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The Diff is a newsletter exploring the technologies, companies, and trends that are making the future high-variance. Posts range from in-depth company profiles, applied financial theory, strategy breakdowns and macroeconomics.
## Elsewhere
### Banking
Chinese banks are increasingly squeezed by decreasing interest rate spreads: the rates on long-term loans are dangerously close to the rates the banks pay for deposits. China has severe economic problems in the form of an aging country and an overhang from real estate debt, but China also has a uniquely wide range of ways to deal with these kinds of problems. It's hard to talk about historical precedent given how much China's system has evolved, but at various times in the past the Chinese banking system has been the temporary shock-absorber for various macro problems—and while that's historically meant credit problems, there's no particular reason duration losses can't be absorbed by the banks for a while and then worked off over time.
### Financial Engineering
One of the unique things about Softbank is not just the portfolio, but the fact that Softbank delights in complex financial engineering to buy and sell the exact return profile they want to target. The latest instance of this is Softbank's proposal for a joint US/Japan sovereign wealth fund. Softbank tends to be levered long equities, so anything they can do to reduce downside, like breaking a trade deal logjam, is beneficial. They like to back capital-intensive businesses—sometimes their presence makes a business more capital-intensive all on its own—and when those businesses are strategic, they'll tend to get government funding.
### Hiring and Game Theory
One of the core competencies of investment banks is to spend two years turning entry-level employees into financial modeling machines, at which point some of those new employees will stick around and many of the others will depart for higher-paying jobs in private equity. And the curse in this business is that the more reliable a bank is at doing this kind of training, the earlier in a new banker's life the PE firms start hiring. This has reached the absurd point where they lock in their post-banking job around the same time they start the job itself. Last year, recruiting started on June 23rd, but this time it started last week, albeit with just one firm, THL.
There's something almost touching about how the big banks end up being the lumbering, unsophisticated counterparty that gets ruthlessly picked off by 22-year-olds, but it's hard to break the deadlock: the banks are starting to ask new analysts to disclose their job offers, for the sympathetic reason that they shouldn't be put on a deal where they're negotiating against a future employer and for the less sympathetic reason that the bank will probably treat them differently if it knows they aren't sticking around. But private equity still has all of the leverage in this situation, and the only way around that is for either banks or PE firms to collude in order to set a more fair time for the hiring season to start in earnest.
### Currency Blocs
One of the US's exports is that American asset managers raise money overseas, and some of the upside from this stays in the US—and since that overseas money often comes from countries that run a trade surplus, it means the US financial sector gradually recaptures some of the share of global trade that American manufacturing has lost. But some European investors are warning US asset managers not to be too Trump-aligned in their approach. The US still has a comparative advantage in both generating alpha and gathering assets, but the US is also not the only country willing to tolerate deadweight loss in order to achieve broader economic aims.
### AI SEO
This is useful high-level overview of how to optimize content so it leads to referrals from LLM chatbots, analogous to the older business of trying to get organic traffic from search engines. For a long time, the party line among search engines was that the highest ROI was 1) putting a little effort into things like having a sitemap, making sure text wasn't in images, wrapping titles and subtitles in the appropriate HTML tags, etc., and 2) writing good content that deserved to rank #1 for the query in question. And the party line among SEO consultants was that no, there were plenty of ways to make the algorithm work for you that extended beyond this. But LLMs are probably closer to the search party line, and only getting closer: the actual way to get LLM traffic is to be cited as a source, and the way to get that is to say something original that answers a question a chatbot user might have. The Diff is getting a growing share of new subscribers from LLMs, but that's downstream from the earlier goal of being a newsletter busy people don't skip.