The Latest On The Global Economy: China Has The Power And That Ain’t Good
Global investor confidence is increasingly dependent on the Chinese Communist Party keeping the party alive, while the CCP’s political instinct is to bring its private sector to heal and thus remove a source of political competition. The economic news out in the past week is making investors nervous that despite the expected good news on the COVID front, the major economies are all slowing and leaving China in pole position, with the CCP steering. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. But taken together, the market looks set to discount further bad news and fall moderately over the next few days.
Despite Trump’s protectionist policies and Biden’s amplification of them, the very issues Trump ran on regarding China continue to plague the global economy, namely high Chinese savings buoy their trade surplus. Last month’s surplus showed stronger exports (28.1% growth) and weaker imports. Tariffs have accomplished little to nothing. The only way out of the trade imbalance is for the American worker to become more productive based on what she brings to the workplace, rather than what capital brings in automating work. Higher labor productivity from a shrewder and more productive working class would raise wages without causing inflation, which would buoy the savings rate if workers invested more for their retirement. This is effectively what east Asians have done for generations, to the enormous betterment of their living standards.
China’s imbalances aren’t good for China either, since it reflects the nation’s vulnerability to the global consumer. Instead of creating a healthier domestic economy the CCP has become an economic Savonarola and the results are clear: overall credit is declining since the nonbank sector is under fire both politically and from the Evergrande collapse. So China depends on the global consumer and here the news is problematic, as the workshop of Europe — Germany — is seeing declining expectations (ZEW survey), while the consumer of last resort — America — is seeing lackluster job growth. On top of that inflation has risen due to temporary factors (pandemic issues, supply chain issues hurting vehicle production, high energy prices) which is moving the Fed to begin tapering liquidity — a move that won’t help the global economy either. Add it up and China is powering the world and thus the CCP’s political actions are ever more important to global confidence. That confidence is clearly eroding as the consolidation in the equity markets since early September is taking a long time and beginning to feel like a bear market.
On Monday I sold my position in Gibraltar Industries (ROCK); my current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).