“False Assumption #1: Engagement Brings Complete Cooperation.”
-Dr. Michael Pillsbury
On the heels of the worst (i.e. slowest) Industrial Production report coming out of China in 17 years, what could possibly go wrong with market expectations on USA/China “trade deal” progress?
The aforementioned quote comes from a must-read on China vs. USA titled The Hundred-Year Marathon where Pillsbury reminds us of not only USA “deal making” history with the Chinese, but all of his prior assumptions and mistakes:
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“Ever since President Nixon’s opening to China in 1971, US policy towards the People’s Republic has largely been governed by those seeking ‘constructive engagement’ with China to aid its rise… I was among the first people to provide intelligence to the White House favoring an overture to China… I largely accepted the assumptions shared by America’s top diplomats and scholars, which were inculcated repeatedly in American strategic discussions, commentary, and media analysis…” “Every one of the assumptions behind that belief was wrong…” “For 4 decades now, my colleagues and I believed that ‘engagement’ with the Chinese would induce China to cooperate with the West on a wide range of policy problems. It hasn’t. Trade and technology were supposed to lead to a convergence of Chinese and Western views on questions of regional and global order. In short, China has failed to meet nearly all of our expectations.” (pg 7) |
How long have you studied China and global trade cycles during economic slow-downs? What are your expectations on “progress”, from here? Are you hoping for “interim progress” or that some equity index holds its “year-to-date” return, post Quad 4 in Q4 of 2018 risk?
Back to the Global Macro Grind…
On the heels of that rancid Chinese Industrial Production report for AUG and Fixed Asset Investment, Retail Sales, etc. #slowing:
A) China’s Premier Li said it will be “difficult to maintain 6% GDP growth”, even while they make up the headline number … and
B) The Shanghai Comp and Hang Seng dropped -1.7% and -1.2%, respectively, overnight
Part B) of that came at a critical time as both the Shanghai Composite Index and Hang Seng failed @Hedgeye TREND resistance inasmuch as the economic data failed to #accelerate against easing base effects.
Read-through to both Asian economic data and global macro markets (ex-USA’s FOMO on “stocks”):
A) Indonesian Exports #slowed (collapsed really) to -10% year-over-year and Indonesia’s “stocks” dropped -2.1% on the news
B) Copper is down another -0.7% this morning after failing @Hedgeye TREND resistance on last week’s “trade progress” bounce
Since our 4 Quadrant GIP Model went bearish on China, Europe, and EM #slowing back in Q1 of 2018, I’m not one of the apologists in your inbox for telling you to buy those respective equity markets because they looked “cheap.”
DDDD (Data Dependent Darius Dale), Dr. Drake, and I are just Senior Bean Counters @Hedgeye who wake up, God willing, with two feet on the floor every morning, measuring and mapping economic and market data in ROC (rate of change terms).
Fortunately (and for the right reasons) our #process has had us ignore every Macro Tourist headline that “this is it… this time it’s true… the deal is on” and focus on what data is being reported against The Cycle’s base effects.
When something (anything really) #accelerates, our job is to A) let you know and B) save and make money on that.
One of the biggest impediments to Chinese “stimulus” causing an #acceleration in growth is a STRONG US DOLLAR. As anyone who has read Darius’ research on the matter knows, this time is actually different for China. They’re no longer running a massive current account surplus.
And… being the EM world’s largest borrower of US Dollar denominated debt, they are effectively short US Dollars.
That’s partly why tomorrow’s Fed meeting matters more to the Chinese than another round of meetings with Trump’s team. Why?
A) If the Fed is not Dovish Enough… and
B) Global Growth continues to #slow alongside US Growth in Q3
Then the Fed won’t be successful in doing what it really needs to do in order to stimulate the illusion of growth: asset inflation. In order to do that the Fed needs to break the back of the Bullish @Hedgeye TREND call we started making on USD back in April of 2018.
#StrongDollar isn’t just bad for the Chinese and their ability to actually stimulate (sorry bros, 6 “rate cuts” of the RRR since China started slowing in late 2017 hasn’t cut it), it’s bad for multi-national US companies who have to report #EarningsSlowing in US Dollars.
I know. I know. We-Work really really really hard @CNBC FOMO Futures Now to come up with whatever the next narrative has to be to be bullish on “stocks.” But, post the Fed meeting, like China, US companies are still going to have to report the reality of Q3.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.40-1.96% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Shanghai Comp 2 (bearish)
DAX 117 (bearish)
VIX 13.11-19.19 (neutral)
USD 97.50-99.01 (bullish)
Oil (WTI) 52.53-63.19 (bullish)
Nat Gas 2.37-2.72 (bullish)
Gold 1 (bullish)
Copper 2.52-2.70 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
