“China policy should not be in the hands of the China School.”
-Ambassador to Beijing
That’s neither a new drinking game nor a comment from a US Ambassador – that’s what Japan officially decided on China by 2006. It took a long while for Tokyo to figure that out. How long will it take the USA and what will she decide by 2020 and beyond?
There was the Chinese Reform era of 1 then, in the eyes of many US Hawks, there were the “Fake Reforms” of President-For-Life Xi. There was also the misunderstood asterisk of the largest fiscal and monetary stimulus in the history of China in 2016.
The Hu-Wen leadership (began in 2003) is not the Xi leadership. “Hu and Wen, despite the risk-taking roots of their patrons, operated more like housekeepers, bedding down the reforms their predecessors had unleashed and living off the export and investment boom triggered by China’s entry in to the World Trade Organization in 2001.” (Asia’s Reckoning, pg 183)
Back to the Global Macro Grind…
But every US investor understands all of the economic (cyclical and secular) time-series’ and political dynamics in China … and everyone knows precisely what the latest #BeanDeal is going to mean for a much hoped for Global Economic Recovery…
Roger that.
Here’s what our Chinese Cycle and Data Bean Counter in Chief, Darius Dale, had to say about what the CEO of Texas Instruments (TXN got hammered on realistic guidance yesterday) was saying about the “trade war” yesterday:
The summary of their commentary (i.e. “We are still slowing well beyond what would’ve normally been the bottom and we’re not sure why, but everyone agrees to agree that it’s OK to blame the trade war.”) is precisely the point we are trying to make on slides 27-32 in our Macro Themes presentation, specifically that the Globally Synchronized Recovery of 2016-17 was an artificial sugar high perpetuated by massive, one-time stimulus initiatives (i.e. Shanghai Accord + US Tax Reform).
Investors and CEO’s that expected growth to inflect once growth comps started to recede on a 2yr basis in 2H19 is a tacit admission that they believe the longer-term TREND in growth had inflected higher because of those artificially high growth rates. We don’t think that is the case, which is why we think those distortions are still being worked through, per the ongoing downside surprises to growth.
Drinking game: every time you hear “trade war” and “uncertainty” in any company commentary, replace it with the phrases “artificial sugar high” and “slowing growth” and everything makes more sense.
What do you think about our cycle view and post-2001 Chinese economic & political history?
We sincerely want to know. Like reading a book on these matters (every 10 days for me at least these days), I’m constantly learning that I don’t know what I don’t know.
What I do know is what both Chinese markets and incoming economic market data are signaling every macro morning. On this AM’s data:
A) > 50 and Accelerating: France Manufacturing (50.5), France Services (52.9), France Composite (52.6), Eurozone Services (51.8), Eurozone Composite (50.2)
B) > 50 and Unchanged:
C) > 50 and Decelerating: Australia Manufacturing (50.1), Australia Services (50.8), Australia Composite (50.7), Japan Services (50.3), Germany Services (51.2)
D) < 50 and Accelerating: Germany Manufacturing (41.9), Germany Composite (48.6)
E) < 50 and Unchanged: Eurozone Manufacturing (45.7)
F) < 50 and Decelerating: Japan Manufacturing (48.5), Japan Composite (49.8)
Hashtag “so you’re saying there’s a chance” for green shoots in France… and also an ongoing and broadening slow-down in Asia?
Yep. And tomorrow morning, instead of listening to a CEO paint blue-skies for me on an outlook he’s had wrong for a year now, I’ll do the same thing I did this morning. And then again, and again … and again.
What I will not do is chase “stahks” either to lower-highs (how many of those has CAT made since our original cycle call for #ChinaSlowing in Q1 of 2018 btw?) or on a short-term hedgie reaction to “better than expected” news…
When reality is most of these global demand execs don’t know what to expect if China is indeed who Japan was becoming in the 1990s (i.e. a secular #slowing story that had no political catalyst, “deal”, or short-term “end”)…
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.58-1.81% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8004-8192 (bearish)
REITS (VNQ) 92.20-95.99 (bullish)
Energy (XLE) 56.16-59.51 (bullish)
Shanghai Comp 2 (bearish)
VIX 13.02-18.12 (neutral)
USD 96.60-98.40 (bullish)
EUR/USD 1.09-1.12 (bearish)
GBP/USD 1.25-1.31 (bullish)
Oil (WTI) 52.25-56.17 (neutral)
Gold 1 (bullish)
Copper 2.57-2.68 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
