“We are sowing the seeds of Ignorance, Corruption, and Injustice, in the fairest field of Liberty.”
According to Joseph Ellis in Revolutionary Summer, that’s what John Adams wrote to Joseph Hawley on August 25, 1776. Adams could have said that about heavy-handed government in August of 2013 – and, in principle, he’d still be right. But betting against the prospects of American growth rising above compromised politicians has often been wrong.
Politics versus people - that’s not new. Americans generally dislike socialists and/or plutocratic pomp. On August 13, 1776, George Washington called the British out like most of us call out conflicted central planners today: “Their cause is bad; their men are conscious of it, and if opposed with firmness and coolness… victory is most assuredly ours.” (Revolutionary Summer, pg 86)
I like that, a lot.
Back to the Global Macro Grind…
I also like seeing all of the growth factors in our multi-factor model rip to the upside. It’s especially fun to watch on days like yesterday when my contra-stream (I built one on Twitter of market pundits who are wrong at least 65% of the time) starts whining.
Winning versus whining – that’s not new either. There are a lot of losers out there who whine but, over time, Americans eventually put those people on mute and roll with winners who have principles they can associate with.
There’s been a lot of whining about US GDP “dropping to 1%” in Q213 – but that didn’t happen either. US GDP has by no means had a championship season, but it’s been a heck of a lot better than Q412’s 0.38% - and it’s what happens on the margin in macro that matters to us most. Here’s the Q213 breakdown:
In other words, government spending fell as Consumption and Investment rose. Good, eh? It’s not a new story in America. It just hasn’t happened in a while – and that’s the point.
Since C + I + G + (EX-IM) is the GDP equation, whiners (particularly partisan ones) will add that:
But let’s get real here – who really cares about those line items when the big stuff (Consumption and Investment growth) is finally going the right way for once?
To give them some air-time, the Princeton/Yale/Harvard Keynesian Econ 101 textbooks will also whine about “net exports being down because the Dollar went up” and “disinflation is a threat to our academic dogma” – but again, who cares?
I went to Yale and, admittedly, was confused about this “inflation is good, deflation is bad” concept. My family doesn’t buy into the class warfare labeling thing, but we do buy (and invest) more when the purchasing power of our hard earned currency appreciates.
Is Bernanke’s fear-mongering about “deflation” really the hobgoblin?
We answer that on slide 36 of our current Global Macro Themes deck (ping if you’d like a copy) where we outline a recent study by Atkeson & Kehoe that spans a time period of 180 years (across 17 countries) that found no relationship between deflation and depressions.
The objective study actually found a greater number of episodes of depression with economies experiencing inflation than with deflation. Over the 180 year time period:
So what say you President Obama? Yes, we know. We know that you know that we know.
Bernanke’s cause is no longer saving us from the end of the world. That was so 3-5 years ago. Perversely, it’s to talk down growth in order to uphold un-precedented (and un-elected) central planning power on the order that this country hasn’t seen in 237 years.
But he’s conscious of it. So is the country.
Mr. Market gets it too. That’s why all of these end of the world (#EOW) trades that were driven by an explicit Policy To Inflate (Gold, Treasury Bonds, etc.) are coming unglued. That’s also why growth investors are getting paid.
Liberty flows. She still plays to the hands of the independent minds. We don’t have to be long Bernanke Bubbles in order to get paid. We have to be right on the slopes of the lines in our model.
Growth’s slope is up; Inflation’s is down – and unlike the government, I like that, a lot.
Our immediate-term Risk Ranges are now as follows (12 big macro risk ranges are in our new Daily Trading Range product):
UST 10yr 2.52-2.71%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
TODAY’S S&P 500 SET-UP – August 1, 2013
As we look at today's setup for the S&P 500, the range is 17 points or 0.22% downside to 1682 and 0.79% upside to 1699.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, AUGUST 1, 2013
JULY GGR DICJ
JULY GGR 29.485BN MOP (28.626BN HKD, 3.691 BN USD), up 20% YoY
S KOREAN PLAN FOR MACAU GAMBLING RIVAL COLLAPSES Bloomberg
South Korea's Incheon city said a $290 billion plan to transform a fishing village into a rival to Macau has collapsed. Incheon Free Economic Zone official Jung Mi-hyun said luxury hotel operator Kempinski AG, a key member of the development consortium, failed to raise a promised $40MM by the end of July. Kempinski's Korean unit KI Corp. is the largest shareholder in the consortium, Eightcity Co. Korean Air Lines Co. is the second-largest.
Park Seong-hyun, vice chairman of Eightcity, said the company is still trying to attract investment to the project and Incheon city is also responsible for the delay in raising the money on time.
Takeaway: Chinese equities might appear “cheap”, but cheap is likely to get sustainably cheaper in the absence of a positive catalysts.
POLICY GAME-CHANGER?: SHORTING CHINA JUST GOT A LOT MORE DICEY
From our 6/26 Early Look titled, “Uncertain China”: “We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.”
Today, Chinese officials finally signaled that they are perhaps more willing to keep the game going for longer than us short-sellers of the heavily indebted Chinese financial system and associated fixed asset bubble might prefer. Today President Xi Jinping said the leadership will guarantee that the +7.5% growth target for this year will be met, despite a notably absent inflection in economic momentum. In addition to Xi’s statement, the official Xinhua News Agency also chimed in with an update from Beijing:
Statements #1-4 do not reflect a meaningful shift in China’s fiscal and monetary policy guidance. Conversely, statement #5 does signal a slight change relative to previously implemented property curbs and an overt focus on combating speculation across China’s bubbly property markets.
Taken in conjunction with a less-than-subtle statement today put forth by Sheng Songcheng, head of statistics with the PBoC, we can reasonably conclude that Chinese officials are less concerned about the outlook for future [unabated] property price appreciation than they had been in recent months:
“Unbalanced supply and demand caused rising home prices, not the country's ample money supply… One of the main targets of monetary policy is to maintain the stability of overall consumer prices and not to target prices of specific goods.” (emphasis our own)
The key takeaway from this statement is that the PBoC’s preexisting reservations about meaningfully easing monetary policy in the face of a buoyant property market are now likely mitigated, on the margin. In kind, the property sector outperformed the broader Shanghai Composite Index by +195bps on the day.
All told, while we continue to think Chinese monetary policy will remain relatively tight with respect to the intermediate-term (first chart), we must acknowledge the emergence of a more unfettered path towards PBoC easing – which, generally speaking, is being appropriately reflected in Chinese money markets (second chart).
WHERE TO FROM HERE?: CHINA’S 2H13 GROWTH OUTLOOK REMAINS SOFT
Where Chinese growth trends from here is anyone’s best guess; the most probable answer is “sideways” given the uniform guidance out of the Chinese policymaking spectrum of late. Our GIP algorithm suggests a slight uptick in 3Q followed by a deceleration in 4Q; leading indicators for Chinese growth are starting to rhyme with this quantitative outlook:
Interestingly, Chinese GDP seasonality trends concurs with the aforementioned “sideways” view:
Lastly, the case for continued slowing is supported by diminished cross-border liquidity, at the margins, and a probable uptick in NPLs in the form of debt rollovers across the Chinese banking system.
In the absence of meaningful deposit growth, debt rollovers slow broader economic growth by diverting incremental credit away from productive enterprises, at the margins, to unproductive enterprises that are merely trying to stay afloat. This phenomenon remains a core tenet of our structurally negative outlook for Chinese economic growth. Contrary to the 2008-09 period, it’s almost impossible for us to model in another dramatic [positive] inflection in Chinese growth/growth expectations that is worthy of investors getting excited about on the long side of Chinese equities.
Even if Chinese officials suddenly decided to implement another big stimulus package for reasons we can’t fathom (Xi and Li will be in office for 10 years; 2H13 growth pales in comparison to the task of maintaining economic stability over the long term), it remains to be seen how much incremental debt the system can take on over a relatively short period of time.
The latest statistics from ChinaScope Financial indicate that total assets and liabilities of SOEs were respectively 45T yuan and 30T yuan, respectively, in 1H13. The debt ratio of 66.7% is fast approaching the regulatory ceiling of 70%; among the 294 listed SOEs, 26.9% exceeded the limit and will eventually have to become compliant either through asset growth or deleveraging…
Jumping back to the Chinese banking system for a minute, we’ll leave you with a few data points that suggest parts of 2H13 could rhyme with what we saw in JUN from an interbank liquidity perspective:
CONCLUSION: CHINA REMAINS A VALUE TRAP
We’ll conclude this note with exactly how we concluded our 7/10 note titled, “CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS?”:
“In the immediate term, macro markets mean revert and we recommend having a tried and tested quantitative risk management process to properly interpret the price action. Over the intermediate-to-long term, however, macro markets tend to trend in the absence of a fundamental inflection(s) in economic gravity. With respect to Chinese stocks – specifically bank and property developer shares – we think that trend remains south [for the foreseeable future].”
Economic gravity in China is – at best – trending sideways though 2H13. Moreover, structural growth headwinds for 2014 and beyond remain a clear and present danger for what we’d argue are increasingly consensus “value buyers” of Chinese equities. Chinese equities might appear “cheap” (a view that we wholeheartedly disagree with), but cheap is likely to get sustainably cheaper in this case in the absence of a positive catalyst or series of positive catalysts.
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