Economy

China, Interrupted

By David Stockman  |  February 4, 2020

It is not certain that everything is uncertain.

– Blaise Pascal, Pensées (1669)

In the concluding paragraphs of his most recent missive on the situation in China, Chris Scott notes that “this crisis will mean Beijing has to keep the stimulus coming.”

Indeed, the coronavirus had the Peoples Bank of China injecting 1.2 trillion yuan – or $173.81 billion – into money markets on Tuesday via reverse bond repurchase agreements. Reuters also notes that the PBoC “unexpectedly cut the interest rate on those short-term funding facilities by 10 basis points.”

We are all monetary central planners now.

The short view tells us the Dow Jones Industrial Average is up 500 points today and that major stocks are at all-time highs.

The longer view holds that more stimulus now only amplifies the intensity of the inevitable crash. If the global economy is the proverbial camel’s back, “this crisis,” Chris writes, “is a lot heavier than a single straw.”

We’re already seeing reverberations, with Hyundai, the world’s fifth-largest automaker, suspending production at South Korea factories due to supply-chain disruptions.

And Macau, which saw six times the gaming revenue generated by Las Vegas in 2019, will shut down for 15 days.

Today is an “up” day. But there will be “down” days, even as this flashpoint dulls.

Action like this is also a great reminder why I brought Michael Coolbaugh on board last summer. Mike’s going to navigate this volatility, identifying upside opportunities and steering us from undue downside risk as well.

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I’m sure you’re probably bored of this by now, but I think it bears the repetition: I literally cannot think of a better way to identify opportunities for upside while we continue to prepare for the inevitable prodigious downside that comes with these sordid bubbles.

Like Chris, Michael has already demonstrated his value here in Deep State Declassified.

The Delta Profit Summit simply promises more – much more – of the same.

Now, here’s Chris on China…

A Kingdom Paralyzed

By Chris Scott

China is the second-largest economy in the world, by a wide margin. It’s the engine of global growth and the center of gravity in Asia, many parts of which will pick up where China left off as the Middle Kingdom’s economic expansion inevitably wanes.

But the most populous country on Earth is, as I write this, almost completely paralyzed, from head to toe. And there’s still zero clarity on when life will go back to normal.

I recounted last week how I got out of the country as the novel coronavirus crisis was just blowing up. For days after I returned, I was still plugged into the experiences of people inside China. Keeping in touch with friends and family and using a box that allows me to stream live Chinese TV, I watched a country that’s stopped in its tracks.

It’s like something out of a Hollywood movie, with your regularly scheduled programming is interrupted by updates and public service announcements about how to protect yourself from the virus.

A Country at War

President Xi convened another Politburo Standing Committee meeting on Monday, the second one in two weeks focused on the virus response. He continued to define the challenge in language otherwise reserved for times of war.

And that’s exactly the level of disruption China is seeing right now. People are staying inside their homes as if cities were being shelled with artillery. The nation is mobilizing every available resource for a singular task: eliminating the disease.

There’s been much praise lavished upon the Chinese government – and specifically Xi Jinping – for the handling of this crisis. Notably, the Director-General of the World Health Organization, Tedros Adhanom Ghebreyesus, has said the leadership is setting a new standard.

“The speed with which China detected the outbreak, isolated the virus, sequenced the genome, and shared it with the WHO is very impressive and beyond words,” he said during a press conference. “So is China’s commitment to transparency…”

“In many ways,” he declared, “China is actually setting a new standard for outbreak response.”

Politics Over Everything

But Ghebreysus is wrong. And that’s probably because he’d just emerged from a study session with Xi.

The decision to trap residents of Hubei province in the epicenter of the outbreak – and the telegenic construction of a hospital in 10 days – may not have been necessary at all if it weren’t for the fatal flaws of communist governance.

For many in the Chinese public, images of courageous troops racing to get supplies across the country flashing across their TV screens may strike a chord of resilience and strength.

But it should as well bring to mind images of Soviet troops marching into northern Ukraine to clean up the mess in Chernobyl.

Soldiers are about as useful for fighting a coronavirus as they are for getting rid of nuclear radiation.

The reality is that the priorities of maintaining stability and following rigid Communist Party protocol led to the silencing of warnings by some accounts dating all the way back to late December.

“Stressing politics is always No. 1,” the governor Hubei province said on January 17. “Political issues are at any time the most fundamental major issues,” he added, reportedly citing Xi Jinping’s demands for total obedience.

Complaints filed in official channels from health workers paint a picture of ample warning signs of a dangerous viral outbreak.

Meanwhile, apparatchiks told doctors the following: “Don’t use the words viral pneumonia on the image reports… thinking that if the official reports had nothing, then we were exaggerating.”

Those official reports that “had nothing” kept people spreading the virus without taking precautions for weeks.

Lasting Pain

And, now, China is facing a calamity of epic proportions.

Two dozen cities, provinces, and regions have ordered businesses to remain shuttered until next Monday – at the earliest.

According to CNBC, those places accounted for 80% of China’s GDP. And 90% of exports.

There’s really no telling just how bad this will get in terms of economic impact. Whether China sees a recession because of this, as some are warning, is not clear.

What we can be sure is that, like the Trade War, this crisis will mean Beijing has to keep the stimulus coming, ensuring that they won’t be able to reign in the country’s ballooning levels of debt.

Goldman Sachs thinks this won’t cause a major hit to the global economy in 2020, with a base-case scenario that holds things will get back to normal by the end of the first quarter.

But parsing the numbers to see exactly what percentage of gross domestic product is shaved off directly as a result of this disruption is missing the point. There’s already a lot of straw on this camel’s back.

And this crisis is a lot heavier than a single straw.

A Time to Act

The combination of the coronavirus outbreak in China and the quadrennial return of presidential politics 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