• run with the bulls

    get your first month

    of hedgeye free


China: A Financial Crisis With Communist Characteristics

China: A Financial Crisis With Communist Characteristics - flag china


Some say China’s credit boom will perpetuate a collapse in its debt markets, the yuan, and its stock market. This misses the mark. China has the critical tools necessary to engineer a "soft landing" and slow the country's economic growth.


While we disagree with the China doomsday scenario, slowing growth will undoubtedly hurt the country’s stock market. We suggest investors short Chinese large-cap stocks (FXI).


Setting aside China’s phony GDP data, their economy is clearly slowing. The chart below shows the breakdown of China’s growth by sub-industries. The recent “recovery” in 2016 was predicated on the growth rate of heavy industry. 


China: A Financial Crisis With Communist Characteristics - screen shot 20170208 at 4.10.12 am


It's unlikely this growth in heavy industry repeats itself. It was perpetuated by a significant amount of fiscal and monetary stimulus.


In January 2015, the People’s Bank of China pumped 1.235 trillion yuan into the economy. This January, it was a mere 350 billion, a -72% decline. A centrally planned slowdown of this magnitude has never been attempted before in modern economic history. While we’re not calling for collapse, it is safe to assume the glide path down will be less linear than Beijing hopes. 


China: A Financial Crisis With Communist Characteristics - The Yuan Is Forcing the PBoC s Hand


Currently, China is experiencing a financial crisis with communist characteristics. While China may eventually accomplish their twin goals of permanently downshifting GDP growth and rebalancing economic drivers, their insistence upon maintaining financial and economic stability throughout effectively transfers deflation risk from the market in the near term to the real economy over the longer term.

Instead of boom turned bust, policymakers will continue throwing cold water on the economy, specifically the overheated property market.


China: A Financial Crisis With Communist Characteristics - Property Price Bubble 1st Tier Cities

China Won't Collapse

China’s economy has a closed capital account, which essentially means companies, banks and individuals can’t move substantial amounts of money in or out of the country without bumping up against the government’s stringent rules and regulations.


This largely explains away the possibility of material currency devaluation in China. Comparing China to the 25 other emerging markets we track across a variety of metrics reveals some interesting insights:


  • Short-Term External Debt (as a percentage of total foreign direct investment) is a proxy for how much money China needs to pay back to foreigners. It’s only 10% versus about 19% for other emerging markets.
  • Inbound Portfolio Investment is the biggest culprit for short-term, large currency fluctuations. On that measure, China has a lowly 3% relative to 16% for the average of other Emerging Markets.
  • Dollar-Denominated Debt (as a percentage of foreign exchange reserves) is only about 35% versus 100% for the average of most other emerging market economies.

Bottom Line

We believe that Beijing has the critical tools necessary to engineer a “soft landing” and slow the country’s economic growth. While a soft landing is not a face-plant for the Chinese economy, slowing growth will hurt the country’s stock market. Steer clear of Chinese large-cap stocks.

Stock Market All-Time Highs: Sell Some?

Stock Market All-Time Highs: Sell Some? - all time high


The S&P 500 and Nasdaq just hit all-time highs. Meanwhile, measures of volatility in the Dow, S&P 500, and Nasdaq just hit their lowest levels since 2007. Volatility rises when there's uncertainty. And falls as investors get more confident.


Investors are clearly confident.


As you can see in the Chart of the Day below, 60-day realized volatility (a fancy way of saying historical volatility) hit a cycle low. "That's pulverized the bears," writes Hedgeye CEO Keith McCullough in this morning's Early Look. Just 41 days into 2017 and the Nasdaq, S&P 500 and Russell 2000 are up 6.2%, 3.3% and 1.9% respectively.

Falling Volatility: What now?

Simple. Book some gains but keep your core position in U.S. equities. Buy more on pullbacks. Why? Here's a brief synopsis with links for further reading:


And Something for the Stock Market Bears...

If you’re looking for a fundamental stock market correction catalyst, the first big one is in April when we get first quarter GDP. 


(Click here to learn more about subscribing and how to position for a potential correction.)

Cartoon of the Day: Animal Spirits

Cartoon of the Day: Animal Spirits - NASDAQ giraffe 02.09.2017


The S&P 500 and Nasdaq hit fresh all-time highs today.



Click here to receive our daily cartoon for free.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

3 Reasons To Sell Lazard: Risks, Complacency & Highly Cyclical | $LAZ

3 Reasons To Sell Lazard: Risks, Complacency & Highly Cyclical | $LAZ - short laz black book


The Hedgeye Financials team will be hosting a black book conference call to add Lazard (LAZ) to their Best Ideas list as a short on February 14 at 11AM ET. The presentation will outline the still unrecognized risks and complacency in this highly cyclical company.


  1. M&A Set to Comp Lower: After a new high water mark in global mergers and acquisitions in 2015, 2016 was a down year but the Street is expecting a reacceleration in '17 and '18. Estimates are still too high based on "flat to up" activity levels for the New Year which ignores the slow start to 2017.
  2. Article 50 risks a fumble: We think that anything but a smooth handoff on Brexit puts at risk the important UK market for Lazard. With the operating landscape in England subject to a 2 year reorg via Article 50, we are expecting a slough off in deals with uncertainty of the operating landscape.
  3. Active Managers under duress: While the company does have a niche in emerging markets and infrastructure, the active management business is under duress and gone are the days of even mid single digit growth. Staying long LAZ stock at this point, is in essence a short US dollar position because the company's AUM division does better when the US currency is weak.


Please note if you are not a current subscriber to our Financials research there will be a fee associated with this call. Ping sales@hedgeye.com for more information.

Alpert: The U.S. Economy 'Will Go Crazy' If Trump Does This


“The virtuous cycle of capital has broken down,” says Dan Alpert, Managing Partner at Westwood Capital in this new edition of Real Conversations.


That’s not hyperbole. Alpert wrote the book, “The Age of Oversupply.” In it, he argues that a global labor glut, excess productive capacity, and a rising ocean of cheap capital have kept the economies of the first world (notably the United States) mired in underemployment and anemic growth.

What is The Age of Oversupply 

In the “age of oversupply,” companies are unlikely to reinvest profits due to all this excess capacity. “When you have a global capital glut, capital starts to back up and say ‘Geez, you know I can’t make a dime taking risk free returns anywhere,’” Alpert says.


As a result, instead of reinvesting profits in their businesses, companies buy back stock and purchase competitors. Money finds its way into equity markets rather than factories, equipment, and more manpower.


“You don’t need additional primary investment so that capital becomes hyper activated in the secondary markets,” Alpert says in the video interview above with Hedgeye CEO Keith McCullough.


Sound familiar?


That’s why the $24 trillion worth in central bank asset purchases globally have been a drop in the bucket. Growth in productive capacity has been anemic so global economic growth continues to slow. According to the IMF, global growth for 2016 is expected to be 3.1% versus 3.2% in 2015. Advanced economies fared even worse, posting 1.9% growth versus 2.1% in 2015.

A $1 trillion Solution: Infrastructure Spending

There’s hope. In the video interview above, Alpert suggests a solution that the Trump Administration is already predisposed to endorse:


“If you have a massive glut of capital and it’s not flowing back into the U.S. economy in the form of productive plants and equipment, you really ought to take it using the agency that can borrow it cheaply, the U.S. government. Use it to pull up wages by reemploying a large number of steel workers, and construction workers and all of the support industries to rebuild our domestic infrastructure that is the shot in the arm that this country requires.”


On the campaign trail, President Donald Trump proposed $1 trillion in infrastructure spending. “Trump is absolutely right on about the need for an aggressive infrastructure program in the U.S.,” Alpert says.


The reason this stimulates economic growth is relatively simple to understand, Alpert says. By increasing the demand for skilled labor at the top, you employ the underemployed and create demand for other workers to fill those vacated positions and employ the unemployed. Alpert calls this “trickle down labor demand.”


“Take the former construction worker who’s now a bartender and give him a hammer back. Well, now you need a new guy to tend bar.”


Logistics… A fiscal spending program like the one proposed by Trump are typically spread out over a period of five years, Alpert says, so $200 billion each year.


“If you spend $200 billion in this economy in additional government infrastructure spending, rebuild bridges, airports and railways, especially if it’s well targeted. This economy is going to go crazy. It’s going to do great.”


Bottom line? If Trump gets his way and passes a targeted fiscal stimulus program, the U.S. economy is “going to go crazy.”

Poll of the Day: Stock Volatility -40% Since Election Day. Bullish or Bearish?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Stock Volatility -40% Since Election Day.  Bullish or Bearish? - bulls and bears