KEN GRANT - Bull in a China Shop or China in a Bull Shop: Let the Debate Begin


Bull in a China Shop or China in a Bull Shop: Let the Debate Begin

September 23, 2018

With respect to the all-important matter of selecting this week’s title, I couldn’t decide between the two, and anyway, it really doesn’t matter, because both have a ring of validity to them, right? This left me with no reasonable alternative to including/covering them both.

Let’s begin at the crossroads of the conventional and the obvious; the most prominent Bull in a China Shop is the Leader of the Free World: Good Ole 45 himself. Whatever one thinks about his policies (and other than those on trade and immigration, I endorse them), it’s pretty clear that he cannot, will not adhere to certain protocols of decorum. He says (or tweets) whatever comes to mind, and doesn’t care how much damage is done to the porcelain figurines that are either his direct targets or become collateral damage. He insults people’s appearance, their intelligence, their integrity. If one dares to get in his grill, he will retort in the most petulant of ways, trashing the ratings of news anchors, hurling insults at performances of actors/musicians, and even, when the spirit moves, going toe to toe – in ad homonym fashion – with CEOs of the world’s largest financial institutions.

All of the above has driven everyone – well, most everyone – batty. However, existential threats too many to enumerate notwithstanding, the ship of state lurches forward. Macro statistics are nothing short of gaudy, there’s no inflation on the visible horizon, intrusive and counterproductive regulatory constructs are being either simplified or dismantled outright, and there are even plausible arguments that our enemies around the world are unilaterally on their heels.

Oh yeah, and the stock market continues to careen from one record to the next. We are, at least for the moment, in the midst of what can only be described as a Bull Market, and what sits in the midst of our economic angst, and rightfully so? You guessed it: China. So I again submit to the body of deep thinkers that comprise my readership that in addition to our Bull in a China Shop, we also have a China, in fact, the China, in a Bull Shop – our very own U.S. Equity Complex.

If you’re using the fortunes of equity securities as a scorecard, the contrast, at the moment, is striking. At the point of this correspondence, our much-beloved SPX index is up for the year > 9.5%, the NDX over 17%, and the Russell 2000 +11.5%. The Chinese Indices are a different story altogether. As the week ended, they were down nearly 20%, and this after a 3% rally on Friday.

Again, if one uses this math, it would be hard not to conclude that we’re winning this battle of Exports/Imports, but this does not necessarily mean we’re winning the war. Of particular concern is the inconvenient reality that while we live in a land where anybody can attack our leadership (and usually does), China has a stone cold dictator for life calling the shots. Moreover, their organized society has been around about 15 times longer than ours, and has a history of not caring over-much about a lost generation. Or two. There are plausible scenarios in play suggesting that Trump will not survive his current term, and even more so that he’ll be gone by early 2021 at the latest. Who knows? By contrast, however, absent an Act of God or that of the inexorable force of nature, Chairman Xi will still be sitting atop the world’s largest country by population well after Trump and/or his progeny are occupying their time planning and building his Presidential Library – in Mar a Lago, Bedminster, or even (my personal choice) Atlantic City.

So I’m still not entirely convinced that when this here trade war is all over, it is our side that will come out on top.

In light of the foregoing, and considering the dearth of data-flows in a month that has been thrice truncated by holidays (Labor Day, Rosh Hashanah and Yom Kippur), I will cop to some surprise as to how much bovine vitality our indices have demonstrated. OK; so the Gallant 500 is only up ~1% and the NDX is actually down, but I have found myself wondering why any buyers are exhibiting mojo. Recall, here, if you will, that September is the worst month of the twelve on the Julian Calendar for stock market performance, and that by a wide margin.

Of equal puzzlement is the contemporaneous selloff in global bonds, not only with U.S. 10-year yields holding fast to 5-year highs, but even the less-price sensitive JGBs trading at yields last witnessed in early 2016:

The Vig Rises in Across the Amber Grain Waves and Under the Rising Sun:

Now, if you talk to the smart fellas and ladies out there, they are bound to tell you that – wait for it – long lamented inflation is finally on the horizon. Well, I’ve been waiting, and I reckon I’ll believe it when I see it. On the other hand, (and nominally supporting this argument), the grains have worked their way off the canvas, albeit modestly, and the publicity shy but nonetheless vital Copper market in reanimating in notable fashion:

Copper No Longer Coming a Cropper:

Like the rest of you, I have heard the rumors that the U.S. mint is planning on reinstating the penny as the main unit of domestic account, but I discount them. Among other matters, while not widely known, since 1982, our pennies have been comprised of 97.5% Zinc and only 2.5% Copper. Maybe they want to give the latter a boost by changing the mix, but I doubt it, as this, while perhaps helping a few metals traders, would probably just add to the deficit. Rather, based upon the most recent Net Speculative Open Interest reports, I suspect what we have here is a modest short squeeze.

And why not? And while we’re at it, why not attribute at least some of the newfound vigor in the equity markets at least in part to something of a short squeeze in those realms?

Because, on the whole, I’m just not buying into the recent strength of the Gallant 500, Captain Naz or Ensign Russell, and must urge caution to those who might otherwise place too much faith in these soldiers of fortune. Among other matters, with pretty much every component of the quaint, almost forgotten FAANG complex currently sucking eggs, what names, under the banner of heaven are likely to catalyze the launching of the next phase of retro rockets in the stock market moon shot? A few months ago, one might’ve nominated Tesla for this role, but, well, we won’t talk about Tesla – recent nominal rebound notwithstanding. Then there’s Tilray, and as for that: hey wait, what were we just talking about?

So what sort of bull do you currently want to ride up further into the valuation heavens? If you know, I’d ask you to share, but I doubt that you will, because, after all, you shouldn’t.

So it falls to my lot to give you a little help here, but I’m not sure how much assistance I can offer, because it should be remembered that I did not volunteer for the job, nor did I earn it through meritorious promotion. The fact is that that the responsibility devolved to me.

And, with respect to the remainder of September, I am at pretty much at wits end in terms of bull-prodding ideas. The FOMC meets next week and is almost certain to jack up rates again. At the Presser, it’s an odds-on certainty that Powell will discuss the potentially dilutive impacts of exogenous events like Carolina Charlotte and China (have I mentioned China?).

We could get some end of the quarter tape painting, but then it will be October, and of course, the earnings cycle will be very instructive. Yes, it’s going to be another strong quarter, but the early returns show some arguably worrying signs:

Relax, though, I think the quarter will be fine. On the other hand, published reports indicate that the windfall of buybacks catalyzed by Tax Repatriation will soon run its course. Moreover, in case you missed it, there is a full on Washingtonian political battle raging -- the likes of which we haven’t seen in at least 50, and maybe in 150 years, and which looks like it will get worse before the situation improves. , Our modern day toreadors are certainly fixing to take a crippling bite out of Bull #45: the guy that can’t look in any direction without seeing a red cape, and has shown little if any concern about the delicate tea cups or crystal soup tureens he may demolish in response.

And then of course there’s China itself, which cannot be overly pleased about its positioning in our Bull Shop. I’m not saying they could smash it to bits, but, if pushed too far, if history tells us anything, they could probably do some damage and then patiently wait out the opportunity to pick through the wreckage.

Be forewarned.



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