The Hidden Economic China Syndrome
My hunch is that we’ll get a good number of negative reactions about the corporate earnings season during the eight-week, Q4 reporting period.
Why? Well, because that’s what always happens.
Meanwhile, dividends keep rising, rates are falling again and the fear tank is full to brimming.
So, can the markets remain choppy?
You bet they can. And part of me hopes it does.
You really don't want the tension to disappear overnight.
From Thomson on S&P 500 Earnings Data
- Forward fourth-quarter estimate: $173.54 vs last week's $168.95
- PE ratio: 14.6x
- PEG ratio: 2.17x
- S&P 500 earnings yield: 6.85% vs last week's 6.80%
A Couple of Thoughts About China
China is on the opposite end of the scale from the US as it relates to demographics.
They shot both of their feet off with the "not-well-thought-out" one-child policy of the previous 28 years. And like it or not, that is a hole in their economic cycle that will hurt a little more each day as the next decade or two unfolds.
Dr Ed Yardeni recently said that “What’s hiding in plain sight is that China is seeking to become a super-power before it turns into the world’s largest nursing home.”
For all the vagueness in the press about trade wars and all the associated economic parries and thrusts between the two nations is that China is still heavily dependent on trading with the rest of the world.
So the Chinese government will likely make an acceptable trade deal with the Trump administration.
This could be why many CEOs will tell you they are confident the deal will be done, the latest of which arrived in a recent interview with Tim Cook.
What we’ve said for the last four years is that China’s economy will begin to show much weaker numbers without the US helping them. In fact, it could be weaker much sooner than widely expected.
Dr Ed also reminds us that a significant slowing in the growth rate of inflation-adjusted retail sales over the past couple of years suggests that the aging demographic factor—attributable to the government’s previous population control measure—may be hitting consumer spending significantly already.
The Bottom Line
China's domestic issues will not be able to remain hidden much longer. It may have no choice but to make a trade deal in favour of the US quite soon, which sets the stage for a "surprising" boom for US and global equity markets.
The official M-PMI, which focuses on larger companies, showed a slowdown in China’s activity for December at a reading of 49.4. It contracted below 50.0 for the first time in 29 months.
Every month, the Chinese report retail sales and the consumer price index (CPI). The difference between the two is the growth rate in real retail sales.
This has been on a downtrend since 2008-2010, when it typically exceeded 15%. During November, it was down to 5.9%, the lowest reading since May 2003. It’s down from 10.0% during March 2017.
China’s economic growth slowed to 6.5% year on year in Q3 from 6.7% during Q2, and 6.8% during Q1. The Q3 number was the weakest pace since Q1-2009 (Yes, that 2009).
The 12-month sum of China’s auto sales dropped 4.1% during November since peaking in June, with auto production - which is highly correlated with auto sales – declining by 4.3% over the same period.
And unwanted and unsold apartments are “weighing on China’s economy.” Lots of developers who made big bets on China’s property market are deep in debt.
How Do They Solve It?
The thaw in markets over the last few days may very well be a precursor of what's to come.
Liu He is China's vice premier and top trade negotiator. Scott Kennedy, a China expert at the Center for Strategic and International Studies, suggests that Liu He’s attendance, and the number of people in the room this week, were “good signs” that “serious working-level discussions” were unfolding.
Liu’s appearance signals that China is attaching high importance to the talks.
Well, China had previously said the talks would be led by a lower-ranking official from the Ministry of Commerce. And given the facts, level-headed thinking suggests we are likely closing in on a deal which both leaders can embrace.