Global Market Comments
November 29, 2024
Fiat Lux
Featured Trade:
(The Mad DeCEMBER traders & Investors Summit is ON!)
(CHINA’S VIEW OF CHINA),
(FXI), (BIDU), (BABA), (JD)
Global Market Comments
November 29, 2024
Fiat Lux
Featured Trade:
(The Mad DeCEMBER traders & Investors Summit is ON!)
(CHINA’S VIEW OF CHINA),
(FXI), (BIDU), (BABA), (JD)
There was so much enthusiasm for China only a month ago.
A stimulus package was announced, a massive short-covering rally ensured, and finally, after a three-year hiatus, China was back in play. Several hedge funds announced major commitments to the Middle Kingdom.
Here we are only three weeks after the US presidential election, and China now looks so much rubble. Asst prices returned to their starting points. The hedge funds have so much mud on their faces. It’s back to a long wait.
Which gives us all plenty of time to think about what China is really all about.
I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China’s position in the world today.
He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $12,969, compared to $81,695 in the US.
We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.
China can’t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs want to secede.
China’s military is almost entirely devoted to controlling its own people, which makes US concerns about their recent military build-up laughable.
All of Asia’s progress, to date, has been built on selling to the US market. Take us out, and they’re nowhere.
With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.
There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net.
Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.
Ever heard of a Chinese unemployment office or jobs program?
Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.
The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.
As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.
After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.
I’ll consider what Minxin Pei said next time I contemplate going back into the (FXI) and (EEM).
China: Not All Its Cracked Up to Be
Mad Hedge Technology Letter
September 30, 2024
Fiat Lux
Featured Trade:
(CHINESE TECH GLITTERS IN THE SHORT-TERM)
(BABA), (JD), (PDD), (BIDU)
The bazookas have been unloaded, and the results are big.
The aftermath is reverberating through the rest of the world’s equity markets.
The Chinese economy is in the dumps and the Chinese communist party is using every tool in the proverbial toolkit to pull them out of their slump.
Juxtapose that in the face of a demographic time bomb and we could say that it is in the nick of time.
Now that we have decades of data on the issue, the Chinese economy has major structural issues and instead of fixing it, they are throwing liquidity at it.
Chinese purchasing power is about to drop through the toilet pipes, but I believe bellwether stocks like Alibaba (BABA), JD.com (JD), Pinduoduo (PDD), and Baidu (BIDU) will perform quite well.
China is all about ecommerce at the retail level anyway and Alibaba will be able to reverse a years-long slump on the back of Beijing’s sweeping stimulus measures.
Flooding the system with liquidity will paper over the cracks and should get consumers out and about instead of eating instant noodles in their little apartments.
Retail is now moving in the right direction again.
Although, long term this does nothing to address the major structural issues in the system, the short-term transfusion should help putting money in consumer’s pockets and liquidity on Chinese corporates will outperform.
Market-support measures initiated by the People’s Bank of China included mortgage rate cuts and an unprecedented $114 billion stock-buying facility.
The renewed positive market sentiment for Alibaba reflects its resilience after struggling in recent years, owing to Beijing’s 32-month crackdown on Big Tech firms and the mainland’s shaky post-pandemic economic recovery.
BABA lost nearly half their value over the past five years.
China’s largest operator of online shopping platforms and a major domestic artificial intelligence (AI) technology player, Alibaba recently won praise from the State Administration for Market Regulation for complying with rectification measures, ending more than three years of regulatory scrutiny that has hung over the company’s operations.
Alibaba’s cloud computing services unit last week announced at an event in Hangzhou the release of more than 100 large language models – the deep-learning technology underpinning generative AI applications like ChatGPT – to the global open-source community and a new text-to-video model, as the company showed its rapid progress in this field.
Earlier this month, Alibaba founder Jack Ma called on employees of the business empire he created 25 years ago to “believe in the future” and “believe in the market” amid stiff competition.
The Chinese Communist Party and their heavy handed approach has a lot to do with many tech companies fizzling out.
It is impossible to really kick start growth when they are suppressing it.
However, now is the time when the government has realized they are overdoing it and have unleashed the animal spirits.
Ultimately, the Chiense government is the arbiter of who gets to do business and how well in China.
In the short-term, Chinese tech stocks will outperform American tech stocks.
Chinese tech stocks are cheap by almost every metric – buy the dip in Chinese tech.
Global Market Comments
September 30, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or CHINA IS BACK! plus MY ENCOUNTER WITH ALIENS),
(GLD), (CCJ), (NEM), (TSLA), TLT), (DHI), (FXI), (BIDU), (TNE)
(USO), (BTU), (UNG), (CORN), (WEAT), (SOYB), (LVS), (WYNN) (LVUY) (HESAF)
Global Market Comments
October 25, 2023
Fiat Lux
Featured Trade:
(AN EVENING WITH THE CHINESE INTELLIGENCE SERVICE),
(FXI), (CYB), (BIDU), (CHL), (BYDDF), (CHA)
The current chip war with China brings back memories of my five-decade-long relationship with the People’s Republic of China.
I normally avoid the diplomatic circuit, as the few non-committal comments and soggy appetizers I get aren’t worth the investment of time.
But I jumped at the chance to celebrate the 62nd anniversary of the founding of the People’s Republic of China with San Francisco Consul General Gao Zhansheng.
Happy Birthday, China!
When I casually mention that I survived the Cultural Revolution and interviewed major political figures like Premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern-day Chinese are enthralled. It’s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin.
Five minutes into the great hall, I ran into my old friend Wen, who started out her career with the Chinese Intelligence Service and had made the jump to the Foreign Ministry, as all their best people did. She was passing through town with a visiting trade mission.
When I was touring China in the seventies as a guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank-like Russian sedan.
The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences.
I asked Wen when China was going to float the Yuan. She explained that this is something China knew it had to do, but it wasn’t going to be rushed into by some opportunistic foreign politicians.
If it moves too soon, millions will lose jobs, creating political instability, something the central government wants to avoid at all costs. Many of the largest scale employers were only marginally profitable, and a hike in the renminbi of only a few percent would force them out of business. I pointed out that that was exactly what was happening in the US.
Worth More Than Meets the Eye
I warned that if the Middle Kingdom waited too long, Washington would force them into an appreciation through punitive import duties and anti-dumping actions, as we did with Japan 50 years ago.
It was Nixon’s surprise ban on textile imports in 1971 that finally persuaded Japan to float the yen, then at ¥360. If that didn’t convince the Chinese, then imported inflation would. The longer China delays, the bigger the pop when their currency is finally set free.
Wen then went on the offensive, claiming that Chinese workers were being exploited by American companies keeping wages low. The product that China made for $1, and sold to the US for $2, was then sold by Walmart (WMT) for $20, which kept all the profits.
She pointed out that the Walton family had a combined net worth of $238 billion, more than the total worth of the lower 40% of the US population. This could never happen in China.
I told her that by selling the product at $20, Walmart wiped out another US company that used to make that product domestically and sold it for $40, throwing those people out of work.
Modern Times in China
I then asked Wen what were her country’s plans for its massive foreign exchange reserves, now at $3.2 trillion. She agreed that this was a problem because the reserves were pouring in so fast at an embarrassingly high rate of $10 billion a month and that it was the most rapid accumulation of wealth in history (click here for the data). In any case, reserves have been falling for the past year from a peak of $4.1 trillion.
While it had more than enough Treasury bonds, any attempt to sell might cause their value to collapse and freeze relations with the US. I suggested China should start hedging its gigantic holdings without selling them, or some managers would be facing a firing squad in the future.
China tried to recycle its surpluses by buying foreign companies that produce the natural resources it desperately needs. But takeover attempts were fought tooth and nail as a foreign invasion, or on national security grounds, such as the attempt to buy California’s Unocal in 2005 and Australia’s Oz Minerals in 2012.
It was now using a strategy of buying low profile minority stakes in foreign resource companies. China took a big stake in the Petrobras (PBR) secondary equity offering, which didn’t work out so well, as the company is now facing bankruptcy.
I asked her about the real estate bubble in China that was causing so many foreign investors to lose sleep. She said it was true that sales were slow at some luxury buildings in Beijing and Shanghai, but the great majority of developments were aimed at working people and were filling up as soon as they came on the market.
The 40% down payment demanded by the People’s Bank of China headed off the rampant speculation that brought the American financial system down. Buyers of second homes were required to pay entirely in cash.
Rooms With Views
Wen then complained about the aggressive military stance the US was taking towards China, ringing it in with the Seventh Fleet. Holding a knife so close to the country’s foreign supply line jugular vein made them nervous.
China was basically indefensible. All it would take was the sinking of a few grain ships, and 50 million would starve within a year.
Wen told me there is a school of thought in Beijing that as the country’s economic power grows- it passed Japan to become second in GDP in 2010– that the US will increasingly perceive it as a military threat. This would lead America to mete out the same hostile treatment to China as it has done to Russia since the Ukraine War began.
Walking Softly, But Carrying a Big Stick
I assured her that the Seventh Fleet was there to watch and listen, but to do nothing. It was really in a position to provide a security blanket for allies, like Japan and South Korea, but nothing more. China wasn’t engaging in the belligerent behavior that Russia was at the height of the Cold War, like blockading Berlin, basing missiles in Cuba, stationing fast attack nuclear submarines off our coasts, and invading Afghanistan.
I argued that if China truly has no expansionary intentions, the more we know about you, the better. It is always prudent for a potential adversary to conclude you are not a threat, and that no action is needed.
The more you help the US do that, the better. China is decades behind the US in military technology, and you really have nothing we want. Little more than 200 nuclear weapons without an ICBM or submarine delivery systems were hardly viewed as a major threat.
Wen seemed perturbed that I was aware of her country’s nuclear stockpiles, and asked how I knew this. I said that former CIA director Leon Panetta told me. She said “Oh.” I asked what was that test downing of a satellite in space about, anyway. She didn’t answer.
Looking at the world for the next 30 years, who is the Pentagon going to model and war game against, but China, with its 2.5 million-man army?
Wen countered that the People’s Liberation Army was purely a defensive force. With a 12,000-mile land border, an 11,000-mile coastline, and dubious neighbors like Russia, Iran, and India, they have no other choice. Its ability to project force over great distances, as the US can, is virtually nonexistent.
Its 1979 invasion of Vietnam was about reclaiming ten miles of lost territory. China got involved in Korea only after General Douglas MacArthur threatened to rain atomic bombs on the mainland, losing 2 million men, including Chairman Mao’s son. China could have done a lot more in the Vietnam War, but didn’t, limiting its participation to a supply, logistical, and advisory role.
That’s a Lot of Border to Defend
I then warned that if you really are worried about the Pentagon, you should stop hacking into our computers. She replied that the US started this by emptying out Chinese mainframes many times, and they were only responding in kind.
I said yes, but that China was targeting private companies, like Google (GOOG), Microsoft (MSFT), and Oracle (ORCL) that without military-grade software, were unable to defend themselves. The Chinese agencies involved then used the data to their own commercial advantage.
What Did You Say the Password Was Again?
By the time Wen married, China had already adopted its one-child policy. As much as she wanted more children, she understood the government’s need to adopt such a drastic policy. Without it, the population today would be 1.8 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead.
The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing.
Her husband, a mid-level official at the Ministry of Commerce, fared less well, dying of lung cancer at a relatively early age. The US and Europe had exported their worst polluting industries to China to take advantage of lax environmental controls, turning the air in Beijing into a choking haze.
Sometimes her son would come home from school coughing and wheezing so badly that he couldn’t play outside. The two packs of cigarettes a day her husband smoked didn’t help either.
Imported From the USA
I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs.
I was about to intercede when my late wife, Kyoko, let go with a blood-curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority and the dreaded Kempeitai, or secret police, and they beat a hasty retreat.
To this day, I’m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my copy of HG Well’s A Short History of the World, which she treasured, as the book was then banned in China.
Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community. She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant’s salary.
Wen told me that China was grateful for the billions of dollars that foreigners had poured into her country as a result of my writings. I replied that I was simply trying to show my readers where to make some money, nothing more. It was pure opportunistic self-interest.
One of my early recommendations, Chinese search engine Baidu (BIDU), was up more than tenfold in less than two years. Did she happen to know about any more future Baidu’s? Wen said that she wasn’t that close to the stock market, but that she would get back to me.
I asked Wen if she still had the book I gave her nearly five decades ago. She said it had become a family heirloom and was being passed down through the generations. As she smiled, I noticed the faint scar on her eyebrow from that unpleasantness so long ago.
In view of Wen’s comments, I think you have to pass on investing in China (FXI) for the short term.
Mad Hedge Technology Letter
June 21, 2023
Fiat Lux
Featured Trade:
(IS ALIBABA INVESTABLE?)
(BABA), (BIDU), (PDD)
Chinese ecommerce company Alibaba (BABA) is essentially a proxy for the Chinese economy and that’s not a good thing lately.
The last few years have been poor.
Single digit growth for the nations’ best tech company is not going to cut it for a prototypical growth company, but it’s not all their fault.
The company has been mired in chaos amid a faltering economy.
At a national level, China is quickly turning into the next Japan with a rapidly aging workforce, a mountain of debt, and youth unemployment going through the roof.
Throw in a dollop of geopolitical strife against the biggest economy in the world and this cocktail of lethal variables has meant that its top ecommerce company is stinking up the park.
It was just 10-15 years ago when China was the place to be flourishing during a golden era of prosperity and opportunity.
Now this paper tiger, its ghost cities, and social credit system are defensive as ever with its siege mentality after the self-induced Wuhan incident. The incident literally went viral in 2020 which lead to mass lockdowns and robot dogs barking orders.
This isn’t necessarily the best backdrop for tech firms to flourish.
In a desperate way to restart growth BABA has now gone back to the well like calling for Michael Jordan to unretire for the 3rd or 4th time.
Funnily enough, they are calling on the NBA’s Brooklyn Nets owner Joe Tsai to save the company.
Tsai understands the business intimately: he was right beside Ma at Alibaba’s inception in a Hangzhou lakeside apartment in 1999.
Another former friend is also called on to save the company – Eddie Wu, current chair of the Taobao and Tmall Group which is the name of BABA’s digital platform.
The former computer science major is credited with helping develop the company’s ad platform and the PayPal-like Alipay, now part of the Ma-backed Ant Group Co.
The company never regained its stratospheric growth, particularly as new entrants such as ByteDance and Pinduoduo (PDD). sapped its core business. It began to lose market share in the cloud, its other engine of growth, to state-backed rivals.
Long-time BABA rival Baidu Inc. — once dismissed by investors as having missed the mobile revolution — introduced China’s first ChatGPT-like AI service Ernie to positive reviews, highlighting how Alibaba and its peers may be falling behind in next-generation technology.
Beyond technology, much of the market has fixated on the imminent restructuring, and its potential to unleash a half-dozen publicly traded companies, starting with more mature units like the cloud and logistics.
In Baidu’s wake, Alibaba unfurled its own large language model dubbed Tongyi Qianwen. That might be key to ensuring the company name endures 102 years, as co-founder Ma once famously and repeatedly declared was his over-arching ambition.
BABA has told us they are rolling out their new generative AI apps but the Chinese communist party has flagged as something that must go through them.
Technology intersected by authoritarianism usually ends up a failure.
Creative juices aren’t flowing and the dynamism saps the creativity juices.
I highly doubt that Chinese generative AI can hold a candle to the Silicon Valley iteration.
Nothing they have rolled out signals they are ahead of Microsoft or Google.
If readers want to get into the future of tech through stocks, avoid China and focus on the best of breed.
Global Market Comments
December 5, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD MARKET AND THE BAD MARKET)
(TLT), (XOM), (OXY), (TSLA), (SPY), (BABA), (BIDU), (KBH), (PHM), (LEN), (AAPL)
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