How China Became The Most Dangerous Country In The World

January 22, 5:00 pm EST

China reported the slowest growth since 1990 on Monday (+6.4%).

This an interesting period to reference because, at that point, China was in the latter stages of executing on an economic plan.  At the core of that plan was currency manipulation — i.e. devaluing it’s currency (i.e. trashing it) so that they would have a distinct advantage on price when competing for world exports (i.e. they would always be the cheapest).

It worked.  The Chinese economy grew at an average of 12% the following five years (1991-1995).  From 1991 to 2009, leading up the global financial crisis, China grew at 10.5% annual rate.  That’s 18-years of double-digit annualized growth, on average.

That’s why the Chinese economy has ascended from a $350 billion economy to a $12 trillion economy since 1990.

Here’s what that looks like in a chart ….

Thanks to decades of uncontested currency manipulation, China is now the second largest economy in the world and on pace to be the biggest soon (though it still has just an eighth of the per capita GDP as the U.S.).

Why does it matter?

When they maintain a cheap currency, to undercut the world on price, they become the world’s sellers to everyone.  That means they accumulate a mountain of foreign currency as a result (which they have).  China is the holder of the largestsforeign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars?  They buy our Treasuries, which keeps our rates low, so that U.S. consumers can borrow cheap and buy more of their goods — adding to China’s mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth.  And so the cycle goes.

This has proven to be a recipe for booms and busts (big busts), and a destructive global wealth transfer. 

So coming out of a decade long global economic slog, U.S. growth (driven by fiscal stimulus) has put us in a position of strength to negotiate reform in China. 

An economy running at 6% in China is recession territory and makes them vulnerable to an uprising against the regime. And trade tariffs put more and more downward pressure on the growth number.  That’s why they’ve been willing to talk.  Here’s what President Xi said yesterday about the ruling party’s outlook for retaining power in China:  “The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment … The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Treasury Intervention Has Put The Bottom In Stocks

January 2, 5:00 pm EST

Happy New Year! We are off to what promises to be a very important year for markets and the economy.

Contrary to what the growing narrative has been on the economy and stocks over the past several months, I think we’re in for a hot economy, a big bounce back in stocks and resumption of the bull market in commodities.

The pieces are in place.  The linchpin will be China.

On that note, Trump had been in the clear position of strength in the negotiations on China, until stocks began to melt.

A sour stock market can ultimately erode economic activity.  And that becomes the big risk heading into this new year.

The Trump agenda has had big wins on the economy.  But those wins are at risk of being undone if the stock market calamity continues.  This is the weakness I’ve suspected has been exploited by China.  The indiscriminate selling has had all of the appearances of liquidations and/or manipulation.  With few cards to play, this (hitting the stock market) was one they could play.

Now, if we look back through history, major turning points in markets have often been the result of some form of intervention.  With that in mind, to counter the indiscriminate selling of stocks, on December 23rd we had a response from the U.S. Treasury Secretary and (the next day) a meeting of the “President’s Working Group” on financial markets.  That was an intervention signal.  When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.

Again, market followers like to have very clear, neat evidence to describe every tick in markets.  And that leads them to very wrong conclusions when markets are at extremes (as they force their worst case scenarios to fit the price).  They don’t factor in the influence of intervention and manipulation (both by policymakers and powerful market players).  Markets are made up of people (and their varying motivations), and the evidence isn’t always so clear.

Bottom line:   As I said in my last note before Christmas, the lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
China Running At Worse Than 2009 Levels

December 14, 5:00 pm EST

We’ve talked about the struggling Chinese economy this week.

As I’ve said, much of the key economic data in China is running at or worse than 2009 levels (the depths of the global economic crisis).

And the data overnight confirmed the trajectory:  lower.

As we’ve discussed, this lack of bounce in the Chinese economy (relative to a U.S. economy that is growing at better than 3%) has everything to do with Trump squeezing China.

He acknowledged it today in a tweet ….

dec14 china tweet

The question:  Has China retaliated with more than just tit-for-tats on trade?  Have they been the hammer on U.S. stocks?  It’s one of the few, if not only, ways to squeeze Trump.  As we discussed last week, when the futures markets re-opened (at 6pm) on the day of mourning for the former 41st President, there was a clear seller that came in, in a very illiquid period, with an obvious motive to whack the market. It worked.  Stocks were down 2% in 2 minutes.  The CME (Chicago Mercantile Exhange) had to halt trading in the S&P futures to avert a market crash at six o’clock at night.

Now, cleary stocks have a significant influence on confidence.  You can see confidence wane, by the day, as stocks move lower.  And, importantly, confidence fuels the decisions to spend, hire and invest.  So stock market performance feeds the economy, just as the economy feeds stock market performance.   The biggest threat to a fundamentally strong economy, is a persistently unstable stock market.  In addition, sustaining 3% growth in the U.S. will be difficult if the rest of the world isn’t participating in prosperity.

With that in mind, in my December 1 note, I said “it may be time for Trump to get a deal done (with China) and solidify the economic momentum needed to get him to a second term, where he may then readdress the more difficult structural issues with China/U.S. relations.”  That seems even more reasonable now.

We end the week with this chart of the S&P.
dec14spx

We have two 12% declines in stocks this year.  And you can see the fear beginning to set in.  With that, the best investors in the world have made their careers by “being greedy when others are fearful” (Warren Buffett) or “buying when most people are selling and selling when most people are buying” (Howard Marks).  There is clear value in stocks right now.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Trump Is Squeezing China

December 12, 5:00 pm EST

We talked about the China trade story yesterday.

In a nutshell, Trump has capitalized on an aligned Congress (in the first half of the mid-term) to stoke the U.S. economy.  And that has strengthened the leadership position of the U.S. coming out of the decade long post-global economic crisis period.

With that, Trump has used the leverage of global economic leadership (in a vulnerable global economic period) to force change in China.  And as we observed yesterday (in the charts of Chinese GDP, industrial production, domestic investment and retail sales), he’s getting movement because the Chinese economy was sputtering before the trade crackdown, and is now running out of gas. Much of the key economic data in China is running at or worse than 2009 levels (the depths of the global economic crisis).  We get new data on industrial production, domestic investment and retails sales out of China tonight.  This should provide more information on how the Chinese economy is being squeezed.

As for stocks, we have eleven trading days remaining for the year.   The S&P 500 finishes today down about 1% for the year, and down 3.4% month-to-date.  On the quarter, stocks are down 9% — the worst fourth quarter since 2008.  If we look back at monthly returns, dating back to 1950, stocks have finished UP in December 75% of the time, for an average gain of 1.5%.  Only two times have stocks has worse December performance over the near 70 year period (2002 and 1957).

And remember, as we discussed earlier this week, it’s not just stocks.  It’s a zero (or near zero) return year for all major asset classes this year.  Stocks, bonds, gold, real estate … nothing is working.  The winner on the year has been cash.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
More Sanctions On Saudi Unlikely, Despite Congress Grandstanding

December 5, 5:00 pm EST

I was away from the markets yesterday, on a big down day.  With markets closed today to honor the 41st President, let’s take a look at what happened on Tuesday.

Why the ugly and persistent plunge in stocks?

Many of the reasons that have been attributed to the two stock market corrections this year, bubbled up again yesterday. But as we’ve discussed, the stock declines this year appear to have had everything to do with Saudi capital flows–and less to do with all of the hand-wringing issues you hear and read in the financial media.  Same can be said for yesterday.

When prospects rise that Saudi assets may be threatened by sanctions(or seizures in the case earlier this year, related to the Crown Prince’s corruption crackdown) indiscriminate and aggressive selling of U.S. assets hit immediately (likely led by the Saudi sovereign wealth fund, which has assets over half a trillion dollars).

We had it again yesterday.  Stocks had a big gap up on Monday on movement on U.S./China trade. It was after the close on Monday that the news hit that the CIA would brief the special Senate committee on Tuesday.  Stocks immediately started moving lower. The Dow futures were down 250 points by midnight.  And then of course, yesterday, when news hit that the briefing was underway (just after noon), the bottom immediately fell out of stocks. A little more than half an hour later, U.S. Senators were standing in front of cameras telling the world that the Crown Prince was involved in the murder and that Congress should invoke the Magnitsky Act.  This law authorizes the government to sanction human rights offenders, freeze their assets, and ban them from entering the U.S.

That sounds ominous for the Crown Prince.
But the Magnitsky Act comes in the form of a request from Congress, and the President has the discretion to act or not (but must decide within 120 days).

With that, I suspect this was nothing more than grandstanding.  Trump will not (can not) act for the reasons we discussed last month.

From a security standpoint, Saudi Arabia is a critical alliance in the fight to defeat ISIS and check of Iran. Maybe more importantly, pushing Saudi Arabia toward an alignment with China and Russia in the long game would be a grave danger for the U.S.
Taking action against the Crown Prince would jeopardize both.
So, as I said last month, Trump has been leveraging the Saudi crisis to get oil prices lower. And he’s gotten it – to the tune of a 35% decline in oil prices. And to this point, it appears Trump has settled on the sanctions that have already been levied already on Saudi individuals involved in the Khashoggi murder (which don’t include the Crown Prince).

If he sanctioned the Saudi government over this, oil prices would probably explode and stocks would crash (not really an option).

We’ll see how stocks react tomorrow after a day of reflection.  I suspect Tuesday created another buying opportunity.

What stocks do you buy?  Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Fed ‘Near The End’ On Rate Normalization

November 28, 5:00 pm EST

Yesterday we talked about the perfect setup, coming into today’s scheduled speech by the Fed Chair, for Powell to signal a pause in the Fed’s rate normalization program.

The sharp fall in oil prices in the past two months has taken some of the edge off of inflation concerns.  And there has already been evidence that the speed at which rates have moved has caused a slowdown in housing. So this was the perfect opportunity for the Fed Chair to give a clear signal that they are near the end on rate normalization.

Indeed, that’s what we got.  And that did indeed provide a positive catalyst for stocks, and I suspect it will be a positive catalyst for what has been some deterioration of confidence in the economic outlook.

That all aligns nicely with the technical picture we’ve been watching in stocks.

Here’s another look at the bounce off of this big trendline for stocks, that continues to grow in scale.

So this adjustment in the market’s perception on the interest rate outlook is a catalyst for what could be a very aggressive rebound in stocks into the year end.  More fuel would be a positive outcome from the Trump/Xi meetings on U.S./China trade, which will come toward the end of the week.

With the above in mind, among the biggest rebounds in global markets should be emerging markets.
As of last month, the MSCI Emerging Markets Index was down 27% from the January highs.
What stocks do you buy?  Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Collapse In Oil Prices Have Taken The Pressure Off Of The Fed

November 27, 5:00 pm EST

Earlier this month, we talked about the big fall in oil prices.

If we look back over the past five years, the magnitude of that move is only matched (or exceeded) in cases where there was significant manipulation in the oil market and/or a systemically threatening oil price crash.

As we’ve discussed, the pressure on oil this time around seems to be about manipulation — and appears to have everything to do with Trump’s leverage over the Saudis (related to sanctioning the Kingdom over the Khashoggi murder).

But we’ve now traded down to the important $50 mark.  That’s 35% from the highs of just October 3.  And this is an inflection point where it could go bad, but it also could present a goldilocks scenario (a level that’s just right for the U.S. economy).

Sure, cheap oil is good for consumers.  You save a few extra bucks at the pump.  But in the current environment, it presents risks to the financial system.  The shale industry’s break-even point on producing oil is said to be $50.  Below that, they dial down production, lay off workers, stop investing and quickly become a default risk to their creditors (U.S. and global banks).  We saw it back in 2016.  The same can be said for those countries heavily dependent on oil revenues (i.e. they become default risks as oil prices move lower).

That’s the bad side. The good side to the oil price slide?  As we’ve discussed, it should relieve some pressure on the Fed. The Fed likes totalk about their inflation readings excluding effects of volatile oil prices.  But they have a record of acting on monetary policy when oil is moving.

The bottom line: Oil plays a big role in their view on inflation.  And given the quick drop in oil prices, the Fed’s concerns about inflation should be cooling. Again, this opens up the door for the Fed Chair, tomorrow, to take the opportunity in a prepared speech at the Economic Club of New York, to signal a pause coming in the Fed’s rate normalization program. That would be a positive catalyst for economic and market confidence.

What stocks do you buy?  Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Trump Is Settled On Saudi Sanctions — Good For Stocks

November 21, 5:00 pm EST

We looked at the below chart yesterday.  We’re continuing to get a bounce off of this big trend line that incorporates the lows of the oil price crash of 2016, and the election later that year. 

Importantly, as I said yesterday, the stock declines of this year appear to have everything to do with Saudi capital flows — and less to do with all of the hand-wringing issues you hear and read in the financial media.

As we discussed last month, the top for stocks in January and the top in October, both align perfectly with the timing of events in Saudi Arabia.

Let’s revisit that timeline from my October note: “Remember, last November the Saudi Crown Prince Salam, successor to the King, ordered the arrest of many of the most powerful Saudi Princes, country ministers and business people in Saudi Arabia on corruption charges. More than $100 billion in assets were claimed to be under investigation (a third frozen) in what was called the “Saudi purge.”

These subjects were detained for nearly three months. The timing of their release and the market correction of early this year is where it all begins to align.

They were released on Saturday, January 27. S&P futures open for trading on Sunday night. Stocks topped that night and proceeded to drop 12% in six days. And rallies in stocks were sold aggressively for the better part of the next seven months.

Fast forward to this month and we have the murder of the journalist who was a public critic of the Crown Prince Salam. As the details of story pointed back to Salam, on October 3, U.S. bond markets got hit (to the hour of news hitting the wires) and stocks topped that day, and have proceeded to drop by more than 8%.

Clearly, the destabilization in Saudi Arabia has put considerable assets in jeopardy. With that, those in control of those assets have likely been scrambling to protect them, as U.S. Congress pushes for sanctions, which could include freezing Saudi assets.”

Now, over the past few weeks, we’ve seen some back and forth onwhether or not the Saudi Crown Prince would be implicated in the Khashoggi murder and/or, most importantly, sanctioned.  And the moves in stocks have been reflecting that whipsaw.  Remember, the Saudi sovereign wealth fund is worth more than half a trillion dollars.  They’ve been heavily invested in the tech giants.  And those (the tech giants) have led the way down.  Any uptick in the probability that we see more U.S.-based Saudi assets frozen or threatened, has created selling in stocks.

But as we said yesterday, Trump seems to be settled on the sanctions that have already been levied (excluding the Crown Prince and broader government).  That’s a positive for stocks.

And he’s leveraging the Saudi crisis to get oil prices lower.  Remember, we talked about the oil bargaining chip earlier this month.  Here’s an excerpt from my November 9 note:  “It’s probably no coincidence that the slide in oil prices started the day that the Saudi Crown Prince was implicated in journalist Jamal Khashoggi’s disappearance. Remember, the bond market got hit, to the hour, of this headline hitting …
Stocks topped a few hours later, and that was the top for oil prices too.
When Trump spoke with the Saudi Crown Prince on the phone on October 16, oil was trading above $71. We haven’t seen that level since.
Trump‘s position on high oil prices is no secret. He doesn’t like it. And Saudi Arabia is well aware. Is it possible that Trump has leverage and is using it? Likely. Is it possible that the Crown Prince is willing play ball with U.S. demands (on oil production) in order to avoid sanctions (or worse).“
Interestingly, Trump is now confirming the above with his statements over the past couple of days.
Bottom line:  When stocks decline for non-fundamental reasons, it’s a huge buying opportunity.  This is one of those moments.
What stocks do you buy?  Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Have a great Thanksgiving!
Trump’s Handling Of Saudi Arabia Is A Big Deal For Markets

November 20, 5:00 pm EST

Stocks hit this big trendline today and bounced.

This line comes in from the oil price crash-induced lows of 2016.  And, as you can see, we have the bottom of the fallout in the futures market on election night, and the lows of last month. This area also puts the S&P 500 right at a 10% decline from the October highs.

Is it the bottom of this sharp two-day slide?  Maybe.

Let’s talk about why stocks have gotten hit, again, this week.

Last week, it looked like the fog had lifted.  We were looking for the Fed to signal a pause on rates.  We got it, to a degree, with the message that the ‘normalization phase’ for rates was in the “final days.”  We had the U.S. Treasury name those Saudis to be sanctioned in the Khashoggi murder.  The Crown Prince wasn’t one of them – which means the Kingdom was not being sanctioned.  And we had news that progress was being made on U.S. China trade.  That was all good news for stocks.

But the latter two of these hurdles for stocks was reversed over the weekend.

We had some confrontational talk from Pence and Xi.  And we had news that the CIA investigation would implicate the Crown Prince in the murder of Khashoggi.

Everyone is well aware of the U.S./China trade implications.  As for the Saudi, implications, it’s more complicated.  First, Trump has been trying to make the case for Saudi Arabia’s critical alliance in the fight to defeat ISIS and check of Iran.  Maybe more importantly, pushing Saudi Arabia toward an alignment with China and Russia in the long-game would be a grave danger for the U.S.

Taking action against the Crown Prince would jeopardize both.

So, as I suggested earlier in the month, Trump seems to be leveraging the Saudi crisis to get oil prices lower.  He said as much today. And to this point, it appears that he’s settled on the sanctions that have already been levied.

If that holds, that’s good for stocks.  The risk, given the amount of wealth Saudi Arabia has in U.S. capital markets, is any change in that stance that might mean broad sanctions on the Kingdom of Saudi Arabia.  That’s where Saudi liquidations, in effort to secure assets, is dangerous for the stock market.

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.
Stocks Trading On Fear, Not Reality

November 16, 5:00 pm EST

Stocks end the week on a strong note.

We’ve talked all week about the catalysts to fuel the continuation of recovery in the stock market.  The Fed’s signalling that their rate normalization program is in the final steps was a big one.  We’ve also possibly cleared the overhang of the potential for broad sanctions on the Saudi government.  And now we’re getting movement on the China/U.S. trade negotiations.

Again, just in the past few days we’ve cleared a lot of the fog that has been hanging over stocks.

With that, as we head into the weekend, let’s take a look at a few charts …

On Wednesday, we looked at this chart above.  This big retracement level was setting up nice, technically, for another leg higher in the post correction recovery for stocks.  It looks like we’re getting it.

And I continue to think this may all end in a sharp V-shaped recovery.  In the chart below, you can see what the slope of that move may look like.  
The stock market fears are driven by “what-ifs.”  Meanwhile the reality (the “what is”) is clearly supportive of much higher stock prices: strong economic growth, subdued inflation, strong corporate earnings and cheap valuations.
Have a great weekend!
Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.