With a little help from his nephew, Iolaus, Hercules slew the multi-headed Hydra of Greek mythology. Iolaus cauterized the Hydra’s neck wounds as Hercules cut off the serpent’s heads. Until the cauterization technique was employed, the Hydra grew back more heads for every decapitation it sustained, a frightening creature to be sure. Today a new Hydra is growing in plain sight but, unlike the Hydra’s ability to threaten the world with multiple appendages, it appears to be limited, for now, to two heads.
We speak of the rapidly separating economic ecosystems nurturing the two biggest economies in the world, China and the United States. The best place to observe this separation is in technology. Emerging 5G applications will expand broadband usage a hundred-fold. Smart homes will proliferate. Control of HVAC and stereo systems, even the temperature of the household refrigerator, will be centrally controlled by smart phone. Industrial processes will be a major beneficiary of 5G, allowing service companies great power as data flows in ever larger quantities. The Chinese wield Huawei, Alibaba, Baidu and other similar firms. The U.S. fields Facebook, Google, ATT, Amazon, Verizon and many more. All will be accessing travel patterns, eating preferences, entertainment choices, and, well, our daily and online lives.
Divergent Economic Philosophies
The current trade war between the two powers sheds light on dramatically different approaches to building the best economic system. The term “Cold War” has been bandied about describing the current climate but is probably not accurate in that the Cold War was predicated on walling off the Soviet Union from global economies. The opposite is true for China. China is deeply engaged in world trade. After clashing with U.S. trade policies, the two goliaths will not surrender their pursuits and methods for accomplishing their goals, therefore the Hydra-like development.
With trade spats and military incursions, this Hydra can be every bit as nasty as the mythological serpent. In this construct there are two self-contained systems, one Chinese-centric and one U.S.-centric. This is counter-productive, as there is gross duplication of effort and huge obstacles to overcome for citizens and companies working in the separate systems: in trade, academia, and services. Already countries are having to choose sides in 5G development, siding with the country they feel will best serve their interests.
In an unorthodox approach, the U.S. has made comments about buying European telecom companies Nokia and Ericsson to create an international conglomerate to counter China’s Huawei. At a German security conference this month, Speaker of the House Nancy Pelosi told the European gathering, “Allowing the Sinification of 5G would be to choose autocracy over democracy. We must instead move towards…an internationalization of digital infrastructure that does not enable autocracy.”
It is interesting to note the United Kingdom, a longtime ally of the U.S., appears to be trying to take the middle ground, and it approved using Chinese 5G technology from Huawei. True to form, the U.S. version will rapidly monetize the 5G environment, while the Chinese stress social controls generated by the data. In essence there will be two internets; some have coined the phrase “Splinternet”. Adding to this tension in the UK is the Chinese offer to build the British high-speed rail line between London, Birmingham, and Manchester in record time. China Railway Construction Corporation (CRCC) has assured the British that it can deliver the project far cheaper than previous estimates. CRCC has already completed most of the 15,000-plus miles of China’s high-speed rail network. It will be far more difficult to build such a network in the UK. The British enjoy property rights and private ownership of land, far from the norm in China, and are impediments when laying rail. Nevertheless, the rail offer is tempting to the UK’s new PM, Boris Johnson.
Herculean Efforts
To fuel China’s global expansionary effort, in the throes of coronavirus, we anticipate China’s central bank will flood the economy with liquidity much like the Federal Reserve did in 2008. Watching this Hydra-like growth will be fascinating.
Another battleground will likely be in medical advancements. This is particularly true writing today as the world struggles with coronavirus. Can Chinese medical efforts be trusted to contain the disease? Can we trust their estimates of its spread? Are they capable of finding a cure in a timely manner? All are questions with few answers, but for countries with aging populations such as the U.S., any methods to alleviate costly medical procedures will help reduce soaring budget deficits. Genetic editing and alteration, for example, is a technique that has led competing scientists worldwide to escalate research and to grapple with huge ethical issues. Investment potential is immense and numerous public companies already exist in this space.
Genetic editing consists of altering DNA strands to eliminate exposure to different diseases. In 2012, the discovery of Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR), and their interaction with an enzyme called Cas9, led to an amazing capability to “cut out” the portions of DNA identified as disease oriented. For instance, a DNA strand can contain the BRCA1 gene, identified as being a component in breast cancer. Using CRISPR-Cas9, one could possibly eliminate this portion of a person’s DNA and reduce the odds of breast cancer. The lingering question remains, what other unintended consequences could develop from these genomic alterations?
Because the long-term effects on humans from these procedures are unknown, the agricultural arena has seen the bulk of research, some of which has already enjoyed positive outcomes. Disease resistant vegetables are one such development. The older technique of genetically modifying crops has become a flashpoint for protests, particularly in Europe. In contrast, today’s CRISPR simply edits the existing DNA in an organism and does not introduce new material from another organism. This has huge potential to increase crop yields and reduce hunger globally while avoiding concerns brought about by genetic crop manipulation.
But a problem arises when scientists take the process too far. This occurred in China in November 2018 when a Chinese scientist, He Jiankui, used CRISPR-Cas9 to edit the HIV susceptibility of twins being born in China. His work was done with no input from the international scientific community. There had been adequate warnings about using human subjects for this kind of genetic editing because the CRISPR cutting technique leaves cells to heal themselves, a process that could lead to mutations that bring unintended, perhaps harmful, consequences. Extensive testing is needed before CRISPR is shelf-ready for such human embryo manipulation. The Chinese government fined the scientist and sentenced him to three years in jail, a strong statement, but, nevertheless, the two-headed Hydra shows itself again in the potential schism of U.S./China approaches to innovative technologies. What other medical experiments and research are occurring in the Middle Kingdom we know little of?
While CRISPR-Cas9 is still not utilized in embryonic applications, the approach is quickly moving forward in the treatment of cancers and blood disorders. One company, Crispr Therapeutics, conducts its genetic edits outside the human body, making for a more controlled approach to the application. The company currently plans three cancer treatment trials and will then move on to tackle diabetes-related conditions. Once this road is travelled Crispr Therapeutics will try treatment directly in humans, skipping external editing. Another public company, Intellia Therapeutics, is using initial low dose injections of CRISPR-Cas9 directly into humans, moving forward with both direct editing inside the body as well as external editing techniques to tackle leukemia and liver diseases.
Editas Medicine, also a public company, seeks to restore sight to the blind. Other listed companies in the sector include Guardant Health, Exact Sciences, and Natera. Obviously, CRISPR-Cas9 technology is in its infancy, but the potential is massive. The role it could play in reducing disease will potentially play out in a myriad of outcomes including reducing Medicare costs to an aging population, not to mention adding years of productive life to suffering patients.
Looking for an Iolaus
Like Hercules’s task, it is the Hydra we must deal with, determining how, as investors, to navigate the differing regulatory, financial, and social systems. It is not easy. To this writer, the Chinese system seems to have a flaw, one that could retard future advancements in science and technology. Surprisingly it lies in a “little red app” otherwise called “Xi Jinping Thought”. The app sits on most Chinese cell phones and is to be studied closely so the leader’s thoughts can be passed on to the population. Frequent taps on the cell phone app are generally a favorable sign to an ever-vigilant security apparatus that citizens are actively engaged: studying Xi’s insights is always a good indicator of one’s ongoing conformity. Such behavior smacks of the Cultural Revolution when thousands were sent to re-education camps for training in Mao’s thoughts. It did not produce a particularly innovative society, and some of this seems to be on display today.
With the coronavirus rampant in Wuhan, the Chinese published the genetic sequence for the disease on the internet—perhaps several weeks later than it should have–in hopes of spurring a cure. Within two weeks the Centers for Disease Control (CDC) had a test available for Coronavirus, enabling a quick, genetically based method to identify infected people. It is no surprise that this innovation sprang from a U.S. source and not a lab deep inside Tsinghua University in Beijing. It is difficult for innovation to thrive in an autocratic state. Odds are that a cure will come from a similar Western source, a Pasteur Institute in France, or a multinational drug company like Johnson & Johnson, which will assist the U.S. government to control the virus outbreak. Companies such as Novavax and Vaxart are forging ahead on coronavirus cures and their stock prices have soared. All this leads us to maintain a sharp eye on Western stocks amidst the Hydra’s realm; risk does not abate, but potential abounds.
After killing the Hydra, Hercules used the beast’s poisonous blood to tip his arrows for future battles where the Hydra’s blood was transmitted by arrowhead to the victim’s bloodstream causing certain death. Now, centuries later, it is possible that a small company in suburban Boston, among other firms, will soon be able to read strands of Hydra DNA and genetically alter the poisonous blood disorder, perhaps saving future victims of Hercules’ lethal arrows.
E. B. “Chip” Beard
February 2020
