[COFFEE] Changing World Order: USA vs China

Have you seen this video by Ray Dalio?

Dalio has measured key components to an empire’s success over the history and came up with this chart:

So it looks like it all starts with good education, which is followed by innovation, then comes competitiveness, output, trade, followed by military power and financial domination. The final cherry on the top is that your currency gains the World’s reserve currency status.

Here’s the data for the US:

So it’s evident that the US is way past its prime when it comes to education, competitiveness, or even output. Somehow the innovation is still an outlier.

And here an aggregation of all factors for all empires in the last 500 years:

So we can see that we had periods of domination: first the Chinese, followed by Dutch, British, and Americans. Dalio has analyzed what happened in the past to be able to tell us what will happen in the future. And each time the history repeats itself.

Lower output means lower prosperity. The rich manage to protect their interest, but the standard of living of the poor decreases which leads to a widening gap between the rich and the poor. But this is just a symptom, not the cause of the initial problem. The empire then tries to help the situation by using their reserve currency status and printing money. But it always ends with a downfall.

So here’s my question to you: do you think the US is on the way out and China will replace it as #1 World power? Are we going to have a World War or will this conflict resolve peacefully? Can we act based on that prediction?

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是的! 学习中文.

Btw it sucks, in Chinese one really have to write a poem to come to 二十个字.

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Well it’s only a matter of time until China has the highest GDP in the world. Based on PPP they already surpassed the USA. India will follow next.

But times haves changed. Maybe there won’t be many individual countries in 200-300 years due to globalization and migration.

I tried with Mandarin. I suck in languages even if I speak some… I’d love to start again though.
China is really cool and there is a lot I’d love to see about china.

They only have a couple of issues, I assume like some other empires, unlike the US that started sort-of well and had its up and downs.

If they change some of the cultural shift that has born in the last 100years and the government understands that they are “fighting” useless “wars”, it might happen.
Let’s just hope they won’t learn from the russian and start paying politiician around the world…

At the moment I think it won’t happen also because china don’t want it to happen.

Regarding GDP, I am not an avid youtuber, but I think you can easily find a couple of videos about how GDP works and how China has such a high one. It revolves around building infrastructure and housing.

Funny that Dalio seemed to have changed his mind because he reduced all of his EM positions recently and boucht S&P instead:

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Well, we’re talking about multiple decades, during which this unveils, so it could be that short term you have some other factors that exert stronger influence.

China has some natural wonders, but I don’t see what’s so cool about China that is inherently Chinese. Just look at how the communist government is handling the latest covid outbreak in Shanghai. People are trapped in their homes, cannot even go shopping, rely on centrally distributed grocery deliveries. Many are starving, just look at the videos of people screaming in terror from their balconies. Drones and robo-dogs are patrolling the streets and blasting government orders through the speakers. It’s freaking scary how this country operates. Is this our future? I think some western leaders, like Justin Trudeau, look at this unrestricted power with envy.

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No. I don’t think China is ever to replace the US as #1 world power simply because The West would not accept that a totalitarian, communistic rogue state like China is going to be the world power #1 and its currency the global reserve currency. For that to happen it would have to be accepted by large parts of the world. And there are now many strong enough regions that have the powers to prevent it from happening, what might have been not the case in earlier occurrences of Chinas domination.

In theory, it could happen if China would go through thorough reforms of their culture, political system, and government, i.e. become a democracy, get rid of totalitarianism, get rid of rigid government control, stop with human rights violations, get rid of communism, etc. But I doubt that’s going to happen anytime soon.

In fact, I think that China must be very careful now not to gamble away their advantage and position with the west, otherwise they could meet the same fate as Russia now and basically become irrelevant again. China’s position currently is very unstable and if they are doing a few major blunders now and if they are too greedy, their position in the world could change drastically.

I think a world war 3 could be very realistic depending on how Russia will continue to act (Finnland and Sweden are likely going to join NATO, will Russia attack them? Are they going to use nukes? etc.) and how China’s position will be in this. Is China going to attack Taiwan in a similar way? Is China forming an alliance with Russia? I think this question is completely open and all scenarios are possible.

  • Make sure the militaries in the west are ready for a potential WW3
  • Withdraw from certain markets and stop to throw money into them from an investor’s perspective. Easy solution: just drop emerging markets, otherwise we’re financing our own downfall
  • As entrepreneurs we must be more vigilant and take such scenarios into consideration, the short-term profits management approach is definitely not helpful here. If US companies continue to send all their intellectual property to China and for example produce iPhones and other stuff in China, they don’t need to wonder if once China has the capacity to deliver technology by themselves and compete with US companies, this is actually already happening to some extent now but could be even worse in the future. From a consumer perspective this might be positive because there will be cheaper alternatives and more competition. But it’s not so good for global stability.
  • Stop doing business with countries with which we don’t share values. We can still sell them stuff, but should remove our dependencies to them. Remove dependencies from countries that are likely not to be with us once the world gets divided into 4 factions. E.g. get rid of oil, gas stuff and also make sure we don’t need stuff that is only produced enemy factions. Maybe then we need to produce that stuff in one of our allied countries, not in China, Russia, Arabic countries etc.

Yes, it could be that there will be not only 1 global super power, but maybe 3-4 global super powers. Maybe there will be still countries but it won’t be important anymore and the world map just has 4 colours in the future depending to what alliance a country belongs to.

China has much more than just “some natural wonders”. It has a shitty government at the time, hopefully for the Chinese and everyone else this will change.

Exactly. Government changes, culture, nature etc. stays.
…actually I hope that at least some of their “cultural” issues will disappear as well :slight_smile:
But as I said, they are a creation of the last century issues they had. I am talking about the “Chabuduo” (o Cha Bu Duo) problem they have.

This is about the US, not about China. I doubt that China was in a position to take over. They will in the next 20 years face a demographic time bomb. At the same time, they still struggle with Corruption and they face a major challenge with their Values. China tries to heavily push back on these issues but I guess its too man peoples minds to be changed b a weak player like the communist party.

What this means for an investor, don‘t put 60% of your investments into the US. More than 30-40% can heavily hurt you over the next 30+ years.

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Why is that? Innovation and technology is still top, competitiveness still okay, military sector will flourish, etc. all the top companies in the world are from the US every great new idea or service comes from the US so far. What country is going to replace this? From that perspective I would even say it would be good to go all-in US. I’m not going to do it because I want to be diversified in case I’m wrong. But in the past, this would have certainly been a good idea and as of now I don’t see any indications why that should change in the short and mid-term.

If you believe this is the case and there is a heavy decline in the US market in the upcoming 30+ years, wouldn’t it be more consequent not to invest in the US market at all? Why 30-40% if you think it’s going to decline heavily and is going to heavily hurt us?

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Rich Chinese culture and heritage has been largely destroyed by communism and the cultural revolution. They were literally razing heritage sites. This heritage lives on in Taiwan. I wonder if it could ever be restored. But I would like you to expand on that thought, what does China have to offer, in your opinion?

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Sorry I don’t have a very articulated thought to share. My feeling comes from having spent a few months travelling through China several years ago, when I have experienced a rich and diverse culture. Cuisine in particular comes to mind.

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I saw the video. While it is of amazing production quality and presents the underlying information pretty well, china is atm. no where near the US and especially not as close as the graphic suggests.

The big advantage for China atm. is their sheer manpower, but it will decay due to their terrible political choices in the past etc… It’s tricky to say if China will actually overtake… And in the end: I am not the one who’s able to tell the future, if so I’d be, I’d rather play Lotto…

So…
Don’t invest (too much) in US
Don’t invest in EM

(Some of) You guys plan to stick 60+% of your equity allocation into Europe? :sweat_smile:

VT is currently at:

  • 9.90% Emerging Markets
  • 15.50% Europe
  • 10.70% Pacific
  • 0.20% Middle East
  • 63.70% North America

Or:

  • 60.3% US
  • 27.4% World ex CH/US
  • 9.9% Emerging Markets (3.1% China, 1.9% Taiwan, 1.6% India)
  • 2.4% Switzerland

I think it makes sense to follow something close to that.

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Yes, I think China generally would be an interesting market but there are several issues that prevent me from investing into it:

  • No government reform in sight
  • Constant human rights violations
  • Their ongoing and unfit Covid strategy will obliterate their economy
  • They are still close to Russia and do not condemn their actions
  • They have the same imperialistic tendencies like Russia (occupation of Tibet, Taiwan threat etc)

Maybe it would be better to keep only 30-40% US as @TeaCup suggested. I’m a bit irritated because basically all these changes would mean a clear strategy change and it’s not something I wanted to do lightheartedly. I will read more about this and consider options.

Yes, currently I do not hold EM anymore. However, there may be some interesting EM such as Brazil.

Maybe 30-40% will be US, and maybe 20% CH, then maybe 10% Asia, 10% Australia/NZ, 20% Europe , maybe a bit of selected EM such as Brazil?. As I mentioned in the other thread there are many comments from finance experts that say that a passive total market strategy is not viable anymore. Abandoning such a strategy would give the possibility to allocate something like this.

However, for example I wouldn’t want to invest in European companies that are heavily dependent from Russian gas, in case of a delivery stop. I guess it would also be better to invest in sectors that are less dependent and also some that are less sensitive to economic cycles, and also some which are not so extremely overvalued. This is basically also something that gets recommended by many experts nowadays, rather than just going for total market / market cap.

It could also be that now comes the time again for value investors.

But in terms of China, as long as the above issues exist or at least to that extent, I don’t see myself investing into China. It may not be required to fix all that to become interesting again for investments, however all of that together is a toxic cocktail.