(BIDU) Archives - Page 7 of 8 - Mad Hedge Fund Trader

Don't Worry About the BATs

The Chinese BATs (Baidu, Alibaba, and Tencent) are China's response to the American FANG group.

It's one of few sectors outperforming the vigorous American tech sector, and valuations have soared in the past year.

Former English teacher Jack Ma founded the Amazon (AMZN) of China named Alibaba in April 1999, which has grown to become one of the biggest websites on the Internet.

This company even has a massive cloud division that acts in the same way as Amazon Web Services (AWS).

Alibaba also has Alipay on its roster, the fintech and digital payments subsidiary of Alibaba.

Baidu, led by Robin Li, is the de-facto Google search of China and is entirely tailored for the Chinese market without English language support.

Tencent, created by Ma Huateng, has an assortment of businesses from social media, instant messaging, online gaming, and digital payments.

Tencent's WeChat platform is the lynchpin acting as the gateway to the robust Tencent eco-system.

The BATs have heavily invested in autonomous vehicle technology set to roll out in the coming years.

These companies are some of the biggest venture capitalists in the world throwing around capital like Masayoshi Son's SoftBank.

Alibaba has seen its share price rocket from $135 in June 2017 to $206.

Baidu has also seen huge gyrations in its share price elevating from $174 in June 2017 to $270.

Tencent, public on the Hong Kong Hang Seng Index, has gone from $273 HKD (Hong Kong dollars) to $412 HKD.

And this is all just the beginning!

An economy growing a stable 6.5% per year with companies able to scale to a mind-boggling 1.3 billion people is something of which to take notice.

China hopes to wean itself from its industrial heritage betting the ranch on a rapidly expanding tech sector.

Does this put China on a collision course steamrolling toward the American FANGs?

Highly possible but not yet.

Even though the BATs modus operandi has been to follow in the footsteps of the FANG's business model, they do not directly compete.

Ant Financial, the fintech arm of Alibaba, was blocked from purchasing MoneyGram International (MGI), effectively, closing any doors leading to the lucrative American digital payments industry.

This also meant curtains for WeChat, the multi-functional app that half of the Chinese use as a digital wallet, in the digital payments space.

The Committee on Foreign Investment in the United States (CFIUS) has made it crystal clear that BAT's capital will be scrutinized more than ever before because of China's open policy of transferring Western technology expertise to the mainland for the purpose of leading the world in technology.

China cannot have its cake and eat it.

The first stumbling block is that the American market does not suit the BAT's FANG business model with Chinese characteristics.

For example, the only other market Baidu search operates in is Brazil.

It has leveraged itself to the Chinese consumer whose purchasing power has spiked from its burgeoning middle class.

Another headwind is the lack of innovation caused by a rigid education system punishing freedom of thought in favor of rote memorization.

Innovation is American tech's bread and butter and investors pay up for this ingenuity that cannot be found elsewhere in the world.

This is also the reason why the BATs need to buy American technology and not the other way around.

Original concepts such as Uber and Airbnb were made in America first and Didi Chuxing and Tujia are rip-offs of these American companies.

The list is endless.

The BATs understand they cannot go head to head with American talent, but that does not mean they won't win out in the end.

To make matters worse, global tech talents do not want to work in China if they are reliant on America to develop something and copy it.

Why not just go work in Silicon Valley for a higher salary?

This was highlighted when the only tech talent to cross over to the other side quit in a blaze of glory.

Hugo Barra was poached from Alphabet in 2013, where he worked as vice present for the Android mobile operating system.

He was installed as the vice president of international development for smartphone maker Xiaomi, the Apple (AAPL) of China.

Barra suddenly threw in the towel at Xiaomi in 2017, offering a harsh critique stating, "What I've realized is that the last few years of living in such a singular environment have taken a huge toll on my life and started affecting my health."

Not exactly the stamp of approval the Mandarins were looking for.

In turn, China has focused its effort on recruiting Chinese-Americans who understand the working environment better and have roots or even family on the mainland.

The dire tech talent shortage is worse in China than Silicon Valley because Chinese tech companies have zero access to non-Chinese talent.

Even with a reverse in immigration policies by the administration, America continues to be the holy grail of tech jobs.

That is why you see hoards of Chinese, Indians, Russians, and every other country's best and brightest waiting in line to make the move.

Taiwanese American CEOs lead some of Silicon Valley's best companies such as the CEO for Nvidia (NVDA), Jensen Huang, and the CEO of Advanced Micro Devices (AMD), Dr. Lisa Su.

Only 1% of Baidu's revenues is extracted from American soil underscoring the BAT's China-first business model. Tencent isn't much better at 5%, and Alibaba heads the list at 11%.

Compare these statistics with Alphabet (GOOGL) making 53% and Facebook (FB) earning 56% of revenue from international sales.

Amazon is still very much an American business but 32% of revenue comes from international sales.

The bulk of this revenue is mainly from Europe where American large-cap tech companies are staunch mainstays.

China has focused on building out its business in Southeast Asia instead.

Those governments are cozy with Beijing and are willing to relinquish some sovereign influence to develop its poor digital infrastructure.

The nail in the coffin for potential BAT companies doing business in America is the total lack of data protection in China.

If you think what Facebook is doing doesn't make you sleep at night, the BATs are running riot with personal data in China.

Expect multiple attempts of hackers breaking into your email while your phone number is constantly harassed by spam messages and robo-calls galore.

This is a normal day in the life of a Chinese national and they are used to it.

China understands they are not ready to eclipse the juggernaut that is Silicon Valley.

The BATs are biding their time organically growing by investing into American tech firms helping their overall products and services.

The past five years have seen a gorge of American investment amounting to 95 deals totaling $27.6 billion.

However, this smash-and-grab investment party is effectively over because CFIUS has clamped down on exporting local technology.

Consequently, the BATs will continue to focus on what they know best - the Chinese market.

Southeast Asia is also ripe to become the next stomping ground for the BATs. Expect them to dominate in this region for years to come.

The runway is long in domestic China. The 6.5% annual growth is entirely biased toward these three companies to prolong their hearty growth trajectories.

The communist party even has a seat on the board at each of these companies highlighting another area of conflict if these companies dive head into the American market.

Let's just say corporate governance in China is a shell of what it is in America.

One day there could be an all-out battle for tech supremacy, but these Chinese companies would need some assurances they would likely come out on top.

That is hardly the case yet and they make way too much money by copying Silicon Valley.

_________________________________________________________________________________________________

Quote of the Day

"The leader of the market today may not necessarily be the leader tomorrow," - said Tencent founder and CEO Ma Huateng.

June 13, 2018

Tech Letter

Mad Hedge Technology Letter
June 13, 2018
Fiat Lux

SPECIAL ACRONYM ISSUE

Featured Trade:
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Special Acronym Issue

Tech Letter

The tech industry is infatuated with acronyms.

The two-, three- and four-letter acronyms of yore have been spruced up by a new wave of contemporary terms.

There are a lot more of them now and readers will need to absorb the meaning of each term to avoid our content seeming like a Grecian dialect.

The Mad Hedge Technology Letter will break down the relevant terminology that applies to the current tech sector.

This will aid readers in their pursuit of financial satisfaction.

FANG: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (now Alphabet) (GOOGL)

Jim Cramer, the host of CNBC's Mad Money, coined this term as this quartet became such a force to reckon with, that they deserved their own grouping. Financial commentators and analysts often refer to the FANGs that ultimately represent the developments and destiny of large cap tech. Apple is sometimes grouped in this bundle with analysts adding a second A inside the acronym.

AWS - Amazon Web Services

The cloud arm of Amazon is its cash cow. Amazon invented this business out of thin air in 2006. It offers the ability for Amazon to operate its e-commerce division close to cost by plowing profits from its thriving cloud arm. AWS is the backbone to the whole Amazon operation. Without it, Jeff Bezos would need to rethink another genius business model because current and future success hinges on this one subsidiary. AWS is the market leader in the cloud industry, carving out 33% of the total market. Microsoft is the runner-up and saw its market share surge from 10% to 13% in the latest quarter.

GDPR - General Data Protection Regulation

Europe has been a stickler concerning individual data protection, and the American companies running riot with Europeans personal data has reached its climax. On May 25, 2018, new European regulations were implemented to give the user more control of handing out their personal data. Penalties for non-compliance are steep. Companies risk being fined up to 20 million Euros or 4% of annual worldwide turnover, whichever is larger. Facebook's Mark Zuckerberg now has a reason to behave like an angel. The least regulated industry in the world is finally experiencing the bitter regulation pill most industries have felt for centuries.

SaaS - Software as a Service

A software distribution model licensing software on a subscription basis. Instead of installing many of these software programs, many of them are available through the Internet on the cloud. Most subscriptions work on an annual basis, and this recurring revenue model has carved out additional income from companies that were used to paying a one-off fee for software. This model has been highly successful. Even former legacy companies have deployed this business model to critical acclaim.

AI - Artificial Intelligence

An area of computer science that strives to deploy human intelligence into machine simulation. The four main tasks it carries out are speech recognition, learning, planning, and problem solving. A.I. has been identified as a cutting-edge tool to fuse with technology products boosting the underlying performance creating massive profits for the participants. This phenomenon is controversial with the prophecy that robots might advance rapidly and turn on their inventors. As each day passes, A.I. is starting to infiltrate deeper into our daily lives, and humans are becoming entirely reliant on their positive functions to carry out daily tasks.

IoT - Internet of Things

Internet connectivity with things. This network will connect billions and billions of devices together. Your bathtub, thermostat, and razor will be armed with sensors and processors that reroute the performance data back to the manufacturer. Deploying the data, engineers will be able to enhance products with even more precision and high quality serving the end customer needs. 5G testing is ongoing in select American cities and new hyper-fast Internet speeds will make mass adoption of IoT products a reality.

5G - 5^th generation wireless system

This is the successor to 4G and is poised to increase wireless Internet speeds up to 20 gigabits per second. Some of the traits will be low latency, high mobility, and will be able to accommodate high connection density. This technology is crucial to the development of the next generation of groundbreaking technology such as autonomous cars that need a faster Internet speed to run elaborate software. The war to develop this technology with the Chinese has turned into a heated standoff. China is stubbornly bent on becoming the global leader of technology in the future, and the communist government views 5G as the keys to the Ferrari. U.S. companies Verizon (VZ), AT&T (T) and Sprint (S) plan to roll out 5G in 2019. Other key companies are Huawei, Intel (INTC), Samsung, Nokia, Ericsson and Qualcomm (QCOM).

BAT - Baidu, Alibaba, and Tencent

This trio is the Middle Kingdom's answer to America's FANG. The nine-year domestic bull market has been led by large-cap tech, at the same time China's economy has been fueled by Baidu, Alibaba, and Tencent. Baidu and Alibaba are tradable through American depositary receipts (ADR). Tencent is public on Hong Kong's Hang Seng stock exchange, the third largest stock market in Asia. These companies are all a mix and mash of functionality that covers the same broad spectrum of the FANGs. They are the best companies in China and are on the cusp of every single cutting-edge technology from A.I. to autonomous vehicles. The Mad Hedge Technology Letter does not recommend these stocks to our subscribers because the Chinese government is on a nationalistic mission to delist Alibaba and Baidu from America and bring them back home. Initially, Alibaba wanted to list on the Hang Seng Hong Kong stock exchange, but draconian rules applied to dual-listing made the company flee to America.

NIMBY - Not In My Back Yard

Local opposition to proposed development in local areas. Although not a pure tech term, the epicenter of the NIMBY movement is smack dab in the middle of the San Francisco Bay Area where all the premium tech jobs are located. Local opposition has made it grueling for any developers to build.

What's more, the expensive cost of land has made any new building a tough proposition. This explains the 10-year drought where San Francisco experienced not a single new hotel built. The dearth of housing has caused San Francisco housing prices to skyrocket to a medium price of $1.61 million as of March 2018. Exorbitant housing prices have triggered a mass migration of Californians fleeing the Bay Area in droves. The shocking aftereffects have put highly paid Millennial tech workers spending the bulk of their salary on housing or living in dilapidated shacks. The extreme conditions we are now seeing are forcing schools around the Bay Area to close in unison as young families cannot afford to stay. Tech companies have become public enemy No. 1 in the Bay Area as locals are desperate to maintain their current lifestyle but are finding it more difficult by the day.

MAU - Monthly Active Users

Favored by social media companies to measure growth trajectories. This is how Twitter (TWTR) analyzes the health of its user numbers delivering a narrative to potential investors by hyping up user growth. If investors value this metric, this allows companies to focus on driving growth at the expense of burning cash. Thus, emerging social media companies such as Snapchat (SNAP) run huge loss-making operations for the promise of future profits after scaling.

ARPU - Average Revenue Per User

Favored by maturing social media companies, particularly Facebook, which has already grown global usership to 2.2 billion. Once the emerging hypergrowth phase comes to an end, social media companies focus on extracting more income per user through targeted ads. Facebook and Alphabet have the best ad tech divisions in all of Silicon Valley. The business model has made Facebook an inordinate amount of money as advertiser's flock to this de-facto marketplace paying more for effective ads whose price is set at an auction. It's a vicious cycle that attracts more traditional advertisers because it is the only method of selling to Millennials who are addicted to social media platforms. Cord-cutting is accelerating this trend forcing advertisers to co-exist with the Mark Zuckerberg model.

There are many more acronyms in the tech world that need explaining and that is exactly what I will do. The Mad Hedge Technology Letter will be back with another slew of technical terms to help subscribers understand the tech universe.

_________________________________________________________________________________________________

Quote of the Day

"You can worry about the competition... or you can focus on what's ahead of you and drive fast," said Square and Twitter CEO Jack Dorsey.

May 23, 2018

Tech Letter

Mad Hedge Technology Letter
May 23, 2018
Fiat Lux

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Why the Big Deal Over ZTE?

Tech Letter

Here's the conundrum.

Beyond cutting-edge technology, there's nothing that China WANTS OR NEEDS to buy from the U.S. China's largest imports are in energy and foodstuffs, both globally traded commodities.

China is playing the long game because it can.

Earlier this year, China altered its constitution to remove term limits and any obstacle that would hinder Chairman Xi to serve indefinitely.

If it's two, four, eight or 10 years, no problem, China will wait it out.

As it stands, China is enjoying the status quo, which is a robust economic trajectory of 6.7% economic growth YOY and at that rate will leapfrog America as the biggest economy in the world by 2030.

China does not need handouts.

It already has its mooncake and is eating it.

The Chinese are also betting that Donald Trump fades away with the passage of time, possibly soon, and that a vastly different administration will enter the fray with an entirely different strategy.

The indefinite "hold" pattern is a polite way to say we surrender.

ZTE Corporation is a Chinese telecommunications equipment manufacturer and low-end smartphone maker based in Shenzhen, China.

This seemingly innocuous company is ground zero for the U.S. vs China trade practice dispute.

The U.S. Department of Commerce banned American tech companies from selling components to ZTE for seven years, crippling its supply chain after violating sanctions against Iran and North Korea.

ZTE uses about 30% of American components to produce its smorgasbord of telecom equipment and down-market cell phones.

What most people do not know is that ZTE is the fourth most prevalent smartphone in America, only behind Apple, Samsung, and LG, commanding a 12.2% market share, and its phones require an array of American made silicon parts.

In 2017, the company shipped more than 20 million phones to the United States.

The ruling effectively put ZTE out of business because the lack of components shelved production.

Low-end smartphones account for almost one-third of total revenue.

ZTE could very well have survived with a direct hit to its consumer phone business, but the decision to ban components made the telecom equipment division inoperable.

This segment accounts for a heavy 58.2% of revenue. Therefore, disrupting ZTE's supply chain would effectively take down more than 91% of its business for a company that employs 75,000 employees in over 160 countries.

Upon news of ZTE's imminent demise, the administration made a U-turn on its initial decision stating "too many jobs in China lost."

The reversal made America look bad.

It shows that America is being dictated to and not the other way around.

When did it become the responsibility of the American administration to fill Chinese jobs for a company that is a threat to national security?

The Chinese refused to continue talks with the visiting delegation until the ZTE situation was addressed.

Treasury Secretary Steve Mnuchin and company were able to "continue" the talks then were politely shown the door.

Bending the rules for ZTE should have never been a prerequisite for talks, stressing the lack of firepower in the administration's holster.

However, stranding the delegation in Chinese hotel rooms for days waiting in limbo, without offering an audience, would have caused even more humiliation and anguish for the administration.

China is not interested in buying much from America, but one thing it needs -- and needs in droves -- are chips.

Long term, this ZTE ban is great for China.

I believe China will use this episode to rile up the nationalistic rhetoric and make it a point to wean itself from American chips.

However, for the time being, American chips are the most valuable import America can offer China, and that won't change for the foreseeable future.

The numbers back me up.

Micron (MU) earns more than $10 billion in revenue from China, which makes up over 51% of its total revenue.

Qualcomm (QCOM), mainly through its lucrative licensing division, makes more than $14.5 billion from its Chinese revenue, which comprises over 65% of revenue.

Texas Instruments (TXN) earns more than 44% of revenue from China, and almost a quarter of Intel's (INTC) revenue is derived from its China operations.

The biggest name embedded in China is Apple (AAPL), which earned almost $45 billion in sales last year. Its China revenue is three times larger than any other American company.

In less than a decade, China has caught up.

China now has adequate local smartphone substitutes through Huawei, Oppo, Vivo, and Xiaomi phones.

Skyworks Solutions (SWKS), a chip company reliant on iPhone contracts, is most levered toward the Chinese market capturing almost 83% of revenue from China.

You would think these chips would be the first on the chopping block in a trade war. However, you are wrong.

China needs all the chips it can get because there is no alternative.

Stopping the inflow of chips is another way of stopping China from doing business and developing technology.

The Chinese economy has been led by the powerful BATs of Baidu (BIDU), Tencent, and Alibaba (BABA) occupying the same prominent role the American FANGs hold in the American economy.

They are not interested in digging their own grave.

To execute the 2025 plan to become the world leaders in advanced technology, they need chips that power all modern electronic devices.

The most likely scenario is that China maintains development using American chips for the time being and slowly pivots to the Korean chip sector, which is vulnerable to Chinese political pressure.

Remember that South Koreans have two of the three biggest chip companies in the world in Samsung and SK Hynix. China has used economic coercion to get what it wants from Korea in the past or to prove a point.

Korean multinational companies, shortly after the Terminal High Altitude Area Defense (THAAD) installation on the Korean peninsula, were penalized by the Chinese government shutting down mainland Korean stores, temporarily banning Chinese tourism in South Korea, and blocking K-pop stars from performing in the lucrative Chinese market.

The Chinese communist government can turn the screws when it wants and how it wants.

Therefore, the next battleground for tech could migrate to South Korean chip companies as China is on a mission to suck up as much high-grade tech ingenuity as possible while it can.

China has some easy targets to whack down if the administration forces it into a corner with a knife to its throat.

Non-tech companies are ripe for massacre because they do not produce chips.

Companies such as Procter & Gamble, Starbucks, McDonald's, and Nike could be replaced by a Chinese imitation in a jiffy.

Apple is the 800-pound gorilla in the room.

An attack on Apple would hyper-accelerate tension between two leaders to the highest it's ever been and would be the straw that breaks the camel's back.

Technology has transformed the world.

Technology also has been adopted by nations as a critical component to national security.

Nothing has changed fundamentally, and nothing will.

China will become the biggest economy in the world by 2030.

China will kick the proverbial can down the road because it can. It never has to cooperate with America again.

Contrary to expectations, American chip companies are untouchable, and investors won't see Micron suddenly losing half its revenue over this trade war.

Until China can produce higher quality chips, it will lap up as much of Uncle Sam's chips until it can force transfer the chip technology from the Koreans.

American chip companies can breathe a sigh of relief.

_________________________________________________________________________________________________

Quote of the Day

"If we go to work at 8 a.m. and go home at 5 p.m., this is not a high-tech company and Alibaba will never be successful. If we have that kind of 8-to-5 spirit, then we should just go and do something else." - said Alibaba founder and executive chairman Jack Ma.

May 4, 2018

Diary, Newsletter

Global Market Comments
May 4, 2018
Fiat Lux

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May 3, 2018

Diary, Newsletter

Global Market Comments
May 3, 2018
Fiat Lux

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Don't Be Short China Here

Diary, Newsletter

Everyone who has been reading this letter for the past decade (yes, there are quite a few of you), know that I am a fundamentalist first and a technician second.

Of course, you need to use both, as those who mistakenly leave one tool in the bag reliably underperform indexes.

The one-liner here is that I use fundamentals to identify broad, long-term, even epochal trends, and technicals for the short-term timing of my Trade Alerts.

Do both well, and you will prosper mightily.

Strategists often like to cloak themselves in the fundamental or technical mantels alone. But parse their words carefully, and the best fundamentalists talk about support and resistance levels, while the ace technicians refer to the latest economic data points.

The reality is that the best of the best are using both all the time. The differential titles have more to do with marketing purposes than anything else.

Having said all that, you better take a good, hard look at the chart below for the Shanghai Stock Exchange Composite Index ($SSEC). The 2016 low has held and the long-term uptrend lives.

My bet is that it resolves to the upside. All it would be doing then is coming in line with the rest of the global equity markets, including those of many emerging markets.

Since the last top, the earnings multiple of Chinese companies has plunged, from 35 times to a mere 15 times. This means that the 6.5% a year growing economy (China) is trading at a lower multiple than the 2.3% a year growing one (the U.S.). The big question among strategists since 2009 has been how far these valuations would diverge.

If I am right, then you can expect a rally of at least 25% in the Shanghai market soon, and more in peripheral markets, such as Hong Kong (EWH) and in single Chinese names. My bet is that it starts in August, when the current correction ends and we resume the year-end ramp-up.

You should place a laser-like focus on the Chinese Internet sector, so you won't go wrong picking up some Baidu (BIDU) around $180, if you can get it (click here for my original recommendation to buy the stock at $12 nine years ago).

If you are looking for further confirmation of the coming bull move in China across asset classes, please peruse the chart below for copper. The red metal has one of the closest correlations out there with the fate of the Middle Kingdom's economy and stock markets. It appears to be breaking out of a major five-year downtrend as well.

The other nice thing about this scenario is that it provides more fodder for my expectation of another global bull market move in the fall, when you can expect major indexes to tack on another 10% by year-end.

Jim Chanos, watch your back!

April 16, 2018

Tech Letter

Mad Hedge Technology Letter
April 16, 2018
Fiat Lux

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The High Cost of Driving Out Our Foreign Technologists

Tech Letter

There is only so much juice you can squeeze from a lemon before nothing is left.

Silicon Valley has been focused mainly on squeezing the juice out of the Internet for the past 30 years with intense focus on the American consumer.

In an era of minimal regulation, companies grew at breakneck speeds right into families' living quarters and was a win-win proposition for both the user and the Internet.

The cream of the crop ideas were found briskly, and the low hanging fruit was pocketed by the venture capitalists (VCs).

That was then, and this is now.

No longer will VCs simply invest in various start-ups and 10 years later a Facebook (FB) or Alphabet (GOOGL) appears out of thin air.

That story is over. Facebook was the last one in the door.

VCs will become more selective because brilliant ideas must withstand the passage of time. Companies want to continue to be relevant in 20 or 30 years and not just disintegrate into obsolescence as did the Eastman Kodak Company, the doomed maker of silver-based film.

The San Francisco Bay Area is the mecca of technology, but recent indicators have presaged the upcoming trends that will reshape the industry.

In general, a healthy and booming local real estate sector is a net positive creating paper wealth for its people and attracting money slated for expansion.

However, it's crystal clear the net positive has flipped, and housing is now a buzzword for the maladies young people face to sustain themselves in the ultra-expensive coastal Northern California megacities. The loss of tax deductions in the recent tax bill make conditions even worse.

Monthly rental costs are deterring tech's future minions. Without the droves of talent flooding the area, it becomes harder for the industry to incrementally expand.

It also boosts the salaries of existing development/operations staffers who feed into the local housing market spiking prices because of the fear of missing out (FOMO).

After surveying HR tech heads, it's clear there aren't enough artificial intelligence (AI) programmers and coders to fill internal projects.

Compounding the housing crisis is the change of immigration policy that has frightened off many future Silicon Valley workers.

There is no surprise that millions of aspiring foreign students wish to take advantage of America's treasure of a higher education because there is nothing comparable at home.

The best and brightest foreign minds are trained in America, and a mass exodus would create an even fiercer deficit for global dev-ops talent.

These US-trained foreign tech workers are the main drivers of foreign tech start-ups. Dangling financial incentives for a chance to start an embryonic project at home is hard to pass up.

Ironically enough, there are more AI computer scientists of Chinese origin in America than there are in all of China.

There is a huge movement by the Chinese private sector to bring everyone back home as China vies to become the industry leader in AI.

Silicon Valley is on the verge of a brain drain of mythical proportions.

If America allows all these brilliant minds to fly home, not only to China but everywhere else, America is just training these workers to compete against American companies in the future.

A premier example is Baidu co-founder Robin Li who received his master's degree in computer science from the State University of New York at Buffalo in 1994.

After graduation, his first job was at Dow Jones & Company, a subsidiary of News Corps., writing code for the online version of the Wall Street Journal.

During this stint, he developed an algorithm for ranking search results that he patented, flew back to China, created the Google search engine equivalent, and named it Baidu (BIDU).

Robin Li is now one of the richest people in China with a fortune of close to $20 billion.

To show it's not just a one-hit wonder type scenario, three of the top five start-ups are currently headquartered in Beijing and not in California.

The most powerful industry in America's economy is just a transient training hub for foreign nationals before they go home to make the real cash.

More than 70% of tech employees in Silicon Valley, and more than 50% in the San Francisco Bay Area are foreign, according to the 2016 census data.

The point that really hits home is that the insane cost of housing is preventing burgeoning American talent from migrating from rural towns across America and moving to the Bay Area.

This trend was reinforced by domestic migration statistics.

Between 2007 and 2016, 5 million people moved to California, and 6 million people moved out of the state.

The biggest takeaways are that many of these new California migrants are from New York, possess graduate degrees, and command an annual salary of more than $110,000.

Conversely, Nevada, Arizona, and Texas have major inflows of migrants that mostly earn less than $50,000 per year and are less educated.

That will change in the near future.

Ultimately, if VCs think it is expensive now to operate a start-up in Silicon Valley, it will be costlier in the future.

Pouring gasoline on the flames, Northern Californian schools are starting to close down as there is a lack of students due to minimal household formation.

The biggest complaint is that there is no affordable housing.

A 1,066-square-foot property in San Jose's Willow Glen neighborhood went on sale for $800,000.

This would be considered an absolute steal at this price, but the catch is the house was badly burned two years ago. This is the price for a teardown.

When you combine the housing crisis with the price readjustment for big data, it looks as if Silicon Valley has peaked.

Yes, the FANGs will continue their gravy train but the next big thing to hit tech will not originate from California.

VCs will overwhelmingly invest in data over rental bills, and the percolation of tech ingenuity will likely pop up in either Nevada, Arizona, Texas, Utah, or yes, even Michigan.

Even though these states attract poorer migrants, the lower cost of housing is beginning to attract tech professionals who can afford more than a burnt down shack.

Washington state has become a hotbed for Bitcoin activity. Small rural counties set in the Columbia Basin such as Chelan, Douglas, and Grant used to be farmland.

The bitcoin industry moved three hours east of Seattle for one reason and one reason only - cost.

Electricity is five times cheaper there because of fluid access to plentiful hydro-electric power.

Many business decisions come down to cost, and a fractional advantage of pennies.

Once millennials desire to form families, the only choices are regions where housing costs are affordable and areas that aren't bereft of tech talent.

Cities such as Las Vegas and Reno in Nevada; Austin, Texas; Phoenix, Arizona; and Salt Lake City, Utah, will turn into hotbeds of West Coast growth engines just as Hangzhou-based Alibaba (BABA) turned that city into more than a sleepy backwater town with a big lake at its center.

The overarching theme of decentralizing is taking the world by storm. The built-up power levers in Northern California are overheated, and the decentralization process will take many years to flow into the direction of these smaller but growing cities.

Salt Lake City, known as Silicon Slopes, has been a tech magnet of late with big players such as Adobe (ADBE), Twitter (TWTR), and EA Sports (EA) opening new branches there while Reno has become a massive hotspot for data server farms. Nearby Sparks hosts Tesla's Gigafactory 1 and most likely its next addition.

The half a billion-dollars required to build a proper tech company will stretch further in Austin or Las Vegas, and most of the funds will be reserved for tech talent - not slum landlords.

The nail in the coffin will be the millions saved in taxes.

The rise of the second-tier cities is the key to staying ahead of the race for tech supremacy.