much is Warren Buffet’s American Express bet. I’m going to get the numbers wrong, I’m going to have to go back and research this. I think it was something like 75% of his fund. But I really think that people like Buffet, and I think Stan said this in your interview is, when you study the greats, there’s really only one thing that is underlying, one common denominator with all the greats and they all have these massive concentrate high conviction bets.

Trung Phan (11:47):
Absolutely. Actually, because I don’t want to lose the thread on Buffet because I know he’s such a mainstay and probably the reason why this podcast even exists. I’d love to have your thoughts on this kind of thing, I just thought about it recently-

Trey Lockerbie (11:57):
Sure.

Trung Phan (11:58):
… I’m sure other people have written about it. The buffet was famously criticized for not being a tech investor. He never invested in Microsoft even though he was very good friends with Bill Gates in the ’90s and the positions he would’ve put on in that trade, he probably would be worth 50, $100 billion. And then also he invested in IBM, which was a total bust. But I think when they did the position in Apple in 2016, and I know is one of his lieutenants that brought the position to him, but they put in I guess, 30 to 40 billion around 2016, I think including dividends, the all-in return on that is looking about 150 billion now. So as a public market tech investor, I might ask you, no one’s ever had a position that large. That must be a public market, on the tables, that’s got to be number one, right? 150 billion in returns?

Trey Lockerbie (12:36):
It is. Yeah. I’m pretty sure-

Trung Phan (12:36):
It is, right?

Trey Lockerbie (12:37):
… you’re right about that. Yep.

Trung Phan (12:39):
Yeah. And he did it in his ’80s, to me, which is just insane. And I also bring this up because watching the crazy stuff that’s happening, NFTs, Dogecoin, all the cryptos, it’s just having the understanding that Buffet may be the greatest tech investment ever in the public markets in terms of absolute dollar returns in his ’80s, even though his entire career was not tech, that gives me a little bit of comfort in being like, “You’re going to miss a lot of things. But if you can get one right…” and to your point, you can get one right, as you did with [MX 00:13:05] or Stan did with breaking the bank of England and various other investors have done, you got to get one. I think that mindset’s also very important. Because especially now with how fast markets are moving and how many asset classes are out there, is if you get psychologically impinged every time you miss out on something it’s over, right? It’s freaking over.

Trey Lockerbie (13:23):
It’s so true. And I can’t think of one I’ve had, or I’ve come across yet where I’d be willing to put more than 100% of my money into something. So I’m still waiting for my one shot here.

Trung Phan (13:32):
Fair enough.

Trey Lockerbie (13:33):
But I do agree, you only need one.

Trung Phan (13:35):
What’s crazy is, so he breaks the bank of England in ’19, I think ’92. And then the .com bubble comes around, and he is shorted in 99. He’s like, “This is insane. These valuations are absurd.” And he tells me this on the podcast. But what’s crazy is that he was already at that point, one of the most established investors in the game, at that point, the late ’40s. And in ’99 he actually was able to turn a profit. This would be another lesson, but I’ll finish this one first. It’s like after he turns a profit in ’99, figures up 35%, in the year 2000, he had taken his money out of the market. And he had watched two of his junior portfolio managers, lower level portfolio managers, the market was still ripping and they were making a killing. And he said that he personally could not watch them make a killing.

Trung Phan (14:19):
And he went back in the markets and put a $3 billion position on. And he says, he called the top by a couple of weeks, and he had lost basically $3 billion. And his lesson from that was just that, “you put your emotions will never go anywhere. Doesn’t matter how successful you are.” This was one of the most famed trades ever made was by Stanley Druckenmiller, George Soros, 10 years later, he’s still fighting these emotions and takes one of his worst losses ever, even after he had made a huge win in ’99. And him making that win in 99 was actually another lesson I learned from him. It’s the Mark Andreessen quote, is a strong opinion loosely held. Something to that effect.

Trung Phan (14:56):
So in ’99, Stanley was very adamant and he was very confident that the market was overvalued. So he shorted the fund, I think he was short $200 million and various next stocks or maybe even just NASDAQ, but the market was still moving against him, the same way he moved against him in 2000 in the sense that, his portfolio managers kept going up. In ’99, even though he in his bones knew the market was wrong, he just said, “I don’t want to fight the tape anymore.” And he flipped it, he went long. So it’s funny because tied in the whole .com thing are two of his lessons. He’s like, “You can have strong conviction,” but the whole [Kanes 00:15:28] quote, “If the information changes, I can change my mind.” And in ’99 with the information change was that it was clear the market standing wasn’t going to change.

Trung Phan (15:34):
People were going to keep pumping money into the market, keep on holding these bets. But then the second end of yin to the yang or the yang to the yin was in 2000, even after he had made this incredible turnaround in ’99, the emotion, he’s like, “You can never stop fighting emotions.” So those… To summarize the lessons I had now at this point are like, make high conviction bets and on trade to high conviction bets. And then you’re always fighting your emotions. And then the third one strong opinion is, loosely held. Turn it around if it looks like it’s going against you. The last thing I’ll add on that is he never uses a stop loss. He says it’s the dumbest thing ever. That’s what he says in that podcast. It doesn’t make sense to him. He’s like, “Okay, if the position’s bad, just cut it. Cut it because it’s bad, don’t cut it because it went down 20%. Cut it because the thesis changed.”

Trey Lockerbie (16:13):
It’s amazing to me that in a year where he lost $3 billion, he still managed to not have a down year, 30 for 30. 30% on average for 30 years, didn’t have a down year for, was it 30 years or how many years?

Trung Phan (16:26):
I don’t think he’s ever taken a down year. But yeah, he lost on that trade. I guess he had made enough beforehand to like the L. He actually found that going through different asset classes… So he does equities, fixed income, and obviously FX. He said that a benefit that he solved from that was, “It never forced you to make a trade in the sense that if you’re only a credit trader, you might only get a once in a generation trade for five years, you go through the credit cycle.” But he’s like, “I’m playing all these different things.” Which is almost even counter to his first thing, which is like, “Be so concentrated on one thing.” But I guess different brain, right? Druckenmiller’s on another level. The whole point being, I guess he wanted to keep on being able to find these once-in-a-lifetime opportunities, and to do that, you have to be able to trade in many different asset classes.

Trung Phan (17:11):
Because again, going back to credit as an example, you might only get a once-in-a-decade trade once in a decade. However, if you’re playing in four or five different asset classes and you know them well, you can build these levels of conviction. You’ll get these opportunities more often. And he brings back the point being that, let’s say he himself was a credit trader, if you’re waiting around for these once-in-a-decade trades to make these high convictions all-in bets, you might talk yourself into making some pretty bad bets. You are like, “Oh, I haven’t done an all-in bet in three years. It’s like maybe it’s time.” So I found that lesson actually very interesting.

Trey Lockerbie (17:40):
One thing that stood out to me that was super interesting is that one of Stan’s biggest concerns he mentioned was regarding China and Taiwan. So let’s discuss the dynamics that are playing out there in Asia. And you’ve written about some conflicts bubbling up even in the south China sea since 2014. Are we seeing some acceleration of that? Talk to us about the dynamics at play.

Trung Phan (18:00):
I think at the top level to answer that question is, obviously the semiconductor manufacturers are primarily in Taiwan. Like if you rank-ordering CSEs at the top Taiwan semiconductor manufacturing company, and China has led claim to Taiwan for ages. The fears around Taiwan are similar to what’s happening in Hong Kong when the handover happened in 1997 when Hong Kong was given from the British back to China was mandated by the treaty that was done centuries ago or during the late 18 hundreds. There’s supposed to be freedoms put in place, like the rule of law and a certain democratic allowances, and China has just mostly stripped those away in the decade since. And a lot of people now are concerned that something similar will happen in Taiwan. This is not news to anyone. China has made very clear statements about Taiwan is a province of China.

Trung Phan (18:48):
And so Stan’s position was that he doesn’t think that China will invade Taiwan before the 2022 Olympics, they don’t want to deal with an international boycott, but afterward, his feeling it’s anything can happen. And again, my personal perception of it is very, as informed as you can be as a guy living in Canada that reads the internet. And the other part I frame about this is, even the China experts don’t even know. People that spent all day dealing with China have been dealing with decades, they’ll readily admit they don’t really know what’s going on because the Chinese communist party, it’s a very inscrutable structure. Obviously, Xi Jinping has ultimate control at the top. And I think something I read, which is very interesting is, that Xi is much more ideological than the two leaders before him, Hu Jintao and Jiang Zemin, he’s much more ideological.

Trung Phan (19:33):
His father was one of Mao Zedong’s close lieutenants, went up and down with Mao as anybody does, a lot of the close leaders did, but so he’s called a princeling. Which is somebody that is a child of somebody close to Mao or within his inner circle, that first generation of communist leaders. And what I read, I can’t remember what the source was, but found it interesting was that Mao knows that the demographics for China are very bad. It’s estimated that by the end of the century, it’ll be half the size it is now, so call it seven to 800 million. That has a lot to do with just richer countries, have fewer children, also the one-child policy is having terrible effects on their economy and future growth. And so Xi Jinping knows the demographics are not in their favor. And they also, the Chinese communist party had witnessed basically from financial crisis to the election, Donald Trump, that the west was a lot more shaky than the perception of the superpower.

Trung Phan (20:22):
Let’s just focus on America. It’s like, they had this financial crisis, they’re supposed to be the gold standard for capitalism. And then China is watching this whole financial crisis unfolded, they are like, “Wait, the system, maybe we can cave our own path,” which is what they’ve obviously gone and done. So the financial crisis happens. And then the election of Donald Trump just exposed so much political weakness it looked like to them in the country. It’s like, “How could this country be so divided?” And whatever you think about Donald Trump, obviously the whole election and his four years in office were very Rocky. But China and Xi Jinping are looking at it, it’s like, “Okay, demographics are not in our favor. America’s not looking as strong as they really are anymore. And then you add what happened recently with Afghanistan.” And he knew there’s a window.

Trung Phan (20:59):
So that’s why to this writing, he’s been so aggressive. He knows that China has this small window to really solidify itself. And if you want to put yourself in the shoes of the Chinese, just think about the South China Sea and its waters. It’s very comparable if you’re North American or American and listening to this, it’s basically what happened with America in the Caribbean and Latin America 100 years ago, 150, 160 years ago. The Monroe doctrine under President Monroe in the 1820s was essentially like, “Okay, European state imperialists, you’re no longer wanted in our backyard. We don’t want you in our waters in and around Latin America. And we don’t want to deal with you, we own this region now.” And then Teddy Roosevelt followed… He didn’t start the Spanish-American War, but his policies afterward, when America basically kicked Spain out of Latin America and the Caribbean was also like, “Listen, this is our backyard, please don’t come in. If you do, it’s going to be some problems.”

Trung Phan (21:53):
And so China is looking at the South China Sea, Taiwan, and that whole region like, “Wait, this is our backyard. 150 years ago, America put their foot down and kept the waters to themselves, controlled the seaways, we’re just going to do the same.” So their logic totally makes sense from a geographical perspective. I think it’s a little bit more difficult for them in the sense that America really is just an island. It has Canada to the north and Mexico to the south, with no real threats. China’s bordered by 14 countries. And it’s fought with India. It’s fought with Russia, Vietnam, so these are all contentious relationships. So just to answer your initial questions, that’s the threat. China wants to secure its position in its own backyard.

Trung Phan (22:34):
And I think they understand they have a small window to do it because demographics are not going to be in their favor moving forward. So I think that is the overarching threat. Then if you layer that underneath is the fact that, for the global economy, because there’s so much semiconductor manufacturing equipment there and the quote-unquote semiconductors of the new oil, that’s the threat that stands seeing why that’s so disruptive.

Trey Lockerbie (22:54):
So what I’m trying to understand rather is, should China make a move on Taiwan? Is there a risk of destabilizing the region? Markets react to conflict, I think generally speaking, but what is the threat economically that have systemic risk to markets around the world?

Trung Phan (23:10):
Right. So I think if you look at the price chart for stocks after the invasion of Iraq and the 20 year Afghanistan war, even the Gulf war, is like there’s a… The first Gulf war, when many people were like, “Okay, this is clearly about oil.” Even after that disruption, I think there’s a small recession afterward, but up into the right, the ’90s was just booming ’90s. But I think it’s pretty clear that this Taiwan situation is very different in the sense that, everything requires semiconductors. And also, you’re putting China up against America, this isn’t America going up against Iraq in Kuwait. This is the two big boys now and China is no small fry. But I think the article you mentioned that I did write, it was based on Robert Kaplan’s book about the South China sea, but you have a lot of good points actually.

Trung Phan (23:49):
He talks about Naval warfare is very different than a land warfare in the sense that things go slower, it’s because it’s nature, it’s the water. He calls water has stopping power, that you can’t move us fast. And the type of war that would be enacted here is, it’d be America’s offensive versus China’s defense, which they’re going to be in their own backyard. So it’s very asymmetrical actually because it’s a lot easier for trying to defend the region than it’ll be for America to attack. But I think that would be the disruption. It’s like, you take off the semiconductors and then also the uncertainty of having one and two, number one and number two going at each other’s next. I think that’s not comparable to anything that’s really happened for 100 plus years. This week, there’s a very big defense agreement signed between Australia, the US, and the UK.

Trung Phan (24:31):
It’s actually the cover of The Economist. The agreement basically is that some combination of the UK and the US will be supplying eight nuclear subs to Australia. And this is actually shock waves in the region because Obama said about a decade ago that they wanted to leave the Middle East, America, and pivot to Asia, you remember the famous pivot to Asia? But during the decade since China has claimed more land, claimed more islands, been very aggressive with its neighbors, and built out its position in the lead up potentially to a Taiwan invasion. But this deal that happened this week is really substantive in the sense that the US, especially after what happened, the abysmal withdrawal from Afghanistan. People are like, “Oh, they’re going to withdraw from the world.” This deal actually, it looks like the US and Australia or very clearly drawing a red line in the sense that they’re going to make sure that the US continues to have a presence, a very strong presence with its allies in the Pacific and in and around China.

Trung Phan (25:22):
The thing about the nuclear subs, and there’s actually a lot of controversy because, Australia originally had a deal with the French, but those are diesel subs and they without telling the French, we’re taking this other deal. So if you Google Emmanuel Macron right now is just going to be pissed. And the nuclear subs are interesting because they’re much more difficult to detect and they can go much longer. The hindering factor on a nuclear sub is the food for the crew, that’s it. That thing could go forever if you didn’t have to feed the crew. So America and the UK are basically going to be giving… these aren’t nuclear subs that have missiles, they’re just nuclear subs in the sense that they can and stay in the water for a very long time, can do reconnaissance. And I wanted to bring that because this deal literally just happened this week.

Trung Phan (25:58):
And I think it signals that if a conflict were to happen with Taiwan, because I know people have been waffling and saying the [inaudible 00:26:06] like, I think America has just given up. After what happened in Afghanistan, the allies are like, “Okay, can we trust them anymore?” This deal signals, “Actually, you know what? You can trust us. We’re really putting our foot down in the Pacific region.” And they also have previous defense agreements with Australia, Japan and India called the Quad. But this one is very serious because of the dollar amount and because of how it was enacted and rolled out.

Trey Lockerbie (26:27):
You’re bringing up a lot of stuff I want to touch on. But what’s coming to my mind in this ven diagram of sorts between Asia and real estate and core demographics, and other risks entering the market is this news of Evergrande and what they’re facing. And it’s gone from being the next Lehman brothers to maybe being in nothing burger. And it’s hard to gauge where we stand. So I’m curious to hear from you what your take on Evergrande has been.

Trung Phan (26:55):
Real estate’s always been interesting in communist and developing countries because, for example, in Vietnam, the asset manager I worked for, at the time I was running $1.5 billion, this would be 2008, 2009. Just for reference, that’s about 2% of the country’s GDP, so it was pretty large. It’d be the equivalent if the somebody in the US was running a, what was it? A couple of hundred billion dollar fund, so very large relative to the economy. And what’s interesting about real estate in Vietnam, I don’t want to do an overarching brush, but because in these developing countries, and Vietnam is much less developed in China. I think the GDP is around two, 3000 China is maybe 10 to 15, so it’s not nearly as far along. But real estate is interesting because if you’re good at anything in Vietnam, at the time I was there, you’re going to end up in real estate.

Trung Phan (27:36):
And the reason is why. If you’re throwing off profits, exporting shoes or exporting fish sauce, or exporting seafood, there’s not a lot of places to put the money other than reinvesting the company, but where else are you going to put the money? There’s no venture capital system to put it into, there isn’t a burgeoning services sector, at that time it’s growing and slowly. So if you have all this money lying around and it doesn’t really matter what industry you’re in, you’re going to buy real estate. Because you know it’s a scarce asset and also it’s going to be dual-use. You’re going to purchase it as an investment asset, but also if you are one of these factories, you need to build it because those factories don’t even exist. So real estate in Vietnam has always had a very interesting thing. And then you take the homeownership aspect of it, right always a big part of the communist ideology.

Trung Phan (28:15):
And they obviously vary country by country, is we take property from the capitalist and that includes real estate and homes and then we’re going to give it to the population in some capacity. I know typically that’s around the means of productions, not necessarily how you live, but you’re taking property array, is the overarching thing. So China’s situation from what I understand is very interesting because Evergrande, the match was lit for this Evergrande situation. It was lit 20 years ago with China’s debt field growth, but the real lighting of how it tumbled to now was, about a year ago, China wanted to reorient its economy away from this crazy real estate lending because real estate has just eaten up such a large part of the economy. It’s at 25 to 30%.

Trung Phan (28:55):
And in the early 2000s, dumping all this money into real estate was very productive because you didn’t have any of the infrastructure, the homes, the buildings at that time, built them out. The example that’s always brought up is how much dollars of GDP can you create for dollar debt? And that ratio is just shrunk. It used to be a dollar of GDP to say, hypothetically used to be able to create $3… A dollar of debt used to be able to create $3 of GDP. Now it’s like you need $4 of debt to create $1 of GDP, so it’s much more unproductive growth. And Xi Jinping, I think the way he framed it was actually, he called it fictional growth versus genuine growth. And we’ve obviously all seen what has happened in the tech sector, where China has put a very hard line on tech education, reorient resources away from industries that they don’t think is necessarily benefiting the countries broader missions.

Trung Phan (29:40):
So a year ago, trying to reorient the economy get away from real estate, it put three red lines into place. I think it was around what a better asset ratio could be, debt-equity, and then the cash to short-term debt ratio. They set red lines and said, “If you’re a real estate developer, you cannot cross these red lines.” So over the past year, a number of different developers and real estate companies have had to liquidate assets and also fire a lot of their staff. And then Evergrande just happens to be the biggest one in the space. So they’ve been able to muddle around, but it obviously came to head in the past couple of weeks based on interest payments. But what I found interesting is the number one resource I go to for China is Michael Pettis, I don’t know if you’ve ever read him.

Trung Phan (30:20):
He writes for Carnegie Endowment. He’s a China expert. And he’s actually also debt and just understands the money flow, expert. He’s written multiple books over the last few decades. But I found what he said super interesting is, so Evergrande has $300 billion in liabilities. They have 1.7 million unfinished apartments, which total about $200 billion. And the nature of the real estate industry is the cash conversion cycle can be very difficult, depends on how you play it. But they did it well, they’re a pre-selling unit. So they were getting money way before they were building it out, but they basically ran out of money. Part of it had to do with profligacy, part of it had to do with their expanding into EV manufacturing and all this crazy stuff that they had no business being in. Part of it was a slowing kind of home buying and the slowing of the economy in general.

Trung Phan (31:04):
So if you frame all that, you have a situation now that’s a powder can keg, it was lit a year ago and now it’s coming to Evergrande and they have all these liabilities. And the confidence of whether or not they can continue as a business creates these spiraling… what’s it called? The spirals for debt. It’s like, as soon as you lose confidence in a business, suppliers lose confidence, your workers don’t really want to work or don’t have confidence in you as a going concern, so all these things happened that just worsen the debt crisis. And what Michael laid out was basically, this is the Chinese government’s options now. And again, I think you mentioned it at the top, it’s like, we actually have no idea what’s happening. It looked like it was a new Lehman, now it looks like it’s going to be okay, or maybe it looks like they’re going to kick the can down the road.

Trung Phan (31:46):
But he framed it in three ways. He said so it’s clear to him that the Chinese government wants to do one thing with the credit market. Because for so long real estate had been giving privilege and the government was fine with having all this money go into the sector, even if it looked like some of the products were not productive. It looks like this move is very clear, “Okay, we’re actually going to force discipline on the credit market now.” It’s like, “From this day forward if you’re going to, as a lender or a bank lend to an Evergrande or another developer, you’re going to have to use real underwriting. You can’t just use the fact that the government is not going to let it fail, which is basically what was happening.

Trung Phan (32:20):
It was like Evergrande was too big to fail. And the Chinese government was doing everything they can how to get people housed. And they would do anything to prop up the real estate sector. So Michael Pettis was saying that basically, they want the credit market to re-rate, but there’s a huge problem in the sense that it’s very difficult to do this because it’s in every single person’s interest to unload their books, get off everything. And if everybody individually does the rational thing, the whole thing’s going to collapse, fire sales left, right and center. So this is something that China is going to have to deal with. The other thing that he has to deal with, we touched on, was financial distress. The suppliers don’t think you’re going to get paid. The people that paid for homes now don’t have confidence, they don’t want to buy a new home.

Trung Phan (32:57):
They were also purchasing wealthy products that Evergrande was selling, which is part of how Evergrande was funding itself. And those things aren’t going to exist anymore. So they stop buying groceries or they stop buying discretionary goods. So there’s all these things that now the confidence of economy is out. So you’re trying to re-rate the entire credit sector, but there’s no easy way to do that. Now, you are trying to deal with the financial stress of the economy and how do you keep the confidence? The way Michael said it, there’s a hierarchy of the creditors. This is how he put it. He said, “If you’re going to have an orderly unwinding of Evergrande, the retail investors would probably get paid off first for the wealth products and then the contractors and suppliers, local governments. And then you have the Chinese creditors, and the last is of foreign creditors. If you’re a foreign creditor in Evergrande, I don’t think you’re getting your money back.”

Trung Phan (33:41):
But having said that, he does explain that China has a lot of ways to make this happen. It’s a closed economy, so money’s not going to rush out of the economy like it did in the Asia financial crisis in the late ’90s. It’s a closed, very strong regulatory state. Basically, they can just tell people what to do.

Trey Lockerbie (33:56):
It’s so interesting. And on that last point, you read that the central banks in China printed something like 120 billion. And I think the question to your point is, is this just the beginning? Does that snuff it out? It doesn’t sound like it’s going to do enough. We’re printing 120 billion a month, so-

Trung Phan (34:12):
Yeah, exactly.

Trey Lockerbie (34:13):
… you got to step it up a little bit. Evergrande has something like two times the amount of employees as something like a Facebook, thousands of employees. And they were actually threatening to take away their bonuses if they didn’t lend money to the company.

Trung Phan (34:27):
Right. Exactly.

Trey Lockerbie (34:27):
And so you are now indebted to your own employee. This is really mind-boggling stuff and-

Trung Phan (34:31):
And also paying the suppliers with empty apartments, very similar lines, right?

Trey Lockerbie (34:36):
Well, let’s talk about that too. Because you mentioned China’s desire to prop up the real estate market specifically. And it touches on what’s resulted as these empty cities that are all across the country. And you mentioned that the declining demographics, which certainly aren’t supporting that. I do have a theory about the one-child policy, you touched on this, where you’ve got all these… The ratio from men to women, especially in China, is so over-indexed with men that they’re competing for women to get married, you have to own real estate, just as a prerequisite. So you simply… And then to take care of your parents, there’s a whole nother cultural element there that’s driving real estate decisions. But it seems like they’ve really overdone this idea of, “Hey yeah, we’re going to invest in real estate because it’s a store of value.” To be a store of value, it has to be scarce. And by continuing to produce it, it seems like it’s going the opposite direction. So those are just some general thoughts, but what do you take [crosstalk 00:35:27]?

Trung Phan (35:27):
Yeah, absolutely. I agree with you. There are some numbers here that I wrote down just to speak to the scale of how absurd it was. 25 to 30% of China’s GDP is somehow tied to the real estate sector. A quarter of home buying is on speculation, and real estate, just as an industry needs so much debt, just the nature of development. And this adds on top of the fact that China as a country… So Michael Pettis was basically saying that, even if it was just Evergrande, even if it was just the real estate market being over-indebted, you could probably muddle your way through, but it’s the entire economy. State-owned enterprises, local governments, household. I think the number is 270% of the GDP, which is unheard of in a country at this stage in development. They doubled that number called for the mid 150%, so 270 in the last decade.

Trung Phan (36:11):
So it’s out of control debt growth. And Michael’s written about this extensively, but essentially, when you grow via… And debt growth is unproductive. Again, going back to how many dollars does a dollar of debt produce in GDP? If it’s like $4 of debt produces $1 GDP, it’s unproductive. It’s like, no matter what happens, it’s going to have to resolve itself in some capacity. And I think the Japan example in the ’90s, the lost decade for Japan, which basically turns into the lost decades, is something that is often brought up. And just again, from my un-expert brain is the one I see the most, the communist party in China has just such control over the country. I can’t imagine them letting this type of total meltdown happen. Even if it’s healthier for the country in the long run, they can’t do it because of their legitimacy, it’s not based on democracy, because they’re not voted to be in position. Their legitimacy is providing economic growth.

Trung Phan (37:03):
So if they’re to allow this implosion, a financial implosion, this is very similar to the COVID crisis. It was a crisis of legitimacy because, if they can’t contain and keep the population healthy, then why are they in power? The same thing’s actually happened in Vietnam. The Delta variant is ripping through the country. So a year ago Vietnam was totally in control of COVID. Closed their borders to China, closed flights in and out. And I think there’s something like less than 100 cases for most of 2020. Delta Variant comes in, the country’s unvaxed, similar problem in Australia actually. And now they’re having a crisis legitimacy, the Vietnamese communist party. So the reason why I bring all this up is to answer your question about, how will China resolve or allow this to resolve itself is, I don’t see them letting this to implode, which means the Japan option is what’s going to happen.

Trung Phan (37:46):
In my eyes, if that’s their two options, you go the Japan route, which is, you’re growing at 1% for the next decade, which will have honestly disastrous effects too. The economy gets crushed like that. And you reorient 30% of the economy in the way people lose jobs, local economies aren’t going to be able to pay for services, on top of the fact that they’re not even far enough developed to pay for those services.

Trey Lockerbie (38:08):
All right. So to wrap things up a little bit, I’d love to get your take. You have your finger on the pulse of all things tech and finance, and you’re writing about this stuff every day. What is exciting you the most when you get up in the morning and go to work? What are you excited to write about? What opportunities in the market are you seeing for retail investors? What’s getting you going in the morning here?

Trung Phan (38:29):
There’s just so much intellectual energy around figuring how a decentralized crypto-based economy can help creators because that’s where I see myself headed. And haven’t even begun to grasp the top levels of it. It’s like Chris Dixon from Andreessen Horowitz writes incredible threads about web three. Packy McCormick from Not Boring writes incredible stuff on web three. I find it even difficult to unpack some of their ideas. But it’s just that their love of ownership and how you can structure new organizations is mind-blowing. And mind you, there’s going to be a lot of failed experiments along the way. But I think that aligning creator’s interests with their fans and giving fans potential equity participation in a creator… I know, for example, creator coins are a very popular thing. BitClout, which has had a muddled history when it launched about six, seven months ago was basically letting people invest in… Think about Twitter, but you can invest in individual profiles.

Trung Phan (39:22):
I find these ideas interesting because it really just aligns everybody and also gives people the opportunity to benefit financially. Because right now, I have 200,000 followers on Twitter, but I don’t make any money from it. And any ideas that I have for trying to make money, not that I’m even thinking about it, but would be off-platform. I’d want to push people off-platform, whether it’s to a newsletter or to a course. But if you were to create a way from fans, there are so many of these tools, Only Fans, Patreon, but the crypto side of it is just that you can start from square one and build communities and have everybody align almost immediately. There’s a lot of these crypto communities on Discord where your membership is like an NFT. So I find these ideas very engaging. I haven’t gone nearly far down the rabbit hole enough. But an example that I mentioned in our email exchange was that, so Jack Butcher, one of my podcast hosts and friends for Not Investment Advice, he has played a lot in the NFT space.

Trung Phan (40:10):
He’s one of the top 10 creators on Foundation, which is an increasing back NFT market. And he did something interesting which speaks to why I find this space so fascinating. So I know a lot of people are probably seeing the crazy jpegs, crypto punks, or Bored Ape, it’s just the Twitter profiles now. And what’s interesting about that is Jack brought up a good point on one of our older podcasts in that he said, “If you were to put the equivalent of a bill or your bank account saying, ‘Hey, I’m worth $5 million in your profile picture,’ you’d be like, ‘Yo, what’s wrong with you?'” If you put a rare crypto punk in your profile picture, that a lot of the internet side people will know it’s worth 10, $20 million, totally above board, totally it’s accepted. So he took that same mentality or he found that psychology also worked for charity and a charitable cause he did. When the Afghanistan pullout happened, he just thought, “Hey listen, I have a bit of a platform.”

Trung Phan (40:59):
He’d done courses as a visual designer and he was just like, “Okay, how do I use my platform and the NFT mechanism to raise money.” So going back to the example I said is, it’s very gauche and frowned upon to put a $5 million bill within your profile picture. But what if you were to buy an NFT and that money is routed directly to a charity? And also that record of you doing that just goes directly to your blockchain or it’s tied to your Ethereum account. You don’t have to do the intentional action of telling people that you’ve done good, it all happens automatically. And I think that lowers the barrier a lot to charity because people put at their names on buildings. And that’s a very kind of, again, maybe somebody thinks it’s a bit tacky way to show that you’re a charitable person. But if you’re doing charity and it’s all automatically done and everybody understands, it’s all automatically being tracked and recorded, it takes away that friction of like, “Hey, I don’t want people to think that I’m just doing this for the name.”

Trung Phan (41:56):
It’s like, “I’m going to do it… Now we’re going to start living in the world where everything’s just recorded.” He realized this mechanism as he was doing it because he used a crypto publishing platform called Mirror, where he could embed NFTs. He raised $200,000 for Afghanistan relief. Basically, he was sending survival kits to Afghanistan families. Like if you bought one NFT, the money was going directly to this cause, he never touched a single dollar. So two things happen. You remove the psychology of people not wanting to be charitable because they don’t really know where the money’s going, so he had to move that out of the way. He also removed the part like, “I want to do something charitable, but I don’t want to look like a guy that’s doing it just because people know.

Trung Phan (42:33):
So those two elements, those frictions, that is to me, a paradigm change of how you can use an NFT to do charity. That actually blew up my mind in the sense that, a lot of these things that you’re seeing like a digital training card, I get it. I get the value in that, you create digital scarcity, but does that actually create new behavior? In my mind, this charity thing is so clearly a new behavior that’s enabled by the blockchain and NFTs. And that is what… To answer your question. When I wake up, I’m seeing all the crazy things that are happening on the web three-space is like, that’s definitely what gets me excited.

Trey Lockerbie (43:01):
That’s a great point you just brought up about the philanthropy side of it that I had not thought of. I’m just getting my arms around it myself. I definitely, and I said this on another show. I think it’s something investors really need to take note of because I think there is something different about this wave than say, the ICOs that happened in 2017 or something. There’s a lot of similarities on the surface and you could easily point to this and just say, “Well, this is a tulip mania bonanza.” But I do think structurally and I think that’s the thing that I want to learn more about is, what tools are used to then verify, “Okay, that money really did go to that charity of sorts.” It’s on a blockchain supposedly, but how are people visibly tracking that kind of thing?

Trung Phan (43:43):
To answer your question is that, there’s a startup that actually helps route funds between wallets specifically for charity. And then you can… literally, it’s all there. It’s like the money you bought this NFT with is going directly to the wallet that belongs to this charity. To your point, what is the layer that you’re going to verify that that is the charity’s wallet? But clearly, there are people very able to do that and these things are being implemented. But I think that’s a valid concern that… Square has actually done some interesting things that suggest that they’re moving in this direction with creators. They have a creator bank, they bought a title and they’re funding these… I think they’re working on a niche lending move, where you can fund an artist, they’ll know it just from their Tidal streaming, even though Tidal is not the biggest streaming service.

Trung Phan (44:26):
They’ll underwrite an artist. They’ll be like, “Okay, we’ll underwrite your next album because we know how hard you can hit.” I think that’s in the works. And then you combine that with Twitter. I know the history of product development is not great, but somebody brought up a great point, I can’t remember who might have been Casey Newton, the journalist formerly of the Verge. What it’s basically saying is, “Facebook has a lot of baggage and that’s why all their crypto products have never really gone off the ground.” And but Twitter is like, because they’re functionally the same they were 10 years ago, there seems to be a lot more space to experiment. And in my eye, Twitter is a much better network. It’s like the joke that only your old uncles and aunts use Facebook, I know that’s not necessarily true. But something about Twitter makes me feel like they can capture this opportunity much more. And the Square element is just… It’s all the pieces are there. Do you know what I mean?

Trey Lockerbie (45:10):
That’d be interesting. I keep saying this, but the future will not be boring. Trung, this has been so much fun. I’ve been really looking forward to talking with you, been following you for a long time.

Trung Phan (45:18):
This was awesome.

Trey Lockerbie (45:18):
I’ve loved the content you’re putting out. And this was such an interesting wide-ranging discussion. And I know our audience is going to get a lot from it. So thank you so much for coming on the show.

Trung Phan (45:27):
Absolutely, man. Thank you so much, Trey. That was amazing.

Trey Lockerbie (45:30):
All right. That’s all we had for you this week. If you’re loving the show, please feel free to subscribe and even leave us a review. Trung and I connected on Twitter, so if you want to connect with me, definitely do so there @TreyLockerbie, or if you have your own curiosities, you can always ask us a question that we might even play on the show at asktheinvestors.com. And with that, we’ll see you again next time.

Outro (45:48):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.