• New Year’s Sale! Get A Free Month Of Hedgeye

    New Year's Resolution? Leave Wall Street in the dust. Get a free month of any Hedgeye investing product. Win this year.

“China wants to dominate the region rather than adapt to the American-made world.”
-Richard McGregor 

That’s a perspective that you won’t get from an American-made tweet. It’s also part of The Long-Game that Xi is playing against Trump. That game extends well into the year 2025. 

As McGregor goes on to remind us in Asia’s Reckoning: “China is neither an ally nor a security partner of the United States. If China surpasses the US economy in size, which it’s on track to do by 2025, it will be the first time since the early 19th century that the world’s largest economy will be non-English speaking, non-Western, and non-democratic.” (pg 7) 

Will China actually get there by 2025? Does Xi see his long-term political and economic fate in the hands of Donald Trump? We’ll see if there are more very very hugely good meetings that make whatever “deal” this is going to be very very close… but, ultimately, the real threat in both the short and long-term is going to be economic gravity. 

Back to the Global Macro Grind… 

When I write “economic gravity”, I mean The Economic Cycle. As anyone who has followed Xi’s history knows: 

A) Xi knows all about The Cycle and how to try to centrally plan and control it
B) When The Cycle #slowed to its late 2015 lows, Xi’s stimulus was the largest ever in China 

And, as all of you know, ever is a very very long time. 

The Real Threat: Economic Gravity - z 01.26.2018 China cartoon

In today’s Chart of The Day (slide 94 in our Q2 Macro Themes deck) I’m showing one of the most important ROC (rate of change) charts there are when it comes to measuring and mapping the Chinese economic cycle: 

A) The black bars = the 2yr avg nominal growth rate of GDP in China’s Secondary Industries in the comparative base period
B) The red line = the actual ROC (year-over-year growth rate) reported by the Chinese government 

As you can see, the Chinese Red Line ramped during the 2016 Chinese stimulus: 

A) Because it was the largest Net Liquidity provided as a % of Chinese GDP in history… and
B) It’s easier for the ROC of GROWTH to ramp when the base effects (black bars) are EASING 

Yep, if your lifelong ambition is to go from living in a cave (like Xi did) to being elected “for life”, that’s how you stimulate! You make the economy look strongest from its weakest point. 

But now what? 

As I’ve written and said too many times to count at this point, I really don’t know what’s going to happen next, but I’m probability-weighing as best I can with Darius using our apolitical and data driven #process, daily. 

Our GIP (Growth, Inflation, Policy) Model suggests that the most probable outcome (from here) is currently: 

A) China’s economy #accelerating in Q2 through Q4 of 2019 as the aforementioned base effects EASE
B) China’s economy going from 8 quarters in a row of Quads 3 and 4 into Quads 2 then Quad 1 

The real threat to that outlook = The Data. 

Since the economic data is the A part of my A/B Test on anything macro, the B part of the test matters obviously too. That’s measuring and mapping Chinese markets using my TRADE/TREND/TAIL #process: 

A) Shanghai Comp was +0.7% on the bounce overnight but remains below @Hedgeye TREND resistance of 2979
B) Tangential market signals like the KOSPI and Copper also remain Bearish @Hedgeye TREND signals too 

Then there’s considering what other major economies are reporting. This morning two of the largest economies that matter in the world (Germany and Brazil) reported the following: 

A) German Factory Orders DOWN -6.0% in MAR vs. -8.4% in the prior month
B) Brazil’s PMI #slowed to 50.6 in APR vs. 53.1 in MAR 

We also have ongoing economic and market crashes going on in both Argentina and Turkey this morning: 

A) Argentina’s Industrial Production recession #slowed to -13.4% in MAR vs. -8.5% in the prior month
B) Turkey’s stock market #crash continues, down another -2% this morning (down -25% since Q1 of 2018) 

I know, what could possibly go wrong when some big economic things are already going wrong? If Trump tweets on Friday (preferably into the US stock market close) that we may have a “deal” again, isn’t everything going to go right? 

Never before have portfolio managers, worldwide, had to try to be certain about such tweetable uncertainties. 

UST 10yr Yield 2.45-2.58% (bearish)
SPX 2 (bullish)
RUT 1 (neutral)
NASDAQ 7 (bullish)
Shanghai Comp 2 (neutral)
VIX 11.81-16.59 (bearish)
USD 96.50-98.14 (bullish)
Oil (WTI) 60.65-66.23 (bullish)
Copper 2.74-2.88 (bearish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer

The Real Threat: Economic Gravity - Can Chinese Growth Rebound with the Toughest Comp in the Rearview