Transcription
What's up, guys? I'm an early retired quant trader, and I want to help you think about how to manage your personal investments in this rapidly changing geopolitical environment. Let's get into it.
So, I want to start by saying that the conventional wisdom that the S&P 500 always goes up 8 to 10% annually is just American propaganda. It doesn't have to go up 8 to 10% annually. It has historically, but mostly because the United States has gone from a regional power to the global hegemon, the superpower of the world. The United States pushes this propaganda because they want you to invest in their country and they want you to park your hard-earned cash.
And it's the same way with the real estate industry within the United States, how they'll always say things like, "Home ownership is the American dream," and, "Oh, it's a rite of passage. Renting is just making your landlord rich." You know, like things like this are just propaganda to get you to make a 5:1 leveraged bet, the biggest purchase of your life, and have it be on American soil. So, you're locked in and you have to continue to work to pay off your mortgage. That's why home ownership is pushed so hard as well in the United States.
So, you probably know this, but the stock market loosely tracks the economic health of a country. The stock market generally goes up as the GDP grows in the country. And that's not going to completely track, but over a long enough time period, that's generally true. The reason they can kind of decouple from time to time is because the stock market also prices in sentiment, bullish or bearish sentiment, because people are using the stock market to attempt to front-run the actual economy. So the stock market can kind of drift up if it's bullish, and it can kind of drift down if it's bearish. But over a long enough time period, um, the stock market generally converges with the actual health of the country.
And so when you talk about where to invest your money, uh, you are, believe it or not, placing a geopolitical bet on the future economic health of that country. More and more, especially today, deciding where to invest simply boils down to geopolitics. And that wasn't true over the last, uh, 100 years or so as a US citizen because the US was separated from the Eurasian landmass, and they generally just experienced slow and steady growth. With the rise of China and us entering this new multipolar world, there is a serious risk of that trend actually ending.
So, as an example, Japan was projected to surpass the United States in total GDP in the '80s. A lot of people probably wouldn't remember this, but they were on a trajectory where they would overtake the United States. And you saw this in pop culture and things like *Back to the Future 2*, where Marty McFly's boss was a Japanese dude. And you saw it with things like Nakatomi Tower in the *Die Hard* films. There were a lot of allusions to fear in the West that Japan was going to become the new global hegemon. But then what happened, right? The United States made Japan sign the Plaza Accord, which Japan really had no choice but to sign because Japan is basically a vassal to the United States. And that's basically where the Japanese economy peaked. And then it basically stagnated and crashed for multiple decades, the lost decades, as they say. It took 35 years for the NIK to catch up to where it was back in 1990. You know, it's an example of a developed, first-world country where an investment would have gone nowhere for 35 years. That can certainly happen to the United States as well.
The lesson to learn is that no matter how productive the country is and how dedicated the citizens of that country are, at the end of the day, it boils down to geopolitics. The United States is the more powerful country, and Japan is the vassal state to the United States. So the United States was never going to let Japan, their own vassal, overtake them economically. And so once Japan reached roughly 70% of the US GDP, the United States just came out and said, "All right, we're going to make you sign this treaty," and twisted their arm and basically put Japan in its place.
And when China's GDP reached roughly 70% of the US GDP, that's also when the United States decided that they're going to try to twist China's arm to put China in its place. And this is just geopolitics. A lot of people get lost in the weeds about, "Oh, what does the Plaza Accord do?" "Oh, wait. So, you're pegging the currency?" Or, "Oh, so you're you're rolling short-term bonds into long-term bonds?" And they're focusing on the wrong thing. The idea isn't to get lost in the details of what's happening in economic policy because economic policy can be interpreted in so many different ways. The greater point is that you can put a black box over the event where the inputs to the black box are which country is more powerful, and the output to the black box is the more powerful country is going to get their way. So business between the two countries moving forward will now benefit the more powerful country. And sure, it may sound cynical, but if you study history, this is true. It really boils down to understanding which countries are positioned better and are more powerful, and investing in those countries.
And so it's no surprise that the United States and the S&P 500 is the most performant stock index in the world over the last 50-plus years, over the last 100 years, in fact. And it raises the question of, "Should I invest in China as they may supplant the United States?" But first, let's talk about war. Since we are at war in Iran and we're in uncertain economic times, if we talk about World War I and World War II, it may surprise you to find out that the United States stock market actually performed well over both World Wars. And it may seem unintuitive because the world is at war, but the United States was well-positioned, and they were producing a lot. And and in terms of how businesses measure GDP and which companies are represented within these indices, it makes sense that the United States stock market did well. So war can actually boost GDP. Of course, it depends, right? Uh, the UK, their stock market collapsed during World War II, and that would make sense seeing as Germany was dropping bombs all over them and a lot of business came to a screeching halt. But again, the United States is geographically blessed. It's protected by two vast oceans with allies to the north and the south. And they were able to remain relatively unscathed through both world wars. The only real attacks on US soil are Pearl Harbor and 9/11. Neither of them really made a huge dent on the US GDP.
So, we're entering a multipolar world now with a rising China and Russia evolving into being the junior partner. And a lot of people don't realize this, but every single thing the US does in terms of foreign policy is about China. It's about trying to prepare the chessboard so that they have the upper hand in the cold war against China. So Venezuela was mostly about China. A lot of people were talking about oil. The US is self-sufficient in oil. The US does fracking and has huge reserves. They're not too concerned about oil. This isn't 2004. The US primarily wants control of Venezuela so that they can control oil shipments to China and Russia so that they can choke out their rivals if they need to. And Cuba as well, right? Cuba is heavily dependent on Venezuelan oil. If the US can reclaim Cuba, it's just one less threat in their sphere of influence.
It's similar with Iran. Yes, people will say, "Oh, this was all about Israel." Two things can be true at the same time. And when you're making geopolitical decisions, you are often attempting to kill multiple birds with one stone. But it was also primarily about China. Iran sends most of their shipments of oil to China. And so if the US can get control of Iran, then now with Venezuela and Iran, the US is slowly creating choke points where they can choke out oil to China. And why does this matter? Well, China, with its 1.3 billion people, is still heavily dependent on oil. They attempted to get around this with the Belt and Road Initiative, but that's had some setbacks, and they still heavily require shipments of oil to pass through the Strait of Malacca, which is a major choke point, and the US still has the superior navy to China. So if these tariff wars and if this cold war really escalates and goes from an economic war to a kinetic war, the first chess move that the US can play is to choke out oil shipments to China through the Strait of Malacca. And China understands this.
So, you know, there's a lot of back and forth between the US and China over tariffs, and then China says, "Well, we produce almost all the rare earth, so we're going to cut off rare earth minerals to you." Being able to choke out China by saying, "Well, we control Venezuela, and we control Iran. We're gonna cut you off from oil." Now, these are all attempts to re-raise. They're all points of leverage in this wider negotiation between the US and China.
And lastly, there's Greenland, right? A lot of people think, "Oh, this is a Trump thing. Trump's just crazy." It has nothing to do with that. Like, a lot of these things are deterministic. People have been talking about this for decades. Basically, with global warming, the ice caps are melting. So there are new sea lanes around Greenland that are now available that are more efficient in terms of shipment routes for all these different countries. And, uh, Russia builds these icebreaking ships. The sea lanes are going to evolve in this new world. The US doesn't want to lose their advantage, so they're trying to establish ground in Greenland. Coincidentally, Greenland also has a ton of rare earth minerals. And in this new world where we try to move away from fossil fuels and we try to move towards EVs and more green energies, a lot of them are dependent on these rare earth minerals. It's also important for satellite coverage, right? So there's multiple reasons why now it's so important. I don't even think Trump cared about geopolitics before he became president. He told this stuff by his advisors. For those of you who think that Trump is this lunatic who's just suddenly got obsessed with trying to annex Canada and and Greenland, it's because those have become now important geopolitically in this rivalry between the US and China and Russia.
That's the main thing that's changed in the last decade or two. With China entering the WTO, they've had this meteoric rise. They can now supplant the United States. So everything we thought was the peaceful world order, it was always just predicated on the fact that the US was the undisputed global hegemon. So international law was basically just US law. You know, it was all a mirage the whole time. The idea was just that if people didn't follow international law, the US would come in as the global police and make them follow it. And now that we don't have one undisputed global hegemon and we're entering this period of great power rivalry, we're seeing that it was always a mirage. It's just might makes right.
And so China takes the South China Sea, and Obama can't do anything about it. 20 years earlier, the US would just push China out of there. 20 years earlier, in the 1990s, when China was making threats to invade Taiwan, Bill Clinton just floated an aircraft carrier out there and just went like that. And then the Chinese are really big on saving face, but they they just had to back off. The difference in military might was so, so vast that there was nothing China could do. Now Obama can't just do that. You see China practicing these military drills around Taiwan, and the United States just can't do that anymore. Why? Because in the last 20 years, China has built up their navy and their their general defense to the point where military strategists put a war in Taiwan at about 50/50 as to who would win between the US and China. And China practices asymmetric warfare. So even if their military technology isn't on par with the US, they are focusing asymmetrically on only technologies that would help them win a war in their backyard. So they have a ton of short-range missiles that can reach all the way to Guam, the first and second island chain. It's reached the point where the US can't police the South China Sea as effectively anymore. And so they're asking Japan and South Korea to boost their defense spending to try to kind of lock arms with the US to keep China contained.
So back to finance, right? China is trying to overtake the United States in technology. The person who has the technological advantage is going to win the wars of the future. You see this most recently with the AI race, and you see China's neck to neck. So with the release of DeepSeek, you saw that the entire US tech sector collapsed, and the Chinese Hang Seng Tech Index rallied. So you see there's a zero-sum nature between people investing in the US tech sector versus China's tech sector. And you also should know that the entire US economy is disproportionately led by tech giants like Apple, Microsoft. And so when the US tech sector crashed, the entire US stock market crashed. You're seeing that this AI tech war is going to determine, in many ways, whether money is going to flow to the US or China. And yes, with the release of DeepSeek, you saw Chinese stocks like Alibaba rally aggressively. That's people switching teams and saying, "I don't think the US has this. I think China might overtake them in the AI race." And so you're seeing this tech arms race play out live in the financial markets.
So that said, do I think that you should hedge and put half of your money in Chinese tech stocks? I would say no, because China is run differently. It's an authoritarian country. So people in China can tell you they view their stock market more like a casino because the state can intervene a lot more. In the United States, there's more of a checks and balances between different points of power. But, you know, as you saw with Jack Ma and Ant Financial, the CCP can just step in and create new regulations to stunt certain companies if they want to. And they can unilaterally, you know, just provide subsidies to another company and make them a state champion. They can do things like just step in and dilute shares, and this sort of creates a lot of corruption and uncertainty in the Chinese stock market. Yes, while that can lead to outperformance, it can also lead to underperformance.
But more to the point, this relationship where the stock market tends to track the health of the economy and the GDP growth is a little looser in in China as compared to the United States. It's also why the Chinese are so obsessed with real estate because real estate is a hard tangible asset. You own it, you live in it. So the Chinese Communist Party can't just dilute your shares of your real estate. And that gives the Chinese people more sense of security. So you see that even with the Chinese diaspora across the world in Toronto and Vancouver, how they bought up all the properties. A lot of economic policy is upstream to culture. And it's also why the Chinese are really big on gold because they don't trust their stock markets. And so that pretty much leaves real estate and precious metals as primary investment vehicles.
So what happens if China wins the cold war and they take over technology? They win the tech arms race. Will China's Shanghai Composite go to the moon and the US S&P 500 crash? No. At least that's not what I think would happen. I think it's about 50/50 who would win in the cold war between the US and China in this trap. And I think that if China wins, China is very practical. They're businessmen. So I think that they would want to give the US a soft landing because the US is a big consumption market, and they would want the US to still be successful so that they can continue to do business with the US. So I think that the center of economic power would move to China, and unequal treaties will now be signed that favor China, which is what the US had been doing to Japan and other countries while they were the global hegemon. And so you would see a certain amount of a brain drain from Silicon Valley to Shenzhen and things like that. People would start learning Mandarin Chinese and trying to work for, uh, you know, Alibaba and places like this. But the US stock market, the S&P 500, would perhaps go from returning 10% annually to 5% annually. And with the UK, that's about how much they make on their index, right? The FTSE, right? The FTSE averages about 5% annually. The US will no longer be the king of the world, but your investments will still have positive returns. You know, you can sort of use the handoff of the baton from the UK to the United States as a precedent to understand how that might happen. There was Pax Britannica in the past in the 1800s. And once the UK got bombed out during World War II, they owed so much money to the United States, they couldn't maintain their empire anymore. They handed the baton to the United States. And then we got Pax Americana. That's when the US stock market really took off post-World War II, and the UK sort of stagnated. And so I think that that's a reasonable precedent between what could happen between China and the United States.
Because aside from all of this tough talk by world leaders, the world is mostly run by billionaires. The billionaire class, or as Chimath put it, 150 or so of the most powerful families. Those people are not these jingoistic, nationalistic people. These people are independent of nation. They have pride not in their nation. They have pride in their families and their family crest or whatever. And so these people all work with each other, and it's in their interest to have these powerful countries work together because that makes more money for them, and subsequently for us normal folks too.
So, in conclusion, where's the best place to put your money in a rapidly changing geopolitical world? I think the United States continues to be the best place to put your money. Yes, you could try to cherry-pick individual Chinese tech stocks. That may work out for you, but it may not too, because investing in stocks in China is seen more as gambling because of the unpredictability of how this, how the state has control over these individual companies. And if you invest in the US, you're either going to win the the cold war with China and continue their dominance and average 8 to 10% annually, or they'll lose, but China will probably give them a soft landing, and they'll average about 5% annually from there. And at that point, you can decide whether you want to diversify into certain Chinese tech companies or other places. And as far as diversifying internationally into other countries, I generally don't like that play. I generally try to just allocate my money into the strongest countries in the world. And the reason is because, as I've said previously, it's all just might makes right. It's dog eat dog. All of these economic policies and treaties, it's just noise. What's really happening is the strong countries are just bullying the weak countries, and so the money will always flow up to the strong countries. That's how this works. Anyone who's done business knows that people at the top are ruthless, and they got there because they're ruthless, and so they're going to always push for self-interest. You're either going to invest in the US or China if you want the best performance. And that's why the United States stock markets, you know, like S&P 500, always outperforms international funds. Yes, there are years where international funds, like last year, 2025, international funds outperformed the S&P 500, and that that can happen here and there, that that'll happen in the one-off year, but on average, the S&P 500 is going to outperform the aggregate international funds that represent other countries for the reasons I outlined because the United States is the most powerful country, most dominant country in the world. They're going to brain drain other countries. So the smartest Indians in India are going to come to the United States to to become the CEOs of US tech companies and so on. We're going to skim their top 0.1% and brain drain them and have them work in the United States. That's what you can do when you're the most powerful country in the world.
So what about diversification? People might say, "Oh, well, even if international exposure lowers your overall performance, maybe it'll diversify. So it'll like smooth out the bumps to to improve your risk-adjusted returns." Sure, I can understand that argument, but generally speaking, even internationally, the United States is so powerful, and they already have their tentacles all over the world. So, you already have international exposure when you own Coca-Cola, when you own McDonald's. You know, if you go to Thailand, you'll see a strip mall with a Starbucks and a McDonald's. And you think their local coffee chain can compete with Starbucks, or their local hamburger chain can compete with McDonald's? The strong eat the weak. The amount of power and experience that the United States has in these businesses, they can outcompete local businesses easily. That's why China had the requirement where US companies can only be in China if they're majority owned by local Chinese, right? Cuz China understood that it's it was wise of them, frankly. You know, in the same way that that Facebook and Mark Zuckerberg just gobbled up WhatsApp and just gobbled up Instagram, if there's ever a rising threat, the more powerful company will just choke it out or acquire it. And so, I'm generally not worried about international diversification. The US already gives you international exposure. And so, I continue to believe that simply being invested in the S&P 500 over the next few decades will continue to be where you can get the best risk-adjusted returns, even as the geopolitical environment continues to evolve. Whether China wins the cold war or the US wins, investing in the US still has the highest expected value for the reasons I outlined. If the US wins the cold war with China, having bet on the US the whole time will have given you the best returns. If China wins, the US will get a soft landing. Their annual returns will flatten a little bit, probably down to 5% or so annually. And at that point, it might make sense for you to selectively buy a few of the state champions of China like Huawei or Alibaba or Tencent. That's how I'm playing this this whole geopolitical game.
All right. Well, if you want to go over your own personal investment and early retirement strategies, I have a Calendly one-on-one call link in bio if you want to book a call with me. And, uh, let me know if you disagree in the comments. Take care.