Global Market Comments
May 3, 2018
Fiat Lux
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When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks.
I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide.
Aggressive population control measures where underway, and strict quotas were in force. Everyone was taking their grandmother in to get sterilized.
Some 38 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $6 trillion, its growth could exceed that in the Middle Kingdom as early as 2018.
Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be.
The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage.
When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000.
That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world.
Even though it has recently been terminated, China's 30-year-old ???one child??? policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the People's Congress in 2013 could lead to posturing and political instability, which the markets could find unsettling.
India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers, make my travel reservations, and tell me how to work my new altimeter watch.
In August, I recommended Tata Motors (TTM), and it has gone up in a straight line since, instantly making it one of my top picks of the year. On the next decent dip take a look at the Indian ETF's (INP), (PIN), and (EPI).
??
Better to Own This Pyramid
Than This Pyramid
I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals.
So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, who is known as ?Hoss? to his close subordinates.
Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes.
As he spoke, I was ticking off the stock, ETF and futures plays that would best capitalize on the long term trends he was outlining.
The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO) and (PANW). Peer nation states, like Russia, are no longer the main concern.
Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.
The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general.? However, the 30,000-man surge there brought a dramatic improvement on the ground situation.
Iran is a big concern and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.
Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.
Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites.?
We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.??
The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI).? The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.
I left the dinner with dozens of ideas percolating through my mind, which I will write about in future letters.
Everyone who has been reading this letter for the past eight years (yes, there are quite a few of you), know that I am a fundamentalist first and a technician second.
Of course you need to use both, as those who mistakenly leave one tool in the bag reliably underperform indexes.
The one liner here is that I use fundamentals to identify broad, long term, even epochal trends, and technicals for the short-term timing of my Trade Alerts.
Do both well, and you will prosper mightily.
Strategists often like to cloak themselves in the fundamental or technical mantle. But parse their words carefully, and the best fundamentalists talk about support and resistance levels, while the ace technicians refer to the latest economic data points.
The reality is that the best of the best are using both all the time. The differential titles have more to do with marketing purposes than anything else.
Having said all that, you better take a good, hard look at the chart below for the Shanghai Stock Exchange Composite Index ($SSEC). This is a classic narrowing triangle spread over the entire five years of the Chinese bear market that is imminently going to explode one way or the other.
My bet is that it resolves to the upside. All it would be doing then is coming in line with the rest of the global equity markets, including those of many emerging markets.
Since the top, the earnings multiple of Chinese companies have plunged, from 35 times to a mere 15 times. This means that the 6% a year growing economy (China) is trading at a lower multiple than the 2% a year growing one (the US). The big question among strategists since 2009 has been how far these valuations would diverge.
If I am right, then you can expect a rally of at least 25% in the Shanghai market soon, and more in peripheral markets, like Hong Kong (EWH) and in single Chinese names.
The rally will also place a laser like focus on the Chinese Internet sector, so you won?t go wrong picking up some Baidu (BIDU) around $180, if you can get it.? I originally recommended buying the stock at $12 seven years ago.
If you are looking for further confirmation of the coming bull move in China across asset classes, please peruse the chart below for copper. The red metal has one of the closest correlations out there with the fate of the Middle Kingdom?s economy and stock markets. It appears to be breaking out of a major three-year downtrend as well.
The other nice thing about this scenario is that it provides more fodder for my expectation of another global bull market move in the fall, when you can expect major indexes to tack on another 5% by yearend.
Jim Chanos, watch your back!
I did not buy the rally in stocks this week for two seconds.
Once the S&P 500 (SPY) bounced off of the $190 level the first time, it was only a question of how soon to sell again. When I said ?Sell every rally in stocks this year,? I wasn?t kidding.
As it turns out, I caught the absolutely top tick in the (SPY) at $195.
That?s where I quickly bought the (SPY) February $202-$207 vertical bear put debit spread. Within hours, the index cratered an awesome $70 handles, and I was already looking at 70% of the maximum potential profit.
The great luxury of the S&P 500 SPDR?s (SPY) February, 2016 $202-$207 in-the-money vertical bear put spread is that it allows you to cash in on continued extremely elevated levels of the Volatility Index (VIX).
This is why the potential return is so high for a front month options spread already 7 handles, and now 12 handles in-the-money.
In the meantime, I continued to run big shorts in the (SPY) with my February 187 and $190 puts.
This was on the heels of cutting by half my (XIV) position at cost, and taking profits on my (SPY) January $182-$187 vertical bull call debit spread during the rally.
Since yesterday, I have cut the net exposure of my sizeable trading book from 40% to 0%. This is how you do it.
My lack of faith in this market can be measured by the bucket load.
I believe that oil (USO) hasn?t bottomed yet.
All we are seeing here is a round of natural short covering you would expect as the price bounces off the big round number of $30, something which computer driven algorithms love to do.
There are many more visits to the $20 handle for oil to come. Brent is already there.
If you have some magical insight into the price of oil, better than the entire industry combined, and are convinced that Texas tea bottomed yesterday, then you shouldn?t touch the S&P 500 SPDR?s (SPY) February, 2016 $202-$207 in-the-money vertical bear put spread. In that unlikely scenario, stocks rocket from here.
Then there?s China (FXI), whose continued turmoil will bring further US stock losses. I assure you, not even the Chinese know what?s going on in China. They are more like the unfortunate deer that is frozen in the headlights.
If the stock markets of the Middle Kingdom were either up or down 10% tomorrow, I wouldn?t be surprised.
I?m quite happy with the performance of the Trade Alert service so far in 2016.
Here we are only 8 trading days into the New Year and many traders have already blown up, including quite a few trade mentoring newsletters. We should be hauling in some big numbers in January and February.
This is how you trade a crash. Watch and learn. The opportunities are legion.
Don?t waste your time trying to analyze financial markets right now.
There is only one ticker symbol you need to know about, that for the Shanghai Stock Exchange Composite Index, the ($SSEC).
When Shanghai goes up, the rest of the world?s risk assets happily join the party. When it drops, ?RISK OFF? fever goes pandemic.
China upped the ante this week when it allowed its currency, the Yuan, or the renminbi as it is known locally (the people?s currency), to float freely for the first time in 25 years. That produced a two-day devaluation of 3.6%.
In the very long history of currency debasements, this one was barely a whimper.
Ancient Sumerians used to shave the edges off of gold and silver coins 5,000 years ago.
When President Nixon took the US off of the gold standard in 1973, the dollar eventually fell 75% against the European currencies.
More recently, the Euro has given up 37% against the greenback, moving from a position of grotesque over valuation to dealing with the Greek credit crisis.
So Beijing?s move this week barely tips the needle in the official history of devaluations.
What it does do is create a giant psychological effect, and therein lies the problem.
Since June, the Mandarins in China have been pulling out all the stops to halt a free fall in the country?s share prices.
It has cut interest rates and relaxed reserve requirements. It banned high frequency trading, blaming the collapse on foreign short sellers (sound familiar?). It has even made stock selling illegal in roughly 94% of the country?s free float.
Still, the bears remain emboldened by their recent success.
By cutting the value of the Yuan, the government is providing a modest boost to the economy. A cheaper currency means less expensive exports and more of them, thus, making local businesses more profitable and creating jobs.
But not by much.
There are not a lot of products that live or die on a 3.6% margin. America has not just lost a chunk of its own exports from the additional competition, contrary to the claims of the TV networks and bogus newsletters with which I compete.
But by taking the first such move to undercut the Yuan in 25 years, it is showing the world how serious a problem is the stock crash.
Will the stock collapse feed into the main economy? Is 10% of the world?s GDP going into a Great Recession? Yikes!
SELL, SELL!
There are a few other problems with the Chinese firecracker.
It violates a secret agreement with the US government, made a decade ago, to allow a steady 3-4% a year appreciation of the Yuan against the dollar.
This was designed to slowly eliminate the artificial under valuation of the Yuan that gave the Middle Kingdom an unfair export advantage. The arrangement was responsible for the 20% rise of the Yuan since 2009.
(Sorry Donald, but you?re holding the chart upside down. Yes, I know, stock charts can be pesky things).
Reneging on the deal is ruffling feathers at the US Treasury in Washington. But it won?t amount to more than that, as long as it is temporary.
Which it will be.
China still has a massive trade surplus with the United States. In 2014, it totaled a staggering $343 billion. It maintained that heady pace, totaling $171 billion during the first half of 2015.
There are an awful lot of Chinese clothes, electronics, and toys sitting on the shelves of American retailers.
Its imports are falling, thanks to the collapse of the price of oil and other bulk commodities.
The natural state of the currency of any country running such huge surpluses is for it to rise in value. That will continue in China?s case for the foreseeable future.
Once the waters settle in the stock market, you can count on the Yuan to regain its upward path.
However, this isn?t going to happen in a day. It could be weeks or months until order returns to Chinese equity markets. Until then, expect some scary days there and here as well.
Compound these problems with the uncertainty over the Federal Reserve?s decision on interest rates in September and slower than expected US growth.
It certainly leaves traders and investors alike, with a full plate of issues to consider.
As if we didn?t have enough to worry about.
For some background on my 45 year coverage of the Middle Kingdom, please click here for my 2011 SPECIAL CHINA ISSUE.
Surprise!
I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom (click here for their home page). So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.
These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China?s GDP will triple relative to our own from current levels.
A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn?t work, they had another $500 billion package sitting on the shelf. But with GDP of only $6.5 trillion today, don?t count on China bailing out our $16.5 trillion economy.
China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC?s, and to live in big cities. Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75-story skyscraper is going up there every three hours!
Some 1,000 years ago, the Silk Road was the world?s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths.
Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the latter. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.
To me, this all adds up to buying on the next substantial dip big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.
Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the fa?ade, real estate sales are falling, and that the economic engine is starting to sputter.
This will be bad news for the rest of us, as China imports 50%-80% of the world?s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.
There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars? worth of new stock issues in the US through IPO?s, a privileged elite is getting their money out of the country as rapidly as they can.
Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.
However, I think that Jim, who confesses to having never visited China, is missing the broader long-term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.
While a lot of apartment buildings have been constructed, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its past blistering 11% per annum GDP growth rate to only 7.7%, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020.
Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.
China has already taken steps to head off a housing crisis, unlike the US. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn?t think of that here.
I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of malaise selling exhausts itself. The Country?s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old ?one child? policy, when too many single children have to start supporting two retiring parents.
China: Not Enough Demand?
When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide.
Some 36 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2013. Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China's 30-year-old 'one child' policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the People's Congress in 2013 could lead to posturing and political instability, which the markets could find unsettling. India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization that took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers, make my travel reservations, and tell me how to work my new altimeter watch. In August, I recommended Tata Motors (TTM), and it has gone up in a straight line since, instantly making it one of my top picks of the year. On the next decent dip take a look at the Indian ETF's (INP), (PIN), and (EPI).
Better to Own This Pyramid
Than This Pyramid
Taxi! Taxi!
When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 36 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.
Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China's 30 year old 'one child' policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People's Congress in 2013 could lead to posturing and political instability which the markets could find unsettling. India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).
Better to Own This Pyramid
Than This Pyramid