Chinese Communists Smile At Social Strife Across The West Yet Global Wall Street Raises A Glass To Them: The Geopolitical — Stock Market Connection

China and the US couldn’t be farther apart on the economic front as a rising chorus of former bulls now agree the US is going into recession while the IMF calls China a green shoot for the global economy under the stewardship of Xi Jinping. But for the bulls a strong Chinese economy is actually a plus for the US economy since it props up global trade, while a declining US economy suits Xi and the rest of of America’s antagonists fine. The bulls make a hyper-optimistic case that US equities should look through the forthcoming recession to strong 2024 earnings and thus keep the S&P at healthy valuations, which in turn helps Chinese equities and sets off a virtuous cycle. Such comical optimism reigns supreme as the bulls are in control despite a mini-banking crisis, and look to take the market higher as the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Oil's chart is signifying global growth. The US yield curve is rising and in the current context that is bullish. Expect the S&P 500 to rise modestly over the next few days.

Key to the markets is whether China can decouple from the US and hit its 5% growth target even as the US goes into a Fed-induced recession. So far the results are mixed, as Chinese stocks are stuck in a trading range much like the US, while key commodities suggest the Chinese reopening is problematic. The risk to Xi Jinping is that middling confidence turns into revolt as the Chinese have already experienced people power via the rollback of zero-COVID. Xi needs to make his 5% target and decouple from the US not only to keep the people onside of the Chinese Communist Party but also to make China a true pole that keeps Europe partly in its camp and ensures the long-term security of the CCP, especially as his key vassal Russia faces a grim future.

But if the US can escape the mini-banking crisis unscathed saved for the long-telegraphed recession to come, then confidence in the Fed and the American system will remain moderate. And signs are emerging that confidence in China will decline no matter what government statistics the CCP releases. Al-Jazeera notes “Bao Fan, the founder of China Renaissance, has joined a long list of influential businessmen to suddenly disappear in China, and is just one of a growing number of wealthy Chinese businesspeople who have looked to Singapore — dubbed the “Switzerland of Asia” — to escape Beijing’s crackdowns on private industry and corruption. “Wealth has flooded into Singapore from China and Hong Kong in recent years,” a wealth manager at a Singaporean bank with a large number of Chinese clientele, who spoke on condition of anonymity, told Al Jazeera. “In confidential conversations, many of them have named the disappearances of Chinese business people along with uncertain economic times as primary reasons for moving money out of China,” the wealth manager said.

The CCP might be able to cajole Singapore to tighten up on high end migration since the wealthy Chinese are a disruptive force to the economy and potentially to the politics and culture of this city-state island nation as well. AJZ further notes “Chinese nationals that do not qualify to buy real estate under Singaporean law have opted to rent instead, contributing to more than a tripling of the yearly rental costs of some high-end properties. Across the city-state, rental prices increased by 33.2 percent from January 2022 to January 2023, according to the Straits Times newspaper. A lawyer in Singapore’s wealth management sector last month estimated that the number of wealth management offices more than doubled in 2022 from 700 offices to 1500, with about half of them originating from China...Singapore imports more than 90 percent of its food, leaving the country vulnerable to external headwinds. Food inflation exceeded 8 percent in January and February, significantly higher than the overall inflation rate, according to Singapore’s Department of Statistics.”

If high-end migration continues then confidence in the CCP will decline and that could result in unpredictable policy shifts, further exacerbating the global economic outlook. The risks are so profound that the wall of worry the bulls feel confident in scaling is likely to be too slippery, and the S&P breaks as earnings season begins in a few weeks.

Yesterday I added to my modest position in the inverse levered ETF SPXU. Consequently my current positions include a smaller but still large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO and inverse levered ETF SPXU.