China’s Plan to Tank Their Own Stock Market

Statue

This post China’s Plan to Tank Their Own Stock Market appeared first on Daily Reckoning.

When I say the fix is in for FXI that’s not meant to be mysterious. FXI is the ticker symbol for a U.S. exchange-traded fund (ETF) composed of the largest Chinese stocks.

The phrase “the fix is in” simply refers to government-backed manipulation. When you combine the two into a government plan to tank their own stock market, at least to a point, you’re as close to a sure thing as stock market indexes allow these days. That’s exactly what’s going on in China right now.

A currency devaluation will likely lead to a stock market collapse, but it’s a trade-off China is willing to accept because a cheaper currency will stimulate exports and support jobs.

China’s motives in market manipulation are about social stability more than profit and loss. Of course, the Chinese have nothing against making money; they’re good at it. But China is controlled by a Communist Party dictatorship that is most concerned about its self-perpetuation.

That self-perpetuation can involve prison camps, thought control and torture if needed, but on a day-to-day basis it’s more likely to involve avoidance of inflation, unemployment and market panics (versus slow, steady declines).

Investors with vague or no recollection of the 1989 Tiananmen Square protest and massacre in Beijing have been taught to recall the event as a “pro-democracy” student rally complete with a 33-foot-tall papier-mâché statue called the Goddess of Democracy that was destroyed as the military cleared the square. That’s a highly selective and misleading portrait of the overall protest.

It’s true that student demonstrators placed demands for more freedom of the press and freedom of speech in their petitions. Yet the origins of the protest were economic. Rapid economic growth in the 1980s had resulted in large gains for some but had marginalized and disgruntled many others.

Inflation was a real tax on those with limited resources and an easily avoided inconvenience for the rich. It was these economic grievances — inequality and inflation — that gave rise to the protests. The pro-democracy aspects were tacked on in the later stages as the crowds grew.

Initially the Communist Party leadership was divided between moderates, like Zhao Ziyang, who favored some dialogue with the protesters, and hard-liners, like de facto leader Deng Xiaoping, who favored a forced breakup of the protest and the arrest of its leaders.

In the end, the hard-liners got the upper hand and the result was a violent military attack on the demonstration. Death estimates vary widely and cannot be verified but range from 1,000 to 10,000 dead protesters. Communist Party leadership itself was thrown into chaos in the aftermath of Tiananmen with Zhao Ziyang being purged and Jiang Zemin being installed as the new hard-line party leader.

This statue, located at the University of British Columbia in Vancouver, is a replica of the Goddess of Democracy first displayed during the Beijing Tiananmen Square protests in April–June 1989.

The ghosts of Tiananmen …read more

Keep Your Eye on China

This post Keep Your Eye on China appeared first on Daily Reckoning.

The trade war is beginning to take its toll on China as the Chinese economy is losing momentum. Beijing has pledged to increase small-business lending and increase infrastructure investment to help offset the impact.

Ting Lu, chief China economist at Nomura Intl. in Hong Kong, said, for example, “The Chinese economy will get worse before getting better. It takes several months to turn around. Beijing will step up credit easing and fiscal measures to deliver a recovery and prevent financial troubles such as a rise of bond defaults.”

But with a debt-to-GDP ratio of about 250%, China is already well into the danger zone. How much more debt-financed stimulus can it take?

Research by economists Kenneth Rogoff and Carmen Reinhart indicates that debt-to-GDP becomes a drag on the economy at 90%.

The Chinese financial sector (banks, insurance, asset management, shadow banking, etc.) is totally insolvent. Consumers’ savings have been used to finance ghost cities, white elephants, capital flight, Ponzi schemes, bribes and kickbacks.

There are some real assets to show (their trains are the best in the world) and some growth, but not nearly enough to cover the liabilities that have been created in the form of bank deposits, corporate bonds, “wealth management products,” intercompany loans, etc.

On the other hand, China has enough in hard currency reserves to clean up the mess. China will need hard currency in addition to yuan money printing to handle the external dollar-denominated debt.

The policy issue for China, therefore, is when and how they go about the cleanup. If China moves too quickly, they risk slowing the economy, slowing job creation and delegitimizing the Communist Party.

If China waits too long, they risk an uncontrolled panic and a liquidity crisis, which can grow far worse than the initial problem through contagion. Chinese contagion also has the potential to go global.

Given this dilemma, China is trying a Goldilocks approach of not too fast and not too slow. This Goldilocks plan has three parts:

1. Keep the problem from getting worse than it already is.

2. Shut down the worst institutions in a relatively transparent “no drama” manner.

3. Play for time with regard to the rest of the financial system and try to grow out of the problem.

Will China be able to pull off this Goldilocks approach to a potential credit crisis? Of course not. Nobody’s that good or that lucky. Still, the Communists will try and may be able to keep the greatest Ponzi scheme in history afloat in China for another year or so.

The endgame is still a financial crisis that the Chinese won’t see coming. In that case, China’s only solutions are to close the capital account, devalue the currency, nationalize the financial sector and put the malefactors in jail.

This story is getting worse because of the escalating trade war that shows no signs of letting up. On top of it we now must add an emerging-markets crisis as the crisis in Turkey threatens a spillover.

The problem …read more

Dollar ↓ Profits ↑

Zach Scheidt

This post Dollar ↓ Profits ↑ appeared first on Daily Reckoning.

Most stock investors couldn’t care less about the dollar.

When it comes to the dollar, most people here in the U.S and abroad have just one concern: what can a dollar buy me?

And when you start talking about the dollar as an asset in the currency markets, investor’s eyes glaze over.

Who could blame them?

The math that goes into valuing a currency and predicting its path is practically the stuff of rocket scientists.

To be honest, I leave the art of currency valuation to people much smarter than me.

But as a trader, I do follow the movements of the U.S. dollar closely.

And you should, too. Here’s why…

Americans buy a ton of imported goods like cars, televisions and washing machines. And overseas, consumers buy similar goods that originate in the U.S.

The same concept applies to the financial markets.

Allow me to explain…

The U.S. boasts the world’s largest stock market. And most commodities such as oil and gold are priced in U.S. dollars, too.

So when the value of the dollar falls against other currencies, it makes assets priced in dollars cheaper for foreign investors.

Conversely, when the dollar’s value rises… these assets become more expensive.

Since the start of the so-called “trade war,” the dollar has risen against the currencies of China, the European Union, and most other emerging market nations.

No surprise here…

As one of the world’s largest importer of goods, America has more firepower in a trade war than anyone else.

So as the strongest nation of those “at war,” the dollar has become a safe haven for global investors.

And the dollar’s rise has kept a lid on gains of stocks and commodities.

But…

As your editor Zach Scheidt has talked about this for months here in The Daily Edge, the spat over global trade could be over just as soon as it began.

In fact, the markets aren’t buying a protracted fight at all.

The S&P 500 has not only made up its trade war losses on the year — but the index is now closing in on a new all-time high.

The volatility index — otherwise known as the fear gauge — remains well below the 20 level that would signal real fear of falling stocks.

And gold — the world’s oldest safe haven — has been making fresh lows for months now.

If the smart money were truly scared of a global economic collapse, gold would be soaring — and risky assets like stocks would be tanking.

So…

I would bet on the markets, rather than the fear-mongering talking heads.

And when the trade war fighting stops, the dollar — which had been in a solid downtrend before the trade talks — will resume its dive.

And when this happens, the stocks that have taken the biggest beating on talk of tariffs — metals and mining companies — stand to soar.

Yours for weekly profits,

Alan Knuckman
Floor Trader

The post Dollar ↓ Profits ↑ appeared first on Daily Reckoning.

…read more

The Strongest Earnings Since When???

best earnings chart

This post The Strongest Earnings Since When??? appeared first on Daily Reckoning.

What were you doing in the fall of 2010?

At my house, we were getting used to the idea of having four kids in school AND 2-year-old twin girls that we were potty training.

Talk about a lot to keep track of!

Investors had a lot on their plates in 2010 as well, thanks to a surge in profits from companies that were rebounding from the great recession.

In the fourth quarter of 2010, companies were reporting an astounding 30% increase in earnings growth. That’s the stuff bull markets are made of — and incidentally, we were in the very early stages of what has turned out to be one of the best markets for investors in generations!

I bring up this strong season of earnings growth because today we’re actually in the same environment!

According to the latest data, this earnings season is turning out to be the strongest one since 2010, giving investors a great environment for building their wealth.

So what does that mean for us and our income investments?

Strong Earnings Lead to Buybacks and Dividend Hikes

As more and more companies report results for the second quarter, one thing is becoming very clear.

The strong economy is driving sales steadily higher. And tax cuts are allowing companies to grow their profits exponentially!

That’s exactly what income investors want to see.

But the next question is what will companies do with these profits?

In many environments, I would argue that companies should look for ways to reinvest their profits into new growth opportunities. That way gains can continue to compound and future profits will also grow.

But we’re in a bit of a unique period right now where growth is pretty much a given and companies can look at other options for cash they’re pulling in.

This year, our income plays are doing two important things with extra cash:

They’re paying larger dividends…

And they’re buying back shares.

As an income investor, you know exactly what higher dividends mean for your cash flow. It means you personally have more to spend on your day-to-day expenses. (Or if you’re reinvesting your dividends, you are now able to buy more new shares with the cash that comes into your account.)

But what about the share buybacks?

When a company buys back shares, it means they’re essentially retiring the shares and leaving fewer shares available for investors. This is great news for us.

Because next quarter, there will be fewer shares for our companies to divide income between. So it means future earnings per share will be higher. And it means our companies will have even more cash to give to us in the form of dividends.

So this strong earnings season is a very big positive for our income investments.

Breaking out and Heading Higher

As I look at the stock market right now, I’m very encouraged to see the S&P 500 moving above the key 2,800 level.

You need to know that since the market started pulling back in February, the S&P has tried several times …read more

This Time Is Different — No, Really

Chart

This post This Time Is Different — No, Really appeared first on Daily Reckoning.

“Experience keeps a dear school,” said Ben Franklin, “but fools will learn in no other.”

The wise man remembers. The fool forgets.

The wise man listens. The fool talks.

He ignores both the living and the dead… the immemorial dead, whose whispers carry the distilled wisdom of history.

No — this time is different, comes the fool’s eternal cry.

The past is of no use to me.

Rising economic interdependence had rendered war obsolete, argued the foolish author of The Great Illusion in 1909.

The events of 1914 — a mere five years hence — revealed the true illusion:

The illusion that rising economic interdependence had rendered war obsolete.

The dead knew better. But no one sought their ghostly counsel.

The stock market had attained “a permanently high plateau,” boasted leading economist Irving Fisher on Oct. 16, 1929.

The 1920s had roared… and the arc of industry bent in one direction — up.

A cataclysm was all but impossible.

“Black Tuesday” followed two weeks after Fisher’s fateful words.

The crash cleaned him out.

If only he had felt the dead tugging at his elbow… warning him.

They would have reminded him about the Panic of 1819… the Panic of 1857… of 1873… of 1893… of 1901… of 1907.

The longer departed would have recalled the Financial Panic of A.D. 33. The banking crisis of 1345. Tulip mania. The South Sea Bubble. The Mississippi Bubble.

And more… many more.

“This time” was no different.

But with the hubris so typical of the living, Fisher turned away.

Of course he was not alone…

The Business Week, on the widespread illusion that “this time is different,” dated Nov. 2, 1929:

This illusion is summed up in the phrase “the new era.” The phrase itself is not new. Every period of speculation rediscovers it… During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way… the fundamental conditions and requirements of progress and prosperity have changed, that old economic principles have been abrogated… that business profits are destined to grow faster and without limit, and that the expansion of credit can have no end.

Does this passage not describe our very times?

You do recall the tech boom?

We were told the internet had revolutionized the economy.

Companies no longer needed to show profits… or revenue.

“Eyeballs” were enough to justify wildly inflated stock valuations.

This time was different — until it wasn’t.

The business all came to grief in 2000–01.

We next draw your attention to what Doug Ramsey, CIO of Leuthold Group, calls the “scariest chart” in his database:

It tracks the price-to-sales ratio, one indicator of a stock’s value.

This metric lives in the shadow of the far more common price-earnings ratio.

But since it is based on actual revenue, many consider it a truer reading and less easily manipulated.

What does the chart reveal?

That today’s price-to-sales ratio excels that of the tech boom.

Ramsey on the parallels to today:

The statistical similarities …read more

967% Gains So Far… And This Obscure Investment Could Double It

Fairfax India

This post 967% Gains So Far… And This Obscure Investment Could Double It appeared first on Daily Reckoning.

Are you ready for a huge, high-conviction investment bet that one of the best hedge fund managers of the past 20 years just made?

I don’t know why I asked, I can’t hear what your answer is anyway!

I’ll get straight to the point.

The hedge fund manager that I’m talking about is Monish Pabrai. And the high conviction investment bet that Pabrai just made is on… India.

That’s right. As of today, Pabrai has 40 percent of his fund invested in India and just 0.1 percent of his billion dollar fund invested in the United States.1

That means just $1 million is invested in America, while $400 million is invested in India.

You don’t see that every day from a hedge fund manager!

I’ve followed Pabrai closely for 20 years. And while I once recall him owning a small basket of Japanese stocks that traded below book value, I don’t ever recall any sort of international high-conviction investment like this.

The man obviously thinks that Indian stocks represent by far the best value in the investment world today. His track record would suggest that we should pay attention.

The Pabrai Philosophy — Concentrated And Careful

Since launching his fund near the end of 2000, Pabrai has generated a cumulative return of 967 percent for his investors. That performance smashes the 168 percent that the S&P 500 has produced over that time.

What I particularly love about following Pabrai is that the man runs a very concentrated portfolio.  He holds few positions and only invests when he has extremely high conviction.

When he does invest, he invests a meaningful amount.

Because Pabrai owns only a small number of positions at any given time, he can’t afford to make major mistakes. One big error would ruin his overall performance.

That means that each and every investment is heavily scrutinized.

His long-term track record tells you what kind of a stock picker he is.

With 40 percent of his portfolio in India, his conviction level in the opportunity presented in that emerging nation today must be off the charts.

With a little detective work, I was able to determine that the Indian housing finance sector is the particular segment of Indian stocks that Pabrai is really infatuated with.2

His logic is sound.

Indian mortgages as a percentage of owned home value is ludicrously low. Just 6 percent of the value of Indian homes has been pledged as collateral for mortgages. The norm in other emerging economies is almost 20 percent, and in the United States it is closer to 40 percent.

As India continues to see millions and millions of people climb into the middle class, demand for financing the purchase of a home is going to skyrocket. Pabrai believes that India’s housing finance sector is going to have to grow at 3 to 4 times the rate that Indian GDP is growing.

With India’s GDP growing at nearly 7 percent, that means the housing finance sector is going to be growing …read more

Buybacks Will Keep the Bull Running

This post Buybacks Will Keep the Bull Running appeared first on Daily Reckoning.

In the Fed’s July report to Congress, Jerome Powell unleashed what was likely the most important statement to the Trump administration. Powell said that interest rate hikes, which had been forecast to include two more hikes this year, would be executed at a gradual pace ‘for now.’

Those two coded words are very important.

The biggest banks on Wall Street will likely view those two words alone to mean that the Fed is still cautious about the economy and the financial markets. What they know is that the Fed is signaling that it reserves the right to return to its full toolkit of monetary policy options.

The Fed could apply one of three options: to further its gradual quantitative tightening (QT) program, to remain neutral, or to launch another round of quantitative easing.

The Fed bloated its balance sheet from $800 billion to a high of $4.5 trillion since the financial crisis first appeared on its radar screen. That money was allegedly used to bolster financial markets and keep the economy afloat in the economic aftermath of the 2008 crash.

The Fed added $700 billion to its balance sheet from September 2008 to November 2014. Incidentally, that figure was more than the U.S. nominal GDP expanded over the same period.

It’s hard to believe, but this November will mark the 10th anniversary of quantitative easing (QE).

And what do we have to show for it?

As Stephen Roach, former chairman of Morgan Stanley Asia notes:

The verdict on QE is mixed: the first tranche (QE1) was very successful in arresting a wrenching financial crisis in 2009, but the subsequent rounds (QE2 and QE3) were far less effective. The Fed mistakenly believed that what worked during the crisis would work equally well afterwards.

Wall Street made out like bandits, while Main Street mostly got crumbs. The majority of Americans saw very few benefits from QE.

Now that process has swung into reverse — somewhat.

At the end of last year, the Federal Reserve announced it would aim to reduce the size of its massive book of assets by $50 billion per month as part of its efforts to ‘taper’ its quantitative easing program.

But the devil is in the details. As one CNBC article notes, “the Federal Reserve’s efforts to unwind its mammoth portfolio of bonds isn’t as easy as advertised.”

It turns out that the money the Fed gets from the payments coming from the mortgage-backed-securities (MBS) it holds, is “running below the capped level of payments it has targeted for runoff later this year.”

What this means is that that the Fed isn’t hitting the proper levels to meet its own book reduction goals.

Either it couldn’t compute its own book proceeds properly — or it was lying to test the markets for a downside reaction while tapering.

Yes, quantitative tightening is happening — the Fed has actually reduced its books by $100 billion so far this year on top of $67 billion last year — it’s just unfolding …read more

How Trade War Can Actually Boost the Stock Market

This post How Trade War Can Actually Boost the Stock Market appeared first on Daily Reckoning.

Round and round it goes, and where it stops, nobody knows…

China announced plans yesterday to impose 25% tariffs on an additional $16 billion worth of U.S. products.

The imposts enter effect on Aug. 23 — the precise date when the United States imposes its own 25% tariffs on $16 billion in Chinese goods.

The Chinese government claims it was “forced to retaliate.”

And at a perfect one for one, Chinese retaliation is nothing if not measured.

But where does it end?

Wars are easy to start… but not always easy to stop.

And if the U.S. tariffs were designed to lower the trade deficit with China, the business has not yet matched its advertising.

The trade deficit scaled a record high in June — nearly $29 billion.

At $28.1 billion, July’s trade deficit ran a close second.

With bated breath we await August’s data.

Stocks were mostly lower today on the news.

The Dow Jones closed the day 45 points in red territory.

The S&P was flat, while the Nasdaq scratched out a slender five-point gain.

But could trade war fears actually propel markets higher?

A scandalous question, to be certain.

Are not these fears at least partly responsible for this year’s roller-coasting stock market?

After all, tariffs generally raise the costs of business inputs.

These costs ripple throughout the economy… like a splashing stone sends ripples across a still lake surface.

Businesses pull in their oars… lower their sights… cancel projects and reduce investment in their growth.

We note that a survey by the National Association for Business Economics reveals 76% of economists believe current trade policies will drag on the economy.

But because of this year’s tax cuts, corporate coffers burst with cash.

If trade wars keep it out of productive use… what to do with the overflow?

The answer, for many, is obvious:

Buy your own stock. 

Explains Reuters:

The escalating trade war between the United States and China may prompt U.S. companies to shift money they had earmarked for capital expenditures into stock buybacks instead, pushing record levels of corporate share repurchases even higher.

Our own Nomi Prins, in affirmation:

In a world of uncertainty, cash is king. With the $34 billion worth of tariffs on goods from the U.S. and China, and the possibility of Trump slapping another $200 billion of tariffs on Chinese goods, companies are running scared.

That kind of incentive is a strong catalyst for banks to deploy a chunk of their tax cut savings into buying their own stocks.

Second-quarter buybacks are up 57% over last year’s.

Goldman Sachs now projects that stock repurchases will total $1 trillion this year — 46% higher than last year.

And as we explained last week, Apple’s record buybacks are partly responsible for it becoming the first U.S. corporation to a $1 trillion market cap.

What a corporation does with its money is none of our business — or anyone else’s but its shareholders.

Whether it spends its bounty on buybacks, thumbtacks, or bootblacks… it is all one to us.

But an unwholesomeness hangs about the entire …read more

Nobody Else Believes Me… Do You?

Investors still skeptical

This post Nobody Else Believes Me… Do You? appeared first on Daily Reckoning.

For months I’ve been pounding the table on the U.S. market.

I’ve been telling you how the economy is strong, and how the wealth effect is spreading across the country which is leaving people with money to spend and capital to invest.

I’ve talked about the strong job market, about rising wages, and about higher home prices and growing corporate earnings…

And as I’ve explained, all of these factors are bound to drive the market higher once this pullback runs its course.

But one chart I came across today shows that not many of you are listening. And I’m worried that you might be one of the many people who will be left behind…

Retail Investors are Missing Out

Six months after the words “trade war” started hitting media headlines, the U.S. stock market is very close to hitting all-time highs once again.

As I type, the S&P 500 is within a half percent of the high hit in January. And there’s a good chance that by the time you open your inbox and read this alert, the market may already be trading at a brand new high.

But most investors won’t be celebrating the move.

Instead, they’ll be kicking themselves for pulling out of the market when things got scary. And they’ll be trying to find the best way to get their money back into the market before it’s too late.

Take a look at the sad chart below to see what I’m talking about:

You can see the red line (which is the U.S. stock market) inching closer to hitting new highs.

But at the same time, the green line shows the level of confidence that individual investors have in the market. With the green line so much lower, I can tell that investors are skeptical and have pulled money out of the market because they’re afraid.

Now, it doesn’t take a rocket scientist to figure out that you don’t want money on the sidelines when the market is hitting a new high. But that’s exactly the position most Americans are in right now. Because they’ve been told to be fearful of a trade war.

It’s sad for the people who aren’t participating in the market right now.

But if you’ve been listening to my advice and you have your money invested in the strongest companies that are growing earnings, this chart is actually very exciting! Because it tells you there is a lot of money on the sidelines just waiting to help you grow your investment profits.

Let me explain further…

When Sentiment Shifts, Stocks Go Parabolic

If you think the current market rebound is good, wait till you see what happens when investor sentiment starts to shift.

Remember all those investors who are afraid of a trade war right now?

Those same investors will soon have a new fear — the fear of missing out on the market’s rally!

It’s simply human nature. Some investors follow their “instinct” and get out at exactly the wrong times, and then get back …read more

U.S. Must Turn to Russia to Contain China

This post U.S. Must Turn to Russia to Contain China appeared first on Daily Reckoning.

Vladimir Putin stands accused in the media and global public opinion of rigging his recent reelection, imprisoning his political enemies, murdering Russian spies turned double-agent, meddling in Western elections, seizing Crimea, destabilizing Ukraine, supporting a murderous dictator in Syria and exporting arms to terrorist nations like Iran.

At the same time, the country of Russia is more than Mr. Putin, despite his authoritarian and heavy-handed methods. Russia is the world’s 12th-largest economy, with a GDP in excess of $1.5 trillion, larger than many developed economies such as Australia (No. 13), Spain (No. 14) and the Netherlands (No. 18).

Its export sector produces a positive balance of trade for Russia, currently running at over $16 billion per month. Russia has not had a trade deficit in over 20 years. Russia is also the world’s largest oil producer, with output of 10.6 million barrels per day, larger than both Saudi Arabia and the United States.

Russia has the largest landmass of any country in the world and a population of 144 million people, the ninth largest of any country. Russia is also the third-largest gold-producing nation in the world, with total production of 250 tons per year, about 8% of total global output and solidly ahead of the U.S., Canada and South Africa.

Russia is highly competitive in the export of nuclear power plants, advanced weaponry, space technology, agricultural products and it has an educated workforce.

Russia’s government debt-to-GDP ratio is 12.6%, which is trivial compared with 253% for Japan, 105% for the United States and 68% for Germany. Russia’s external dollar-denominated debt is also quite low compared with the huge dollar-debt burdens of other emerging-market economies such as Turkey, Indonesia and China.

Under the steady leadership of central bank head Elvira Nabiullina, the Central Bank of Russia has rebuilt its hard currency reserves after those reserves were severely depleted in 2015 following the collapse in oil prices that began in 2014.

Total gold reserves rose from 1,275 tons in July 2015 to about 2,000 tons today. Russia’s gold-to-GDP ratio is the highest in the world and more than double those of the U.S. and China.

In short, Russia is a country to be reckoned with despite the intense dislike for its leader from Western powers. It can be disliked but it cannot be ignored.

Russia is even more important geopolitically than these favorable metrics suggest. Russia and the U.S. are likely to improve relations and move closer together despite the current animosity over election meddling and the attempted murders of ex-Russian spies.

The reason for this coming thaw has to do with the dynamics of global geopolitics. There are only three countries in the world that are rightly regarded as primary powers — the U.S., Russia and China. These three are the only superpowers. Some analysts may be surprised to see Russia on the superpower list, but the facts are indisputable.

More to the point, Russia is a nuclear superpower at least on par …read more

U.S. Plans to Destroy China’s Superpower Ambitions?

This post U.S. Plans to Destroy China’s Superpower Ambitions? appeared first on Daily Reckoning.

Is the United States trying to eliminate China as an economic threat?

And is Trump recruiting a critical ally in support thereof?

Today we peer behind the sturm und drang of daily events… and pursue the deep currents of strategy beneath the roiling surface.

Our tale begins in 2015 with a Chinese government report — Made in China 2025.

It was released to the blast of trumpets… and great fanfare.

The report details China’s ambitions to lead in such fields as robotics, aerospace, clean energy and advanced materials.

By 2025, for example, China intends to seize 70% of market share for “basic core components and important basic materials” in strategic industries.

The report represents a critical step towards Chinese President Xi Jinping’s distant vision:

China’s being a truly global superpower by 2050.

But China is evidently concerned that its ambitions have attracted worried interest around the world…

Since June, the Chinese government appears to have suppressed all mention of Made in China 2025.

State news agency Xinhua mentioned the report 140 times in the first five months of the year, Reuters reports.

But not once since June 5.

One Western diplomat — who refused to be identified — told Reuters:

“China is apparently starting to adjust to the blowback caused by the heavy propaganda… They won’t stop doing it, [but] the way they talk about it is changing.”

“Hide your strength, bide your time,” advised late Chinese leader Deng Xiaoping.

Perhaps the Chinese authorities are following Deng’s counsel.

But official Washington is on alert…

This June, Trump’s senior trade adviser Peter Navarro said of Made in China 2025:

The Chinese are now suppressing it from being referenced in public because they don’t want people to know the intent of the plan, which is to capture 70% of global production in the emerging industries of the future within the next seven years… These are the future of the world and of America, and China cannot have 70% of production of these industries by 2025.

Navarro has authored a book yielding some insight into his perspective on China:

Death by China.

Navarro’s boss has expressed identical sentiment:

“If we lose the industries of the future,” warned Trump, “we won’t have a future.”

Can the United States derail — or at least delay — China’s superpower ambitions?

Yes, says Eric Peters, CIO of One River Asset Management:

“Engineering a decade of rolling Chinese financial crises would be the most effective foreign policy the U.S. could run.”

But how, specifically?

“The best way to bring Beijing to its knees is by running a tight monetary policy in the U.S.,” continued Mr. Peters.

We can’t help note the U.S. is presently running a tight monetary policy — or tighter, at least.

The Federal Reserve is in midcourse of a rate hike cycle that could endure through 2020.

It has also taken to reducing its balance sheet — a form of tightening.

A stronger dollar attracts investors away from weaker currencies, such as the Chinese yuan.

More investments in dollar-denominated assets translates to fewer investments in yuan-denominated assets… thus less investment …read more

Signs Point to a Global Slowdown

Chart 1

This post Signs Point to a Global Slowdown appeared first on Daily Reckoning.

As gold has struggled through 2018, (down over 10% from $1,363/oz. on January 25 to $1,215/oz. today), my forecast for a strong year-end for gold has remained unchanged.

This forecast is based on a better-late-than-never realization by the Fed that they are overtightening into fundamental economic weakness, followed quickly by a full-reversal flip to easing in the form of pauses on rate hikes in September and December.

Those pauses will be an admission the Fed sees no way out of its multiple rounds of QE and extended zero interest rate policy from 2008 to 2013 without causing a new recession. Once that occurs, inflation is just a matter of time. Gold will respond accordingly.

Gold above $1,400/oz. by year-end is a distinct probability in my view. Even if gold rallies to the January 2018 high of $1,363/oz. by year-end, that’s an 11.5% gain in just a few month’s time.

Let’s drill down a bit.

Let’s start with the Fed. The reality of Fed tightening is beyond dispute. The Fed is raising interest rates 1% per year in four separate 0.25% hikes each March, June, September and December. (The exception is if the Fed “pauses” based on weak stock markets, employment, or disinflationary data, a subject to which we’ll return). The Fed is also slashing its balance sheet about $600 billion per year at its current tempo.

The equivalent rate hike impact of this balance sheet reduction is uncertain because this kind of shrinkage has never been done before in the 105-year history of the Fed. However, the best estimates are that the impact is roughly equivalent to another 1% rate hike per year.

Combining the actual rate hikes with the implied rate hikes of balance sheet reduction means the Fed is raising nominal rates about 2% per year starting from a zero rate level in late 2015. Actual inflation has risen slightly, but not more than about 0.50% per year over the past six months. The bottom line is that real rates (net of inflation) are going up about 1.5% per year under current policy.

From a zero base line, that’s a huge increase.

Those rate hikes would be fine if the economy were fundamentally strong, but it’s not. Real growth in Q2 2018 was 4.1%, but over 4.7% of that real growth was consumption, fixed investment (mostly commercial) and higher exports (getting ahead of tariffs).

The other components were either small (government consumption was +0.4%) or negative (private inventories were -1.1%). Q2 growth looks temporary and artificially bunched in a single quarter. Lower growth and a leveling out seem likely in the quarters ahead.

The Fed seems oblivious to these in-your-face negatives. The Fed is extending its growth forecasts to yield 2.27% for Q3 and Q4, and expects 2.71% for 2018 as a whole. That’s a significant boost from the 2.19% average real growth since the end of the last recession in June 2009.

By itself, that forecast offers no opening for a pause in …read more