China Taking Destiny into Its Own Hands

Includes: FXI, SPY
by: Keith McCullough

“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.