Investments

On Strange Bedfellows

By David Stockman  |  January 7, 2020

Indeed, only what does not have a tangible measure can easily be exaggerated in importance. This is the basic reason why the privileged elite in every society has always consisted – and, I submit, will always consist – of members who perform unproductive services under one form or another. Whatever the title under which this elite may receive its share, this share will never be that of worker’s wage – even if, as is possible, it may be called by that name.

– Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process

“China’s had another record year of corporate bond defaults. That’s not a crisis. It’s a plan.”

That’s the opening line of a recent Bloomberg story on the state of things in the Middle Kingdom. Of course, that old nickname seems a little antiquated. “Red Ponzi” is much more apt.

Here’s more from Bloomberg:

But rising defaults also mean that global investors have to abandon some assumptions about which borrowers are safe. There are some nasty surprises on the long list of companies that have either defaulted or have seen their bond prices plunge. Among them: a would-be Wall Street-style investment bank endorsed by China’s premier and two technology companies connected to top universities. In December, a commodities company called Tewoo Group Corp. delivered the biggest dollar-bond default in two decades by a state-owned enterprise. That event “could prove a turning point,” says Todd Schubert, a managing director for fixed income at Bank of Singapore. It’s getting more dangerous to count on some companies being, in essence, too connected to fail.

Indeed, as Chris Scott notes as he resumes his regular Tuesday updates on the U.S-China relationship, they may be at least as infatuated with “easy money” than even we are…

All “Easy Money,” All the Time… Chinese-Style

By Chris Scott

Major Chinese stock benchmarks started the year off with two days in the green (or red, if you’re watching a price board in China – remember, everything is upside down there).

This is all thanks to the People’s Bank of China, whose “put” is working just like the Federal Reserve’s, only with Chinese characteristics.

“Socialism with Chinese characteristics” is how the Communist Party has chosen to describe its Frankenstein’s monster of an economic system. One part free enterprise, nine parts investment from Wall Street and Corporate America, rounded out with 90 parts party control. Just stitch together and voila… “it’s alive.”

But the dragon that woke from its slumber to start this century is more akin to the brainy creature in Mary Shelley’s tormented tale than it is to Hollywood’s flat-topped oaf. China’s debt-laden patchwork of modern megalopolises and sprawling industrial hellscapes is guided warily by partners of America’s elite.

By now you’ve probably heard the name Liu He (pronounced “Huh”), the man who’s on his way to Washington next week to sign the “phase one” trade deal.

Apart from being Chinese President Xi Jinping’s middle school buddy, Liu’s bonafides include years of study in the U.S., culminating a master’s degree at Harvard. This is the guy credited with articulating Beijing’s policy of trying to reign in the debt binge.

Xi’s other right-hand man, Wang Qishan, is known for his close ties to Wall Street.

Nominally China’s Vice President (a role Xi created to keep the elderly Wang in the cockpit), Wang thought that get-togethers with his pal Stephen Schwarzman of Blackstone, along with bigwigs from the likes of Goldman Sachs and Morgan Stanley could help diffuse the trade war.

He was, of course, wrong. But that’s beside the point.

All this is to say that the financial elite of America are in bed with communists in Beijing, and those communists are keenly aware of their debt risks and are learning from us.

And what better lesson to learn than easy money cures all ills.

The big news that helped Chinese stocks up this week was that the People’s Bank of China cut the required reserve ratio for banks by 50 basis points, thus freeing up about $155 billion. It’s not enough to stem the tide of defaults, but it’s enough to buck up investors.

This stimulus path has been going on for more than a year, ever since the Trade War hit just as growth was slowing thanks to the deleveraging campaign.

But this RRR cut came earlier than expected and, while it doesn’t represent a massive stimulus, it represents exactly what the Fed’s policy represents on this side of the ocean.

There’s a key difference between the “Powell Put” and the “CCP Put,” however. It’s the CCP’s, and not the PBOC’s… If the Donald were in charge, just think of how much money the Fed would be printing ahead of the 2020 election.

In China, there’s no four-year election cycle, so we can’t expect anything drastic while the proletariat are still mostly keeping their pitchforks at home. But investors know that Beijing will step in before the wave of defaults gets any more out of control than it already is.

That’s not to say that the debt crisis isn’t getting worse as we speak. The China debt timebomb watch is still in full effect. Is the hidden, off-balance sheet local government debt 12 trillion yuan or 40 trillion?

But, for the moment, even as the high-speed rail extravaganza stretches out into provinces where operations will be even more unprofitable than the existing money-hemorrhaging ones are, it doesn’t seem to matter.

China’s Bubblevision paints an even rosier picture than ours does.

Keep Keeping It Real

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.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

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 we’d like 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