“You cannot be asked to apologize every day, can you?”
-Mao Zedong (to Japan, 1954)
We spent all of yesterday grinding in our summer-time suits in NYC. It was a great day to meet with Institutional Investors as it wasn’t a big central-market-planning (cowbell) or “trade deal” day. It was nice and quiet. People could actually think.
We got into a few in depth conversations about longer-term secular TRENDs in China and the similarities to the epic peaks that the Japanese saw in the late 1980s. The USA had “trade wars” and tariffs with Japan then too, don’t forget.
Kissinger, who didn’t like Japanese bureaucrats, would say things like “I don’t know where the textile negotiations stand; they bore me… with Japan, we always talk textiles instead of the direction of the next 10 years.” (Asia’s Reckoning, pg 20)
Back to the Global Macro Grind…
“So…” as the Old Wall likes to say… what’s the “deal” going to be with China at the end of this week?
Oh, in the words of the GOAT Tweeter in Chief, “believe me”, our clients had plenty of thoughts on this topic yesterday! Forget the next 10 years (and what happened to Japan in the 1990s), this is all about the next 10 days.
Not that 1-day of meetings is a proper sample size, but I haven’t had 1 client tell me they’re going into this Chinese dinner in Japan shorting everything China.
Fight both Fed rate cuts and whatever Trump wants to say that day? No thank you seems to be the view there.
I personally have no idea what “deal” Trump is going to make or if he’s going to make one at all. “So”… my exposure to China = 0%. I’ll deal with that open-the-envelope risk on/off when I see the market’s reaction to it.
In the meantime, DDDD (data dependent Darius Dale) and I are just bean-counting The Cycle data:
- Hong Kong Exports for the month of May were down -2.4% year-over-year (reported this morning)
- Indonesia’s Exports for the month of May were down -9.0% year-over-year (reported yesterday)
- Singapore’s Exports for the month of May were down -15.9% year-over-year (reported last week)
“So”… the read-through on Asia’s export economy = certified train wreck in Q2 of 2019.
But is this cyclical, secular, or both?
As you can see in today’s Chart of The Day (slide 93 in the Q2 Macro Themes deck), China’s Secondary Industries (Heavy Equipment, Construction, pseudo “empty cities”, etc.) slowed to 0% growth, TWICE, in the last decade:
- During the Great Financial Crisis and
- During the Deflationary Slowing of 2016
After the 2nd #ChinaSlowing to 0% growth (2016), the PBOC provided the biggest monetary stimulus in the history of China (yep, that’s a long history!).
In order to stimulate like that, the Chinese needed Janet Yellen’s Fed to “drop its dot plot” and devalue the US Dollar.
Especially now that China is effectively short of US Dollars and trying to fund their new Current Account Deficit (in the prior 2 #ChinaSLowing to 0% growth periods, they had a Current Account SURPLUS) with USD denominated debt…
What China really needs isn’t a deal with Trump. China needs PE Powell to cut by 50bps at a time and devalue the Dollar!
“So”… you’re saying there’s a chance?
Yes, I actually am. But it may not be on the same timeline that all of Wall Street has been panicking about since Quad 4 hit the US and Global economy in Q4 of 2018. This might take, God forbid, another 10 weeks, instead of 10 days.
There are many, but one scenario to consider (that new highs in Gold are considering this morning):
- The Fed isn’t Dovish Enough with its July rate cut AND
- The China “deal” looks like basically every chart of everything Asia (and Asian Export data)
Then, by the September Fed meeting, PE Powell might just have to panic and do to the Dollar what China really needs.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.98-2.14% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 59.30-61.51 (bullish)
REITS (VNQ) 88.61-91.76 (bullish)
Financials (XLF) 26.56-27.41 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 208 (bearish)
VIX 14.23-18.17 (neutral)
USD 95.25-96.85 (neutral)
USD/YEN 106.79-108.70 (bearish)
Oil (WTI) 49.35-59.12 (bearish)
Gold 1 (bullish)
Copper 2.61-2.74 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
