BFM 89.9 asks Tony Nash from Complete Intelligence on how China’s PBOC adoption of looser monetary policy will affect the yuan and the broader Chinese economy.
SM: BFM 89 nine. Good morning. You’re listening to the morning run. I’m Shazana Mokhtar are together with Philip See. It is Christmas Eve, Friday, the 24 December 9:06 in the morning. But in the meantime, let’s take a look at the activity on Bursa Malaysia.
PS: It’s flat like Coke without any bubbles.
SM: Oh, no, that’s the worst kind of flat.
PS: Yes, the foot sabotage. Malaysia is flat slightly down .09% at 1515.
SM: So still above 1500.
PS: Still above 1500.
But it’s been yoyoing a bit green and red so far. But the rest of the markets across Asia are in green territory. The Straits time is up at 3100. Cosby also up 58% at 3015. Nikkei also up zero 6%, 28814. Now, just to bring your attention, looking at the crypto Bitcoin 5998.65 above the 50,000 mark. Theorem also uptrend 4114115.184. Now, if we shift over to the currencies, ring it to US dollar 4.11988. You’re seeing some strengthening there. But across the other two currencies pound and sing dollar, we’re seeing some weakness there.
Ring it to pound 5.62967. Ring it to Sing dollar 3.0922. Now, looking over to the value board. Really. Smattering of small caps actually driving it, but cost number one Ata IMS at .72 cent unchanged, followed by SM Track up 13% at .13, followed by Kajura Tran asphas flat at .26%.
SM: Okay, so that is the snapshot of Bursa Malaysia at 9:09 this morning. We’re taking a look now at how global markets closed yesterday.
So if we look at the US markets, they closed in the green. The Dow was up 0.6%. The S&P P 500 was up zero 6% as well. The Nasdaq was up zero 9%. So a lot of optimism going into the Christmas weekend. Joining us on the line for analysis on what’s moving markets. We have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. Now 2022 is just a week away. And given the triple headwinds of Fed tapering, Omicron and a China slowdown, will there be a difference in how developed and emerging markets in Asia are going to be impacted?
TN: I think with the tightening in the Fed and with what emerging markets are going to have to do, meaning in the near term, like China is going to have to loosen. So I think you’ll have a strengthening dollar and more of a rush for capital into the US, so that should at the margin, kind of help US markets stay strong across debt and equity. Other things. I think in emerging markets it could eventually China loosening. The PVC loosening could help demand in emerging markets, but it’s going to be hard to get around the hard slowdown that started in China around Omicron.
PS: I see.
And so when you contrast that to the Fed tightening, right. You said China PBOC is adopting a looser monetary policy. How will this affect the UN in relation to those Asian currencies in which there’s a lot of trade between these two countries?
TN: Yeah. CNY has been strong for a protracted period, and it’s made sense on one level, so China can import the energy and food, particularly and some raw materials that it needs in a time of uncertainty. So the PVC has kept it strong through this period. What we’ve expected for some time. And what we’ve shown is that after Lunar New Year, we expect the PPOC to begin to weaken the CNA. We don’t think it’s going to be dramatic, but we think it’s going to be obviously evident. Change of policy, Chinese exporters, although they’ve been producing at not capacity, but then producing pretty.
Okay. China is going to have to devalue the CNY to help those exporters regain their revenues that they’ve lost over the last two years. So we’re in a strange period globally of moving from kind of state support back to market support, whether it’s the US, Europe, Asia, we’ve really had state supportive industries, state supportive individuals as we move beyond covet. Hopefully we’re moving more into a market orientation globally, and there will be some volatility with that.
PS: Yeah, but I was wondering for China, especially, I’m interested to know what the state of the Chinese consumer will be in 2022 because the government is worried for slow down. Right. And wouldn’t they want to expedite and give a bit more ammunition to the Chinese consumer?
TN: They would. But the problem is with Chinese real estate values declining, a lot of consumer debt is secured against real estate. And so the ability of Chinese consumers to expand the debt load that they’re carrying. Is it’s pretty delicate? It’s a fine balance that they’re going to have to run. So either the economic authorities in China push real estate markets up to allow Chinese consumers to keep debt with their real estate portfolios, or they make other consumer debt type of rules that allow Chinese consumers to hold more debt.
Real estate is the part that’s really tricky in this whole equation in China, because if real estate values are falling, the perceived wealth of those consumers is falling pretty rapidly as well, and the desire to consume excessively, it’s just tempt out.
SM: And I suppose still sticking to our view of China looking at metal commodities, what metals have been affected by the slowdown of demand in China? And do you foresee a recovery for them in early 2022?
TN: Yeah. We’ve seen industrial metals like copper and steel, and those sorts of things really slow down dramatically compared to where they were earlier in 2021. We’re seeing reports of, say, copper shortages at the warehouse level at the official warehouses in China, but that’s not real. What we’re seeing and I speak to copper producers in Australia and other places. What they’re telling us is that those copper inventories are being shifted to unofficial warehouses to create a perception of shortage. So we may see a run. We may see an uptick in, say, industrial metals prices in early 22, but we don’t expect it to last long because the supply of constraint is not real.
So until demand picks up for manufacturing and goods consumption. And the other thing to remember is we’ve had a massive durable goods wave through covet. Everyone’s talked up on durable goods. Okay, so there is almost no pent up demand for durable goods. And this is the stuff that industrial metals go into on the demand side, there are some real problems on the supply side. There seems to be plenty of supply in many cases. So we don’t necessarily see the pressure upward, at least in Q1 of 2022 on industrial metals.
PS: And that’s why I’m quite interested where you say that this demand is, I think slowly going to dissipate because yesterday key US inflation gauge sharpest rise in nearly 40 years, right? Personal consumption expenditure surged 5.7% in November. How long do you think this elevator level will last?
TN: Well, US consumers are pretty tapped out. So I think inflation happens for a couple of different reasons. Some people say it’s only monetary. Not necessarily true. We’ve seen real supply constraints that contribute to inflation. We’ve seen demand pulls because of overstimulating economies, and those two things together have accelerated inflation. And so we have to remember at the same time in 2020, we saw prices. If things go down pretty dramatically around mid year, say a third of the way through the year to mid year to just after mid year.
Some of these inflationary effects have been a little bit base effects because prices fell so hard in 2020. But we have seen consumption ticking up because of government stimulus. And we have to remember if the Fed is tightening things like mortgage backed securities, their purchases of mortgage backed securities will slow. Okay, so if people can’t refinance their house or buy new houses again, those wealth effects dissipate if you have a home. If your home price is rising, whether it’s the US or China or elsewhere, the wealth perception is there and people have a propensity to spend.
But if the Fed is pulling back on mortgage backed securities, then you won’t necessarily have that wealth effect that will dissipate. So government spending will decline marginally because build back better didn’t pass. We won’t have that sugar rush of government spending flowing into the economy early in 2002, although we may see something later. I believe governments love to spend money. So I believe the US government will come with some massive package later in the year to bring government spending back up.
SM: Tony, thanks very much for speaking to us. And an early Merry Christmas to you. That was Tony Nash, CEO of Complete Intelligence, giving us a quick take on what he sees moving markets in the final year. In the final weeks of 2021. Looking ahead to 2022.
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In this second part, Mike Green explains what will happen to Europe if China invades Taiwan. Will the region be a mere audience? Will it be affected or not, and if so, how? How about the Euro — will it rise or fall with the invasion? Also, what will happen to China’s labor in that case, and will Chinese companies continue to go public in the West?
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This QuickHit episode was recorded on December 2, 2021.
The views and opinions expressed in this What happens to markets if China invades Taiwan? Part 2 Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: So we have a lot of risk in, say, Northeast Asian markets. We have a lot of risk to the electronics supply chain. I know that this may seem like a secondary consideration. Maybe it’s not.
What about Europe? Does Europe just kind of stand by and watch this happen, or are they any less, say, risky than any place else? Are they insulated? Somehow?
I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follows so that we can get to the right number to reach more people.
MG: No, Europe exists, I would argue, as basically two separate components. You have a massive export engine in the form of Germany, whose core business is dealing with China and to a lesser extent, the rest of the world. And then you have the rest of Europe, which effectively runs a massive trade deficit with Germany. I’m sorry. Germany is uniquely vulnerable in the same way that the corporate sector is vulnerable in the United States. That supply chain disruption basically means things go away.
They are also very vulnerable because of the Russian dynamic, as we discussed. In many ways, if I look at what’s happened to Germany over the past decade, their actions on climate change and moving away from nuclear, away from coal into solar, et cetera, has left them extraordinarily dependent upon Russian natural gas supplies. It’s shocking to me that they’ve allowed themselves to get into that place. Right.
So my guess is that their reaction is largely going to be determined by what happens with Russia rather than what happens with China. Right. In the same way that Jamie Diamond can’t say bad things about China. Germany very much understands that they can’t say bad things about China.
Europe, to me, is exceptionally vulnerable, potentially as vulnerable as it has ever been in its history. I agree. It has extraordinary… Terrible way to say it. I don’t know any other way to say it, but Europe basically has unresolved civil wars from 1810, the Napoleonic dynamics all the way through to today, right. And everybody keeps intervening, and it keeps getting shoved back down into a false equilibrium in which everyone pretends to get along, even as you don’t have the migratory patterns across language and physical geographic barriers that would actually lead to the type of integration that you have with the United States, right.
Now ironically, the United States are starting to see those dynamics dramatically reduce geographic mobility, particularly within the center of the country. People are becoming more and more set in their physical geographies, et cetera. Similar to the dynamics that you see in Europe, which has literally 100,000 more years worth of Western settlement and physical location, than does the United States. But they’ve never resolved these wars. Right.
And so the integration of Europe has happened at a political level, but not at a cultural level in any way, shape or form. That leaves them very vulnerable. Their demographics leaves them extraordinarily vulnerable, the rapid aging of the populations, the extraordinarily high cost of having children, even though they don’t bear the same characteristics of the United States, but effectively the lack of land space, et cetera, that has raised housing costs on an ownership basis, et cetera. Makes it very difficult for the Europeans, and they have nowhere else to go now. Right. So the great thing that Europe had was effectively an escape valve to the United States, to a lesser extent, Canada, Australia, et cetera, for give or take 200 or 300 years, and that’s largely going away. Right.
We are becoming so culturally distinct and so culturally unacceptable to many Europeans that with the exception of the cosmopolitan environments of New York City and potentially Los Angeles, nobody wants to move here anymore. Certainly not from a place like Europe. I think they’re extraordinarily vulnerable.
I also think, though, that they’ve lost sight of that because they’re so deeply enjoying the schadenfreude of seeing the unquestioned hegemony of the United States being challenged. Right. It’s fun to watch your overbearing neighbor be brought down a notch. Right. You tend not to focus on how that’s actually adversely affecting your property values in the process.
TN: Sure. Absolutely. So just staying on Europe, what does that do to the importance of the Euro as an international currency? Does the status of the Euro because of Germany’s trade status stay relatively consistent, or do we see the CNY chip away at the Euros, say, second place status?
MG: Well, I would broadly argue that the irony is that the Euro has already peaked and fallen. Right. So if I go back to 2005 2006, you could make a coherent argument that there was a legitimate challenge to the dollar right.
Over the past 15 years, you’ve seen continual degradation of the Euro’s role in international commerce, if I were to correctly calculate it, treating Europe as effectively these United States in the same manner that we have with the US, there’s really no international demand for the Euro. It’s all settlement between Germany, France, Italy, et cetera.
If I go a step further and say the same thing about the Chinese Yuan or the Hong Kong dollar, right. They really don’t exist in international transactions. To any meaningful degree. The dollar has resumed its historical gains on that front. Now that actually does open up a Contra trade.
And I would suggest that in just the past couple of days, we’ve seen an example of this where weirdly, if the status quo is maintained, the dollar is showing elements of becoming a risk on currency as the rest of the world basically says some aspect of we’re much less concerned about the liquidity components of the dollar, and we’re much more interested in the opportunity to invest in a place that at least pretends to have growth left. Right. Because Europe does not have it. Japan does not have it. China, I would argue, does not have it. And the rest of the world, as Erdogan and others are beginning to show us, is becoming increasingly dysfunctional as a destination for capital. Right.
Brazil, perennially the story for the next 20 years and always will be right. Africa, almost no question anymore that it is not going to become a bastion for economic development going forward. And we’re broadly seeing emerging markets around the world begin to deteriorate sharply because the conflict between the United States and China creates conditions under which bad actors can be rewarded. Right.
If I sell out my people, we just saw this in the Congo, for example, if I sell out my people for political influence, I can suddenly put tons of money into a bank account somewhere. Right. China writing a check for $20 million. It’s an awful lot of money if I’m using it in Africa.
TN: For that specific example, and for many other things, the interesting part is China is writing a check for $20 million. Yeah, they’re writing a check for €20 million. They’re not writing a check for 20 million CNY. It’s $20 million. All the Belt and Road Initiative activities are nominated in dollars.
So I think there’s a very strange situation with China’s attempt to rise, although they have economic influence, they don’t have a currency that can match that influence. And I’m not aware, and you’re such a great historian. I’m not aware of an economic power that’s come up that hasn’t really had its own currency on an international basis. I’m sure there are. I just can’t think of many.
MG: Well, no. I mean, the quick answer is no. You cannot project power internationally unless effectively the tax receipts of your local population are accepted around the world. Right? Broadly speaking, I would just highlight that the way I think of currency is effectively the equity in a country right now. It’s not a perfect analog, but it’s a reasonable analog. And so, what you’re actually saying is the US remains a safe haven. It remains a place where people want to invest. It remains a place where people believe that the rule of law is largely in place. And as a result, anyone who trades with the United States is willing in one form or another to say, okay, you know what? I can actually exchange this with somebody who really needs it at some point in the future.
I think one of the reasons that we tend to think about the dollar as having fallen relative to the Euro or the CNY is we have a very false impression of what the dollar used to be. Right. So we tend to think about the dollar was the world’s reserve currency following World War Two and everything happened in dollars. Right.
People forget that half the world, certainly by population, never had access to dollars, never saw dollars. There was a dollar block. And then because of their refusal to participate in Bretton Woods, there was a Soviet ruble block and then ultimately far less impactful things like a Chinese Yuan, et cetera. But the Soviets, for a period of time, had that type of influence. They could actually offer raw materials. They could actually offer technology. They could offer things that had the equivalent of monetary value to places like Cuba, to places like Africa, to places like South America, et cetera. China right.\
That characterized the world from 1945 until 1990. Right. I mean, the real change that occurred and really in 1980 was that Russia basically ran out of things to sell to the rest of the world, particularly in the relative commodity abundance that emerged in the 1980s after the 70s, their influence around the globe collapsed.
And I think the interesting question for me is China setting up for something very similar. Right. It feels like we’re looking at a last gasp like Brisbanev going into Afghanistan, right. And oh, my gosh, they’re moving out and they’re taking over. Well, that was the end. They make a move on Taiwan. And I think a lot of people correctly point to this. It’s probably the end of China, not the beginning of China.
I just don’t know that China knows that it has an alternative because it’s probably the end of China, regardless.
TN: Sitting in Beijing, if you bring up any analogues to the Soviet Union to China in current history, they’ll do everything to avoid that conversation. They don’t want to be compared. Is Xi Jinping, Brezhnev or Andropov or. That’s a very interesting conversation to have outside of Beijing. But I think what you bring up is really interesting. And what does China bring to the world? Well, they bring labor, right. They’re a labor arbitrage vehicle. And so where the Soviet Union brought natural resources, China’s brought labor.
So with things like automation and other, say, technologies and resources that are coming to market, can that main resource that China supplied the world with for the last 30 years continue to be the base of their economic power? I don’t know. I don’t know how quickly that stuff will come to market. I have some ideas, but I think what you’re saying is if they do make a play for Taiwan, it will force people to question what China brings to the world. And with an abundance of or, let’s say, a growing influence of things like automation technologies, robotics, that sort of thing, it may force the growth of those things. Potentially. Is that fair to say?
MG: I think it’s totally fair. And I would use the tired adage from commodities. Right. The cure for high prices is high prices. If China withdraws its labor or is forced to withdraw its labor from the rest of the world, there’s two separate impacts to it.
One is that China’s role as the largest consumer of many goods and services in things like raw materials, et cetera. That has largely passed. Right. And so as we look at things like electrification, sure, you can create a bid for copper. But at the same time, you’re not seeing any building of the Three Gorges again. Right. You’re not seeing a reelectrification of China. You may see components of it in India. And I would look to areas like India as potential beneficiaries of this type of dynamic. But we’re a long way away from a world that looks like the 20th century. And you’ve heard me draw this analogy. Right. So people think about inflation.
The 20th century was somewhat uniquely inflationary in world history. The reason I think that happened is because of a massive explosion of global population. Right. So we started the 20th century with give or take a billion people in the global population. We finished the 20th century with give or take 7 billion people. So roughly seven X in terms of the total population. The labor force rose by about five and a half X.
If I look at the next 100 years, we’re actually approaching peak population very quickly. And if I use revised demographic numbers following the COVID dynamics, we could hit peak global population in the 2030s 2040s. Right. That’s an astonishing event that we haven’t seen basically since the 14th century, a decline in global population. And it tends to be hugely deflationary for things like raw materials. Right. People who aren’t there don’t need copper, people who aren’t there don’t need houses, people who aren’t there don’t need air conditioners, et cetera.
I think the scale of what’s transpiring in China continues to elude people. I would just highlight that we’ve all seen examples of this. Right. So go to any Nebraska town where the local farming community has been eviscerated with corporatization of farms, and the population has fallen from 3000 people to 1000 people. What’s happened to local home prices? What’s happened to the local schooling system? What’s happened to deaths of despair, et cetera. Right. They’ve exploded. China’s facing the exact same thing, except on a scale that people generally can’t imagine. The graduating high school classes are now down 50% versus where they were 25 years ago. That’s so mind blowing in terms of the impact of it.
TN: That’s pretty incredible. Hey, Mike, one of the things that I want to cover is from kind of the Chinese perspective. Okay. So we’ve had for the last 20-25 years, we’ve had Chinese companies going public on, say, Western exchanges and US exchanges. Okay. So if something happens with Taiwan, if China invades Taiwan, do you believe Chinese companies will still have access to, say, going public in the US? And if they don’t, how do they get the money to expand as companies?
Meaning, if they can’t go public in the west, they can’t raise a huge tranche of dollar resources to invest globally. So first of all, do you think it’s feasible that Chinese companies can continue to go public in the west?
MG: Yeah. Broadly speaking, I think that’s already over. Right. So the number of IPOs has collapsed, the number of shell company takeovers has collapsed. So the direct listing dynamics. I just had an exchange on Twitter with a mutual friend of ours, Brent Johnson, on this. Ironically, that would actually probably help us equities for the very simple reason that the domestic indices like the S&P 500 and the Russell 2000 do not include those companies. Right.
So if those companies fail to attract additional capital or those companies are delisted, it effectively reduces competition for the dollars to invest in US companies and US indices. Where those companies are listed and are natively traded, at least are in places like Hong Kong, China, et cetera, those are incorporated in emerging market indices. And I would anticipate, although it certainly has not happened yet. That on that type of action, you would see a very aggressive move from the US federal government to force divestiture and prohibit investment in countries like China.
I think that would very negatively affect their ability to raise dollars. Again, and I mean, no disrespect when I say this. I want to emphasize this, but we tend to think of Xi Jinping as this extraordinarily brilliant, super thoughtful, intelligent guy. The reality is he’s kind of Tony Soprano, right? I mean, it’s incredibly street smart, incredibly savvy, survived a system that would have taken you and I down in a heartbeat. Right. You and I would have been sitting there. Wow. Theoretically, someone would have shot. Congratulations. Welcome to the real world, right. He survived that system. But that leaves him in a position where I do not think that he’s actually playing third dimensional chess and projecting moves 17 moves off into the future. I think he very much is behaving in the “Ohh, that can only looks good.”
I think it’s really important for people to kind of take a step back and look at that in the same way that Japan wasn’t actually forecasting out the next 100 years. The Chinese are not doing that. It’s a wonderful psychological operation. One of the best things that people can do is go back and relisten to the descriptions of IBM’s Big Blue computer or Deep Blue. I’m sorry beating Gary Kasparov. Right. So one of the things that they programmed into that computer was random pauses. So the computer processed things and computed things at the exact same speed. But by giving Kasparov the illusion that he forced the machine to think, he started to second guess himself.
Well, what did I do there that made it think, right. He didn’t do anything. It was doing its own thing and designed to elicit a reaction from you. I think China’s done probably a pretty good job of getting a lot of people in the west and elsewhere. And I think Putin is even better at this, of second guessing our capabilities and genuinely believing that we’re second rate now.
It’s fascinating. There was just a piece that came out from the US Space Force where they’re talking about the rising capabilities of China. And if you read the public Press’s interpretation of this, China is moving ahead in leaps and bounds. And what actually he’s saying is, no, we’re way ahead. But they are catching up at an alarming rate.
TN: That’s what happens. Right.
MG: Of course, it is always easier to imitate than it is to innovate.
TN: Right. When I hear you say that it’s easier to imitate than innovate. I know you don’t mean it this way, but I think people hear it this way that the Chinese say IP creators are incapable of creating intellectual property. I don’t think that’s the case. I don’t think you mean that to be the case. They are very innovative. It’s just a matter of baselining yourself against existing technology. So it does take time to catch up. Right. And that takes years. Your TFP and all the other factors within your economy have to catch up. And it takes time. It takes time for anybody to do that.
MG: Well… And I think also it’s important to recognize that things like TFP, total factor productivity, tends to be overstated because we don’t do a great job of actually correctly defining it.
TN: It’s residual. I can tell you.
MG: Exactly right. And just to emphasize what that means, it means it’s the part that we can’t explain with the variables we’ve currently declared. Right.
TN: Right.
MG: And so when I look at TFP in the United States, I actually think TFP is quite a bit lower than the data sets would suggest, because I think that we are failing to consider the fact that we’ve introduced women into the labor force. We’ve introduced minorities into the labor force. Right. So the job matching characteristics or the average skill level of people has risen.
People live longer, so they get to work in different industries and careers for a longer period of time. The center of the distribution is now starting to shift too old, and that’s showing up as a negative impact. But we failed to consider that on the other side. And the last part is just again, remember going back to the start of the 20th century, the average American had three years worth of education at that point. Third grade education, where a year was defined as three months, basically during the non harvest season. Right.
TN: It’s the stock of productivity. Correct. We’re adding to that stock of productivity, and the incremental add is large compared.
MG: But small compared to the stock. Absolutely correct. Right.
TN: Okay. Just to sum up, since we wanted to talk about the impact on markets, I want to sum up a couple of things that you’ve said just to make sure that I have a correct understanding.
If China is to invade Taiwan, we would have in Northeast Asia a period of volatility and uncertainty. That would go across equity markets, across currencies, across cross border investments and so on and so forth. Okay. So we would have that in Northeast Asia.
MG: And I would just emphasize very quickly. So we’ve seen this rolling pattern of spikes in volatility. Right. So we saw it in 2018 in the equity markets. We saw it in late 2018 in the credit markets and commodity markets. We’ve now seen it in interest rate markets. What’s referred to as the Move index. The implied volatility around interest rates has reached relatively high levels of uncertainty.
The one kind of residual area where we just have seen no impact whatsoever has been in FX. That has been remarkably stable, remarkably managed. That’s kind of my pick for the breakout space.
TN: Okay. Great. Europe also appeared of volatility because of their exposure to both China and Russia. Since both China and Russia have a degree of kind of wiliness, especially Russia, I think almost a second derivative. Europe is volatile because of both of those factors. Is that fair to say? And that has to do with the Euro that has to do with their supply chains? That has to do with a number of factors.
MG: I would broadly argue that’s a reasonable way to think about it. I mean, almost think about it. Flip the image and imagine that the continents are ponds and the oceans are land. Right. What we’re describing is a scenario where a rock gets dropped into Asia or a rock gets dropped into Europe. You will see the waves spread across. There’s potential for sloshing over, and it’ll absolutely impact the United States. But in that scenario, we literally have two giant barriers in the form of the Pacific and the Atlantic Ocean that separate us.
And while our supply chains are integrated currently, in a weird way, COVID has been a bit of a blessing in starting to fracture those supply chains. We’ve diversified them significantly in the last couple of years.
TN: Okay. And then from what I understand from what you said about the US is supply chains will definitely be a major factor. Corporates will likely keep their investments in China until they can’t. They won’t necessarily come up with, say, dual supply chains or redundant supply chains.
US equity markets could actually be helped by the delisting of Chinese companies. Or we’ll say, US listed equities, meaning US companies listed could be helped by the delisting of Chinese equities, potentially.
MG: Certainly on a relative basis. I might not go so far as to say in an absolute simply again, because you do have people and strategies that run levered exposures. And so anytime asset values in one area of the world falls, you run the risk that the collateral has become impaired, and therefore there’s a deleveraging impact.
TN: Yes. Understood. And then the dollar continues to be kind of the preeminent currency just on a relative basis because there really isn’t in that volatile environment, there aren’t many other options. Is that fair to say?
MG: Well, again, I think there’s an element of complication. I would prefer to argue volatility. I think it is hard to argue that the dollar wouldn’t appreciate, but I also think it’s important, and this is why I go back and say we can’t actually stop Russia from taking Ukraine. We can’t stop China from taking Taiwan.
If they were to actually do that, then there is kind of the secondary loss of phase dynamic associated with it that may you could see and you’ve already seen Myanmar. You could see Thailand. You could see Vietnam. Say, you know what? We got to switch. I’m skeptical, but I’m open to that possibility.
TN: Interesting. Okay. Very good. Mike, thank you so much for your time. I really appreciate how generous you’ve been with what you’ve shared. I’d love to spend another couple of hours going into this deeper, but you’ve been really generous with us.
I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follow so that we’ve we can get to the right number to reach more people.
So thanks again for watching. And Mike Green, thanks so much for your thoughts on China’s invasion of Taiwan.
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In this QuickHit episode, we’re joined by Mike Green to talk about what will happen if China invades Taiwan? We’re not saying that China is going to invade Taiwan, but what if it is to happen? What will be the impact to markets?
Mike Green is the chief strategist and portfolio manager for an ETF firm called Simplify Asset Management. They specialize in derivative overlays and derivative structures that modify the traditional market exposures. Their flagship products are things like US equities with downside protection.
His background prior to Simplify, has been in hedge funds for about 15 years and have built an expertise or a degree of renowned for the work that he does in primarily the derivatives and volatility space and have managed traditionally in what’s referred to as a discretionary global macro style. The assets that he purchases or that he monitors exist around the world, including places like China, Taiwan, et cetera.
A lot of the discussions Tony and Mike have had around Taiwan are tied to some geopolitical observations and some dynamics that exist in which Mike played a role less under the Biden administration. But in the prior administration had an advisory capacity to some components of the Department of State and Department of Defense.
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This QuickHit episode was recorded on December 2, 2021.
The views and opinions expressed in this What happens to markets if China invades Taiwan? Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: So today we hear or any day, pick a day. We hear that China is invading Taiwan. What are the first things that come to your mind as the news crosses the wires?
MG: Well, I think there’s a couple of things that are really important about the question of is China invading Taiwan, right. And so what we have seen very clearly, and this is fact, not speculation, is a dramatic escalation of China’s incursion on what would traditionally be thought of as Taiwan sovereignty or independence. Right.
We’ve seen a dramatic increase in boats transitioning across the international marine borders. We have seen a dramatic increase in incursion of both fighter jets and bombers into Taiwanese airspace. And in general, the strategy that you see China engaged in is what is typically thought of as a precursor to an invasion. They’re effectively forcing Taiwan to maintain alertness and readiness, which slowly degrades the quality of defenses.
If you have to constantly scramble jets, there’s only so many hours that you can actually have them in the air. There’s only so many hours you can have pilots operating before their capability deteriorates. That is very clearly what is in play here.
Now, it’s an unknown question whether they go to the next step, whether they take what is currently a largely psychological and relative resource advantage to degrade Taiwan’s capabilities, whether they turn that kinetic as compared to hoping for a psychological collapse where Taiwan effectively decides to sue for the best possible deal they can get is unclear.
And I think that’s really what we’re all debating. I mean, China has come out very clearly. Others have made this observation, and it’s not dissimilar to my former employer, Peter Thiel’s observation about Donald Trump, right. That everyone takes him literally, but not seriously. I would flip that on its head. And everyone say everyone takes Xi seriously, but not literally when he says we will reunify with Taiwan in one form or another within the next five years.
And that’s the core of the question. Are they going to do this in a peaceful fashion? Are they going to do it in a kinetic military fashion? What are the ramifications of each of those two strategies and what’s the state of gameplay that is in place right now, as each side including the allies of Taiwan in the form of Japan, the United States, et cetera, evaluates how they want to respond to it.
TN: Right. What is that? What are those initial responses that you think happen, setting aside battle plans, of course. Honestly, I don’t believe that Min Def or DoD know 100% of whether this will happen or not. I think everything is a potential.
What do you think those reactions are initially in terms of, say, markets, investments, even things like trade? Those are like, what do you think happens right away?
MG: Well, I think there’s a couple of things that are worth hitting on. Right. So the first is why does China want Taiwan or why does it matter? Right. So one component is just the psychological final victory over the Republic, the Taiwanese Republic, what is known as the Republic of China outside of the area.
When you think about that dynamic, this is a final victory that would allow Xi to place himself permanently on par with the founders of the Chinese Communist state. Right. The Mao’s, et cetera, of the world. So this is a huge accomplishment.
I think there’s a huge misunderstanding that the objective is to obtain the semiconductor resources, right. To me that feels, one, extremely unlikely to expect that they could do that successfully, and two, I’m not sure it’s actually entirely relevant. Right. But that does then speak to the indications that the game is being taken much more seriously.
And so one of the things that I would point to people is the dramatic expansion of capabilities and investment that Taiwan is making in Arizona, where they’ve effectively doubled on a nameplate capacity and potentially up to 5x the capacity of TSMC in Taiwan. Now, that’s a huge implication.
If we were to put ourselves back into the 17th century, it would be the akin of a European sovereign entity, a small Principality, taking the Crown jewels and shipping them for safekeeping somewhere further away when they were faced with a threat, taking the error apparent and shipping them abroad so that there’s a base of operations. If you think about TSMC’s investment in Arizona, that can be very easily thought of as a base of operations and a source of income for a government in exile. Right. So I don’t think Taiwan is planning on going away.
It also opens up kind of the interesting angle of how effective is China’s strategy, because I think that China broadly looks at it and says, we can wear them down and I would point to it and say, yeah, your best opportunity was actually probably a year ago to use the element of surprise. Now you’ve pretty well telegraphed it. Taiwan has made significant advances. The US Department of Defense, in particular, I would argue, would have been caught very much off guard a year to a year and a half ago. Today they’re pretty much on top of this, right.
The Pacific Theater has been opened pretty widely. You’re actively hearing expressions of support from South Korea, Japan, et cetera. So to me, it feels like the element of surprise has been lost, and now it just becomes a question of, is this ultimately going to happen? It seems extremely unlikely to me that it will be a long term successful component.
Then you have to ask yourself the last question, which is, why does China care beyond simply the moral victory or the desire for that? And that’s where you and I have been through these maps. And I don’t know if we’re doing this in a visual format, but I could share it if you wanted to.
The way the world looks at China is not the way China looks at itself. Right. So the traditional map that we think of with China when we look at it, we see this large access into the Philippines and in the Pacific Ocean. It looks like China has a coastline that is similar to the rest of the similar to the other great powers like the United States. The reality is that their entire access to the Pacific Ocean is framed and blocked by barrier Islands, Taiwan being the most prominent of those. Japan to the north, being another equally important one. The Philippines come into play. Okinawa comes into play there, et cetera. Right. What they’re really trying to do in terms of expressing a desire to take over Taiwan is to break into the Pacific Ocean and pick up that Deepwater Navy capability that is absolutely mandatory for an “Empire to express power.”
Map of China and countries surrounding it. Image from Google Maps.
So I think we’re at kind of a point of maximum uncertainty where it feels like they may have missed the best opportunity to do so. But as you and I have talked about, I’m not sure that China is actually as good at this game as everybody thinks.
TN: I’m with you on that. Yeah, I don’t think they are, either. And one of the things that I’m seeing more and more of two years ago, a year and a half ago, as you mentioned, China was winning diplomatically, not everything. But there was more of a positive bias toward China.
Today, they’re just annoying people. And so if they take an action like that, it seems like they start from a negative position, and it’s hard for them to get to a positive position out of that when Xi Jinping was going to the left to talk and all this other stuff, he had a lot of positive momentum behind him, and he actually could have done a lot of really terrible things, which, if you look at what’s happening in Xinjiang and other things, he did a lot of terrible things. He could have done more, actually. And I think the world would have turned the other way. But now I think it’s really hard for them to turn the other way. Does that make sense to you?
MG: No. I actually think that’s true. I think that they may have gained a degree of false confidence off of the failure to react to Hong Kong. But absolutely, with the exception of… Australia has clearly turned. The UK has recognized that it has to turn. Europe continues to enjoy the schadenfreude of the US’s relative standing having deteriorated. I think Europe is slowly waking up to the risks of their reliance on Russia, particularly for energy supplies.
And an interesting angle, and again, you and I have talked about this offline, would be the dynamic of a simultaneous move in both directions by Russia to expand into Ukraine and China, to expand into Taiwan and the immediate aftermath of the Chinese Olympics in Beijing this winter, which is February. From a purely mechanical standpoint, it’s almost impossible to mount any form of attack on Taiwan until May due to weather conditions, and an amphibious assault would make no sense, you could certainly see an airborne one.
I think there’s a very real chance that we see at least an increase in the drumbeats associated with that to test it out. But Europe will eventually turn, right. They have to understand at their core that they are an exposed peninsula on the Eurasian continent, and they really can’t allow China and Russia to become as dominant as they are expressing at least their interest of becoming.
TN: That’s right. Okay. So you bring up an interesting analog when you mentioned Hong Kong. Okay. So Hong Kong and Taiwan used to be this kind of holdouts from the mainland, and people looked at them as these democracies-ish, although Hong Kong, whether it was a democracy or not as questionable. But the takeover of Hong Kong is one that happened.
I was telling people in 2014 that it was already done. That this was going to happen. And for five years that I talked about it, people said, no, you’re crazy. It’s not going to happen. There’s too much money that goes through Hong Kong and so on and so forth. But it happened. And now in the wake of it, people just kind of shrug their shoulders like, okay, whatever it happened. Do you think that a takeover of Taiwan would be similar? Do you think people would just kind of shrug shoulders and say, “they invaded Taiwan. It was going to happen anyway, let’s just move on.?”
MG: No, I think it’s much harder for people to look at it in that context. Now, I would frame it, if we’re going to use a World War 2 analogy. And you always got to be careful with Godwin’s law about this, but it would be the analog to Nazi invasion or the German invasion, more accurate of the Sudettan land, which ostensibly was done in a manner very similar to Russia’s invasion of Crimea and the Dunbas region, were there to protect the Russian speakers.
We’re not actually there to have any form of substantive gain, and the world has broadly moved on from it. Right. Same thing I would argue with Hong Kong. Well, of course it was ours, right? You didn’t actually expect us to sit around 2047 and wait for this. There had to be a gradual progression in that direction.
Now, if this is the definition of gradual, I’d hate to see the definition of sudden. But again, the world has largely ignored it and moved on because for the most part, those outside the region have not experienced a significant shift. And again, if you were to look at foreigners in Berlin around the invasion of Sudetenland, they wouldn’t have seen anything different either. Right. Maybe they would have seen the riding on the wall and gotten out. But as we know, many didn’t.
There’s the risk that this is similar because the reality is if China were to decide to invade Taiwan, and now we can kind of get into the market impact, I don’t think the west can do anything about it. Right. Remember, this is 100 miles, give or take off the 100 km. I’m sorry. Off the coast of China. The US cannot Mount a credible defense and certainly not the ability to take back that region once China has taken it.
And I think that’s kind of the interesting feature associated with this is that like the actions of Germany and Sudetenland or the Blitzkrieg into Paris or any of these components, it’s going to be very hard to undo this. And so the minute it happens, it becomes a much longer protracted extended dynamic. And that’s the reason we care. It’s not so much that are we going to win or lose? Right. Almost any credible analysis of it says that China can indeed take Taiwan.
Taiwan is unique and in terms of its mountainous dynamics, et cetera. It’s uniquely suited in a lot of ways for guerrilla warfare. So my guess is they will be playing an Afghanistan type dynamic for decades if they take it. And the US would certainly be working in ways to resupply that and create harassment and everything else. But it is unrealistic to think that it can be stopped if they truly decide that they’re going to do that.
And that’s kind of the thing that, to me is more interesting is that how do the pieces start to fall together in a puzzle if they were to do that and what is properly priced under those scenarios? And I think, Ironically, people will point to US equity markets and say, oh, they’re going to fall or the dollar would be affected, et cetera.
I think there’s some truth to that certainly on a short term basis. But as you know, I don’t really think that the fundamentals matter all that much in the US equity markets right now. Are Americans going to lose their jobs and stop contributing to their 401k plans? And is the Federal Reserve suddenly going to step away from markets and stop engaging in supportive activity? To me, that seems very low probability. And so while there could very well be a correction, I’d be surprised if it moved in that direction. But I do think there’s other trades that are particularly interesting. Right.
So we mentioned Hong Kong. The Hong Kong dollar has been completely unaffected, both in terms of the absolute level of the dollar and its relationship with the US dollar. In other words, they continue to trade, basically a parody with very minor exception. But also the volatility associated with that. So taking bets against that relationship have retreated to near the lowest levels in years.
TN: Sure.
MG: If China were to make a play for Taiwan, it would be almost impossible for me to imagine a scenario in which that relationship didn’t fray violently. Same thing becomes true for Japan, right. Because Japan has two separate issues. One is they are a client state of the United States, and now they are directly in the face of a kinetic war that requires them to rapidly increase their government spending and to do so under somewhat existential risk. And at the same time, they have to write off, basically the minute they do that, they have to write off all of the collateral that most of their corporates have invested in China, which has become the single largest source of their external investment. Right.
So those to me, the area across Asia feels mispriced for this risk. Even if we’re just talking about a volatility spike, it feels that that area is much more mispriced than the US equity markets, for example.
TN: Interesting. So what you say about Japanese companies riding off their investments in China with the same go you think for, say, Korean companies as well?
MG: Oh, absolutely. You’re effectively placing them in a very difficult situation for sovereign reasons and for very obvious political reasons. Those are regions: South Korea, Philippines, Japan that really can’t get on board the China train. Right. Because it creates too powerful of an entity, and one that you point out is increasingly unliked. It places too powerful of an entity in their backyard.
TN: Okay. So something like 37, we all kind of know this 37% or something of global manufactured goods are made in northeast Asia. Right.
MG: Right.
TN: And if you look at electronics, it’s a lot more than that. I don’t know the number a lot more than that. So you have a manufacturing base, and especially in electronics, you have a manufacturing location where risk all of a sudden is amped up. Okay. What does that do? I know this is kind of an obvious question, but I want to get a little bit into details. What does that do to supply chains, especially around electronics?
MG: Yeah. Well, the quick answer is obviously it throws them into chaos. Right. And the most important point on the electronics that I would make is that while China holds a fraction of the world’s IP on electronics, again, the commentary around semiconductors, they are massive in the assembly process. Right. They’re basically the assembly line or the finishing stop. And so you have a ton of semiconductors that get shipped into China and then shipped out in the form of flat panel TVs, computers, iphones, et cetera.
That would unquestionably be disrupted. Right. And it creates an interesting, there’s an interesting game theory associated with it, which is you’re effectively talking about splitting the world in two at that point in a manner that is very similar to the breakdown of the alliance between the Soviet Union and the United States following World War II. Right.
TN: Right. This is what I’m not sure a lot of people, especially in the corporate world, understand, is how acute and how distinct that break could be if this happens.
MG: Yeah. I agree with you broadly. Now, the irony, of course, is part of the reason that they can’t embrace that is that redundancy costs money.
If I’m going to build a diversified supply chain, it places me at a disadvantage to competitors that do not do so in the interim. It potentially positions me for a knockout punch for a true winning of the game. But even there, you start to have to ask yourself questions. Would it be politically feasible given the likely response in terms of price controls and everything else that would kick in? Right.
I mean, I find it highly likely that a Biden administration or a Republican administration. Remember, the price controls were instituted by Nixon, not by Johnson. When you start talking about those types of dynamics, the game theory doesn’t really support the desire to fully diversify your resources. It places you at a disadvantage to your peers in the immediate future, and the potential rewards associated with it are somewhat in doubt as well because it becomes politically unacceptable to raise prices in response to that type of event.
TN: Right. Everyone else is going to be knocked out. I’ll be knocked out, too. So there’s no advantage or disadvantage to me to have a redundant supply chain.
MG: Correct. There’s a disadvantage if it doesn’t happen, right? You’re maintaining something more expensive.
So it’s hard to look at those who would be most impacted and say that they’re behaving in an irrational way. Right. Like the game theory is actually very much. Don’t do anything. Don’t do anything. Don’t do anything. Panic.
TN: Right. Okay. So we have a lot of risk in, say, Northeast Asian markets. We have a lot of risk to the electronic supply chain. I know this may seem like a secondary consideration, but maybe it’s not. What about Europe? Does Europe just kind of stand by and watch this happen, or are they any less, say risky than any place else? Are they insulated somehow?
Our CEO, Tony Nash, talks about inflation’s and Omicron’s role in US shares sinking, as fears spread over their non-transitory nature. And how will Asia react to the ‘non-transitory’ nature of inflation and the new Covid variant? Is Gold a good asset to use to hedge against inflation?
Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.
Show Notes
PS: Markets in the US were down across the board. The Dow is down 1.3%. S&P 500 down 1.2% Nasdaq down 1.8%. Now over across in Asia, everyone was up. Nikkei was up .4% Hang Seng up .8% Shanghai Composite also up .4% and STI Singapore up 1.9%. And as I was saying early on, FBM KLCI was down 1.1%.
TN: Yeah. Thanks for having me, guys. I think the biggest consideration really is Powell’s comments on inflation, saying it’s kind of no longer transitory. So people should expect inflation to stay. What that means generally is we’ve hit a new pricing level is his expectation. So meaning prices are not in his mind, in many cases, going to go back to the levels that we saw before this inflationary stairstep. And what we’ve seen, particularly in the US, is consumers have accepted this and consumers accepted it, thinking that it was a temporary rise in prices.
But what he delivered today is some bad news that it’s likely a permanent prize in the level of prices. And the kind of short term cost rises that people thought they were going to endure are more permanent.
KSC: Yeah. So, Tony, try and give us a bit of a perspective here, because obviously the last twelve years and the last accelerated two years of monetary easing have induced this inflation. How does it all end? And does it stop the weak economic growth we’ve been seeing in the US the last few months.
TN: Yeah. So US economic growth, we don’t see a rapid acceleration of US economic growth. And so we have the US, China, Japan, and the EU, all at very subdued growth rates. And that’s bad. Those are the four largest economies with elevated price rises. Earnings are growing in some areas. I’m sorry, wages are growing in some areas, but they’re not necessarily growing across the economy. And part of that, particularly in the US, is a shortage of staff. So people have opted out of the workforce. We’ve lost, like 6 million workers in the US since Covid.
And so there are fewer workers. And so we have wages rising in certain areas. But it’s not necessarily across the board. So people are really going to have to start taking a look at their disposable income to understand what of these ongoing price rises that they can continue to accept. And I think we’re at a point where, since it’s no longer viewed as temporary, people and companies are going to have to start making trade offs. This is really the bad news is when people have to, when it’s no longer temporary, companies and people have to start making trade offs of what to do with their resources.
And that’s where the real problem is. So it’s not ongoing expansionary spending. And even I think it was Biden who said today we don’t expect a stimulus package for the current variant. Again, people are having to look at trade offs, and this is the real problem. When companies have to look at trade offs, they’re looking at their operating costs, they’re looking at their capital expenditure, they’re looking at their investments, they’re looking at other things. So down to Earth type of environment where we’re starting to enter Realville, we’re starting to exit the kind of fantasy environment we’ve been in the monetary induced sugar coma that we’ve been in for the past year and a half.
PS: So that’s a very interesting point, because I’ve always felt like in 2021, we saw this huge divergence in recovery right between the developed world led by the US and emerging markets, which are still really struggling to contain the virus and such. So when we talk about Asia, how do you think markets will react to this tightening of monetary policy by the Fed?
TN: Yeah. We think that Southeast Asia generally will stay pretty muted. We don’t expect early breakout at least over the next quarter or two. We don’t expect really breakout moves in Southeast Asia. We expect China to have a fair bit of volatility, but we do expect China to be generally positive over the next quarter to quarter horizon. We do expect Japan to continue to rise pretty well in India as well. Japan largely on the back of monetary policy automation, other things. So Asia is not one market, of course.
So we do expect different parts of Asia to react differently. Korea will be a mix between China and Japan like it always is. So we’ll see some volatility there reflecting China, but we’ll see some, I guess, acceleration and equities like we would see in Japan to make some both.
KSC: Well, Tony, in truth, inflation has been with us for some weeks now. But what hasn’t been with us for some weeks has been on the Omicron that’s the other big roadblock posing an obstacle to markets. How does Asia behave? How does Asia react, especially since we’re going to be opening in a few hours time?
TN: Yeah, I think Asia generally. You guys know I lived in Asia for most of my life, and Asia generally takes these things in stride with more vaccines available with the typical kind of weathering, the storm kind of approach that people have, particularly in Southeast Asia. I think people will generally take it in stride. This is really the first pandemic. Let’s say in the west that people have had for probably 50 years where they’ve really been kind of freaked out and worried in Asia, we’ve seen these types of pandemics for 2030 years.
It’s a bit different. People are more conservative, people are more used to these types of volatile, say, public health and market and other type of environments in Asia. So of course, we’ll see things shake up, but we won’t necessarily see the dire kind of messages that we’ve seen, say in the west. I don’t think we will. We’ve seen dire messages come out of, say, Germany and Italy and Austria, particularly over the past week with full lockdowns with 100% vaccine mandates, with really dire messaging. I don’t necessarily think we’re going to see super negative messaging in Asia like we’ve seen there.
PS: We won’t freak out as much as what you’re saying then essentially.
TN: No. Come on, man. It’s Asia, right? People are used to volatility in Asia and the developed markets. Developed markets are highly calibrated. Right? 0.2% change. Either way is people see as dramatic in Asia a small they’re not as calibrated. So people are accustomed to more ups and downs, and people just generally take it in stride.
PS: And I said that generally it’s quite calming. Is gold with inflation basically consigned away from this trend trade term? What’s your view in terms of gold? That’s a hit against inflation then? Because if I look at the data, the method is down 6% year to date.
TN: Right. And a lot of the inflationary rise has already happened. A lot of the stuff happens in stairstep fashion, and a lot of the mitigation efforts are already under way. So while we’ll continue to see inflation and we’ll continue to stay at an inflated level, I don’t necessarily. Or we’re not seeing dramatic price rises going forward. Okay. You’ll see it in pockets where there are, say, supply issues or something like that. But gold is more effective when everything is well, gold is a barometer for finding value.
I’ll say that much. It’s a tangible metal and people see it as worth something. And so what used to happen is gold and say the dollar as the dollar do value the gold would appreciate. But now we have crypto and people treat crypto kind of in the same way they used to treat gold. The gold market is really trying to find itself. So I think we’re going to have to see some fallout in crypto if it is to happen. We’ll have to see some fallout in crypto before we start to see gold being the safe haven again or being the preeminent safe haven.
So until Bitcoin and the other crypto assets really deteriorate in value and people go flocking back to gold, which I think will happen eventually. I don’t think it’ll happen overnight, but until we see a lack of faith in crypto, I don’t think we’ll necessarily see dramatic price pressure on gold.
KSC: Tony, you talked about Asia, right? And now China is moving to banners via structure, which is the loophole that allows its companies to list in New York and other foreign exchanges. What does this mean in terms of China’s overall strategy to go its own way to quote Fleetwood Mac?
TN: Sure. Yeah. So I think, of course, it hurts Western banks, and it hurts the Western banks that are in Asia because they don’t necessarily have those fees to take things public in the west. But I think the bigger problem is this those companies going public don’t have US dollar denominated resources to access, and so they have to get CNY or Hong Kong dollar or Japanese yen or other Sing dollar other denominated assets. Okay. But the US dollar is 87% of global transactions. So it helps those companies to have US dollar reserves, especially as they’re newly public.
Because why do you go public? Because you want to buy another company, you want to use that cash for a big investment or something, you want to expand in a big way. So if you don’t have the US dollar assets that come from going public, say, in New York or somewhere in the US or whatever, it’s really hard to have a big source of cash to do a massive international expansion or undertake a big international project or do a big international buy that’s I guess the biggest downside I would see from the decline of that type of structure in China.
KSC: All right, Tony, thank you so much for your time, Tony Nash there chief executive of Complete Intelligence. And just to hang on this last point, Phil, if you don’t list in the US, you don’t get US dollars necessarily. But that doesn’t matter if you are China, and you believe that the real market is domestically or within ASEAN, where you’ve got to combine, I don’t know, 2.1 trillion people or 2.1 billion people. That’s quite a fair few heads. Yes.
PS: Correct. I think it’s a question of whether you see a convergence between where you list versus where you operate.
KSC: Absolutely.
PS: And I think in the past we thought, okay, you could tap financial markets globally to serve your local markets. But I think China is kind of proving the point. No. I think it’ll be closer together.
KSC: Yeah. And what he was talking about in response to your question on gold, Phil, how gold hasn’t responded to all this uncertainty, which has been traditionally the case. And Bitcoin is somewhere hovering around in the mid 50s, which is a bit weird because you would expect some kind of flight to what was seen as safe havens, right.
PS: Ironic is considered Bitcoin a flight to safe havens.
KSC: Well, because it’s finite in nature. So it’s a bit like gold, right. It seems interesting, because in the last few weeks, we’ve seen a move among corporates like Mark Zuckerberg of Facebook and now Jack Dorsey, formerly of Twitter, who has left his job at Twitter. Still, at the same time was CEO of Square fintech platform financial platform. He’s moving to turn Square into a company called Block, and it’s a bit like it would make Mr. Miyagi proud because martial arts moves from square to block, but he’s going all in.
PS: But this is a very interesting thing because he’s going all in on crypto. And I think you’re referring to Blockchain blockchain reference to Blockchain, which is the distributed platform for data used by Crypto.
But it’s interesting, right? This whole name shift.
I think Jack Dorsey, I think, is trying to evolve away from just being a pure payments provider to offering solutions that are anchored on blockchain as a solution.
Tony Nash gave the BFM 89.9: The Morning Run his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets. Will inflation derail hastening of the tapering talk? How does crude oil look like in the next few months? As the Christmas season is coming, how much of a concern supply chains will be for the consumers and the economy? When the Fed begins normalizing rates, which currencies will be vulnerable if or when this happens?
❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.
Show Notes
SM: BFM 89.9 good morning. You are listening to the Morning Run. I’m Shazana Mokhtar together with Khoo Hsu Chuang and Philip See. It’s 9:07 in the morning. Thursday, the 25 November. If we look at how the US markets closed yesterday, the Dow was down marginally by 0.3%. The S&P 500 was up 0.2%. Nasdaq was also up 0.4%. So for some thoughts on where international markets are headed, we have with us on the line Tony Nash, CEO of Complete Intelligence. Good morning, Tony. So the Fed minutes revealed that the pace of tapering may be hastened, while macro data points from personal spending to job data suggest that the US economy is in quite the sweet spot, but will inflation derail this?
TN: Yeah. There was a statement from one of the Fed governors today talking about that inflation is not transitory in their mind or could potentially not be transitory in their mind. That’s a real danger to people who are thinking that we’re really in a sweet spot right now because it could mean Fed intervention, meaning tightening sooner than many people had counted on. So I think people had counted on some sort of intervention, maybe in Q2, but it may be happening sooner. That would have a real impact on the dollar. The dollar would strengthen, and that would have a real impact on emerging markets all around Asia, all around Africa. People would feel it in a big way where there is US dollar debt.
KHC: We are seeing that strengthening US dollar in our currency now. But I just want to get your perspective on crude oil because various countries from the US to China are now tapping into their strategic crude reserves to alleviate the present energy crisis. But if you look at crude now, it’s not really being responsive, right to these actions?
TN: Right? That’s right. So what the US agreed to release is about two and a half days of consumption. Not much. The releases agreed in the UK and India, for example, were really token releases. They weren’t really major portions of their consumption. So these countries are kind of giving a nod to the Biden administration, but they’re not really alleviating the supply concerns that are spiking prices. So it really has been a dud for the White House. It’s been kind of an embarrassment because crude prices haven’t fallen, really. They fell initially, but they really came back after the release announcement was absorbed.
PS: Yeah. Tony, that trickling in oil supply releases from the US government hasn’t done much to alleviate the supply concerns. Gas prices in America have been on a massive uptrend as well, just in terms of inflation and not being as transitory as people expected, as we enter Christmas season, how much of a concern is it for consumers as well as the economy?
TN: It’s a real concern. I have to tell you, I’ve driven halfway across the US for our Thanksgiving holiday, which is tomorrow morning. It’s Thursday here, and we’ve seen a lot of trucks with cargoes on US roads, and I make this drive pretty regularly. So it seems like a lot more on roads than I normally see. So that’s good in terms of the domestic supply chain.
I think it’s the international supply chain that is really concerning, and we still have those backups in the Port of Long Beach. That is the real main constraint for supply chains in the US. So I don’t think we’re going to see major disruptions outside of other ports. But through Long Beach, we definitely see issues.
The semiconductor supply chain is the main impact for, say, electronics and automobiles in the US. We did see semi manufacturers start to produce more auto related semiconductors, say mid-Q3 and into Q4. We should start to see those automotive supply chains, the semiconductor dependent issues and automotive supply chains alleviate, probably in Q1. So that will help.
But for the Christmas season, I’m not sure that there’s a whole lot that’s going to help with electronics and say automobiles.
PS: Yeah, Tony with JPowell still back and still in the fair chair in terms of his reappointment. And he does hike rates earlier than expected to address inflationary concerns. How much of a dangerous is to slowing down the economy in America and as the rest of the world.
TN: Sure, it is a risk in America. I think it’s really hard to hire people in the US right now. There’s a lot of job switching happening and people haven’t come back into the workforce. We lost about 5 million people in the workforce in the US through the Covid period. So that’s a real issue. Anything that raises the cost of doing business is problematic for the US and will inhibit growth. The main problem in the US is that the environment right now, it continues to crush small companies. It’s very difficult for small companies. And while it may seem that small companies don’t matter that much, they are the main employer in the US and the main growth engine in the US. And the Biden administration hasn’t helped this with a lot of their policies. Their policies have been very favorable toward big companies. If the Fed pushes inflation, it will make borrowing a little bit harder. I’m sorry if the Fed pushes the interest rate, it’ll make borrowing a little bit harder. But the collapsing, say, the tapering of the Fed balance sheet will have a bigger impact on liquidity in the US.
SM: And if I could just touch on large US dollar debt and what happens to emerging markets when the Fed begins normalizing rates, which currencies do you see as going to be particularly vulnerable if or when this happens?
TN: Well, I think one that I’m really keeping an eye on is the Chinese Yuan because it’s a highly appreciated currency right now. And the Chinese government has kept the CNY strong so they can continue to import commodities and energy for the winter. And they’ll likely keep it strong through Chinese New Year. We expect CNY to really start to weaken, say, after Chinese New Year to help Chinese exporters. So winter we mostly pass. They want to help kind of push a Chinese export, so they’ll start to really devalue, seeing why probably end of Q1 early Q2.
We do see pressure, the Euro, as you’ve seen over the last three weeks, there’s been real pressure on the Euro as well. Other Asian currencies. We do think that there will be pressure on other Asian currencies. Sing Dollar will likely continue to stay pretty consistent. But we’ll see some pressure on other Asian currencies simply because of the US dollar pressure. The US dollar is something like 88% of transnational transactions. So the US dollar as a share of transnational transactions actually come up over the past two to three years. So there’s much more pressure with an appreciated dollar and it’s coming.
KHC: Just like the one. Tony, India Indian equities record high. Have you reached to speak considering PTM’s IPO failure?
TN: Yeah. I think there’s been a lot of excitement there, and I think it’s at least for now. I think it has I don’t think you can ever really claim that an equity market has hit its peak, but I think for now, a lot of the excitement is dissipated. It may come back in a month, it may come back in six months. But I think that momentum is really important. And as you see, failed IPOs, I think it’s really hard for equity investors to kind of get their mojo back.
SM: Tony, thank you so much as always for speaking to us and happy Thanksgiving to you and your family. That was Tony Nash, CEO of Complete Intelligence, giving us his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets.
This is the most recent guesting of our CEO and founder Tony Nash in CNA’s Asia First, where he shares his expertise on inflation and the US economy. Will consumers continue to spend to help the economy? What’s his view on Biden’s call to boost oil supply to ease prices? Where does he think the US dollar is headed and how will that impact Asian currencies?
The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA.
Show Notes
CNA: What’s still ahead here in Asia First. We’ll check if US companies continue to charm investors with some big earnings in focus. Plus, to give us a stake on markets inflation and the US economy, we’ll be joined by Tony Nash from Complete Intelligence.
US stocks closed in the red overnight as lingering inflation concerns continue to dog investors. The Dow ended lower by six tenths of one percent, dragged down by a four point seven percent. Drop in visa the S&O 500 slipped 0.2 percent. And the NASDAQ fell by 0.3 percent.
Now after the bell, we also had some US tech earnings. NVIDIA shares rose after it beats on the top and bottom lines. The ship maker saw its revenue jump 50 percent on year on strong gaming and data center sales. Cisco shares tumbled and extended trade after missing on revenue expectations before the quarter. The computer networking company also issued a weaker than expected guidance.
For more on the broader markets and economy. We’re joined by Tony Nash is founder and CEO of Complete Intelligence speaking to us from Houston, Texas. So Tony as we heard their inflation fears seem to be back despite better expected earnings but CEO’s are starting to warn of more pain when it comes to supply chains. And that could put a damper on in that could lift inflation. Do you think the US consumers will continue to spend despite all this and will that help the recovery of the US in the next year?
TN: Yeah, I think the real issue here is that inflation is rising faster than wages. And what we’re seeing with oil prices. These oil prices are not terrible given kind of historical prices but it’s oil prices within the context of everything else. Obviously, the supply constraints really are pushing up prices of food and other activities as well as say goods that are imported for say the holiday purchases that Americans will make.
So Americans have absorbed a lot of those price rises to date. They’ll continue to absorb some but I think they’re almost at their limit in terms of what they can tolerate without getting upset.
CNA: Yeah, Do you think there’s a disconnect here when it comes to energy because Biden administration is hoping to boost supply to ease that oil price pressure but OPEC and its allies expect surplus into the next year. So, do you think they’re looking at it differently? And who has it right here and where oil prices headed?
TN: Yeah, I think part of the issue in the US with crude oil is the Biden administration restrictions on pipelines and on the supply side in the US. So, Joe Biden is asking other countries Russia, Saudi Arabia, other OPEC members to supply more oil yet he’s restricting the supply domestic supply in the US. So, I think what’s happening with those other suppliers they have customers who are buying their crude oil. They don’t necessarily want to have to produce more because they want slightly higher prices. They don’t want things too high but they want slightly higher prices and so they’re pushing back on on Joe Biden and saying look you really need to look at your own domestic supply. You really need to look at at those issues yourself before we start to open up our own market.
So you know, the current administration is trying to have it both ways. They’re trying to restrict supply within the US. They’re trying to bring in more supply from overseas. Americans see this and they understand kind of the incongruent nature of that argument from the administration.
CNA: I want to get your thoughts on the US dollar, Tony. Because that hit a 16-month high amid his expectations of more aggressive policy from the Federal Reserve. Where do you think the US dollar is headed and how will that impact us here in Asia, especially Asian currencies?
TN: Sure, it’s a great question. We saw a lot of action with the US dollar yesterday. The dollar index as you said reached highs for in the last say 18 months, two years. And that is on Fed action but one thing to consider is we’re looking at potentially changing the Fed chairman later this year.
So, if the current Fed chairman is exited. There is an expectation of a more dovish Fed chair coming in that’s one possibility. I think people are really trying to… While there is upward pressure on the dollar. People are trying not to get too far too much behind it because there could be a more double dovish Fed chair coming in. So, we think the dollar is overshot just a little bit in the short term.
We don’t expect it to continue rallying at its current pace. We expect say the Euro has fallen quite a bit and depreciated quite a bit in the last say three weeks. It’s going to appreciate just a bit a couple cents over the next month or so. Asian currencies, we think the CNY will stay strong. We think CNY will remain strong through say March, April as they start a devaluation cycle to help exporters. We think the Singapore dollar is going to stay in the same range that it’s in about now. We don’t see much policy change in Singapore and we think with a stable dollar at these levels. We think the same dollar will stay at about the same exchange rate of Scott now.
CNA: All right. We’ll keep our eyes on those currency exchanges and who becomes the next Federal Reserve Chairman. Tony Nash thanks for joining us. Tony Nash there founder and CEO of Complete Intelligence joining us from Houston, Texas.
The emerging markets expert Michael Nicoletos shares his insights into the Chinese economy and why it’s in a very big trouble?
This is the first part of the discussion. Subscribe to our channel to get notified when Part 2 is out.
In this first part, Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?
Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.
Tony Nash met Michael at a Real Vision event in 2019, when he was giving a presentation on China, and he had a chart in there that was actually Michael’s chart. They had a conversation after that and have stayed in touch occasionally since then.
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This QuickHit episode was recorded on October 20, 2021.
The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: So on China. Michael, I wanted to ask you, you sent out a tweet. I think it was last week talking about China’s household debt and it’s on the screen now. So it’s talking about how China’s household debt is at $10 trillion and looking at the ratio of China’s household debt to say, Hong Kong and the US. So can you talk to us a little bit about China’s household debt loads and what that really means for the Chinese economy?
MN: Well, as we all know, it’s been in the news lately. The Evergrande imminent. I don’t know if it’s going to be a default because there are some discussions right now to find a solution. But either way, it’s very hard for it to be repaid at its face value.
Now, the problem here is twofold. One problem is that China is highly levered as a whole, approximately more than 270% of GDP. The other thing is that real estate is approximately 62 trillion, I’d say the property market, which includes also home prices and everything. It’s about 62 trillion, of which around 10 trillion around sold properties. So it’s a very big backlog. The real estate crisis has started with Evergrande, and we’ve seen actually bond yield spiking in China real estate bond prices. And the big issue here is that banks are the ones who lend obviously to the real estates. So right now, banking assets in China are around 400% of GDP. And in Hong Kong, which is a proxy to China is around 900% of GDP. Just to put it in perspective.
In 2007, the relevant numbers for the US was 230%. And Ireland where the crisis started was like 700%. So we’re past both those levels. So we see that there’s a very big debt problem within China. Now, because China has capital controls in place, money cannot leave the country. So the bubble grows, grows, grows. But the money stays in the system.
So people now are starting to be afraid. And it’s the first month after six years that retail prices started falling in China. So this is creating a vicious loop. That fear that the contractor will not deliver your house. It means that you’re not going to purchase a new house. So you’re afraid. People in China have stopped buying, which creates a negative, vicious look.
So China has tried to avert this at least three or four times in the past ten years. Every time China is trying to stem back from giving you debt, we see such a small crisis, and then China is forced to reverse immediately because it cannot afford. It’s too big of an economy. Real estate is approximately 29% of China’s GDP. So you understand that something like that is very hard to control.
Now, China has been a rock in a hard place because I’ve been trying to shift from an investment, let’s say, investment intensive economy to a more consumption driven economy.
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TN: This has been a 20-year transition, right? It’s not something they started two years ago. They’ve been trying to do this for, like, 20 years, right?
MN: They’ve been trying to do this, say ten years. But let’s see, consumption as a percentage of GDP is around 38%. When in the US, it’s around 70%. It’s very hard to get that number higher. And given that all the wealth or most of the wealth by Chinese people, is linked directly or indirectly to real estate, you understand that this is a chicken and egg problem. If you try to stop one problem, you’ll create the other problem.
TN: Sure.
MN: So there are these problems right now in China. I think China will be forced to reverse course again. I don’t think you can afford to create a real estate crisis. I don’t think there would be a world contagion, by the way. But I think it could create a spillover effect with other real estate entities. Evergrande, the size was around 300 billion. It’s actually the biggest one. So we’ve seen the biggest one. And the thing is this could spill over to the whole industry.
Now, what’s the problem here, besides that? The problem is that China has been trying to convince banks and actually all the regions to stop giving loans, which are unproductive. Now, because GDP in China is an input number and not an output number like it’s in the Western countries, whatever the number the government sets, that’s what everyone tries to achieve and they can achieve it by giving more money.
TN: I just want to stop you there because I don’t think that point is well understood. When you say GDP is an input number in China and it’s an output number everywhere else. I’ve been trying to make this point for years to people, and you say… Help me understand, when you say it’s an input number. What do you mean in simple terms?
MN: In simple terms is the government wants 7% growth, so everyone will do the best they can to achieve that 7% growth, no matter what. So it means if I’m a bank or if I’m a region in China and I need to do more, I need to produce more growth. I’ll give out loans, which could be unproductive.
What do I mean? If I build a bridge, this is the most common example. If I build a bridge, when I build a bridge, this is counted in the GDP growth. Now, if I destroy the bridge, that is not deducted by the GDP. Right? If I rebuild the bridge, it’s added again. So in theory, you could make one bridge, build it, destroy it, build it, destroy it. And you would only have growth. So when China wants an input number, it will create bridges. The bridges could be, as we say, the usual “bridges to nowhere.” The famous quote. Or it could be bridges, which are useful. So all these unproductive debt went mostly to properties. And that’s why we see all these vacancies and all these ghost towns around China which actually were built and this was added in the GDP growth numbers. But then no one went to live there and the towns are there, and now they have to bring them down.
TN: Right. Now, you’re famous for kind of calculating for every say CNY spent by the Chinese government, it results in X amount of GDP, right? There used to be a multiplier effect to CNY spent and GDP. But you started seeing as that was diluted. So when you last calculated that, what was that number? For every say Chinese Yuan spent how much GDP was created?
MN: So your viewers can understand because it’s a bit technical. So let’s assume you’re an economy and you create debt. You want that debt to create more GDP than the debt you’re giving. So if you’re giving one unit of debt, you want that one unit of debt to create one point, something of GDP.
So in theory, you would want it to be two, three, four. Okay, that’s not very easy. But if it’s a plus, it means that your debt was accredited. So it helped the economy. The problem here is, since 2008, China from using approximately let’s say, two units of debt to create one unit of GDP. So we’re already negative, because when you have two units of debt to create one unit of GDP, it means that that one unit will end up as a bad debt at some point. It’s not imminent, but at some point it will add up. So we went from 1 to 2.2 units of debt to create one unit of GDP. And right now we’re approximately between eight and nine units of debt to create that same one unit of GDP. So China needs more and more debt to sustain the same rate of growth.
TN: Right. So instead of a multiplier effect, which is what kind of economic impacts people usually talk about, there’s almost a divisor effect in China.
MN: You could say that. But because it’s a closed economy, that money can’t leave the system. So in theory, if you had a free account or if you had an open capital account, the Chinese will say, oh, my God, my currency is overvalued. Or let me take some money out of China and make a dollar. Now, this is not possible because Chinese have, I think, a quota of $50,000 a year they can take out? Something like that. Now, obviously, there are ways to take money out, but it’s not the easiest thing, and it’s not for everyone.
TN: I guess. It’s jewelry and watches the latest.
MN: Right. Okay. It was also Bitcoin. They try to be creative. Well, there’s a good ratio here, which is pretty interesting, and people forget. Now, if you devise the M2, the FX reserves to M2, why do I do that? Because let’s assume money is the money supply within the system. The ratio goes to 9%. Now, the Tiger countries in the Asia crisis in ’97 had the same ratio of approximately 25% to 30%. When it dropped below the 25%, you had the big devaluation.
Now, China doesn’t have a big external debt. So since it doesn’t have a big external debt, there is no trigger from that side of the equation for China to be forced to liquidate that fixed reserves to cover for it. But even though they have approximately $3.2 trillion of FX reserves and maybe another trillion from the banks and everything. I’d say 4 trillion. The M2 is approximately around $36 trillion right now. So these numbers… Imagine a hot balloon that you put air. At some point it’s going to blow. We don’t know what that level is. Okay. It could be like ten years before that happened. Or we could see, in my view, the Japan-like model where for ten years, you have an anemic growth. But you don’t see anything really, not a substantial bust. Because one thing.
TN: You also just destroyed the idea of China becoming a global currency, of the CNY becoming a global currency. Right. Because if they do have to trade on an open basis, then it’s way overvalued. Right. It’s like monopoly money.
MN: Well, China tried or is trying, at least. And it appears through Alipay and WeChat to create a digital Yuan. Why does he want to create a digital Yuan. It’s pretty simple. If the world is using a digital Yuan outside China, it means that the CNY or Yuan or Renminbi or whatever you want to call it, will be used abroad. So this means that it’s usage outside China will increase.
We’ve seen, however, that during the last two years, and I’m sure you have the guests, which are better to talk about this, know this subject a bit better than me. The dollar usage has gone up. The dollar is around 87% of global transactions. It actually went up. So there’s a discussion where everyone says the dollar is dying. The dollar is dying, the dollar is dying. Okay. And I understand where it’s coming from because of the policies. But monetary policies are relative. They’re not absolute. Maybe US is doing something bad, but the rest of the world is not doing something better.
So right now, the US dollar dominance increases. Now. I’m pretty sure I understand that this cannot stay at current levels. But going from 87% to being to 5%, it’s not something that’s going to happen in the next 2 years.
TN: I think the dollar had been down to like 82% six to seven years ago. And seeing it go up to 87%, that’s not a small amount. But the Fed does not want to be the World Central Bank. The US Treasury does not want to be the world’s treasury. So there’s this belief that the US wants to be the dominant global currency. I don’t necessarily believe that’s true. I think there are advantages to having a large portion of global currency usage, but I think 87% is just way too much. It’s way too much concentration of risk, actually, for the Fed and for US monetary officials. Go ahead. Sorry.
MN: No, you’re absolutely right. I think you’re right. However, the US, I think would like to remain the number one. Now, I don’t know what the percentage, the optimal percentage would be. But I’m pretty sure they prefer being the dominant than not being the dominant.
TN: Oh, yeah, absolutely. They want to say number one, but 87% is just too much.
MN: Since we’re talking about the dollar. The important thing about the dollar is that if the dollar strengthens, okay. And I don’t have a strong view here, I think it’s going to strengthen, but I understand if it doesn’t. If the dollar strengthened, this puts the pressure on emerging markets as a whole, because usually emerging markets tend to borrow in foreign currency because the foreign currency interest rate is much lower than the local currency.
For example, in Turkey, it’s 20%. The dollar is 0%. So if there’s a Turkish corporate wants to launch a bond, it will borrow on dollars at five 6% instead of borrowing at 20%. So they try to do that.
Now, as the dollar strengthens, especially for emerging markets, this puts pressure to repay the debt and it becomes harder and harder. So if the dollar were to strengthen, that would create a very, very big problem. I think the Goldman Sachs issued a report where it showed that the growth divergence between emerging markets and developed markets is at its lowest point. If you look at the cycles and it leaves that it could expand and right now, I think it discounts like a 4% growth for EM as a total.
So if the dollar strengthens, I don’t think we’ll see these numbers. I think you’ll see pressure on EM. Huge.
TN: Talking about EMs, and we talked about reserves and you mention Turkey. Let’s talk about Turkey Turkey for a minute because you’ve made some really interesting statements about Turkey. And I’d like to really understand your perspective.
BFM speaks to Tony about corporate earnings as worse GDPs, market expectations, and the Dow and S&P 500 extended losses after their worst quarter since 2008 as Trump warned of a “painful two weeks ahead”. They also get into Tony’s expectations for markets in April, the shortage of US Dollars globally and Chinese Manufacturing data.
BFM: But right now. Let’s take a look at global markets, a deeper look at global markets and to do that, we speak to Tony Nash, CEO of complete intelligence. Tony, thank you for joining us on the line this morning. Now the Dow and the S&P 500 extended loss after their worse quarter since 2008, as Trump warned of a painful two weeks. I think, for the Dow, this was the worst quarter since 1987, if I’m not incorrect there. Now, how badly is this going to hit US corporate earnings across the board?
TN: It does really depend on the energy sector, but generally it’s hitting things pretty bad. I guess the good news is it’s only part of Q1. So the last few weeks of Q1, but I guess the big question mark and the reason markets are really saying negative is nobody is sure how long we need to endure?
It is another couple of weeks, is it another few months? And that’s why we’re seeing markets in the red because nobody really knows. And so I live in Houston, in Texas. So it’s the energy capital of the world. Malaysia’s feeling a similar pressure with the oil and gas and a lot of my neighbors, thousands of my neighbors have been laid off from their jobs. So it’s not just the stores being shut and things that are not happening. It’s actual incomes not coming in as well.
So that consumption part of the GDP calculation will be decimated for at least a single week. And this is why you’ve seen the big government intervention come in with the 2-terms plan, which allows government spending. That ‘G’ part of the GDP calculation, it allows that to replace some of the consumer spendings and that’s one component that’s been displaced over the last few weeks and will be displaced for the part of Q2. So, our view is it the last fiscal plan in the U.S.?
We expect at least one more, if not two, five to six trillion dollars of fiscal spending from the U.S. government. The real question is whether other governments can afford to match a similar proportion of their GDP. I’m skeptical that none of them can. So what matters right now to consumers is fiscal health, fiscal spending. For central banks do not matter as much. What matters is getting hands into the consumers.
BFM: U.S. right now has over 200 thousand COVID-19 cases and the situation does not look like it’s improving, and we might see even more lockdowns in the U.S. So do you expect markets will perform even more badly in April? And how might markets land in April?
TN: No, I think what’s affecting markets really is the uncertainty not necessarily the case count because, you know, not all tests are created equally. And what really matters in the case count is the denominator.
What we found is, yes US test is actually pretty accurate, unlike a number of other tests out there. And so the number of false positives and false negatives are a lot lower that’s my understanding of the US test. And the portion of population that’s been tested in the US is growing pretty rapidly. So although we see those cases counts growing, we see it as a fairly good example of the real picture in the US. Now, what we have seen on the ground here in the U.S. So the governor of Texas came out a few days ago and said that 99 percent of the bed space allocated for covered patients is empty. So we’re not seeing people in hospitals here. We are seeing things in other parts of the country. And of course, there are cases here. But what we’re doing again and again and again is that people will come in with other ailments that will be diagnosed as COVID. So COVID is a secondary or tertiary infection to something that is really, really ailing them.
So and that’s the question that people need to start peeling back is, “Is COVID the primary cause of that fatality or is was there already a number of other ailments in place and COVID was somewhat incidental?” Until we start asking these questions, you really won’t understand how deeply dire the problem is.
BFM: Tony, there’s a shortage of US dollars in the world today obviously as a safe haven. The Fed has introduced a new repo facility for foreign central banks to draw down on what you know about this facility and how effective has it been?
TN: Well, it’s been pretty effective. I mean, we see the trade weighted dollar down 99 with a 99 handle on it now it was up 103 or something, which makes it very difficult for people outside of the U.S. needing dollars. There’s a lot of U.S. dollars denominated debt. There’s a lot of trade conducted in U.S. dollars. So if the US dollar is expensive and if governments are having to buy medical equipment and other things in U.S. dollars, it makes it even harder for them to address some of these quality concerns. So the US government has been working very hard to help other countries by pushing the value of the U.S. dollar down. So these facilities and it’s easy for countries to put up pretty low quality assets in exchange for U.S. dollars. So that the U.S. can churn more U.S. dollars out into the global economy to grain that supply up and, of course, bring the value down. So I’m not really optimistic that they’ll be able to keep it down for long. I think the flight to kind of safe haven currencies is going to persist. So I think the dollar value is going to rise, continue to rise. But I think it’s really important for the Fed to focus on this and to take these efforts in the short term to help countries get the equipment they need and transact in dollars at a lower rate.
BFM: There’s a report forecasting a severe contraction for China this year, however, the latest PMI data beat market expectations. What is your current outlook on China’s economy?
TN: You know what’s interesting forecast, because the world’s economies can’t have a very downbeat China forecast without China’s permission. So, somebody is trying to get bad news out there, okay? So I think what we may be seeing, because we saw the PMIs came out a couple days ago that weren’t that bad. But we’ve also seen a lot of government spending to try to offset the lack of business and consumer activity. So there’s no doubt there’s going to be a bad reading in China this year. And I think the World Bank report is a way for the Chinese government to allow us to get out into the market first so they’re not seen as disappointing on their deliverable of 6 percent. So we’ve, you know, Complete Intelligence had believed that China’s been growing at 4 to 5 percent for the past couple of years. So with this, I believe it’s a 2.7 percent rate been said for continuous something, I can’t remember. But it allows China to deliver under 6 percent to deliver over whatever the World Bank forecast was so that they can start to notch down those expectations. So I think the World Bank report is probably credible. I don’t know that it’s necessarily that dire, but it might be, that I think it gives NBS and China an excuse to clock significantly under 6 layer.
BFM: Tony, how about your comments changed as the context of a couple of reports overnight suggesting a) that China has been doctoring the data on coronavirus the last couple of months and b) that a county in China, other reports suggesting that parts of the country is not under a new lockdown because of a further outbreak.
TN: Well, first, I don’t think it’s crazy that anybody that China’s been doctoring the data, but I don’t think China is unique. I think there are many, many countries out there that are doctoring the data. I think political leaders are afraid that corona would be seen as a political failure. And so I think many, many numbers. And China, usually have been singled out in this kind of data doctoring, which they’re guilty, but they’re not the only ones. So, you know, is there a resurgence of this? I don’t know if there’s a resurgence as much as maybe it didn’t pale off in the way the Chinese authorities said it did. So whether it’s a statistical resurgence, you know, maybe that’s the case. But these were you know, these were always there and they didn’t see the decline that was expected several weeks ago. I think that’s likelier than the fact that there’s just some crazy resurgence in COVID in China. But, you know, I don’t think anybody should be shocked. I don’t think China is angry or guilty than anybody else. They’re known for this. A lot of statistics ministries are known for its reporting and health agencies on this reporting. So it’s just the nature of reporting national level data that can be seen as politically sensitive.
BFM: Thank you so much for joining us on the line this morning. That was Tony Nash, CEO of Complete Intelligence.
Complete Intelligence’s Tony Nash talks about USDJPY and expects the Bank of Japan to roll out dramatic monetary policy measures, but not fiscal policy.
