The AI Gap Is Closing | Jason Hsu on China, Momentum Crashes and the S&P’s Seven-Stock Bet

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Justin J. Carbonneau (1:02)

Jason, hello and welcome back to Excess Returns.

SPEAKER_3 (1:06)

Hi, Justin. Hi, Jack.

Justin J. Carbonneau (1:07)

You are founder and chief investment officer at Rayliant Global Advisors, a quantitative firm focused on investing around the world, both developed and emerging markets before launching Rayliant. You were co-founder of Research Affiliates. I'm not sure if it carries that name anymore, given what's transpired with the firm. But you and Rob Arnott were sort of instrumental and at the forefront of turning factor-based approaches into investible products and investment strategies. And I think today, we had you on a couple of times to talk about your investment approach and how you're deploying these factor-based strategies around the world. And we'll get into some of that. But we wanted to start by, I think, connecting your experience and knowledge into sort of talking about the global race of AI, at least to start. And then we can get into factor-based investing, sort of the risks and opportunities in different areas and different markets, including Asia and China. And then I think bridging the gap, which you do a great job at, at sort of talking about what is working in research and academic worlds into portfolios that work for the real world and actual investment strategies. So, thanks again for doing this. Third time's a charm. You're always welcome here. But I think to start, we wanted to ask you about your reaction to the Anthropic CEO's letter over the weekend.

There's this sort of push and pull happening in AI right now where, I'm not going to rehash it all, but there's safety concerns. Some are calling for more regulations.

Some of these CEOs are saying we need to slow down, we need to put garbage in place. There's a whole sort of narrative out there on this, and you have different sides here, but specifically, I want to ask you, how do you think this issue relates to the US-China AI race? Because on one hand, it's like we have to do everything to keep up with China. On the other hand, you have people that are saying we need to slow down and put safety first regardless of what China does. So do you have any sort of opinion on that?

Jason Hsu (3:09)

Yeah. I mean, I would say yes. We're probably, from a technology perspective, moving full steam ahead on AI development, so much so that a lot of the risks are not being talked about, just for how inadequate, I would say, thinking given to the negative consequence of AI. However, I think the genie is out of the bottle. You can't put it back in the following sense. It's not like US can regulate AI development. We can regulate US companies and their AI development if we want to, but we can't regulate what's happening in China. There are no longer generations behind the US or unable to surpass US if US stops developing AI technology. If the US stops, the Chinese firms will simply leapfrog. So what a regulation we put into place. Let's simply kind of stunt development in the US while having no impact overall question around AI security. So I think the genie's out of the bottle.

Yes, we need to think about safety, but that then becomes a global coordination, and if the G2 countries, meaning US and China, don't play ball here, then it doesn't work.

Justin J. Carbonneau (4:30)

Do you have any sense about how close China is to some of our leading AI labs here? I think earlier this year, you came on and said that DeepSeq was about 80 percent of the way there in terms of what it could do, and it was at 20th of the cost. I think Stanford University recently put the gap between US and China at maybe less than 5 percent, something like that. So how do you view where China stands relative to where we are today?