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“There is no instance of a nation benefitting from prolonged warfare”
-Sun Tzu 

My wife Marybeth is a family therapist so while I’m not an expert like her, I’ve had enough conversations about her work that I consider myself a junior therapist.  Junior, as in no formal education in the field, no experience, but a big ego that makes me just a little dangerous.  With that background I think I can recognize a dysfunctional family when I see one.  And the Greater China family is quite the dysfunctional one.  And that’s our problem too. 

China and its kids are struggling.  The trade war is hurting.  The adopted children, Hong Kong and Macau, are the classic bad child/good child.  China is in a major quandary with the rebellious Hong Kong.  Macau seems happy, but China’s policies are not helping there either.  Finally, the biological children on the Mainland are suffering from bad parenting.  All told, none of the kids are doing well. 

Back to Sun Tzu.  As positive as the ultimate outcome could be (more free trade!) I fear this trade war.  I fear for us, I fear for China’s citizens, I fear for the HK citizens who may be engaged in their own prolonged warfare with the Chinese government.  Will anyone win? 

Here’s what I believe about China, trade, and of course my favorite topic – Macau: 

  • China trade policies are excessively protectionist and their IP policy, is well, very suspect
  • China’s trade policies severely punish the Chinese consumer and the China economy.  Looking at the casino industry, a weaker Chinese consumer (and weaker Chinese Yuan) is not good for the world’s largest gaming market – Macau
  • The US consumer and economy would still be better off with zero tariffs even if the world imposes protectionist policies
  • However, convincing other countries to adopt free trade policies would be the ultimate outcome for global prosperity
  • Trump’s trade war is not good for the short term US economy but if he’s successful in lower China tariffs – both countries benefit over the long term
  • China’s propensity to play the “long game” scares me regarding both economies.  I have little faith in what the “long game” could mean for China and its people
  • Part of China’s “long game” involves incorporating Taiwan into the SAR system along with the other adoptees, Macau and Hong Kong
  • Hong Kong is a huge problem for China and its long term goals – the protests won’t stop so will China grant more freedoms?
  • Macau remains the good step child – no protests, low unemployment, huge budget surplus.  I think the China government has little interest in rocking the successful Macau boat which bodes well for the upcoming concession renewal process for the casinos.  China would rather point to the Macau example than HK although Taiwan would be much more of a HK situation than Macau
  • While the HK protests might be a positive for Macau longer term, the airport closure and unsafe in environment is no doubt a short term negative for Macau gaming revenues

So, while my wife learned her trade starting at the University of Chicago School of Social Work, I developed my free trade, free market beliefs at the University of Chicago Booth School of Business.  In my view, free trade should always be the goal and hopefully it is Trump’s goal.  The question is how long do we want to play the trade war game, even if the end goal of opening up China is admirable?  Unfortunately, I don’t have the answer. 

Picking stocks in any environment is difficult and as much as I love to make Macau stock calls because of the volatility and ever present catalysts, trade and HK protest issues are key drivers right now.  I have opinions but no edge on the resolution of these exogenous catalysts.  I hate the sidelines, but I feel I have no choice.  Thankfully, I still have hotels, domestic gaming, cruise lines, and OTAs – plenty of volatility there too… 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now: 

UST 10yr Yield 1.56-1.80% (bearish)
UST 2yr Yield 1.46-1.69% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 59.12-61.24 (bullish)
REITS (VNQ) 87.25-91.63 (bullish)
Financials (XLF) 26.04-27.57 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 20065-20997 (bearish)
DAX 115 (bearish)
VIX 15.61-24.99 (bullish)
USD 96.82-98.34 (bullish)
EUR/USD 1.10-1.12 (bearish)
USD/YEN 104.40-107.41 (bearish)
GBP/USD 1.20-1.22 (bearish)
USD/CHF 0.96-0.98 (bearish)
Oil (WTI) 50.37-55.72 (bearish)
Nat Gas 2.02-2.22 (bearish)
Gold 1 (bullish)
Copper 2.48-2.61 (bearish)

Todd Jordan
Managing Director/CFO

The Widespread Implications of a Dysfunctional Family - Chart of the Day