Tuesday, February 4, 2020

Where Does China's Giant Ball Of Money Roll To Next? (hint: it's red)

We had some disagreements with a couple Macro Tourist calls on commodities and stopped linking but his last two posts are very intriguing.
From The Macro Tourist, February 2:

Buy the Periodic Table
I am writing this special Sunday edition MacroTourist because my financial twitter feed has erupted with virtual panic from the Chinese coronavirus situation.

I am not here to talk to you about R levels, or how many people have the virus.  I have no special insight to offer you.  Nope, the little I understand is about markets, not virus epidemiology.
If you recall a couple of weeks ago (January 20th - LET'S BE CAREFUL OUT THERE), I wrote a piece warning the markets were not taking this situation seriously enough.
Well, that is no longer the case.

As for whether this panic accelerates from here, again, I don't have a clue.  If someone tells you they know - they are wrong.  We are dealing with human beings here.  When fear grabs hold, it's like a herd of wildebeests getting spooked from a shadow and stampeding 10 miles in the opposite direction.

At this point you are probably saying, "why the heck write a special piece if you aren't going to give any insights into the situation?"
Glad you asked.  The only thing I am confident of is that the response from the Chinese government will be massive, overwhelming and unprecedented.
We are already seeing announcements of monetary stimulus injection - "China Promises Cash and Support to Calm Financial Markets":....
Many pundits are saying this is not enough.  Could be.  Again, no clue.
Since he wrote that China doubled the amount of liquidity being supplied to markets.
But this is just the first round of monetary stimulus to stabilize markets.
Which then brings me to the next group of naysayers.  This crowd believes you can't stimulate an economy in quarantine.  Yup.  Completely agree.  Fiscal stimulus doesn't work when everyone is holed up in their apartment.

However, if you think the Chinese government will simply accept this collapse in economic activity and not do anything on the other side, that's where we part ways.

The governments of the western world get worried when the economy falls off a cliff.  Their natural reaction is to cut spending.  They end up engaging in pro-cyclical fiscal restraint.
China will not have that problem. And in fact, they will have no qualms about getting even deeper into debt to stimulate their economy.

My guess is that they will resort to tried-and-true infrastructure spending.  They will revert to what they know works.  There will be no debates about whether they are burdening their future generations with debt.  There will be no tea-party types telling them to stop spending because the budget is worsening.

Nope.  The communist party will have only one mission.  To get growth back.  At any cost.
I was just chatting on twitter with my buddy Harris Kupperman who writes the popular Adventures in Capitalism Blog and he had this great line (which is typical for Harris - probably one of the funniest market guys out there):
Buy the periodic table.  Couldn't agree with you more Harris....

HT Alpha Ideas

Reading that and his finale my first thought was:

$2.5445 up 0.0375

Also at The Macro Tourist:
This Ain't Even Close To 1999 Yet