Big Creditor

“China is a big country, inhabited by many Chinese.”

-Charles de Gaulle

I love that quote. Maybe Chuck Schumer should read it and respect who is wearing the pants in this Global Debtor/Creditor relationship. He and his protectionist politician friends of the modern day Roman Empire should stop biting the hand that underwrites their lavish lifestyles and open their eyes to reality.

Our job as your Global Risk Manager is to make sure you don’t miss the big stuff. China is “a big country” that is turning into one really Big Creditor. While yesterday’s pre-open futures fireworks were fascinating to watch, closing prices are what matter in this interconnected world of risk management and, as we pointed out at this hour yesterday, China’s decision to let its currency appreciate is not good for the world’s largest debtor nation.

In terms of total reported and unfunded liabilities, the USA is pushing its debt toward a $57 TRILLION hole ($13.1T in debt that trades + $44T in unfunded liabilities like pension, social security, etc.). In lieu of this mathematical reality and an updated US deficit estimate of $1.6 TRILLION for 2010 (+14% y/y vs. 09’), President Obama’s budget director, Peter Orszag, has decided to leave the Cabinet.

Watch what the people in Washington Officialdom do folks, not what they say…  

Orszag’s decision certainly makes sense to us. He’s only 41 years old and apparently wants to attempt to maintain whatever remains of his actuarial credibility. Both the powers that be at Harvard and in China seem to agree with us on this reputational point:

  1. “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” –Alberto Alesina, Harvard University Professor
  2. “The Fed’s decision to buy” another $300B in Treasuries was called “irresponsible” because it “could weaken the dollar” – Li Xiangyang from the government backed Chinese Academy of Social Sciences

With all of Europe and Japan attempting to implement some form of austerity, the writing is on the wall now for the professional politicians of America. Either tell it like it is and do what newly elected David Cameron is going to do in the UK this morning or get out of the way (Orszag opted for the latter option).

No matter what we have the spine to do politically here in America, the Chinese have officially told us that they are going to march down their own path. Raising the value of its currency and “focusing on domestic demand” means exactly what that country “inhabited by many Chinese” said. They have focused on being the world’s growth engine of exports for plenty long enough. Now it’s time for them to hunker down, build their military, and focus on what they can control.

Sound familiar?

Of course it does - for any student of history at least. If you want to make a global macro call on where this Geopolitical Game of Risk is headed, don’t ask someone in Club Myopia for their “read.” Watch the data.

While the Manic Media was getting hyper about the futures being bid up 24 hours ago, this is what was happening in China:

  1. Food - China, the world’s 2nd largest corn consumer, was forecast to become a net importer of the grain for the first time in 14 years (USDA data)
  2. Discretionary Consumption - Companies focused on the Chinese market, including Beijing-based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said they would gain from lower import costs and stronger consumer purchasing power.
  3. Incomes - More than 20 provinces and cities have overseen increases in minimum wages in recent months to help support incomes

This is what a country called America used to be able to do when it had a strong currency/strong balance sheet policy. This not only provided us the generational opportunity to becomes the world’s largest buyer, but also its largest creditor nation. With that status in hand, we saw wages, incomes, and consumption levels make this country the greatest place on the planet.

Sound familiar?

China is starting to get what Reagan and Volcker taught them – respect the cost and value of your sovereign currency and many great powers will be born out of holding Global Creditor status.

These are early days in Chinese policy shifting, but the Chinese have been here before. In different centuries than this, China has made up almost a third of global GDP (peaking at 32% of global GDP in 1839 when the War with Britain began; “The World Economy: Historical Statistics” by Angus Maddison). By the time Deng Xiaoping began to implement reform in the late 1970’s the Chinese had to dig themselves out of the deep dark hole of less than 6% of global GDP. 

In macro, markets, and in life, to understand where you are going, you better have a real good handle on where you came from. Don’t think for one second that the Chinese don’t see the forest through the trees here folks. They’ve seen the dark hole that politicians can lead a country into. “China is a big country” with a longer history than ours.

My immediate term support and resistance levels for the SP500 are now 1095 and 1139, respectively. In the Hedgeye Portfolio we sold our position in Gold (GLD) at $123.04 and we’ll be looking to buy that back on the pullback. Immediate term TRADE support for the price of Gold is now $1220/oz.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Big Creditor - DENG