Macro Hive Weekly Brief: China’s Trade Challenge / Fed’s Provincialism / Facebook’s Crypto Play

(total reading time: 7 mins)

All eyes are on President Trump’s meeting with President Xi on Saturday at the G20 summit in Japan. Markets are priced for a de-escalation of the US-China trade war, and the timing of the Fed’s first rate cut probably hinges on the fall-out from this meeting.

Other US-China dynamics are unlikely to be affected, however. The US establishment will continue fighting its tech cold war with China. The twist is that both US and Chinese tech companies are finding ways to evade restrictions on tech exports, as we highlight for you in the China Digest section below. A larger and more systematic issue is that China’s current account balance could soon move into deficit. Chris Watling of Longview Economics has written an op-ed for Macro Hive on how this could trigger the unravelling of China’s bubble.

We have two other op-eds. One is written by Jonas Ahlander, an erudite portfolio manager from Sweden. He argues that inflation is increasingly driven by global forces, yet central banks like the Fed continue to believe domestic forces matter more. The end result is monetary policy that’s too easy, which further distorts financial markets.

Phil Rush authors our final op-ed. In my opinion, he’s one of the best UK economists. He argues that once we get through the Brexit speedbumps, the BoE will reassert its hawkish views. UK markets need to be prepared.

As for curated content, we have a thought provoking piece on how the Green party is forcing the deindustrialisation of Germany. We have also pulled up some pieces on the buzz markets of the day: Facebook’s new cryptocurrency, Libra; the Marijuana market; how the economies of swing counties in the US are unconstructive for Trump; and lastly, one on China’s population growth problem. For some light reading, I’ve also snuck in a piece on the most powerful hedge fund managers of 2019. And finally, the chart of the week – a new feature – is on denials of H1B (worker) visa applications to the US: they’ve increased dramatically.

That’s all for now.

Central Banks — Misusing Local Tools for Global Problems. Central banks like the Fed have contorted themselves to find a trade-off between domestic unemployment and wage inflation. Yet the more likely relationship is between wages and the global labour market. This suggests that central banks should stop attempting to micro-manage blips in inflation over which they have little control. Rather they should focus on stopping financial market distortions from materialising over which they have more control. (Jonas Ahlandar | June 27)

The One Chart that Really Matters: China’s Current Account Balance .Optimists point to China’s current account surplus as a reason why China’ debt bubble is sustainable. After all, it implies, the country has excess savings and internally fund any newly created debt. However, the current account could soon be turning to deficit thanks to the US-China trade war and the growing domestic (leveraged) consumption. And when the Fed eventually tightens again, all of China’s structural weakness would suddenly become exposed. (Chris Watling | June 27)

BoE: Hawks Caught on Inconsistencies (3 min read). The Bank of England sees a more hawkish domestic inflation picture than either the Fed or ECB see in their regions. Therefore, it doesn’t follow that the BoE will necessarily follow other central banks in easing. Rather it’s Brexit uncertainty that is holding the Bank from re-emphasising its hawkish stance. On that front, the Bank appears more optimistic on Brexit outcomes (It takes the government view), so it is likely a matter of time, before they come out hawkish (Phil Rush I June 27)

For details: Sharp Increase In H-1B Visa Denials

Facebook, Libra, and the Long Game (Stratechery, 11 min read). This is probably the best article I’ve read on Libra so far. It describes the new cryptocurrency led by Facebook, Libra, as a halfway house between a fully open blockchain currency like Bitcoin and a centralised payment system like China’s WeChat Pay. By having a consortium of validators of transactions, rather than just Facebook (the WeChat model), Libra will have less trust issues. Facebook’s play is to be the pioneer of services around Libra, including a wallet for the currency (Calibra). If it is widely adopted (a big if), it would be a challenger to credit card companies – another negative for banks – and even to traditional currencies since Libra is tied to a basket of currencies.  There are also other articles worth reading on this: Most Interesting ETF Filing Ever: Libra, which views Libra as an ETF; and Will Libra Destroy Cryptocurrencies Or Vice Versa?, which views Libra as a version of Paypal.

Analysis Shows Counties That Flipped to Trump Still Lagging Behind Economically (Economic Innovation Group, 2 min read). This report focuses on counties in the US that Barack Obama carried in the 2008 and 2012 elections, but whose subsequent turns were decisive in President Donald Trump’s victory in 2016. The analysis finds that these counties experienced slower growth in employment, a slower rise in the number of business establishments, and a more pervasive decline in prime age workers. This doesn’t augur well for Trump’s re-election prospects.

Rise of the Greens = Deindustrialization of Germany (Mish Talk, 4 min read). A slightly hyperbolic but useful piece arguing that the popularity of the Greens in Germany is forcing the country to deindustrialise before it is ready to do so. The Greens, of course, oppose diesel, coal, chemicals, and big business, stances that hit most DAX companies. The governing CDU is making overtures to the Greens and so are shifting policies in that direction. This presents a bearish case for Germany and by extension the Euro area.

Special report: Weed, Inc. (Axios, 2 min read). Since marijuana seems to be the new crypto-currency for adventurous investors, I suggest reading this excellent summary of the sector. Venture capitalists are investing record sums in marijuana and related business start-ups. In fact, investment is growing twice as fast as it was in 2018. These investments are essentially a bet that marijuana will be legalized in the US at the federal level, as it has been already in Canada. This is all well and good, but many adjacent business start-ups that are needed to build out the industry (logistics, finance, retail, accessories, etc.) may become obsolete after legalisation. It’s a catch-22 for investors.

The Phillips Curve in Recession and Recovery (Macro Mania, 5 min read) An original take on a well-trodden topic. The author finds that the U.S. Phillips curve appears to be negatively sloped when unemployment is rising (as in a recession) and is either flat or even positively sloped when unemployment is falling (as in a recovery). This has been the case for decades. This argues for a less activist central bank during recoveries, and at the very least less need for hikes. The Fed seems to have taken notice with its recent tilt to dovishness.

The 10 Most Powerful Hedge Fund Managers This Year (Worth, 10min read).Bill Ackman of Pershing, Steve Cohen of Point72, Chase Coleman of Tiger, Ray Dalio of Bridgewater, Ken Griffin of Citadel…

Micron’s shipments to Huawei show that in the globalised world, American technology products are not necessarily American (South China Morning Post/Bloomberg, 3 min read). US tech companies like Micron and Intel have found that a number of their products could be classified as non-American and so have resumed selling to Huawei despite Trump’s ban on the company. This shows how globalised companies have become and how interconnected the US and China currently are. It also shows that like most regulation, companies will find loopholes to circumvent restrictions. This suggests that a full US tech blockade on China is highly unlikely.

Why America Is Worried About DJI And Chinese Drones (SupChina, 2 min read) and DJI Sets The Record Straight On Incorrect Speculation Presented During U.S. Senate Hearing (DJI, 8 min read). In case you missed the headlines, another Chinese tech company is being attacked by the US administration. This time it’s DJI, the world’s leading manufacturer of consumer drones. The administration is concerned that the geo-data of US consumers will be accessible to the Chinese government. DJI has responded by saying that all data is held locally on the device and not shared, plus they will assemble in the US (I guess to appear more American). I’m sure we’ll hear an increasing number of these stories in the coming months.

China’s Risky Move To Boost Domestic Oil Production (Oilprice.com, 3 min read). The article argues that Chinese energy companies such as PetroChina, Cnooc, and Sinopec are being directed at a state level to increase investment in domestic oil production. The trouble is that many of the sites are low yield but yet expensive to maintain. Nevertheless, national security concerns, especially around how shipping lanes for oil are controlled by the US Navy will probably override economic concerns. There is a good chance that this means continued underperformance of the Chinese energy sector in equities.

Chinese companies need to prepare for a shrinking talent pool (World Economic Forum, 5 min read). China’s population is shrinking faster than expected. The long anticipated population decline will start in 2027, according to the Chinese Academy of Social Sciences. That’s three years earlier than most predictions. Moreover, by then an estimated 324 million people in China will be over the age of 60. That’s 22% of the population, whereas today the figure sits at around 17%. Already, Chinese companies are automating processes, but this negatively impacts the employment prospects of low- to medium-skilled workers, which will further add to instability. Demand for highly skilled workers will increase, but China is struggling to educate and re-skill workers. I think this touches on a larger megatrend: depopulation, something that many investors appear to be underappreciating.

China central bank says lending small firms jumps 21 percent in January-May (Reuters, 1 min read). The number of outstanding loans to small and micro enterprises rose to 10.3 trillion yuan ($1.50 trillion) at the end of May, up by 21% year on year. This is important as the major criticism for China’s credit policy was that it only benefited larger Chinese companies. One could read this as positive for Chinese growth.

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