Inside An Emerging Markets ETF (EMQQ) | Kevin Carter Interview

All right, welcome back to the show. Today we've got an incredible guest with us, Kevin Carter. Kevin, welcome to the show. How you doing today?

I'm great. Thanks for having me.

This is gonna be a fun episode to interview. First off, Kevin, thank you for coming on. I know you're a busy man. You're doing a lot of different things, running. Well, we're gonna dive into all of that in just a second, all the stuff you get into. But for people listening, give everyone a quick 2-minute boilerplate of— I know you got your hands in 20 things, but kind of your main— give everybody a quick boilerplate and then we'll dive into it a little bit further.

Well, my main business presently and for the last 6.5 years is an exchange-traded fund, an ETF that trades on the New York Stock Exchange with the ticker symbol EMQQ, which is an emerging markets internet fund that owns basically every internet and frontier market company in the developing world, starting with China and the Alibabas and Tencents, but, you know, the Alibaba of Poland and the Amazon.com and PayPals of Brazil. So those types of companies, and that fund has about $2 billion here in the US, another quarter million in Europe, and then I also manage a small partnership It's hedge fund in fees, but we don't necessarily hedge it. And then that invests in the same group of emerging markets internet companies.

Wow. Geez. So, all in emerging markets. So, I'm excited to dive into this and unpack a little bit further. How does one get into launching an ETF? What does that look like? Tell us a little bit about your story about how you got here.

Well, my story is pretty long, but I mean, I started in the investment business 28 years here in San Francisco at a firm called Robertson Stephens. which back in 1992 was the, you know, we used to call it the Goldman Sachs of San Francisco, but now young people think that means the devil. So we don't say that anymore. But it was the premier investment bank focused on technology. And I started in their mutual fund group, which was a small operation at the time. And when I started, when I interviewed for the job, I had a 20-minute meeting. In the first 19 minutes, we talked about college basketball. And then I got a 1-minute overview investment business. And then the guy said, you can start Monday. And I said, well, how can I possibly start Monday? I don't know anything. And he said, well, go buy this book. And he wrote down on a piece of paper, A Random Walk Down Wall Street. Wow. I don't know if you're familiar with the book, but it was first written in 1973 by a gentleman named Burt Malkiel, who's a Princeton economist and a member of the board of Vanguard and really one of the founding fathers of indexing. And so I read that book to start, but I quickly gravitated towards Omaha and I try to think about all business and investment decisions through a Charlie Munger lens. But for the last 20 years, I've ended up being business partners with Bert Malkiel, the author of A Random Walk Down Wall Street and one of the founding fathers of indexing. So I've had one foot in the active world, one foot in the indexing world. With him. And in 2002, we started a company called Active Index Advisors, which did customizable tax-advantaged index separate accounts. So, you know, build your own S&P 500 fund. And, um, we ended up selling that company to Natixis Asset Management in basically December of 2004. But just before that, Google had gone public.

And you, just real quick, you were doing investment banking that whole Interim. And then you left, launched your own, that business, correct?

Oh, well, I had been in the investment management business and then in 1998, I was a very young idealistic person and I had determined that the mutual fund business was a great way for some people to get rich, but they weren't the people that were investing in mutual funds, but the people that owned the mutual fund companies.

Yeah.

There had to be a better way for people to invest smaller dollar amounts. In 1999, I started a company called eInvesting, which was the first company to do fractional share brokerage. So you could buy $2.50 of Coca-Cola. And we sold that company to E-Trade in the year 2000. Then I got back into the investment management business with Active Index Advisors, which we sold to Natixis. But right before we sold that company, Google had gone public. And when Google went public, they asked my partner Bert to come down and give a talk to their employees about investing. And I wasn't involved with that, but soon after that talk, a guy from Google called me and said, hey, I wanna invest with you. And I said, well, who's your advisor? Because, you know, we didn't have any clients directly. We worked through Credit Suisse and Deutsche Bank and Morgan Stanley. And the guy said, well, I really wanna just invest directly with you. And he convinced me to become his advisor. So in 2005, I ended up becoming an advisor to, you know, about 10 of the earliest Google employees. And, and right about the same time, my partner Burton was going back and forth to China, and he wrote a white paper about investing in China. And all these people at Google asked if Bert could come talk about China. And 16 years ago next week, I drove down to Mountain View one morning with Burton, and he gave a talk about China. And all these guys looked at me after his talk and said, we want to invest in China. And so From the moment that talk ended until today, my whole life has revolved around trying to figure out what does that even mean. And so I've been a China and emerging markets person for 16 years. And in 2007, we partnered with Guggenheim Partners and began launching ETFs. So the first funds I was involved with launching were exchange-traded funds with Guggenheim that now have the Invesco brand on them.

So, okay. First off, incredible story. I'm excited to dive into this. That sounded like, yeah, that could have been an hour and you condensed it down to 4 minutes for us, which is incredible, your career you've done. So, take me back a little bit. So, you have those Google employees, they want to invest in China. What did you do with those? Were you finding public securities that they could easily get into? Were you syndicating money together? And then, did an ETF just kind of say, this just makes sense, let's just do an ETF, or did they roll together? How did that work?

Well, so the investment solution that I had was providing these people was basically their own customizable S&P 500 strategy, right? So we'd buy 50 or 100 stocks to track the index pre-tax, and then we'd do systematic loss harvesting every quarter. So if the automobiles were down and we owned General Motors, we'd sell it and buy Ford. And the idea was we could keep the beta. the market return pre-tax, but generate a bunch of losses which have value. And so we can beat the index after tax. And then for the rest of the allocation, we used ETFs. And when they said, we wanna invest in China, we drove back to the office that day and I went straight over to the portfolio managers and I said, look, the Google guys wanna invest in China. Give me a list of all the companies in the China ETF. 'Cause I assumed that we would just buy the iShares China Fund and we did, but I realized pretty quickly that traditional indexing in China and other emerging markets is a really bad way to try to make money. The indexes are broken in emerging markets.

Why, what was broken about them? What was going on in those?

Well, so the first, so, So when I got back into the office, I said, give me a list of all the companies in the FXI, which is the ticker symbol. I wanted to see what's under the hood. And before they gave me the list, my partner Burton pulled me aside. He said, look, when you look at what's in the China ETF, you're going to see that almost all of the companies are Chinese government-owned banks and oil companies. And I said, yeah, I've been to the DMV and I've heard about this. It doesn't sound like a good idea to me. And he said, well, let me tell you how a Chinese bank operates. And the example he gave was, you've got a Chinese manufacturing plant with 15,000 employees, and it's totally inefficient. It's been losing money for a decade, and it's about to run out of money. And it goes across town to the Chinese state-owned bank and says, we need more money. Now, a normal banker would say, no, you haven't made a profit in 10 years. you did not pay us back the last loan we gave you, you are bankrupt. The Chinese banker does not say that. The Chinese banker says, well, if you run out of money, then your 15,000 employees are going to be out in the streets protesting, and we cannot have that civil unrest. The bank makes another loan to an otherwise bankrupt company. When he gave me that example, I got literally nauseous inside because with my simple Omaha brain, earnings equals value and the growth of earnings equals the growth of value. And if the people that run the companies you're investing in don't care about that, why would you invest in them at all? And in the case of the China ETF back then, it was 85% government-owned companies.

Wow.

And for the broader emerging markets ETFs, like the Vanguard and iShares funds, there's still about 35% in state-owned enterprises. It is more like 50% if you count the chaebol in Korea and the oligarchs that took over the Soviet SOEs. These are not real companies and the corruption is— you cannot even make up some of the stuff. The 2 last presidents of Brazil are in jail for stealing your money if you are using a broad emerging markets ETF, because they were looting the state-owned oil company. The president of Korea went to jail for taking bribes from the chairman of Samsung, who went to jail only to get let out for the Olympics, but go back to jail in the last 3 months. So that's the biggest problem. I mean, you have these companies that they're public, but they're not really traditional for-profit operations. And then the other problem, which was to me just adding salt to the wound, was After Burton gave me that example, I was like, okay, gross. And then I got the list of all the companies and I went through it. I saw all the Chinese state-owned banks and oil companies. And I got to the bottom of the list and I said, where's Baidu? Because Baidu, which is the Google of China, was not in the China ETF. And we called the iShares people and we said, well, how come you don't— or where's Baidu? And they said, well, we don't include Baidu. I said, I know, I can see that. Why don't you include it? And they said, well, we don't consider it a Chinese company. And I said, what do you mean? It's the only Chinese company I knew before I got this list and it's the Google of China. Being the Google of anything sounds like something good to be. And they said, well, we don't include it 'cause it trades in the United States. And I said, that's the stupidest thing I've ever heard. So that, that was the other big problem and that problem didn't get changed For at least a decade. When Alibaba came public, it didn't get included in the Vanguard fund or the iShares fund for 3 years. So those are the 2 problems. There's other problems, but those were the 2.

Oh my gosh.

That's—

well, and you're exactly right. It's insane. It makes you nauseous hearing that. I actually was just reading a book. Peter— is it Zeihan or Zhan? He wrote a book called Accidental Superpower, another book called This United Nations. Macroeconomist, but he mentioned the same thing you mentioned about debt in China. He, um, I think his stat was 60%. So first off, China creates the most debt in the world, and most of it goes to these privately held businesses. And he, his stat was 60% of businesses in China, um, excuse me, 60% of the debt they are taking on is to pay off old interest payments on old debt. That's how much debt they're accumulating. It's very interesting. Um, he had a whole paper on this entire thing in his book, and The amount of debt issued that just really is inefficiently, I don't know, deployed in the markets because of the communist government where you're not having fair value markets or they're finding inefficiencies, things like that, which is very interesting. So, back on— so, you find these problems first off. That makes a lot of sense. You're helping these Google guys, you find all these problems, and then from there, you just say, we're doing our own, or what'd you do next?

Well, to be honest, I was pretty reluctant. Burton, you know, my contract ended within the Texas people at the end of that year, and they said, you know, we're gonna let you go off on your own way. And Burton called me the day I called him to tell him I was gonna be leaving. He said, we gotta do China, we gotta do China. And I, you know, I had gotten a little bit of my arms around China, but I didn't see how I could, you know, at that stage in my career, how I could be the—

The guy.

of any value in investing in China. I had never even been to the country, for God's sake, at that point. And, but he was very persistent. And then, uh, someone came to me and said, hey, this, you know, are you guys still working on China? And I said, well, you know, sure. And Burton was— Burton's white paper was becoming a book. And so I was reading the transcripts of that. So I was kind of involved with China, but not really. But he— He told me that the closed-end fund market was hot and that there was a hunger for some China product in the closed-end fund space. And then I asked him to explain to me the mathematics of how that worked if I was, you know, an advisor to a closed-end fund. And they were quite attractive, mainly because in a closed-end fund, people can't redeem the money. So it's permanent capital.

Yeah.

And also because of that, you have no ongoing sales and marketing expense because People can sell the shares, but only to somebody else. So I— And they waved a bunch of money in my face and said, Morgan Stanley would love a China closed-end fund. And so we ended up partnering with Guggenheim 'cause we needed, we didn't have the muscle to do a closed-end fund and distribute it. And we were, this is 2007, and we were in registration We got Citigroup and Wachovia said, we'll underwrite the deal. And I remember when Citigroup said yes, I was like, this is amazing. I'm like, I've never been to China. And I got a call 6 months ago about somebody telling me I could get a closed-end fund done. And now Citigroup's gonna underwrite a fund and it could be billions of dollars. And I remember thinking, this is too easy. And the next day Citigroup was in the newspaper for not very good reasons and the credit the mortgage crisis was just starting to show cracks. And so we were supposed to launch that China closed-end fund in October of 2007, but that market got absolutely just ceased. And so very quickly—

Yeah.

Guo and I said, well, we can do ETFs because they were, you know, they were in the closed-end fund business and the ETF business. And so, and you didn't need an underwriter for an ETF. So we launched Our first China ETF in December 2007 was a ticker symbol TAO, which is a China real estate ETF, which I think they've since closed. Gotcha.

Okay, that makes sense. And you launched it, right? You still launched it that time. Were you—

We did. We did.

Were you nervous about that? Or is there— What's kind of the overhead cost of launching an ETF?

Well, and that was the nature of the partnership we had with Guggenheim was that they paid for all that. What we brought was, here is how to make a good index for this. Then we were basically the marketing, the portfolio investment specialists on it. I think back then, if I had tried to launch an ETF myself, it would have cost a couple million dollars in lawyer fees and things that I do not really care about or want to have to roll up my sleeves and do. The operational elements of The investment management business are not my strength or interest. So, so they, they want— they, you know, they had their own lawyers and everything, trust, and they— so they organized the ETF, and I basically provided that, you know, this is— these are the stocks to buy.

Gotcha. I love it. When I think of an ETF, I think of some really smart guys in some tall buildings with computer servers floor to ceiling surrounding them, and they have this incredible index fund that's trading. Is that the truth? Is that how your office is, just stacked with computers? I'm curious the inner workings of running an index fund. Is it very— I'm guessing it's a mix of people like yourself that are actively thinking through the investments and then I don't know, programmers putting it into algorithms, or how does it work on, at least on your team? How do you guys run as a team? How many people do you have? I'm curious the inner workings of your company.

Sure. Well, we keep things very lean here, and we've outsourced basically everything. In my early days, it cost a lot of money to do an ETF, and it was complicated, so it was easy to just partner with Guggenheim. When I had the idea for EMQQ, I didn't wanna work with Guggenheim because I'd gotten, you know, the unfortunate part of working with that organization at the time was that they didn't spend too much time on sales and marketing. They were more about acquiring other companies and laying off half the people. And they ultimately sold the business.

Hmm.

But I saw, I thought I'm gonna do this myself. But at the time, you know, in 2000, '14, there was— now there's several of these companies, but there was 2 private label companies. So if you had an idea for an ETF, you'd go to them and say, I'd like to launch an ETF. And then you basically pay them to launch it, which back then was about $100,000. That was it. And then you're on the hook though for $20,000 a month. after that, or, you know, it's the greater of $20,000 or 25 basis points. So it was 25 basis points with a $20,000 minimum. And so, and the group's called Exchange Traded Concepts. And I thought, okay, well, this is great. And all I have to do is produce the list of the companies, which you can also sort of outsource that. So I signed on with them, I paid $100,000, and then They had all the lawyers, the transfer agency, the trust, the distributor, all of the plumbing. And 100 days later, it launched on the New York Stock Exchange. So I went from idea to trading on the NYSE for $100,000. That's even less now, you can do it for $50,000 or $60,000. And I remember people would congratulate me. They'd be like, oh, congratulations. I'm like, no, I'm not IPOing Google. I'm IPOing an ETF, which means I'm losing money right now, right? This isn't like I made it. This is— I got $100,000 to launch a fund.

Yeah.

And so all of the stuff, again, the transfer agent, the custodian, all of that stuff we outsource, the portfolio managers, the people that trade the fund, they have computers, you know, maybe not all the way to the ceiling, but that's where the portfolio management effort is done by an outside party. The index itself is rules-based. So our main asset is a document that's 6 pages long. And it basically, it's 6 pages, but it says the following bullet points. Buy every single emerging or frontier markets internet company, right? As long as it meets our minimum of $300 million market cap and $1 million a day of average daily volume. And then, so that's how you get included in the fund. And then the rebalance is described, which happens twice a year in June and December. So on the 3rd Friday of June and the 3rd Friday of December, new stocks are added, stocks are deleted that no longer fit the criteria. And it's just market cap weighted, but there's one modification, which is that the largest company is limited to 8%. of the portfolio. So unlike traditional market cap weighting, we just put a cap on the top stock. And that's because Alibaba and Tencent are so much larger than every— those are both essentially trillion-dollar companies. And so they would dwarf everything else and we wouldn't be in compliance with the diversification rule. So that's it. I have 4 people on my team. We don't have an office. Well, we have an office that is here on my property that's nice. And now half of it's a studio downstairs where I'm sitting now since everything's gone to Zoom. But it's a very lean business and it's worked really well. The white label platforms are really a great thing in the ETF world.

Your team of 4, do you have much day-to-day to do? How often are you making tweaks or identifying new business? What workload is it on an ETF? How passive and active is it?

I guess that is what I am asking. It is passive, but if you do it right, there is a lot of work to do. It is not as easy as you just push the button and here is the answer, here are the stocks. Now, between you and me, and I guess probably everybody else who listens to the podcast, but maybe I ought to phrase this a little differently than if it was just you and me. One of the things I've experienced as an active person that's got sort of pulled into the indexing world is that indexing people don't think about investing. And because they don't really need to, and they don't think about, um, just in general, it doesn't attract people that ask a lot of questions or think about why do we do this this way. And so because of that, there's a lot of things that you'd be shocked to find in the, in the world of indexing. And, and here's an example. So when Before I launched EMQQ, I told you what I learned about the flaws in emerging markets, but the real— the story of emerging markets is the story of the people moving on up. Emerging markets are 85% of the world's people. They are 90% of the people under the age of 30, and their economies are growing twice as fast as the developed world. And the people are what's emerging, right? There's billions of them and they want stuff. They want more and better food, more and better clothing, appliances, vacations, cars, and they want their kids to go to Harvard or, or not Harvard, as you might say. And I didn't go to Harvard, by the way. I went to the University of Arizona and I graduated with a 2.0.

Wow.

To go with my 2.0 in college, that makes me a 4.0 student.

Yeah.

That is the story. It is all about the consumer. What I have been doing for 15 years is like, okay, how do we push down the legacy economy and all the corruption, and how do we get more exposure to the consumer? What I started to tell people to do was just buy the emerging market consumer ETF, because that is— leave out the legacy economy, leave out the banks and the oil and the materials, And there was an ETF with the ticker symbol ECON, E-C-O-N, that tracks the emerging market consumer sector. And when I learned about this fund, I went through all of the holdings, right? And this is a fund that had $1.5 billion at one point. The index is provided by Dow Jones, right? Which is a big operation. And so I wanted to see what was in the index. And I got the list. I went through all 30 stocks. The first 2 stocks, the 2 biggest positions, were both 10%. And you look to see what they were. The first one was a company called Naspers. Country code, South Africa, that's an emerging market. And then sector, consumer staple, right? Their business historically is a newspaper business. But do you know what Naspers is?

No.

So Naspers is a 100-year-old newspaper in South Africa. And like most newspapers, you'd think, well, it's probably not a very good business anymore. Well, it's not. But about 15 years ago, they made what might be the single greatest venture capital investment ever. They bought 43% of Tencent for $30 million, which is now worth $200 billion and more.

Wow.

And so the database said, this is a South African newspaper company, but the balance sheet said, this is a Chinese technology company, right? Now I applauded the position that was good to have to get exposure to the emerging market consumer, but they weren't South Africans buying newspapers. So that was the first one.

Yeah, yeah.

They got, they basically bought it accidentally. And then the second one was also South African and it was a furniture maker. So the database said, Consumer durable, and that company is called Steinhoff International. And it took about 90 seconds to look in the annual report to see yes, they're headquartered in South Africa. They trade in Johannesburg, but all of the furniture gets bought in Europe and Australia, right? The showrooms were not in South Africa. So it just made me so crazy. I was like, wait a minute. This is Dow Jones. They've got a 60-story tower in downtown Manhattan. and they have this big fund and the 2 largest holdings aren't even really what they're trying to buy because they don't look.

Yeah.

They just say the database says these are the 30 biggest emerging market consumer companies. So that's a real problem. And so we check to make sure that you're— because a lot of these companies don't trade in their home markets. Most of them trade actually in the United States. So some databases will People say, oh, this is half your portfolio is in the United States. I mean, okay, well, Alibaba trades on the NYC, but it's Chinese. Yeah.

That's so interesting that the amount of ETFs— because I buy a number of ETFs and I really don't dig that deep. I'll look at a few companies, okay, that looks nice, and let's just get on with it. It's got decent returns. That's pretty interesting to look under the hood and what you guys have done and said, no, we want to get down to the fundamentals. of like back to the Charlie Munger investing, right? We want to get to invest in actually what we're saying we're investing in, right? Not faking it. I want to ask you about, kind of switching topics, I want to ask you about the emerging markets in general, your kind of macro view of emerging markets. Where do you see them going? I've actually had a number of people on this show, a few people on the show talk about emerging markets and the possibilities and opportunities there, also the risks there. But I'd love to hear, first off, how do you define an emerging market? And then secondly, where do you see emerging markets going over the next 10, 20 years? And from an investor point of view, is it as risky and hard to get into? I mean, you guys have an ETF to get into these markets, but what is it like trying to be an investor in these markets?

Well, you know, it's a risky world, and emerging markets are certainly on the riskier side of things. First of all, you know, there's no official definition of emerging markets. as it turns out. There's the MSCI list of eligible countries, which is the— that's sort of the gold standard. Those guys created the emerging markets index originally, and that's what most institutions use. But the Vanguard ETF tracks the FTSE index. So the biggest ETF doesn't track MSCI, and they don't— they're not exactly the same. So the Vanguard fund doesn't include Korea, but the iShares funds do. And then the Vanguard people added the Chinese A-shares. I think the iShares people may have done that as well, but for a while it was just Vanguard. So there's no official list, but we have our own list that's in the back of the index methodology. And we include every emerging market, including Korea. And we also include every frontier market, which are things like Nigeria, Vietnam, Argentina, for example.

So it's frontier underdeveloped, then emerging.

So it's frontier, then emerging, then developed. Well, yes, frontier is like the farm team for emerging markets. These are the— when they first launched the frontier market ETF, the iShares people did, I was all excited because I was already up to my neck in emerging markets. I thought, oh, great frontier markets. These are the really poor countries that have even more room to grow. They tell you, you read the white paper and it sounds all great. Then you get to the back of the back and you see what do they own. This was— well, I call this marketing fraud because they sell you this, they sell you Nigeria, but then you look at what the holdings are and when they launched that fund, 60% of the market cap, 60% of the fund was invested in 3 countries that have a total of 10 million people, Kuwait, the United Arab Emirates, and Dubai. So you, which is basically 10 million very rich people. And the reason that those countries were considered frontier had to do more with their stock markets and— some of the rules about clearing and settlement. And so they tell you about all these people in Nigeria and Vietnam, and then you open the— you look under the hood and you're like, these are 60 million people that make like 90— or I'm sorry, 10 million people that make an average of like $120,000 a year. So it's supposed to be the even lower GDP per capita countries, but that's not the only way you get put in the frontier. And so, that is another big problem.

Geez, interesting, huh? Now, as far as emerging markets in general, for the investment opportunity there, to get into these countries and first off, to get in, number one, and you mentioned a number of different ETFs that just didn't really do what they said they were doing, essentially, like you said, marketing fraud. I feel like it's been a problem for investors to get into emerging markets or frontier markets is just, what do I invest into? What do I buy without— do I actually know what I'm buying? How do I not know it's fraud? Number one, you have a great ETF that hopefully solves that problem for investors. But outside of that, what are some things to look for as an investor?

Well, I think what we have put together is by far the best way for investors to invest in emerging markets. And because what's— here's what EMQQ really represents. You've got, as I mentioned, the whole story, the stuff you wanna own is the consumption story, right? McKinsey calls it the biggest growth opportunity in the history of capitalism, right? Literally. And so it's— EMQQ is really, it's 3 megatrends in one. So the first megatrend is billions of people that want better food, clothing, appliances, et cetera. Now, the way that I— the idea for EMQQ came— let me tell you how it happened. So I had looked in the mirror one morning and I thought, oh my God, what am I doing? I was this young, cocky stock picker. Somehow, I got mixed up with this guy at Vanguard, and now I am building Chinese index funds. Oh my goodness, I have lost my way, and I am getting older, and I really want to be the Warren Buffett of emerging markets, so I got to go do that. I told the Guggenheim people I was going to leave and set up my own investment partnership. I did that. Once I had it organized and my own money invested in it, I thought, well, I should go see if any of my friends want to invest with me. And I made some appointments in the morning of those appointments. I made some slides to show them. And one of the slides I made was a list of the 5 stocks that I bought. The first 3 stocks were stocks that were in the emerging market consumer ETF. Those 3 stocks trading in Hong Kong were Want Want, which is like the Nabisco of China. And then Li Ning and Peak Sports, which are like the Reebok and Converse of China. So the first three were food and clothing. The database put them in a box consumer, so they were in that index and that econ ETF. But then I had two other companies that I had invested in: one on the New York Stock Exchange, the Craigslist of China, Wubao, and the other one trading on the Nasdaq Mercado Libre. which is the Amazon.com and PayPal of Brazil. And I looked at that slide and I thought, all 5 of these are consumer companies. The 3 that are called consumer companies are great. They're growing at 15 or 20%. And I think they have a moat in form of brand equity to use a Buffett term. But then I looked at the other 2 companies, the internet companies, they were growing at 100% and had some of the highest margins I'd ever seen. And while the PEs were higher, the PE versus the growth rate was lower. And I just remember thinking, the 2 best companies I own to invest in the emerging market consumer, they're not even in the emerging market consumer ETF, 'cause the database is calling them something different. They're being called technology. And that was it. I thought about that, printed my slides, drove around town to my meetings, got some checks. I was on my way back home. And I was at a stoplight and my phone rang and it was a friend of mine with a 3-year-old daughter. And my friend said, what's the best emerging markets ETF for my daughter's college fund? And I started to tell her what I told everybody, which was just buy ECON, but then a light bulb appeared above my head and I said, wait a minute, the best emerging markets ETF for long-term investors doesn't exist. And I went straight back to my office and I started to organize EMQQ. And now, so—

Wow.

This wasn't as clear to me at the time. I saw that these companies were clearly consumer companies, whatever you wanted to box them as, and that they had incredible growth and profitability. But what I didn't really appreciate was that it's really 3 things in one, 3 megatrends that are driving this. And I believe that this is not only the fastest growing sector in the world today, but I think this is the fastest growing sector ever. And here's what's happening. All of those billions of people are getting their first ever computer, right? So when I answered that call that day—

Yeah.

I answered it on an iPhone, but that was a pretty new thing for me. I'd only had it for a couple of years back then, but I was already seeing how it was changing my life, right? My family had, you know, back then was going to Target 4 or 5 times a week, but all of a sudden the brown truck or the white truck was at my house once a week. and then twice a week.

Hmm.

And so if you think about how the smartphone has changed our lives, and you map it over to the billions of people in emerging markets, well, I had a computer for 20 years before I got a smartphone. All of these people are getting their first ever computer. It's not on their desk, and it never will be, and it doesn't have an Apple logo. So all those new consumers are getting $50, $80 Android-based smartphones, that are getting better and more affordable every year. And they're bringing with it the 3rd megatrend, which is something that we also take for granted, something I've had for 25 years called the internet. So I, you know, I had, I had a telephone modem access in the Marina District of San Francisco in 1995. That was my first internet connection.

Wow.

But most of the world's never been wired. And so That's the third part of the story. And because these people don't have Target stores, they don't have bank accounts with debit cards, they don't have TVs on the wall with 1,000 channels, they're leapfrogging what we think of as traditional consumption. And the result is that for the, you know, the last 11 years, the average annual revenue growth has been about 38.5% for the whole sector. And I'm not positive of anything, but I've given my presentation to hundreds of professional investor groups and, you know, 80 CFA societies. And I offer a $100,000 cash reward to anybody that can show me a sector that's ever grown this fast, uh, over a 10-year period. And I've asked everybody I know that's smarter than me, and so far my inbox is empty. So, this is where the growth is.

No one's taking you up. Hey, we'll put it live on the podcast today though if anybody can get the— take you up on the challenge. That's absolutely insane. I was talking to a friend just a minute ago. He was talking about credit cards in emerging markets as well. He was saying credit cards completely skipped emerging markets. People do not have credit cards. They went from cash and fiat currency to their phone, to a Venmo type of transaction on their phone.

I can't overstate how big this is in the developing world. And it's a total paradox. someone like me, a fintech entrepreneur in San Francisco. I should be George Jetson, right? I should be paying with my phone, but it's not me. It's Africa. Africa is by far the leading mobile payments market, and Kenya's GDP— Kenya's mobile payments market is now twice the size of their GDP. So it's that leapfrogging, right? They're never gonna have a bank account. It's all QR codes and other forms of mobile payments. Which is a huge deal.

That's—

man, this is— that—

it's, it's really very insane. What's with the leap— like you said, I love the phrase, the leapfrog effect of what's going on. They're getting brand new technology and skipping over the learning curve we had to go through as a society. It's incredible. I want to ask you, Kevin, I know, I know you're busy. I want to keep you forever, actually. We'll keep talking for a minute as long as I can keep you, but I want to ask you from a macro point of view, I'd like to ask a few people this recently. We've printed trillions of dollars last year. We've had very interesting monetary policy, interest rates at zero. I've heard anywhere from 20% to 35% of our money supply was printed in the last 12 months. I don't know the exact number. I've heard all sorts of reports and I try to— anyways, try to figure it all out. What are your thoughts from a macro point of view going forward? What do you— what are some things that you see on the horizon the next 18 months, 24 months, you know, 3, 4 years from a, you know, a macroeconomic view? Are we in a big bubble? Is it going to pop? Do we think we're gonna have hyperinflation? What do you see from your chair in San Francisco?

Well, let me first say that for the most part, I don't think about those things too much. I'm very much a fundamental long-term person. And the story that— EMQQ story is a secular kind of one-dimensional, one-directional thing. And that is what I spend my time focused on. But having said that, of course, I have opinions about these things. And this modern monetary theory is fascinating to me. And when Neel Kashkari from the Minnesota Fed was on 60 Minutes last March, when the world looked pretty bleak and they were saying, how much money can you throw at this problem? And Neel Kashkari with a giant smile kept saying unlimited, infinite amounts. And I was just like, wow, these guys are all in on MMT. And I'm not sure they shouldn't be. I'd love to fix our infrastructure, it's a disaster. So about a year ago when all this was first going down, I called my 88-year-old Princeton economist partner who knows way more than I do about these things. And I said, well, what do you think, Bert? And he said, well, I think you are very well positioned with EMQQ because, you know, one of the things the pandemic did was even further the, you know, this was already the fastest growing sector in the world and they got a huge boost with it, as everyone knows, you know, with COVID coming to town, your smartphone zooming went up. But then he said, you know, Kevin, everybody says inflation's dead, but that's a lot of money going out there. And I suspect that the inflation might not be far behind it. And he's the smartest man I've ever known. So I know he said that. And so I made a very big note of that. So it does make sense, but But we still have a— had a pretty big disruption in our economy and our workforce, and some of these businesses are never gonna come back online. So I don't know what to think about the inflation picture. It feels like my house has gone up in value a lot in the last year, as has the houses in almost every region of the country, I think. And that was the other thing I said last year is that, you know, it's not clear to me that EMQQ went from 30 to 80, or if my dollars went from $1 to 50 cents, right?

Yeah.

In terms of the global picture, China, which is, again, the biggest part of my life because that is 2/3 of our fund, they handled this thing well. They did not have to throw trillions of dollars at it, and their economy grew last year. They have made up ground. They're gonna pass the US faster than they would have without this. And their economy's back. They're gonna have a big year this year. The revenue growth is likely to be over 8%, or no, I'm sorry, the GDP growth over 8% this year. That'll normalize back to the 5 or 6% range. But I think China will be strong. I think Europe and, I mean, the emerging markets, are a real disaster with this. You know, social distancing is not really possible when you're living 5 people in 150 square foot, you know, without even running water. So it's going to be unbalanced, the recovery. Brazil's a complete—

Were emerging markets affected as heavily as developed countries, or what was the effect there and how have they done?

Well, it's really all over the board. I mean, Brazil is a complete basket case. I mean, they've had a lot of problems anyhow, but Bolsonaro, the president, went rogue and was kissing babies in the middle of it, and then he got COVID himself. And, you know, I don't know if you know this guy, he's like, ah, we're tough. Well, you know, he's one of those types. But meanwhile, the states and the mayors were having policies that were against the national government. So they're in trouble there. I mean, that virus has gone really, really bad there. making new highs in terms of cases. So they're in trouble. India— India's been very interesting. I mean, they have very dense populations with very poor sanitation, but they have a very young population. They are the biggest population of people under the age of 30 in the world. And, um, and so then the, the death rates weren't very high early on, but they've had little outbreaks continuing where the cases are getting bad, but it's a mixed bag. That's the thing with emerging markets is there's so many, they're all so different. And Africa also had very low numbers for most of this, but now at least in places like Tanzania, it's really picking up speed.

I wanna ask you about, You mentioned China specifically about their GDP growth and something that I want to ask you because you sound like the expert on this. So, what I was reading about was China had— around the world, we have the baby boomers, but then China instilled the one-child policy. And so, now, those baby boomers are hitting their retirement years. And my understanding was the United States, we have about 3 workers for every 1 retiree. And it's still a struggle on Social Security to manage that. In China, I heard it was 3 retirees for every 1 worker, every 1 kind of type person there. With that big of a— because you had the— what, you know, you had baby boomers, then one-child policy. And I was reading a few papers that they were saying China could be in trouble because of that to maintain that type of a population, an older population. Any thoughts on that?

Well, I— Those numbers don't sound totally right to me, that, that 3 retirees for 1 working person in China. That sounds high. But I know that to the extent I've looked at the demographics for China, they're definitely aging as a population, but they're not nearly as bad as Japan, which is, you know, really where this problem is going to be significant, or if it is a problem.

Yeah.

Right? I mean, who knows? It hasn't really happened yet, so we don't know what will play out in it, but the numbers look worse in Japan. And the numbers I've seen for China are still better than they are for the US and Europe. So even places like Italy and Catholic countries, countries that have, you'd think would have higher birth rates. China's had a higher birth rate. And so I'm not a demographer, but every time I've seen the tables and the statistics on this, it's definitely something that's going to be— the population will be aging in China, but on a relative basis to the US and Japan and Europe, it's It might be deteriorating quickly, but it'll be a long time before it's as bad.

Gotcha. Okay. Interesting. I want to ask you a few kind of quick questions here. I know I could keep you for an hour here, but I want to just kind of fire off some questions at you, see your thoughts on a few things. First one, cryptocurrency. What's your thoughts on cryptocurrency, especially out of the lens of emerging markets? What are your thoughts on that going forward?

Well, I, um, you know, when crypto first showed up 8 years ago and my grandfather and my father-in-law started asking me about it at Thanksgiving, it was right— there was 3 things that had happened that fall. The first venture capital investment went into— it was the first venture capital investment into crypto, which was Coinbase. Somebody bought tickets for the Sacramento Kings basketball game. and somebody bought a Tesla. Those were all things I'd seen in the news. And my grandfather and uncle said, what do you think about this? And I said, well, why does my $20 bill in my wallet have any value? Because I can walk into 7-Eleven and get a 12-pack and a Copenhagen, right? Other than that, it's just a piece of paper.

Mm-hmm.

And if people are giving you real-world stuff for it, it has value. And I decided after the holidays and all this discussion about crypto, I tried to buy Bitcoin was at $1,000. It had been up from $300 to like $1,000 that year. And I'm like, I'm gonna buy $5,000 of this crypto stuff. And Coinbase didn't quite work yet. So every time I went on there and tried to open an account, it would crash. So—

Yeah, yeah.

I have— I think it's the weirdest thing ever, especially when you have this origin story about this fictional human that— it's just, it's hard to even go beyond that part of the story. But, but it doesn't matter because it comes back to if somebody will give you something that you want for it, it has value. And that everybody that's in the crypto business is bullish on crypto. I've yet to meet someone in the crypto business that says, ah, no, I don't think this is gonna work. And the number of people that accept it as a thing is going up.

Yeah, yeah.

And you have one of my heroes, Elon Musk, his S&P 500 company, which is, I think, the greatest business on the planet today, putting money into Tesla. So I think it's gonna continue to go. And with the constraint in demand, I'm sorry, the constraint of supply and this sort of ongoing increase in demand and institutionalization, I think it will work. I still think it's super weird. At least the Bitcoin part of it. But if I had to bet, I would have to bet that— and I own some now. Unfortunately, I didn't buy it back then for $1,000. But I think it's going to go a lot, lot higher.

I love it. And in regards to, do you see emerging markets accepting crypto and using that as a currency?

I don't know about that. I think— I don't think China— I mean, China's basically said no. And, you know, they have their own digital yuan initiative going on. I haven't— I don't recall what else I've seen. I can't remember what India's stance is on it. But it seems like people all over the world are buying into it. And I think that that's— I think there's going to be more and more believers. And I don't know how it'll end, if it will end. It does have a risk of being too lip-esque, I suppose.

Yeah. I love it. Well, Kevin, I know I've kept you probably longer than you planned. I love talking with you. I want to— final question I want to ask you that I give to everyone I bring on the show. I want to give you 2 minutes, a minute and a half, 2 minutes, 3 minutes, whatever it is. I'm going to just give you the mic, open mic. You kind of— your message to the world, what you'd like to leave with this audience, people. You know, there's a lot of people on here that are young entrepreneurs. young investors or young fund managers or want to maybe end up like you one day, but this is open mic. You can talk religion, politics, monetary policy, crypto, emerging markets, whatever you want to talk about. You got 2 minutes, whatever you feel like is most valuable and most important to share with this group. I'll leave the open mic and then we'll close it right here.

Okay. Wow. That's exciting. So, here's what I would say. To me, Investing's pretty simple. And then I talk about investing in the stock market and, you know, the simple math is that what gives companies value is earnings and growing those earnings is what makes a company valuable. And so you wanna listen to Warren Buffett about moats. I think the moat is the most important word in investing. And if you can find companies that have moats that are growing and that are growing, likely to grow for the long term, that's what you ought to be looking for. And the things that have moats, the best way to tell if something has a moat is if you're one of the clients of the business. If you're the one putting the money into the cash register, you know if somebody opened up next door with a similar product, and change the price down by a dime if you would go there or not. And so you're looking for moats and you're looking for growth. And the miracle of compounding is by far the most important part of the math if you really wanna make money long-term. And even experienced people who have heard the miracle of compounding story for 30 years are well served to go back and actually watch how much money you can make if you increase it by 20% a year or 30% a year, or even 15% a year. And of all the things I regret in the investment business, it's not— it's selling things. It's selling things that have— some things which have gone up 100-fold. from what I sold them. So buy and hold great businesses and keep doing that. And you will always get your best buys when everybody is gloomy and it's hard to do. But when you feel like you're gonna barf is usually when you should buy. And when you're, you know, checking out Ferraris and stuff on the internet, maybe it's time to sell.

Great advice, Kevin. I want to thank you so much for coming on today. For you again, it is EMQQ the ticker. Go check them out. And Kevin, any way for people to— if they— I don't know if you want people to get in touch with you, but if there's a way for people to learn more about your company's businesses, where can we direct people to look and to learn more about you guys?

You can find me on LinkedIn, Kevin T. Carter, EMQQ, and you can find us at EMQQ. emqqindex.com, the best way to get in touch with my organization.

Okay, sounds good. Kevin Carter on LinkedIn and then emqqindex.com, right?

Sounds good.

Kevin, thank you so much for coming on today.

All right, thanks for having me. It's been fantastic.