“The centerpiece of Xi Jinping’s proactive foreign policy is The Belt and Road Initiative.”
Now that the US stock market is back to a 1-factor #ChinaTradeDeal model and everyone is supposed to be an expert on Chinese foreign policy, trade, etc., I humbly submit you study both the political history of China and where it is in its economic cycle.
While Trump wants the optics of a very short-term “deal” with the Chinese, it’s critical to remember that Xi’s team is playing the long-game. The Belt and Road Initiative isn’t an American “deal.” It’s a big part of Xi’s long-term economic plan.
“Beijing is adamant that is should not be called a ‘plan’ or a ‘strategy’, lest it be interpreted as a ruse to build an economic empire… in reality, it is very much a Chinese project… that will run through 67 countries.” (China’s Asian Dream, pg 30-31)
Back to the Global Macro Grind…
Would a short-term deal even matter? To The Cycle, that is? Not to remind you of the obvious but it would take a much bigger deal than Trump getting Powell to go dovish to get both the US and Global economy to #accelerate from here.
Q: How do you know that?
A: Two Words – Base Effects
Since the Macro Tourism industry on the Old Wall continues to boom, it’s hard for PMs who don’t do macro to have a rate of change view of The Cycle and its base effects (year-over-year comparisons). That’s a good thing. Capitalize on it.
As a simple reminder on Global Base Effects and why the ROC (rate of change) data continues to be rancid this morning:
- China’s steepest 2-year base effects for 2ndary Industries are in the 1st half of 2019
- USA’s steepest 2-year GDP base effects are in the 1st 3 quarters of 2019
- Europe’s 2-year base effects steepen again in Q2 of 2019 where legit recession risk is in play
To be fair to those who hadn’t learned the lesson in their P&L until the last 3-4 months, you can lose a lot of money at The Cycle turn WITHOUT having a recession. That said, what if certain European countries are in a recession within 3-6 months?
I know, I know. We’re supposed to be talking about China and why US Earnings Season, the Credit Cycle, etc. doesn’t matter as long as we get some “optimistic” tweets about meetings on “trade”…
But stay with me here on Europe for a second. Did you see the German economic data that was reported yesterday?
Here’s the DD (data download) from my macro version of Alexa (Darius Dale):
A) Germany – Why You Don’t Chase Quadrant Rotations Until The Data Or Mr. Market Tells You To: Aaaaand just like that Germany is back in Quad 3 after a disastrous spate of rancid high-frequency economic data this morning. Headline Retail Sales growth slowed -410bps to 1.1% YoY in NOV; Manufacturing Orders growth slowed -130bps to -4.3% YoY in NOV – the steepest decline since the 2012 nadir of the European Sovereign Debt Crisis; while Industrial Production growth slowed -520bps to -4.7% YoY in NOV – the sharpest annual plunge since the Global Financial Crisis. Germany is a classic example of why we consider it poor risk management to jump to the next GIP Model Quadrant outcome (in asset allocation terms) before either the data or market signals are confirming of that view. It’s worth noting that the DAX is still in crash-mode from its late-January 2018 highs
Oh, and DD, how about the former charts that had us rip-roaring BULLISH on US GROWTH stocks at both this time last year and on every damn dip through August 2018? How’s USA’s Small Business Confidence trending?
B) Market/Economic #Slowing Dampening Animal Spirits in the US: With respect to the data specifically, it’s abundantly clear that trade concerns, fiscal uncertainty, and the ongoing globally synchronized deceleration are having an impact on business confidence (NFIB Headline Index ↓ 0.4pts to 104.4 in DEC – the lowest since 2H17), investment demand (NFIB CapEx Plans Index ↓ -4pts to 25 – the lowest level since 2H16), and job postings (JOLTS ↓ -156bps to 16.14% YoY in NOV). The divergence between CapEx Plans (9th percentile of T3Y) and Compensation Plans (91st percentile of T3Y) speaks volumes to the lack of follow-through we’re seeing on corporate tax reform. Rather, the outlook for US corporate profits continues to be victimized by the dual assault of rising wages and a rising dollar. Large multi-nationals like AAPL didn’t tell you how much a weak dollar boosted their earnings in 1H18
Yeah, I hear you DD, but you did say “trade concerns”… so why can’t we just pretend to solve for that, then all of this other data-stuff can just magically re-accelerate to all-time highs, despite being on the wrong side of both the US Earnings and Credit Cycle?
Also, one question on this alleged deal…
DD, I wasn’t in the trade meetings, but Bloomberg is citing people who were “who say China and the US wrapped up three days of trade talks, with positions of both sides closer on areas including energy and agriculture but further apart on harder issues.”
“So”… even if you’re touristy and outright ignorant of The Cycle … and all you cared about when shorting SPY here was the art of the deal, wouldn’t it be harder to conclude that anything material is changing here vs. Xi’s long-term plan?
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.56-2.84% (bearish)
UST 2yr Yield 2.39-2.64% (bearish)
SPX 2411-2587 (bearish)
NASDAQ 6 (bearish)
Industrials (XLI) 61.17-66.96 (bearish)
Shanghai Comp 2 (bearish)
VIX 18.00-34.27 (bullish)
USD 95.01-96.70 (neutral)
Oil (WTI) 43.06-50.99 (bearish)
Gold 1 (bullish)
AAPL 141.09-153.70 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer