Managed to make my way off the grid (kind of) for a few days. The Kenai Peninsula, just south of Anchorage. Tribal land. Glaciers, fjords, orcas, humpbacks, eagles, bears, beavers, bucket lists. Marcel was a world away this week: Hong Kong, Abu Dhabi. He stepped in to write wknd notes (see below).
“We will promptly formulate and introduce policies to restore and expand consumption,” declared Jin Xiandong at the monthly presser for China’s National Development and Reform Commission (NDRC). Xiandong may not be the household name of Powell, but he packs a mighty punch. China’s Commerce Ministry provided the details - an 11-point plan to meet the NDRC objectives. It is a stark contrast to Western macro policy where central banks do the heavy lifting. China’s economy barely grew in the second quarter amid a global manufacturing slump. It’s a welcomed slump for overheated economies like the US, having cooled inflation. But China deviated from the inflation pack, averaging 1.4% in the previous two years compared to 6% in the US and 5% in Europe. Proactive easing is a policy option in China. But is it effective? Economic systems are mostly stable, with brief periods of chaos. The West and the East have a meeting of the minds on what this means – draft policy to restore order, a return to the natural state of stability. But what if it’s a misdiagnosis? Brief periods of instability can be seen as naturally occurring, even desirable - a cleansing, a healthy resetting of expectations. What if the problem is our incessant need to control, to cajole, to combat nature. Hyman Minsky thought so and was mostly ignored. Balance sheets tell the story, carrying infinitively lived truths. Balance sheet weakness is the cost of artificial stability. Policy intervention smooths and soothes shocks - with debt. And if the assets on the other side of the balance sheet aren’t productive, future instability will be even greater. Such is the irony of intervention - near term stability is celebrated, even among economic rivals. The resultant instability is a problem for the next generation. And the US and China take their corners in the ring of the cold war, where innovation under vastly different philosophies will determine the victor. But their capacities to do so are constrained by a common problem - debt.
Yellen says China slowdown risks spillovers but doesn’t see a US recession, Russia lets Ukraine grain deal expire, PBOC keeps 1y MLF rates unch at 2.65%, US / China reopen climate talks after nearly a year, at least 5 dead after flash flooding in PA, US banks face stiffer mortgage capital rule than Basel standard, China growth concerns drag Asian stocks lower, China GDP 6.3% (7.1%e), China ret sales 3.1% (3.3%e), China IP 4.4% (2.5%e), Indonesia Exports -21.18% (-17.80%e) / impts -18.35% (-4.2%e), Brazil eco activity 2.15% (4%e), US Empire mfg 1.1 (-3.5e), S&P +0.4%; ECB’s Knot (hawk) pushed back on further tightening beyond next week, ECB’s Visco says infl may drop more quickly than forecast, BOJ’s Ueda suggests easing to stay until infl view changes, Trump’s request to halt Georgia’s investigation into election tampering denied, RBA mins show concerns over long lags of monetary policy influenced decision to remain on hold at last meeting, Poll shows 51% of Britons would rejoin the EU, Japan Tertiary Industry Index MoM 1.2% (0.4%e), Canada Housing Starts 281.4k (220.0ke), Canada CPI 2.8% (3.0%e) / Core – Median 3.9% (3.7%e), US Retail Sales MoM 0.2% (0.5%e) / control group 0.6% MoM (0.3%e), US Industrial Production MoM -0.5% (0.0%e), US NAHB Housing mkt index 56 as exp, S&P +0.7%; Apple races to develop its own AGI tools, GS misses earnings est, N. Korea detains US soldier who intentionally crossed the border, European heat wave continues, S. Africa says Putin will not attend BRICs summit in person, China vows to boost private economy / protect businesses, NFLX misses estimates but adds subscribers, TSLA beats est but disappoints on margins, Argentina eco activity -5.5% (-3.4%e), NZ CPI 6% (5.9%e), UK CPI 7.9% (8.2%e) / CPI Core 6.9% (7.1%e) / RPI 10.7% (10.9%e), S. Africa CPI 5.4% (5.5%e) / CPI Core 5.0% (5.1%e), EU CPI 5.5% as exp / CPI Core 5.5% (5.4%e), S. Africa ret sales -1.4% (-1.1%e), US Housing Starts 1.434m (1.48m exp) / Building Permits 1.44m (1.5m exp), S&P +0.2%; PBOC sets CNY fixing with strongest bias since November, China 1y & 5y prime rates unch (as exp), Turkey CB hikes 250bp (350bp exp), S. Africa CB unch as exp, TSMC beats est / surprises with cut to rev outlook, UAE pledged to buy $8.5b in Turkish bonds, Japan expt 1.5% (2.4%e) / impts -12.9% (-11.3%e), Australia unemp 3.5% (3.6%e) / emp change 32.6k (15.0k exp), Germany PPI 0.1% (0.0%e), Mexico ret sales 2.6% (3.5%e), US init jobless claims 228k (240k exp), US existing home sales 4.16m (4.20m exp), US Leading Index -0.7% (-0.6%e), EU cons conf -15.1 (-15.8e), US Philly Fed outlook -13.5 (-10e), S&P -0.7%; reports suggest BOJ officials are unlikely to adjust YCC at the next meeting, Russia’s deputy Foreign Minister says ‘There’s no Black Sea corridor anymore, there are only high risk zones’, Russia CB hiked 100bp (50bp exp), Ukraine said to be working to ensure grain export deal continues, Trump’s classified documents trial case set for May 20th, S. Korea PPI -0.2% (0.5%p), UK Cons Conf -15.1 (-15.8e), Japan CPI 3.3% (3.2%e) / Core CPI 4.2% as exp, UK ret sales -1% (-1.6%e) / Core ret sales -0.9% (-1.6%e), UK Public borrowing 18.5b (22b exp), Canada ret sales 0.2% MoM (0.5%e) / Core ret sales 0% (0.2%e), S&P flat.
S&P 500 +0.7% and VIX +0.26 at +13.60. Nikkei -0.3%, Shanghai -2.2%, Euro Stoxx +1.0%, Bovespa +2.1%, MSCI World +0.4%, and MSCI Emerging -1.4%. USD rose +5.7% vs Ethereum, +4.8% vs Bitcoin, +3.1% vs Turkey, +2.1% vs Yen, +1.9% vs Sterling, +1.6% vs Australia, +1.4% vs Sweden, +1.4% vs Mexico, +1.0% vs Chile, +0.9% vs Euro, +0.6% vs China, +0.4% vs Indonesia, +0.3% vs Russia, and +0.1% vs Canada. USD fell -0.8% vs South Africa, -0.3% vs India, and -0.1% vs Brazil. Gold +0.1%, Silver -1.3%, Oil +2.3%, Copper -2.9%, Iron Ore +1.1%, Corn +4.4%. 10yr Inflation Breakevens (EU +4bps at 2.30%, US +11bps at 2.35%, JP -3bps at 1.14%, and UK +5bps at 3.77%). 2yr Notes +7bps at 4.84% and 10yr Notes +0bps at 3.84%.
Argentina +53.9% priced in US dollars (+134% priced in pesos), Greece +49.6% priced in US dollars (+44% priced in euros), Poland +35.1% in dollars (+24.1% in zloty), NASDAQ +34.1%, Hungary +33% (+21.9%), Ireland +30.5% (+25.6%), Mexico +27.5% (+10.8%), Italy +26.4% (+21.7%), Chile +23.5% (+19.7%), Brazil +21.4% (+9.6%), Spain +20.8% (+16.3%), Germany +20.7% (+16.2%), Euro Stoxx 50 +20.2% (+15.8%), France +19.2% (+14.8%), Taiwan +18.4% (+20.5%), S&P 500 +18.1% (+18.1%), Netherlands +16.6% (+12.3%), Denmark +16.6% (+12.5%), MSCI World +16.4% (+16.4%), Czech Republic +15.8% (+11.1%), Japan +14.5% (+23.8%), Korea +14.4% (+16.7%), Saudi Arabia +12.5% (+12.2%), Colombia +11.4% (-8.8%), Russell +11.3% (+11.3%), Switzerland +11.2% (+4.5%), India +10% (+9.1%), Russia +9.6% (+35.7%), Sweden +9.3% (+9%), UK +9.3% (+2.8%), Canada +8.5% (+6%), Portugal +7.9% (+3.9%), Austria +6.7% (+2.8%), Belgium +6.6% (+2.6%), Venezuela +4.5% (+76.1%), Indonesia +3.6% (+0.4%), Philippines +3% (+1.2%), Australia +2.7% (+3.9%), Israel +2.3% (+5%), Singapore +1.5% (+0.8%), South Africa +1.5% (+6.9%), Norway +1.2% (+3.9%), New Zealand +1.2% (+4.1%), China -1.6% (+2.5%), HK -3.8% (-3.6%), Finland -4.6% (-8.1%), UAE -5.7% (-5.7%), Thailand -7.8% (-8.4%), Malaysia -8.7% (-5.5%), Turkey -15.7% (+21.4%).
“Membership in the WTO, of course, will not create a free society in China overnight or guarantee that China will play by global rules,” President Bill Clinton said in pitch-mode. “But over time, I believe it will move China faster and further in the right direction.” Leadership requires risk. Being in a position of command demands that you adjust to the new realities decisively, tossing ego aside. WTO may have been the inevitable start of the next cold war. Or it may have been, as Clinton intimated, the alternative was worse. No matter - a strong China is a reality.
China seized its moment with rapid export growth, a well-narrated story. The world economy has advanced at a 5% annualized pace since 2000, growing to $100 trillion last year. China’s goods exports, at $2.7 trillion, may not seem particularly exciting as a share of world GDP. But the growth since 2000 has averaged 12% per annum. And China exports share of world GDP leapt 4x since then. It is not nuts and bolts, either – it is higher value-add. China export complexity is now 25th place, on par with rich European countries and up from 54th in 2000.
“I believe that my bilateral meetings served as a step forward in our effort to put the US-China relationship on surer footing,” Yellen said after two days and ten hours of meetings. “We believe that the world is big enough for both of our countries to thrive,” the Secretary of the Treasury emphasized in a clear effort to deescalate tensions. Yellen is left to navigate growing frictions, inheriting a shaky position. She also left plenty of those behind. That’s the job – decide to take the pain today for better outcomes tomorrow or punt it forward.
China has a voice again. And Beijing is using it – mostly through actions. Yellen’s visit follows the China Commerce Ministry imposing export restrictions on two key inputs for semiconductor production - gallium and germanium. Those start August 1. It’s not a ban - Chinese exporters will now need licenses to explain how the metals are being used by importers. But it is a clear warning shot. The political playing field is more level than in 2000 or even 2018. Yellen getting on a plane to visit Premier Li already made that point, emphatically.
Royalty? China’s launch up the value curve is evident in subtle ways - like royalties and licensing. China came first in nuclear fusion patents on a careful survey by Japanese researchers. Patent trade has exploded - China royalties’ exports are up nearly 100x since the start of WTO. It has never been about FX devaluation as the path to prosperity. And now it is explicit - China policy is setting CNY to higher valuations against the USD than where it trades in the market. The race in this cold war is technological - like the ones before.
Fostering innovation is the critical ingredient to technological power. And despite wildly different philosophies, the obstacle for China and the US is common - debt. Too much debt reflects bad investments in the past. It is a prison for new investment, the shackles on innovation. China’s swelling private sector debt of more than 200% of GDP is internally financed - local citizens bear the burden. US debt is external - its adjustment can be shared with the world. Great leaders seek resolution, compelling people to follow, and keeping cold wars from getting hot.
“Art is the shortest path from man to man.” It is a phrase etched into the museum glass, and these words are spilling into the Arabian Gulf. I am lying on a black beanbag in the courtyard of the Louvre, Abu Dhabi edition. Cultural Centers are an invitation for dialogue. And the UAE is building a magical one, a symbolic understanding that their future isn’t in fossils. The irony is everywhere. Innovation defines cold wars. And innovation centers on energy. But the race to “net-zero” emission brings into focus the most efficient energy production in the long, long term. Nuclear. It is the only practical, scalable solution. Demands of new technologies give new meaning to the race. The fear and greed around technologies like artificial intelligence are a great leap. Even the Hollywood bubble fears disruption with likeness of stars trivially replicated, almost costless. Only, it isn’t costless. AI consumes inordinate amounts of energy. And that needs a vast amount of investment. Low inflation was deemed the ideal path to efficient investment - the best way to support innovation. It failed. Overvalued assets are in the hands of the few and overwhelming debt in the arms of the many. Innovation needs financial resources - a clean balance sheet. And despite wildly different economic philosophies, the US and China are commonly burdened by liabilities built from smoothing past shocks. Both are also racing to build our sun on earth - nuclear fusion, perpetual energy. China leads on patents, the US on commercialization. Who controls infinite energy takes an impenetrable advantage. Resolving debt challenges is where philosophy will shine brightest - liberalism and the invisible hand guiding to safety, not censorship. Fate has a great sense of irony.
Good luck out there,