China Taking Destiny into Its Own Hands

“Tis a common proof… That lowliness is young ambitions ladder.”
-William Shakespeare

Don’t worry - I didn’t spend the last week reading Shakespeare. I did, however, brush up on my late 19th century global central banking history, and that’s actually where I came across that quote. The quote was in reference to an unproven country that decided to take their economic destiny into their own hands – the United States of America.

While many a British short seller of America’s 20th century has rendered himself a secure job as a Scottish golf caddy, I left Edinburgh yesterday wondering what an American short seller of China’s 21st century might end up doing… super size them fries for me there laddy.

On this continent, US investors should continue to open their minds to The New Reality of global macro winds that continue to blow onto her shores. They’re real, and oh’ are they a changin’.

While the easiest thing for an American investor to do is assume that he is smarter than everyone else and that the Chinese are making up their numbers, it’s also proving to be the dumbest thing to do.

Whether you’re having a pint in the highlands of the United Kingdom or sippin’ on some Sapporo in Japan, if you have a television today you’re going to see Madoff as frequently as you see Michael. They are both performers. They are both American. If your investment thesis is that the rest of the world lies, please take a look at the man in the mirror and re-adjust that set.

This morning I am waking up to a Chinese stock market that is hitting another fresh year-to-date high. In addition to effectively signaling that Q2 GDP will be reported at a higher growth rate than the +6.1% that was reported in Q1, Chinese central bank chief, Zhou, said China’s reserve policy is aimed at “liquidity, safety and returns.” I like that.

All the while, the American manic media is anchoring on Zhou’s comment that China will not make any “sudden” changes to their currency policy. This has investors who completely missed the mother of all REFLATION trades perplexed. Hate to break it to you CNBC, Zhou’s comments aren’t perplexing – buying REFLATION stocks high at the lows of a Broken Buck in mid-June is.

When it comes to managing his largest position, no rational risk manager would ever signal to the world that he is going to start behaving like a crackberry addict. Do US centric investors think we are going to get a memo one day from the Chinese that ‘today is the day we are blowing out of Treasuries’? C’mon. Let’s be serious here.

Inclusive of locking in another higher-high last night, the Shanghai Stock Exchange is seriously in the green for 2009. At a closing price of 2,975 I’ll proactively predict that you’re going to see a cover story on Barron’s sometime soon about a “China bubble”. Right now, most people who missed the crash are bubble pros, don’t forget. That’s what the “I’m smarter than you” does.

What is it that you do? I think that’s the question that people managing countries, currencies, and companies will have to answer in the 21st century. As the Chinese sign a hugely relevant deal with Hong Kong this morning to settle international trade in Chinese Yuan, I think they are telling us what it is that they do. They are taking their destiny into their own hands.

China is The Client. China wants “liquidity, safety, and returns.” China wants the world to buy into one of the 33 IPO’s they have on tap ($10B in issuance).

China doesn’t want Bernie Madoff. China doesn’t want Alan Stanford. China doesn’t want any more US Treasuries (April Treasury data shows that the Chinese actually had a net outflow of US Treasuries to the tune of $4.4B. Outflows mean they are a net seller).

I know, I know… a billion dollars isn’t what it used to be in this country. But then again, the Dollar isn’t going to be the world’s dollar like it used to be either. As we think about this “150 years” that will grip post weekend at Bernie’s headlines this morning. I think we need to keep thinking about what them British caddies are still whining about missing 100 years back. The lowliness in which some currently regard this young Chinese economic power is their ambition’s ladder.

I continue to think that the bubble and crash callers will be frustrated by a US market that, while still trading -61.8% lower than the Chinese stock market YTD, will continue to trade in a proactively predictable range. This morning I have downside support for the SP500 at 910, and upside resistance at 930.

Comments

[conceptwizard:]

China is also buying Gold and has increased its tonnage to over 1100 tons from 3000 in 2003. They are using the barter system with other countries.
China's central bank renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis.

In its annual financial stability report, the central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.

"An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis," the People's Bank of China said.

American officials and talking heads have attempted to downplay the irreversible trend of the dollar fading as the world's reserve currency. They have argued that China is in a dollar trap. With trillions in dollars, they argue, China cannot let the dollar tank.

But as Marc Faber has pointed out, 2 trillion dollars in reserves isn't really that much for a country with as many people as China has. And China long ago signaled that it was gradually moving out of dollars. The signals came in the form of (1) China moving out of long treasuries and into treasuries with a duration of 3 years or less, and (2) China using its reserves to buy commodities, instead of more dollars.

Nouriel Roubini argues:

The process that will lead - in the medium-long term - to a challenge of the US dollar as the major global reserve currency has started. The US creditors - the BRICs, the Gulf states and others - are becoming increasingly alarmed that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. So they will not sit idly waiting for this to happen: they are already diversifying into gold, into resources (as China purchases mines and energy, mineral and commodity resources all over the world).

The writing is on the wall, watch what the BRIC are doing not what they are saying, and when they are doing and saying then you better take them serious. The US is not taking them seriously. It is prudent to make your portfolios hedged against the dollar. Dick Cheny has. Trust me he knows what is to come.

Jun 29 11:52 AM

[Dave Wrixon:]

Excellent Article, though I would be surprised if many even understand what you are telling them.

Jun 29 12:32 PM

[Swashbuckler:]

Not exactly a profound piece. I mean, anyone who hasn't been living on life support for the past ten years or locked in a trunk at the bottom of the ocean knows that China will replace the USA in the 21st century as the major global economic power.

Jun 29 06:36 PM

[sunnsea:]

A country like the US that delights in tearing down each other as much as we do cannot stand. A country that says "No" more than "Yes" to new ideas and out-of-the-box thinking cannot stand in the modern world. We are a 19th Century China in the 21st Century. An insular country that does not speak other languages or attempts to understand anything outside its borders cannot stand even as it trumpets a false kind "globalization" that it has twisted to fit its own insularity.

Jun 30 10:09 AM

[coreopsis:]

Your accurate comments will soon receive a barrage of negative comments from the usual suspects. At the end of the World War II, America started with every advantage in the book.

Its sorry state now is simply blamed on the rest of the world...first the Russians, then the Japanese, now the Chinese. The tragedy of America means responsibility for the well-being of the globe needs to shift and be shared elsewhere. Humpty Dumpty....


On Jun 30 10:09 AM Sunnsea wrote:

> A country like the US that delights in tearing down each other as
> much as we do cannot stand. A country that says "No" more than "Yes"
> to new ideas and out-of-the-box thinking cannot stand in the modern
> world. We are a 19th Century China in the 21st Century. An insular
> country that does not speak other languages or attempts to understand
> anything outside its borders cannot stand even as it trumpets a false
> kind "globalization" that it has twisted to fit its own insularity.

Jun 30 11:28 AM

[Alphameister:]

I don't plan to learn how to speak Chinese, but I sure do relish the ability to invest in those who speak it fluently, have a strong work ethic and are increasingly excited about exploiting opportunities that were never known to their forebears. Will the day come when Chinese stocks will command a premium to US stocks simply because the opportunities for growth are so much greater? I hope so, because that's where my investments are concentrated, though I'd like nothing better than to see the US adopt economic policies similarly conducive to growth that would close or reverse any such gap.

Jun 30 12:26 PM