Beware the Narrative

By David Stockman  |  February 11, 2020

Rage against this injustice; let your lives burn with a flame of decency.

– Xu Zhangrun, “When Fury Overcomes Fear” (February 4, 2020)

God bless our monetary central planners:

Federal Reserve Chairman Jerome Powell said the central bank is “closely monitoring” the extent of global economic disruptions from the coronavirus in China, singling out a risk that has made officials more likely to lower interest rates than to raise them.

The critical dynamic here is “confidence.” Neither Wall Street nor Main Street can be allowed to become hesitant or afraid, lest they stop borrowing and speculating and buying.

But controlling the narrative is not the same as controlling the virus.

Here’s Chris Scott, in an excerpt from his regular Tuesday dispatch on the state of things between the U.S. and China:

Because of the scale and scope of the crisis as well as the speed with which it’s developing, authorities haven’t been able to control information.

When it comes to information that they can control, it seems the powers that be, and specifically Xi Jinping, are totally lost.

There’s more from Chris – who cut short a recent trip to China because of the coronavirus outbreak – below.

For my part here, let’s note that authorities outside the Middle Kingdom have no more interest in accurate death totals being released than the Communist Party of China. So, official agencies and the corporate media dutifully parrot implausibly low statistics as if they reflect reality.

At the same time, China has now placed hundreds of millions of its citizens under quarantine.

Workers can’t leave their homes. Factories are idle. Ports have stopped shipping. International airlines are suspending flights to and from the country.

China’s economy is grinding to a halt.

More than 300 Chinese companies are seeking bank loans totaling at least 57.4 billion yuan ($8.2 billion) to help to soften the impact of the outbreak, reports Reuters.

According to TechNode, AccorFoxconn, the iPhone manufacturer with factories in southern China, hasn’t been allowed to restart its operations in many locations.

One broad estimate shows that a $10 billion decrease in Chinese manufacturing output would reduce the rest of the world’s output by $6.7 billion.

South Korea, Japan, and the U.S. in particular are likely to feel the impact. The ripple effect on peripheral industries could imperil production worth about $65 billion.

It’s not just the economy, either.

Chinese are tracked by the world’s most sophisticated system of electronic surveillance. As Reuters notes, this crisis provides authorities with justification for even more sweeping high-tech social control.

Indeed, partial lockdowns in Beijing and Shanghai have been announced, according to the SCMP, even as Zhejiang Province next door to Shanghai has begun to relax some controls.

Let’s turn it back over to our man who was literally just on the ground…

Requiem for a Chinese Dream

By Chris Scott

Since I warned last week against shrugging off the economic impact of the new coronavirus, things just about went off the rails from the standpoint of China’s ruling elite.

In the span of just a few days, disturbing stories and images spread across Chinese social media in a manner not seen since before President Xi Jinping’s Herculean efforts to tame the internet proved mostly successful over the past several years.

News that a young physician named Li Wenliang who was reprimanded for early warnings of the epidemic died were punctuated by a striking image of the 34-year old in his intensive care unit.

People anxiously followed social media posts of care workers pacing nervously outside the room.

What really gave the story legs to be shared along with messages of disgust and horror by seemingly everyone on China’s Facebook-like WeChat messaging app was the bizarre timeline of reporting. Li’s death was reported by several prominent Chinese news sources late Thursday night – prompting an immediate public uproar – only to be retracted without a clear explanation.

It appeared to netizens, helped by reporters waiting outside of Li’s intensive-care unit, that specialists at the hospital were ordered by fearful party officials to shock the young doctor back to life and keep his heart beating.

Everyone’s “moments” feed – basically the Chinese equivalent of your Facebook “news feed” – was filled exclusively with comments and shared stories about this event. Just think about that for a second. This was not tribal. Even some party stooges that post news simply to advance the official agenda were posting about this.

The story went far beyond the realm of something that party leadership could attempt to reign in.

More terrifying were the images of residents being dragged out of their apartments to face forced quarantine.

More disturbing still were photos of rows upon rows of hospital beds set up in large arena-like settings, with little if any medical equipment.

Rudderless in a Perfect Storm

Because of the scale and scope of the crisis as well as the speed with which it’s developing, authorities haven’t been able to control information.

When it comes to information that they can control, it seems the powers that be, and specifically Xi Jinping, are totally lost.

Xi himself has been a no-show for almost this entire ordeal. His recent appearances in official media have been largely limited to meetings with foreign dignitaries. From the standpoint of the official narrative, it seems they have been trying to keep his hands clean from the quarantine efforts.

That might allow him to lay the blame on others, such as Premier Li Keqiang, who until the outbreak had been sidelined since Xi took power. Premier Li was the first to be sent directly to ground zero in Wuhan as cannon fodder.

But Xi is having second thoughts, it seems. On Monday he made his first “front-line” appearance, face mask and all, visiting a hospital in Beijing set up to deal with coronavirus patients.

Things have gotten so bad that several prominent critics of Xi Jinping in Beijing – figures who tend to keep their powder dry in the current political climate – have felt emboldened to speak out in blunt terms.

A professor at Tsinghua University (think MIT and Harvard combined in terms of prestige), Xu Zhangrun, penned a piece last week explicitly blaming Xi Jinping and the Chinese Communist Party for the outbreak. Here’s a translation of that essay.

The legal scholar was publicly reprimanded early last year when he criticized Xi Jinping’s decision to abolish term limits, arguing that Xi was undoing decades of work to build a consensus-driven government.

Another prominent critic of the party in Beijing, Rong Jian, felt courageous enough to offer up a bunch of juicy quotes to the New York Times, in a sign that this virus battle has weakened the authority’s ability to clamp down on speech without facing a backlash.

“It’s a big shock to the legitimacy of the ruling party. I think it could be only second to the June 4 [Tiananmen Square Massacre] incident of 1989. It’s that big,” he said, adding, “There’s no doubt about his control over power… but the manner of control and its consequences have hurt his legitimacy and reputation.”

That is a sentiment I’ve heard multiple times from people who have been in Beijing watching Chinese politics since the 1980s. This is the single biggest threat to the elite in Beijing since then – by a very wide margin.

The Writing Is on the Wall

And, as the country braces for the economic blowback, the true scale of the crisis is quickly unfolding before Xi’s eyes.

There are three epic battles that he must face at the same time: an epidemic with no clear path to containment, a political challenge not seen since 1989, and a hit to the economy that could finally blow up the debt bomb.

Usually, as we saw with the initial response to this virus, the political challenge must be met head on first, and in tandem with other efforts. But there are signs that’s no longer possible.

And it appears that he has consolidated power past the point that he can blame others for a failure to contain the coronavirus. It has been made clear that other potential scapegoats are working under direct orders from him.

Economists overwhelmingly agree that the economic blow from this crisis will make the very bad debt problem much worse.

Household spending, the very thing that Beijing has been banking on pulling through to carry the economy, is what will be hit hardest, economists say. S&P Global suggested 1.2% could be shaved off GDP growth this year if we see a 10% drop in spending.

Chinese authorities will “throw even more money at unproductive investment in an attempt to support growth,” according to Diana Choyleva, chief economist at China-focused think tank Enodo Economist. “That will only worsen China’s ability to place its economy on a sustainable long-term growth path.”

And with inflation shooting up, the People’s Bank of China has limited options for further easing.

This is a perfect storm. Any large investment bank that’s minimizing the risk here has ulterior, short-term-trading motivations for doing so.

What You See Is What You Get

The combination of the coronavirus outbreak in China and the quadrennial return of presidential roulette in the U.S. has replaced the Trade War as the primary risk for investors.

That’s because, as we’ve been saying for some time now, this is the most politicized market in history.

And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Here’s where I usually say, “Well, The Stockman Letter is made for times like these”…

And I can say that because we brought aboard Michael Coolbaugh to update our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

And he’s doing that. He’s also launched a complementary investment newsletter, Delta Profit Trader, that promises “higher frequency” engagement with markets.

Click here to view the “Delta Profit Summit,” where Michael explains his whole approach to investing in this environment.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market… and Michael’s here to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR