China Property Price Outlook

By Callum Thomas

This chart comes from the latest Monthly Chartpack, which I just sent out to clients.  It shows Chinese property price growth through May against our composite leading indicator.  The composite leading indicator incorporates money supply growth, government bond yields, swap rates, and property stock relative performance.  The key point is despite some stabilization in the May property price date, the leading indicator is still pointing to a further softening in the Chinese property market.  As the property market drives the broader macro/risk outlook for China (and commodities + EM), this is a key chart.  Where it could be wrong would be if the seemingly over-confident consumer drove the market higher, and in Chinese asset markets we have plenty of case studies where “animal spirits” can surprise!  So it’s a complex and evolving outlook, and one that I am spending a lot of time and focus on as a key driver for global markets this year and next.

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‘Blow For Blow’: U.S.-China Trade Spat Devolves Into Name-Calling…

By Heisenberg

…As Chocolate Cake Diplomacy Faces Biggest Test Yet

Well, it looks like Donald Trump’s “great friendship” with Xi Jinping (forged as it was, not in fire, but over “the most beautiful piece of chocolate cake you’ve ever seen”), is going to be put to the test over the next couple of weeks.

On Friday, in the official statement that accompanied the announcement of his decision to move ahead with tariffs on Chinese goods despite the trade truce Steve Mnuchin struck with Chinese Vice Premier Liu He last month, Trump said the following:

My great friendship with President Xi of China and our country’s relationship with China are both very important to me.

Kind words for one’s “rapist”:

Xi, according to Bloomberg, is now set to go “blow for blow” with Trump on trade – and hopefully that means something different than it means when Trump goes “blow for blow” with Russian hookers.

Continue reading ‘Blow For Blow’: U.S.-China Trade Spat Devolves Into Name-Calling…

A Bull in a China Shop


Following is the opening segment of this week’s edition of Notes From the Rabbit Hole, NFTRH 504. For months now we have been tracking a divergence in the key cyclical Semiconductor Equipment segment (I am short AMAT & LRCX) to the broader Semi sector and this week put more context to the divergence.

A Bull in a China Shop

In light of the developing trade war between the US and China, let’s review the all-important Semiconductor sector and in particular, the Semi Equipment segment, which is a key economic early bird (and canary in a coal mine).

Various sectors took hits on Friday as Trump moved forward with Tariffs on China. But most of those sectors and industries are follow-on aspects of the economic cycle, which got its start when the early bird chirped in early 2013.

With China in Trump’s crosshairs and China a very key player in Semi Fab Equipment, there is a fundamental reason that the Equipment companies are faltering. From SEMI by way of a post at in March.

“SEMI predicts Samsung will lead the pack in fab equipment spending in both 2018 and 2019, even though it will invest less each year than in 2017. By contrast, China will dramatically increase its year-over-year (YOY) fab equipment spending for the next two years – by 57 percent in 2018 and 60 percent in 2019 – to support fab projects from both overseas and domestic companies. The China spending surge will thrust it past Korea as the top spending region in 2019.”

The rate of Semi Fab spending growth was easing and a heavy reliance was being put on China to pick up the slack. Here is a screenshot from that post…

Continue reading A Bull in a China Shop

Trump Approves Tariffs On $50 Billion In Chinese Goods, Escalating Trade War

By Heisenberg

Here we go.

On Wednesday afternoon, as the dollar was surging on the back of a hawkish hike from the Fed, WSJ reported that Donald Trump would in all likelihood make good on his threat to go ahead with tariffs on billions in Chinese goods, with an announcement likely coming on Friday.

That decision (were it to pan out) would confirm reports from a couple of weeks ago when Trump, seemingly swayed by the isolationist/protectionist contingent’s rebuke of a trade truce struck by Steve Mnuchin during a meeting with Chinese Vice Premier Liu He, reversed course on an implicit agreement to hold off on further escalations.

WSJ’s post helped catalyze a reversal in the greenback, which renewed its ascent on Thursday following the dovish spin Draghi put on an otherwise hawkish ECB decision.


Fast forward to Thursday afternoon and these headlines hit:

Continue reading Trump Approves Tariffs On $50 Billion In Chinese Goods, Escalating Trade War

China Credit Flows

By Callum Thomas

The May data for China showed a further slowing in the growth of credit.  To be clear, total credit is still increasing, but the issue is that it is increasing at a slower pace.  Now there are basically 2 reasons people worry about China: 1. because debt levels are “too high”, and 2. because debt growth becomes too slow and therefore activity levels slow down.  Today’s chart will give both of those groups something to worry about!  It shows the monthly growth in “total social finance” (a broad measure of credit growth), standardized against GDP, and the key point is that the pace of TSF growth is slowing down.  I’ve also noticed a broader tightening of financial conditions e.g. slower money supply growth, changes in the currency, real interest rates, property prices, etc.  My base case is that the Chinese economy sees slower growth this year, but aside from the negative impact this will have on commodities/EM at the margin, I’m not particularly concerned about major downside risk in China at this time.

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The Charts to Watch in 2018 [Updated]

By Callum Thomas

At the start of the year I posted an article on The Charts to Watch in 2018. It covered some of the key charts and indicators from my 2017 End of Year Special Edition and at the time attracted a lot of interest.  So I thought it would be a good idea to do an almost halfway point update as an eventful 2018 has so far seemingly rushed by.

The format of this article is the same as the original, but I will leave in the exact comments on the charts (in italics and quote marks) for the sake of transparency.  Aside from updating the charts, I have added my updated views and what has changed or become more apparent since then.

But before we get into the charts, here’s a quote from the introduction of original post:

“I’ve said it before and I’ll say it again: 2018 is going to be harder and more complex for investors than 2017.  The cross currents of rising valuations across asset classes, maturing of the business cycle at a global level, and the turning of the tides in monetary policy could make 2018 a watershed year.”

Yep. Sure looks that way!

1. “No more spare capacity in DM. (Next step = Inflation)”
Nothing to add to this.  If anything investors should be paying even more attention to this chart.

Continue reading The Charts to Watch in 2018 [Updated]

China, U.S. Agree To Disagree At Trade Summit

By Heisenberg

‘Continued Hard Work Is Required’: China, U.S. Agree To Disagree At Trade Summit And I’m Not Sure That Counts As ‘Winning’

Well, Hong Kong shares fell again on Friday in a continuation of Thursday’s rout as concerns over trade and jitters over what continued tightening from the Fed might entail in terms of capital flight continue to weigh. Remember, authorities in Hong Kong have issued a series of warnings of late re: rates.

A quick glance looks like we hit the lowest intraday levels since early April on Friday:


On trade, Mnuchin and his not-dream-team are already headed back to Washington and apparently, there are still plenty of unresolved issues. China’s Xinhua suggested that some points had been resolved but “other issues remain relatively big.”

“China and the United States have wrapped up their first round of trade talks with no breakthrough, agreeing only to have more dialogue to ease tensions,” SCMP reports, adding that “a draft framework of US demands asked China to cut the trade deficit by at least US$200 billion by the end of 2020 [and] also demanded Beijing halt subsidies for industries under the ‘Made in China 2025’ plan, and that China should not resort to retaliatory measures against Washington.”

Continue reading China, U.S. Agree To Disagree At Trade Summit

Globally Synchronized Disappointment

By Jeffrey Snider

Like so many financial prices, copper’s is tied to both money and economic fundamentals. They call it Dr. Copper for a reason, good as it has been in suggesting ahead of time the direction for the global economy. China is as central for the setting there as well as in “dollars.”

During the early days of the “rising dollar” I wrote that copper was one clear indication being pulled downward by both. China’s economy was slowing, especially the export side, not accelerating as had been anticipated. The narrative during Reflation #2 was the same as it has been throughout Reflation #3 more recently; global growth would rescue any laggards. They only added “synchronized” to the latest one to really emphasize just how much they mean it this time.

From April 2014:

The ongoing disaster in trade demonstrates the miscarriage of that strategy (on both ends), namely not anticipating orthodox failure across every jurisdiction to deliver promised resurrection. There has been no American surge to reignite the export “miracle”, while Europe tries to convince itself and the world that not shrinking counts as a recovery. Now the Chinese are in a nearly impossible and precarious position.

I have argued before that behavior in the yuan, the recent “devaluation”, was not initiated at the behest of the PBOC to punish “speculators.” Rather, it seems far more likely that it was a dollar problem, one tracing through both global trade and finance.

That all continued, economy and eurodollars, all the way into early 2016. The downturn was serious enough here in the US, but it was decisive in China.

Continue reading Globally Synchronized Disappointment

China Has a Trade Deficit! #Sad

By Heisenberg

Well, China reported a surprise trade deficit of $4.98 billion for March overnight, the first since February 2017. That’s against forecasts for a surplus of $27.5 billion. Exports fell 2.7% y/y, while imports rose 14.4%.

I guess it’s time for Xi to make some red trucker hats – #Make China Great Again!

There’s obviously some seasonality here, but this is still notable – especially in light of trade tensions and questions about the viability of the “synchronous global growth” narrative:


The timing of the Chinese New Year is being blamed for some of this as are “volatile” imports. Here’s Bloomberg’s Tom Orlik:

Continue reading China Has a Trade Deficit! #Sad

Not Your Grandfather’s Trade War

By David Stockman

The Revenge Of Bad Money, Part 1

With his China Trade Wars tweet this AM, the Donald has proved once again that he has an uncanny ability to get to the heart of matters….even if by sheer accident!

Yet he’s right.The trade war was “lost many years ago” and it’s the reason Flyover America has rallied to his bluster and bombast on imports and the nefarious practices of furin guberments:

We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

But, alas, the “foolish or incompetent people” skewered in the Donald’s 7:22 AM tweet are not some defunct Commerce Department or USTR officials from bygone times.

Nope, it’s not pointy-head trade bureaucrats at all. The actual culprits are the “low interest” men and women resident in the Eccles Building, who over the past three decades have transformed the Fed into a Bubble Finance machine and the main street economy into a hollowed out tower of debt.

In a manner of speaking, free money has trumped free trade. And that means what is aborning is not your grandfather’s garden variety trade war; it’s the abiding revenge of bad money—–a debilitating affliction that cannot be bargained away by cooler heads among professional trade negotiators as the dip buyers are so foolishly betting again today.

The truth is, the Red Ponzi is an absolute freak of economic nature that has laid waste to much of the US industrial economy. But the dark secret unbeknownst to the Donald, and the Wall Street/Washington establishment alike, is that the China monster was enabled, fostered and feed by the US central bank’s pursuit of an upside-down monetary policy after 1987.

The turning point came when Mr. Deng concluded that Mao had been wrong about the source of state power: Rather than emanating from the barrel of a gun, as the Great Helmsman had insisted, Deng Xiaoping ordered a 60% depreciation of the yuan, thereby recognizing the far greater efficacy of the credit power that issued from the end of the central bank’s printing press.

Then and there the die was cast. Faced with world history’s greatest mercantilist export campaign and the draining of China’s vast rice paddies of tens of millions of cheap workers to fill Mr. Deng shiny new export factories, the US economy required one thing above all: Namely, a systematic deflation of its bloated price, wage and cost structure; high interest rates to dampen consumption and encourage savings; and sustained supra-historical levels of investment in plant, equipment and technology to equip American workers with an insuperable edge in tools and labor productivity.

Needless to say, Greenspanian money-pumping, soaring debt and wealth effects driven financialization were not merely the opposite of what a regime of sound money would have generated; they were the kiss of death for jobs, prosperity and hope in Flyover America, as the chart below so dramatically illustrates.

Folks, this chart is not the fruit of Adam Smith’s unseen hand of free trade going about the work of the economic gods. China’s monthly exports to the US of just $490 million in November 1987 did not explode by 98X over the next 30 years to $48.2 billion in November 2017 owing to comparative advantage!

Indeed, the chart below would not have happened in 10,000 years under a regime of sound money and honest price discovery in the capital markets. To the contrary, China’s initial advantage in cheap labor would have led to a large inflow of reserve assets (e.g. gold) to China and a large outflow from the US, causing wage and cost inflation in China and deflation in the US.

Stated differently, when coupled with sound money, the free market is not suicidal. Instead, current account imbalances get settled via the movement of true reserve assets. That settlement process, in turn, causes domestic interest rates to fall and credit to expand in the case of  inflows, and the opposite to occur in the case of persistent trade deficits and reserve asset outflows.

At length, domestic prices, costs and wages clear at sustainable levels and current accounts remain in reasonable equilibrium among trading partners over the longer run. By contrast, the purple peak in the upper right hand of the chart below represents a 17% compound annual rate of growth for thirty years running; it’s the work of free money, not the free market.

Continue reading at Contra Corner →

As Boeing Dives, Markets Plunge, Trump Says ‘We’re Not In A Trade War With China Because We Already Lost That War’

By Heisenberg

Remember this, from just over a month ago?

It’s a good thing trade wars are “good” and “easy to win”, because by God we’ve got one now. Or maybe not. Because despite the fact that markets were roiled overnight as China struck back just hours after the U.S. published a list of products subject to tariffs in connection with the 301 investigation, Trump insists that what’s unfolding in front of people with working eyes and ears isn’t actually happening.

So wait, this isn’t a trade war and the reason it’s not is because there was a trade war before Trump was President and we already lost that one? Can you not have more than one trade war? Does an old trade war rule out a sequel? And why did we not “win” the first one? I thought “trade wars are easy to win”? Or maybe not for “foolish” people. And Trump is no “foolish” person, ok? Believe me.

Continue reading As Boeing Dives, Markets Plunge, Trump Says ‘We’re Not In A Trade War With China Because We Already Lost That War’

Asia Rally Dies As China’s Tariffs On U.S. Imports Take Effect – All Eyes On Trump

By Heisenberg

April (and Q2) got off to a less than inspiring start on Monday as an early Asian rally shriveled up and died on the vine as the market tries to figure out how to digest myriad uncertainties around the burgeoning trade spat between Washington and Beijing.

China officially retaliated against U.S. steel and aluminum tariffs on Monday as previously announced moves against 128 imported goods went into effect. The  Commerce Ministry claims Washington did not respond to a a trade compensation consultation submitted on March 26 and so, “in view of the lack of agreement between the two sides, on March 29, China informed the WTO of the suspension of the concession list and decided to impose tariffs on certain products imported from the United States in order to balance the benefits of the US 232 measures against the Chinese,” a Ministry statement reads. Here’s the full statement from the Customs Tariff Commission:

Continue reading Asia Rally Dies As China’s Tariffs On U.S. Imports Take Effect – All Eyes On Trump