U.S.-Israel-Iran Conflict: Underlying Logic Has Changed Since Iraq War

Summary

• A ceasefire is unlikely in the short term because the three sides’ objectives barely overlap. Li Fengfeng’s core judgment is that Iran’s regime is actually more stable when external contradictions outweigh internal ones; showing weakness could break the fragile balance between the Islamic Revolutionary Guard Corps and the new supreme religious leader. Israel’s optimal outcome—from both the national-interest and Netanyahu’s legal perspectives—is to keep fighting until Iran’s regime is overturned. The U.S. is trying to mediate an early de-escalation, but the deadlock is whether Iran believes “anything the U.S. promises today will count”—Iran “may no longer believe that negotiations are negotiations.”
• Compared with the 2003 Iraq War, the underlying logic has changed in 3 ways. Most NATO countries sent troops then; this time nobody is even coming to escort shipping through the strait, while Spain has openly opposed the operation. In 2003, precision-guided weapons and information warfare showed the world “an overwhelming military advantage—not over Iraq, but over the entire world.” That display is absent this time: unconfirmed reports say 4 THAAD systems in the Middle East were destroyed and South Korea’s THAAD was withdrawn, while Iran’s low-cost “little moped” drones are draining expensive interceptors. This may be the first time U.S. overseas bases have come under large-scale attack. Taken together, the 3 factors could have lasting consequences for the U.S. and the transatlantic relationship.
• Capital markets are replaying March 2020. Every major asset sold off—equities, bonds and gold, which is down nearly 20 from its high—while only the dollar rose: “risk-off has reached the extreme… cash is the only reliable asset.” The market is now trading stagflation. The negative loop is “the war does not stop, oil does not fall, supply-chain risks rise, and the economy stagnates while inflation persists.” Li Fengfeng believes rate hikes will ultimately be very difficult; if major economies enter stagflation, stimulus will take priority. The turn will require a credible signal that the war is ending—Trump saying it will stop is no longer enough.
• A regime change in Iran would hurt China in 3 ways. On oil settlement, China has proactively offered renminbi settlement, and the renminbi share of China’s own trade settlement could exceed 50-60% this year. If the U.S. takes Iran, it would effectively control the Middle East and, combined with its own output, could gain potential pricing power over more than half of the world’s oil—“the foundation of the dollar is military support on the left and oil pricing on the right.” China’s western-border security and the Belt and Road would also come under pressure.
• The medium-term, 5-10-year theme is a reassessment of energy structures. Countries will diversify oil and gas sources: the EU has temporarily suspended its planned April blanket ban on Russian oil, while China’s reserves have risen from roughly 40 days to about 140 days. Governments will openly build wind, solar, hydro and nuclear capacity, while “quietly” considering nuclear weapons—“if you are a nuclear state, Israel might at least hesitate to treat you this way.” Disruption to the petrochemical chain threatens fertilizer, pesticides and food supplies. That is why biomanufacturing was written into the 15th Five-Year Plan: China accounts for more than 40% of global basic chemical capacity and needs to decouple from its dependence on oil and gas.
• The record of color revolutions is a cautionary tale. Iraq’s GDP is up 12x since 2003, but crude export sales are up roughly 10x and oil prices rose from $25 to an average of about $70—almost all of the growth came from oil. Unemployment remains at 15-22% and 15-20% of the population lives in poverty. Ukraine completed the final step of “oligarchs controlling politics” and became the region’s poorest country on a per-capita basis; Russia made it 8 or 9 steps of the way before Yeltsin’s handpicked successor Putin stopped the process. Basic state capacity is what matters first. The answer behind the “Miracle on the Han River” was not privatization.
• AI has reached a point of certainty: the “huge continent” of foundation models has stabilized, and application connections are now exploding. China’s token usage has exceeded the U.S. for 4 consecutive weeks at the time of broadcast, ranking first globally. Open Cloud (“little lobster”) became so hot that multiple local governments, starting with Shenzhen’s Longgang district, rushed out support policies until the Ministry of Industry and Information Technology issued a security warning. China’s historical pattern is that “once it reaches the application layer, it becomes very powerful”; over the past 2 weeks, “a huge number of strange and varied new connection points have appeared.”
• China’s future-industry playbook is built around complex supply chains, while the global order is being repriced. China favors sectors such as commercial space, quantum computing and robotics, where the supply chain is long and complex, allowing it to “lay eggs along the way” and capture many intermediate industries; once it climbs 2 steps in succession, “it becomes very difficult to catch up,” as lidar has shown. Russia was not broken by 10 years of sanctions, China used rare earths to bring the U.S. back to the negotiating table, and if this conflict ends with another compromise over oil, it would mark a third Dalio-style reassessment of the world order. Middle Eastern capital has already begun flowing into Hong Kong.

Deep dive

1. The War Takes Hold Within a Month, With Ripples Running From Oil Prices to U.S.-China Talks

• The previous Macro Talk had barely ended when the U.S. and Iran clashed, and the conflict has continued ever since. Li Xiang listed the spillovers: the U.S.-China leaders’ meeting was postponed, and higher oil prices have passed through to China—many people say this is the first time in years they have received a price-increase text message from Sinopec.
• Higher energy prices are pushing global inflation higher, and the U.S. is debating whether to raise rates. The secondary market has been “volatile” over the past month—Li Fengfeng corrected him: “No, no—it’s been down, up and down. There was no sideways movement.”

2. Iran’s Paradox: War Stabilizes the Regime, and Hard-Line Posture Is Rational

• Li Fengfeng’s framework is that Iran experienced unrest after crowds were mobilized to take to the streets last December, but once war began, the country entered a phase in which external contradictions outweighed internal ones. As a religious state, Iran’s regime became temporarily more stable—even the assassinations that had already taken place “made him somewhat more stable.”
• Over the past 5 or 6 years of nuclear negotiations, Iran had moved somewhat away from outright opposition to the U.S. and toward Washington. After this incident, “the past 5 or 6 years were probably all wasted,” and Iran has returned to open confrontation.
• Iran must avoid sealing off the Strait of Hormuz so completely that it drags the entire world into the conflict and turns Iran into “the common enemy of everyone.” That is why it has allowed some commercial vessels to pass in an orderly fashion.

3. The Decapitation Strike Was Rushed: Washington Hadn’t Even Built the Pretext

• Li Fengfeng said the most abnormal feature of the U.S. operation was that it began before Washington had found and repeatedly reinforced a plausible justification. In Iraq, “we eventually proved that the weapons of mass destruction definitely did not exist,” but the U.S. had at least constructed and amplified the pretext first. The same pattern applied to Venezuela, Saddam Hussein and Muammar Gaddafi. This time there was no such buildup: the decision was “relatively sudden, and perhaps somewhat unexpected even for the U.S. itself.”
• He stressed that this was “purely conspiracy-theory speculation.” The U.S. may not have been sure it wanted to fight in the first place. The recent effort to blame the defense secretary suggests it “certainly does not look like something planned several weeks in advance, as the news reports say.” The supposed advance planning more likely refers to Israel’s long-running infiltration and intelligence collection.

4. Trump’s Multiple-Choice Test: Bureaucrats Offered 3 Options, and He Picked the Most Aggressive

• Li Xiang cited Bob Woodward’s account of Trump’s first term. As bureaucratic procedure dictated, the national-security team offered 3 options: an immediate strike, a compromise Plan B that officials hoped the president would choose, and doing nothing. Trump read them and selected A. “Everyone was stunned.”
• Li Fengfeng attributed the decision to 3 factors: it was not an established plan, Israel encouraged it, and Trump believed he could replicate the Venezuela playbook—“a quick war, a rapid change in whether the regime was pro-American, and rapid gains.” That would increase his political leverage while giving selected companies and the U.S. itself access to oil and pricing power. Trump later declared, “I have left Iran to the Iranian people,” hoping a pro-American regime would emerge quickly.

5. The Blitzkrieg Script Failed: 3 Things the U.S. Did Not Expect

• First, the war would drag on without overthrowing the regime. Second, the decapitation strike would not end the conflict in one blow. Third, the delay would allow Iran to close the Strait of Hormuz, triggering a chain reaction that even global capital markets had not anticipated. The market moved through the full sequence: “sudden shock → expectation of a quick end → realization that it could not end → realization that the impact was much larger → panic.”
• One more surprise was that Iran attacked U.S. military bases outside Israel and its surrounding waters. The longer the war lasts, the greater Trump’s political losses, giving Washington an incentive to “rationally bring it to a temporary halt early, in the way he wants.” That is precisely not Iran’s optimal choice.
• Videos of people celebrating the “liberation of the Iranian people” on social media are a classic wartime propaganda tactic, Li Xiang said. The celebratory footage was released by the U.S. and Israel, while the videos of people expressing outrage were released by Iran. History has seen this pattern many times.

6. Israel’s Optimal Outcome Is to Keep Fighting

• From the standpoint of national interest, Israel wants to pull the U.S. into the war and overthrow “the last highly hostile country in the Middle East.” From Netanyahu’s personal perspective, as long as the country remains in a wartime state, he does not have to return for litigation and trial. If Iran were actually defeated, “you can’t call it balancing out the merits and faults,” but perhaps the charges could still be dropped.
• The 3 positions therefore “barely overlap,” leaving the U.S. weakly in the middle. A ceasefire depends on whether Washington can find common ground with both sides, and “it currently looks at least not as easy as Trump has claimed over the past 2 days.” Preventing Israel from continuing is contrary to both its national and personal interests.

7. The Negotiating Deadlock: Promises Are Not Credible, and a New Leader Cannot Show Weakness

• Li Xiang asked what concession the U.S. could offer that Iran would accept. Li Fengfeng replied, “Good question.” Whether there are 15 conditions or 5, “the biggest problem is whether Iran believes U.S. commitments count.” Iran has already been pushed back and forth twice over its nuclear program. “Before, it may have believed that negotiations were negotiations. Now it may no longer believe that negotiations are negotiations.”
• Iran’s internal structure deepens the deadlock. The Islamic Revolutionary Guard Corps controls power and the economy, while the new supreme religious leader—Shiite and selected from the inner circle—“clearly does not have the ability to command the entire field with awe.” “The moment he shows even a little weakness, this fragile balance disappears.” That could trigger a regime change or even turn Iran into a military state in which the Revolutionary Guard controls the country, economy and armed forces. Even for the sake of stability, he has to remain hard-line.

8. The Color-Revolution Scorecard: Ukraine Took the Final Step, Russia Was Stopped Half a Step Short

• Li Xiang asked the basic question: in today’s globalized and military environment, how do you actually bring down a major power—Iran, Russia or even China? Li Fengfeng said the historical record suggests regime change, or a color revolution, is necessary, but the scorecard is poor. Among countries that underwent color revolutions since the 1970s and 1980s, “the vast majority developed worse than expected”; he estimates 60-70% or more took a bad path.
• Ukraine is the complete example: privatization created business giants and oligarchs, who completed the final step of “economic oligarchs controlling politics,” leaving Ukraine the region’s poorest country on a per-capita basis. Russia reached “somewhere between 8 and 9 steps” before Yeltsin handpicked Putin, who blocked the final step in the late 1990s.
• Eastern Europe’s exceptions were helped by the euro zone. Near-free education under socialism had left these countries with some of the region’s highest education levels at the time—Russia and Ukraine still rank among the countries with the highest tertiary-education penetration globally. Western Europe used the euro zone to acquire workers with “high education levels and low wages,” giving Eastern Europe a lift.

9. Iraq After 20 Years: GDP Up 12x, Almost Entirely Because of Oil

• Li Fengfeng’s data chain is straightforward: Iraq’s GDP is up 12x since 2003, while crude export sales rose roughly 10x and oil prices climbed from $25 to an average of about $70 over the past few years, excluding today’s $100 level. Because crude revenue accounts for most fiscal income and GDP, almost all of the growth came from “oil growth and price changes after the lifting of oil sanctions.”
• The cost has been a 15%-22% unemployment rate and a poverty rate of 15%-20%. Per-capita GDP has made only modest progress, while “the bigger outcome has been greater wealth inequality.” The same script has played out in Ukraine, Russia, parts of Central Asia and Latin America. “The closest example to us is the Philippines.”
• The irony is that Washington originally wanted to support a pro-American regime, but Iraq ended up “not entirely pro-American, and somewhat pro-Iranian.” Even if Iran’s regime is genuinely overthrown, the result may not look the way the U.S. expects.

10. Governance Capacity Comes First: An Alternative Answer From the “Miracle on the Han River”

• Li Xiang updated the political framework: for national welfare and economic growth, “basic government governance capacity comes first”—maintaining public order, collecting taxes and building basic infrastructure such as roads. Countries that achieved takeoff and crossed the middle-income trap since the 1970s and 1980s have been concentrated in East Asia, where strong traditions of state capacity provide the underlying explanation.
• A book Li Xiang read over the Lunar New Year, What Created the Miracle on the Han River, reaches a counterintuitive conclusion. South Korea’s most important growth driver was not industrial policy or support for specific sectors, but the fact that the global market expanded many times over while South Korea happened to adopt an export-oriented policy. The government also exercised strong management over companies rather than simply privatizing them.
• Li Fengfeng added the epilogue: most of the conglomerates that had been built up to “do everything and become huge” saw their ownership shift to Western or U.S. capital after the Southeast Asian financial crisis—“like the 5 trading houses Buffett bought.” They became large enough to influence national politics, completing the cycle.

11. If Iran Falls, 3 Ways China Loses

• The first is settlement. China has proactively offered renminbi settlement for oil, while the renminbi share of China’s own import and export settlement is already high and “could exceed 50-60% this year.” If a pro-American regime takes power, “this whole thing disappears.”
• The second is pricing power. Li Fengfeng’s key framework is that “the dollar is America’s most important weapon. At the deepest level is the military; after gold disappeared, oil became the nominal pricing reference and anchor.” The U.S. is now the world’s largest oil producer. Unlike during the Iraq War, it no longer needs to physically control the Middle East; it needs pricing power because its extraction costs are “at least 5x” those of shallow Gulf oil. Taking Iran would put Qatar, Saudi Arabia and the UAE within its sphere. Combined with U.S. production, Washington “could gain potential pricing power over more than half of the world’s oil,” pushing settlement currency back toward the dollar.
• The third is security. A fully pro-American Middle East, especially Iran, would threaten stability in China’s important western minority regions and affect the Belt and Road. Russia is tied down by the Russia-Ukraine war, and its influence in the Middle East has been “mostly or almost entirely wiped out,” with Syria as an example. That makes Ukraine more important to Moscow: with its land-based strategic footholds gone, Russia has greater incentive to consolidate or seize eastern Ukraine.

12. Why the Strait of Hormuz Cannot Be Secured, and Who Has Benefited Short Term

• Li Fengfeng’s family also asked why the strait cannot simply be controlled. His answer, by his own admission based on “limited knowledge,” is an extreme offense-defense asymmetry. The strait is only 30 kilometers wide, oil tankers and cargo ships have no meaningful defenses, and “I don’t even need missiles—I can just use an anti-aircraft gun or some mobile firepower.” The target “is itself a fuel depot.” Naval escorts do not solve the problem.
• Geography determines outcomes. Afghanistan is all mountains, so it became a guerrilla war and the “graveyard of empires.” Iran has strategic depth and highland terrain, making a land war a major “challenge and nuisance” for the U.S. China, because of its size and difficult terrain, was reduced to a semi-colony rather than fully colonized. Russia is the reverse: almost entirely flat and without natural defenses, so it needs strategic depth. That explains its fixation on buffer zones.
• Russia is the biggest short-term beneficiary. Higher oil prices and a slight easing of oil sanctions are a major boost to its fiscal position, currency and financial-market stability. Europe and the U.S. are also too distracted to focus on Ukraine, allowing Russia to fight intensely and accumulate negotiating leverage. “The EU’s blanket ban on Russian oil, originally scheduled for April, is now temporarily not being implemented.”

13. Capital Markets Replay March 2020: Risk-Off at the Extreme, With Only the Dollar Rising

• March’s market action looks very much like March 2020: from “it’s probably nothing” to “this cannot be solved” to “it will persist and get worse.” Over a period of more than a week, “gold, Treasuries and equities all fell, and only the dollar rose.” Risk-off reached the point where investors concluded that no asset was reliable and “only cash was reliable.” The renminbi weakened against the dollar from above 6.8 to around 6.9.
• Li Fengfeng said the market is still trading short-term effects—what benefits from higher oil and what becomes valuable when supply is constrained—and “has not yet begun trading the medium-term impact.” That sets up the subsequent discussion of energy restructuring.

14. Medium-Term Impact No. 1: A Global Energy Repricing—Wind, Solar, Hydro and Nuclear in Public; Nuclear Weapons in Private

• Over the medium term, 5 to 10 years, every country will reassess its energy mix and dependencies. The first path is diversifying sources, echoing the post-pandemic realization that even “such powerful countries could not produce masks.” China began 12 years ago: its oil reserves rose from roughly 40 days in 2014-15 to about 140 days in recent years, with supplies spanning Iran, Malaysia, Russia and Central Asia.
• The second path is self-reliant, controllable new energy. The choices are limited: “wind, solar, hydro and nuclear.” Hydropower faces geographic limits, wind power needs large areas with sparse populations, and solar depends on latitude and land. Nuclear power will be brought back globally. After the oil crisis of the 1970s, the U.S. increased production and exploration while the U.K. developed North Sea Brent—the same historical script. This could help absorb China’s excess new-energy capacity, as “every country will start promoting it,” benefiting Chinese new-energy vehicles.
• The more sensitive judgment is: “I quietly suspect that countries may try to develop some nuclear weapons on the foundation of nuclear energy.” Iran has a reasonably complete industrial chain and is an industrial power, yet it is being treated this way partly because it is not a nuclear state. “If you are a nuclear state, Israel might at least hesitate to treat you this way.” Ukraine once returned its nuclear weapons in exchange for security assurances. Li Fengfeng reread Country’s Destiny, a chronicle of China’s Two Bombs, One Satellite program, which “reads like a novel.” Under simultaneous threats from the U.S. and Soviet Union, China developed the program; “fortunately, it was completed in the 1970s and earlier.”

15. Medium-Term Impact No. 2: Petrochemical Disruption and the Logic of Putting Biomanufacturing in the 15th Five-Year Plan

• The transmission starts with the sharpest stock-market volatility in countries most dependent on Middle Eastern oil—Japan, South Korea and parts of China. If the disruption persists, “the entire petrochemical chain, including fertilizers and pesticides, will be hit hard,” affecting the food supply chain. Governments must reconsider the issue as one of national security.
• Coal-to-chemicals is being promoted in the capital market, although few countries besides China still operate it at large scale. Both petrochemicals and coal chemicals face challenges on environmental and controllability grounds. The medium-term answer is “biomanufacturing and synthetic biology”: “If you use a microorganism, you control the process yourself.” It is energy-intensive but does not depend on imported oil or coal.
• China has included biomanufacturing as a future industry in the 15th Five-Year Plan for the same reason as its new-energy transition: to decouple from oil and gas. The backdrop is scale. China is the world’s largest chemical producer, accounting for nearly half—or more than 40%—of global basic-chemical capacity.

16. The Stagflation Trade Begins: The U.S. Is in the Worst Short-Term Position, and Rate Hikes May Be Difficult

• The market has begun trading stagflation. Li Fengfeng’s explanation of America’s inflationary fate starts in 2022, when the U.S. drew the world’s money toward itself. “Once that much money comes in, it cannot all remain in financial products.” To attract money from around the world, “you inevitably get some inflation.” If the real economy cannot absorb the capital, it circulates through financial products and seeps into consumption and labor costs, creating a problem.
• The one-line conclusion is that oil-driven price increases are “quite unfavorable for the U.S. in the short term, while for China the short-term pros and cons are temporarily offset.” But if China’s growth remains weak while inflation persists, the balance will also turn negative.
• At the tail end of the cycle, global money is “looking for evidence” to support the negative loop of major economies entering stagflation: war continues, oil does not fall, supply-chain risks rise, and stagnation combines with inflation. The reversal requires a major signal. “Rate hikes will ultimately be very difficult.” If broad stagflation emerges across developed economies, “stimulating the economy will take priority,” just as during the pandemic. A ceasefire signal must be substantive: markets believed Trump the first time he said the war would stop and celebrated, then Iran said there had been no talks. “After being put through this 2 or 3 times, people will no longer believe Trump when he says it will stop.”

17. China’s January-February Data Were Abnormally Strong: Imports and Exports Both Up 20%, With 3 “Out of Deflation” Calls Taking Shape

• In January and February, exports rose 21% and imports roughly 19%—“apart from perhaps before 2010, numbers like these have almost never appeared.” Possible explanations include the Lunar New Year timing shift, with the holiday arriving half a month later and January containing an extra week of work; global restocking; and an economic recovery from the trough. “They may all have contributed.” The jump in imports was also helped by the stronger purchasing power created by the renminbi’s appreciation in January and February.
• The 3 forecasts made at the start of the year, in Episodes 99-101, were reiterated: “emerging from the deflationary cycle, partial stabilization in macro data, and a bottoming-out of property prices in major cities”—not a rise. CPI has been positive for 3 consecutive months, and PPI month-on-month growth has been positive for several months. The original call was for both CPI and PPI to turn positive year over year in Q2; higher oil prices may accelerate that process, and by the time listeners hear this episode, “perhaps both will be rising.” The 3-year decline in both PPI and CPI may be changing, but the March and April data are needed for a firm read.

18. Compared With 2003, No. 1: Not a Single NATO Country Came

• The 2003 Iraq War also lacked a U.N. resolution, but “most NATO countries sent troops.” This time, no NATO country has deployed forces—not even to escort shipping through the strait. Europe is also divided internally: Spain “firmly disagrees and does not recognize this action,” some countries neither endorse nor reject it, and others reject it verbally without taking action.
• Li Fengfeng’s conclusion is that “the transatlantic relationship is already completely different from what it was 20 years ago.” That change alone could have long-term consequences.

19. Compared With 2003, No. 2: The Military Myth Breaks, and U.S. Bases May Have Faced Their First Large-Scale Attack

• In 2003, the world’s dominant reaction was: “No one had ever seen warfare conducted this way.” Precision-guided weapons and information warfare showed “an overwhelming military advantage—not over Iraq, but over the entire world.” The U.S. still has an absolute advantage over Iran, but its weapons and methods “did not make the whole world feel that you had an overwhelming military edge.”
• Li Fengfeng stressed that the supporting details are unconfirmed “word on the street.” 4 U.S. THAAD systems in the Middle East were reportedly destroyed, followed by reports that the THAAD systems deployed in South Korea were withdrawn. Chinese media may interpret that as South Korea taking half a step toward China, “but it could also have been taken back for maintenance.” Either way, the missile-defense systems built at enormous cost are “far less powerful than people imagined.” Iran’s domestically produced “little moped” drones follow the Russia-Ukraine battlefield model: high lethality, low manufacturing cost, and expensive interceptors that are difficult to produce at scale and at speed. “You run out of ammunition.”
• The third unprecedented feature is that, unlike Yugoslavia, Libya, Iraq or Afghanistan, this may be “the first time U.S. overseas military bases have been attacked on a large scale.” Countries hosting U.S. bases will ask whether protection still protects them or instead invites a stray catastrophe. Combined with the absence of an overwhelming military advantage, that could have lasting effects on America’s already shrinking global military presence.

20. From Intelligence Warfare to Commercial Space: Low Earth Orbit Is a Contested Strategic Resource

• Starting from Israel’s intelligence capabilities and Starlink’s use in the Russia-Ukraine war, Li Fengfeng explained the underlying logic of the commercial-space boom. Tracking troop concentrations and fire-control targets in real time depends on high-altitude data capabilities. “The physics of low Earth orbit makes it a scarce resource”: the closer an orbit is to Earth, the smaller its circumference and the more limited the resource. Satellites also degrade; after operating for a period, they “keep dropping lower and eventually fall.” Securing low-Earth orbit is therefore strategically important, and it depends on launch capacity—“probably China and the U.S.”
• Cost is the key. A single launch costs roughly RMB50,000 per kilogram. Reusability more than 10 times could lower that by “several times.” Stainless-steel monocoque construction combined with multiple reuses could lower it by “roughly 10x,” to RMB5,000 per kilogram. Launch windows could then support rapid, large-scale deployment.
• The economics of building a constellation are brutal. Low-orbit coverage requires enough satellites: “If you can launch 10 satellites but need 20 to complete coverage, launching 10 does not give you half the commercial value—it gives you barely 10%.” “You must complete the constellation before it has commercial value.” Put simply, it is extremely expensive. Li Xiang compared it with Motorola’s “one-satellite plan.”

21. The Rocket’s 3 Steps: Recoverability, Reuse and Lower Costs

• Li Fengfeng called himself “a half-filled bottle” and said he had learned only fragments from a rocket-engine company that had received investment and reached a valuation above RMB10B, but his breakdown was clear. Nearly all recovery tests involve the first stage. The second stage must return after passing through the atmosphere, creating far more problems with heat shielding and other systems. “Recoverable” means it returns without disintegrating; “reusable after recovery” is a separate achievement. Only after both are achieved can stainless-steel monocoque construction and similar measures make the structure cheaper. The sequence is “launch → recover → reuse → sharply lower cost,” or 3 steps.
• The trap is the fuel system. If the fuel system used for verification must be replaced by a higher-thrust or different system to meet payload requirements, “everything done before becomes worthless.” The industry faces 3 linked difficulties: components are not standardized, the systems are complex to integrate at scale, and there are few opportunities for trial and error. “You have to change 3 things at once.”
• China’s progress is mixed. In December last year, 2 first-stage recovery tests—one by a private rocket company and one by a company that launches rockets for the state—both failed. This year, a state test achieved a successful sea recovery, though it did not follow the same step-by-step path. Starting around May, companies are expected to repeat the tests; “no matter what, they have to find a way to succeed at least once this year.” SpaceX is the only company in the world to complete all 3 steps. The gap is roughly comparable to the difference between Tesla and China’s electric vehicles in 2017-18—“perhaps even larger.”

22. Engines Could Become a Leasing Business: Lessons From Airlines and SpaceX’s Origins

• Li Fengfeng offered an industry factoid: “Every aircraft purchased by an airline comes with a leased engine”—even business jets. Maintenance is highly specialized and cumbersome (“too complicated”), engines are expensive, and they necessarily have to be reused. Rolls-Royce and GE therefore turned engines into an independent finance-leasing business that is “very profitable.” Airlines, by contrast, remain exposed to occupancy rates, fuel prices and countless other pressures. Li Xiang added that Buffett has called airlines “an investor’s disaster.”
• The same logic could apply to rockets. For products with high complexity, high trial-and-error costs and low volumes, having each company complete all 4 steps independently means reinventing the wheel. If an engine company can “specify 20 units at once,” it can spread manufacturing and testing costs across a larger base, turning an engine costing tens of millions into a per-use fee of a few million. “Once commercial space scales up, there may be a role analogous to aircraft-engine leasing.” Li Xiang added that some ASML lithography machines are also leased. Li Fengfeng said, “I didn’t know that,” but agreed that products with low volumes, extreme maintenance, trial-and-error and R&D costs, and nonstandard designs may ultimately move toward pay-per-use.
• SpaceX emerged from a particular historical moment. After the space race ended, “NASA’s budget disappeared but the missions remained, so they had to outsource to private companies to cut costs.” Musk founded SpaceX in 2002 out of a “boyhood dream.” The person he first approached later became NASA administrator. “Even though he couldn’t get it off the ground, until he did, they gave him all the missions.” Government and military contracts came first; commercial orders followed. Once the cost of sending one person into space falls from RMB4M to a theoretical RMB40K—RMB500 per kilogram × 80 kilograms—charging RMB80K or RMB100K could make space travel accessible, “a bit like going to Antarctica.”

23. AI’s Moment of Certainty: The Continent Has Stabilized, and China Leads the World in Token Usage

• There are 2 landmark developments. First, “China’s token usage”—the Chinese term “词元” had only just appeared the previous day—has exceeded U.S. usage for 3 consecutive weeks, or 4 weeks by the time listeners hear the episode, putting China first globally. Second, Open Cloud (“little lobster”) became a major short-term theme. Fengrui required every investment team member to write a short essay on “why now, why this form, and what the long-term impact will be.”
• Li Fengfeng’s central metaphor is that a foundation model “is a huge continent. It used to rise and fall constantly; now the continent’s size and shape have basically stabilized,” like the movement of the Earth’s crust. Different routes are beginning to connect it to other continents. The capability boundary and scale range—from tens of billions of parameters to more than 1T—have become relatively stable, opening the application-led phase. The surge in token usage is direct evidence of large-scale application growth.
• The policy spectacle began in Shenzhen’s Longgang district, where multiple local governments raced to release support policies for “little lobster” applications, offering subsidies for compute and token consumption as well as direct project rewards. The wave continued until the Ministry of Industry and Information Technology warned against installing the software on dedicated computers because of the excessive security permissions it requires. Li Fengfeng drew 4 observations: outside China, “there probably isn’t a government anywhere” doing this; it requires sensitivity “quite similar to that of an early-stage investor”; it shows how fiercely local governments compete; and it shows how much industrial-innovation policy has been delegated to provinces, cities and districts. His summary was: “Regulators are now more aggressive than industry. People in the industry say it isn’t mature, and officials say they are being too conservative.”

24. China’s Future-Industry Playbook: Lay Eggs Along the Way, and 2 Steps Can Make You Uncatchable

• Li Fengfeng said China’s future industries share 2 features: enormous underlying demand oriented toward the future and “long, highly complex supply chains” requiring hardware manufacturing, chips, sensors, software and algorithms. China’s distinctive payoff is that regardless of how long it takes to reach the endpoint, it can capture the upgrading of the supply chain along the way. Li Xiang summarized it as: “Lay eggs along the way—you can lay quite a few.” New-energy vehicles are the template: policy began 12 years ago, investment started early in 2012-13, internet companies entered in 2015-16, and China became an obvious global leader in 2022-23—“10 years from start to finish.” Battery improvement is relatively linear; quantum computing, controlled nuclear fusion and embodied intelligence advance in steps, with periods of slow progress followed by bursts, making the timeline harder to predict.
• Quantum computing provides an example of the eggs laid along the way. All 3 major technical paths may use lasers, and even U.S. laboratories now need to buy light sources from a Shanghai frequency-stabilized laser company. The mechanism is order density. A national laboratory may not have 20 buyers, but 20 funded quantum companies buying one unit each creates enough high-value orders for the supplier to “climb to the next rung.” “If you don’t have those 30 orders and have only 3, you won’t build that rung.”
• Lidar is the complete case study. In 2015, the technological high ground was entirely in the U.S. New-energy vehicles expanded demand, enabling RoboSense and Hesai to emerge and move toward higher scan-line counts and solid-state systems. “When you were developing high-line-count scanning, the news you saw was that U.S. lidar companies were going bankrupt.” They lacked demand on the left and an iterating supply chain on the right. “From 0 to 1, catch up; from 1 to 2, lead. Once you climb 2 steps in succession, it becomes very difficult to catch up.” Fully solid-state systems, drones and other new intelligent hardware will create the next wave of demand.
• Responding to the bubble argument—Li Xiang’s view was that technology must either create demand or meet demand, and if it does neither, it is a major bubble—Li Fengfeng said supply-chain upgrading is not a bubble. “It’s like venture-capital investing: putting money into 50 projects does not guarantee they all succeed, but the country only needs to move the key technical nodes of several supply chains up by one rung.” The Big Fund has made the same point: individual managers and projects will fail, but on the key fronts, “it is enough if someone can make it work.”

25. Epilogue: The Connection-Point Theory, the Third Repricing of the Order, and “Raise Yourself Before Raising a Lobster”

• The possible exit from the war is difficult to find by asking either Israel or Iran alone. Perhaps only the U.S., together with Russia, China and other mediators, can broker a settlement. “In the end, everyone may go to Pakistan to negotiate.” After reading widely on geopolitics, Li Fengfeng’s simplest conclusion is: “Every place that runs into trouble is a connection point.” The Balkans and Turkey are critical Eurasian land corridors; the Suez and Panama canals each connect 2 continents; Pakistan and India control the route around the Indian Ocean from the Eurasian interior to the Pacific, with Singapore farther south. Land corridors are naturally multiethnic and multireligious: “If you are a crossroads, you cannot form a single-nation state.” Fragmented small states remain on the front line of conflict while major powers are courted. Iran happens to sit on the strategic high ground below the Strait of Hormuz.
• The larger framework is that this may be the world’s “third reassessment” of the U.S.-led order. The first was that Russia was not broken by 10 years of sanctions and the Russia-Ukraine war. The second was that the U.S. was visibly competing with China yet was caught short by rare earths and forced back to the negotiating table. If this conflict produces another compromise over oil and the strait, “it will be like Dalio says: the global structure and world order are beginning to shift.” Investors will reconsider “which places offer relatively reasonable, convenient and safe asset-management and capital-storage conditions.” Li Fengfeng said there has been substantial reporting over the past 2 weeks—though he had not verified the data—that Middle Eastern money is beginning to flow into Hong Kong. For now there is nowhere to hide: the Seven Sisters are down roughly 20 from their highs, Chinese consumer, biomedicine and technology stocks are down more than 20, and gold is down nearly 20. “Everything feels unsafe.”
• The impact on the primary market may be a cooling in sentiment. “When everyone’s survival is in question, they first ask how to stay alive. Before raising any lobster, raise yourself.” Li Xiang added that if Hong Kong stocks continue to fall, regulators may temporarily slow approvals for listings. But the other side of the coin is that once the mainland has stabilized, “a new wave of opportunities is beginning to appear on the application side,” with “a huge number of strange and varied new connection points” emerging over the past 2 weeks. The immediate beneficiaries of little lobster are hardware companies such as Apple and Lenovo. Fengrui is watching startup directions but “at least for now there is no consensus.” For portfolio companies with strong technical capabilities and more than medium scale, the technology is already delivering major gains in efficiency, management and “in some sense, headcount reduction.” The historical pattern in China is that “once it reaches the application layer, it becomes very powerful,” because there are more links, more scenarios, more supply chains, a stronger digital-infrastructure base and more digitally aware consumers.