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I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China?s position in the world today.
He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US.
We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.
China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede.
China?s military is entirely devoted to controlling its own people which make US concerns about their recent build up laughable.
All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere.
With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.
There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net.
Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.
Ever heard of a Chinese unemployment office or jobs program?
Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.
The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.
As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.
After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.
I?ll consider what Minxin Pei said next time I contemplate going back into the China (FXI) and emerging markets (EEM).
China: Not All It?s Cracked Up to Be
Everyone who has been reading this letter for the past eight years (yes, there are quite a few of you), know that I am a fundamentalist first and a technician second.
Of course you need to use both, as those who mistakenly leave one tool in the bag reliably underperform indexes.
The one liner here is that I use fundamentals to identify broad, long term, even epochal trends, and technicals for the short-term timing of my Trade Alerts.
Do both well, and you will prosper mightily.
Strategists often like to cloak themselves in the fundamental or technical mantle. But parse their words carefully, and the best fundamentalists talk about support and resistance levels, while the ace technicians refer to the latest economic data points.
The reality is that the best of the best are using both all the time. The differential titles have more to do with marketing purposes than anything else.
Having said all that, you better take a good, hard look at the chart below for the Shanghai Stock Exchange Composite Index ($SSEC). This is a classic narrowing triangle spread over the entire five years of the Chinese bear market that is imminently going to explode one way or the other.
My bet is that it resolves to the upside. All it would be doing then is coming in line with the rest of the global equity markets, including those of many emerging markets.
Since the top, the earnings multiple of Chinese companies have plunged, from 35 times to a mere 15 times. This means that the 6% a year growing economy (China) is trading at a lower multiple than the 2% a year growing one (the US). The big question among strategists since 2009 has been how far these valuations would diverge.
If I am right, then you can expect a rally of at least 25% in the Shanghai market soon, and more in peripheral markets, like Hong Kong (EWH) and in single Chinese names.
The rally will also place a laser like focus on the Chinese Internet sector, so you won?t go wrong picking up some Baidu (BIDU) around $180, if you can get it.? I originally recommended buying the stock at $12 seven years ago.
If you are looking for further confirmation of the coming bull move in China across asset classes, please peruse the chart below for copper. The red metal has one of the closest correlations out there with the fate of the Middle Kingdom?s economy and stock markets. It appears to be breaking out of a major three-year downtrend as well.
The other nice thing about this scenario is that it provides more fodder for my expectation of another global bull market move in the fall, when you can expect major indexes to tack on another 5% by yearend.
Jim Chanos, watch your back!
If I warned them once, I warned them 1,000 times!
The Australian dollar (FXA) is going to fall.
That?s why I cautioned my Aussie friends to sell their homes, get the money the hell out of the country, and pay for their overseas vacations in advance.
As long as it is a de facto colony of China, the fortunes of the Land Down Under are completely tied to economic prospects there.
It is almost a waste of time looking at the Reserve Bank of Australia?s data releases. They have become a deep lagging, and really irrelevant indicators. You are better off going to the source, and that is in Beijing.
And therein lies the problem.
It is highly unlikely that the government in China has any idea what their economy is actually doing. Sure, they pump out the usual figures on a reliable basis like clockwork. These are educated guesses, at best.
Even in a perfect world, collecting numbers from 1.3 billion participants is a hopeless task. The US is unable to do these with any real accuracy, and we have one quarter of their population and vastly superior technology.
For what it is worth, Chinese President Xi Jinping has promised that his country?s GDP growth will not fall below a 6.5% annual rate for the next five years. At this pace, China is still creating more economic activity that any other country in the world.
Which leaves us nothing else to rely on but commodity prices to look at, far an away Australia?s largest earner. These are suggesting that the worst has yet to come.
Virtually the entire asset class hit new six year lows yesterday. I had to go to the weekly charts to see how ugly things really are.
Australia?s largest exports are iron ore (26%, or $68.2 billion worth), coal (KOL) (16%), gold (GLD) (8.1%), and petroleum (USO) (5.7%). When the world?s largest consumer of these slows down, so does demand for these commodities.
BHP Billiton Ltd. (BHP), the largest producer of iron ore, has seen its shares plunge 57% from last year?s high.
But wait! It gets worse.
I have written at length about the transition of China from an industrial to a services based economy. You would expect this, as the Middle Kingdom has virtually no commodity resources of its own, but lots of smart people.
In a nutshell, they wish they had America?s economy. Where services now account for a staggering 68% of all economic activity.
This is why China?s future lies with Alibaba (BABA), Baidu (BIDU), and JD.com (JD). It does NOT lie with its steel factories and coalmines, which by the way, recently announced layoffs of 100,000, the largest in history.
To learn more about the structural remaking of China, please click here for ?End of the Commodities Super Cycle?.
There is one bright spot to mention. Australia is making a transition to a services based economy of its own. Tourism is rocketing, as is the influx of flight capital from the Middle Kingdom.
Walk the streets of Brisbane these days, and you are overwhelmed by the abundance of Asians coming here to learn English, attain a high education, or start a new business. When I came here 40 years ago, they were virtually absent.
How low is low?
It doesn?t help that the governor of the Reserve Bank of Australia, Australia?s central bank, Glenn Stevens, despises his nation?s currency.
He has used every rally this year to talk down the Aussie, threatening interest rate cuts and quantitative easing.
The hope is that a deep discount currency will allow the exporters to maintain some pricing edge on the commodities front.
The market chatter is that the Aussie will take a run as low as $0.55, the 2008-09 Great Recession low.
Whether we actually get that far or not is a coin toss.
And will even $0.55 below enough for Glenn Stevens?
Noted Aussie Dollar Hater
If there is one complaint about the Diary of a Mad Hedge Fund Trader, it is that I am too short term in my orientation. My response is that this is the only way you can obtain a 138% trading return in 3 ? years. I can skim off the cream when others can?t.
There is a reason why we are the only investment newsletter that publishes our performance on a daily basis. Basically, all our competitors lose money for their readers. It?s a lot like those Japanese restaurants that display plastic models of their food in the front window.
Still, I like to throw readers ten baggers when I find them. Long-term followers get that warm and fuzzy feeling when I mention Baidu (BIDU) ($12 to $190), Cheniere Energy (LNG) ($5 to $68), Molycorp ($12 to $80), and Tesla (TSLA) ($16 to $260) for a good reason.
Well, I found another ten bagger, one you can just buy and forget about for the next three to five years. I discovered this jewel at the SALT conference in Las Vegas last month organized by my friend, Anthony Scaramucci (click here for ?The Report on the 6th Annual Skybridge Alternatives (SALT) Conference?).
At the keynote dinner, I randomly picked a table near the stage. One of the couples next to me wore a UCLA pin from where she graduated, prompting a discussion of the Golden age of Bruin basketball and the salad days of? legends John Wooden and Bill Walton (four perfect 30-0 seasons and an 88 game winning streak!).
I casually mentioned I was there as a cancer researcher and DNA scientist during the early 1970?s, and graduated in biochemistry. The ears perked up, and the dam broke.
The gentleman I was dining with turned out to be the CEO of CytRx Corp. (CYTR) a revolutionary innovator in the chemotherapy field. Through a top secret, patented chemical reaction, their chemists can add an acid sensitive linker molecule to pre existing generic chemotherapy drug.
That enables the drug to only kill the cancer cells and not the rest of you as well, eliminating side effects, and permitting a substantial ramping up of the dosage. I worked out the chemistry in my mind, and quickly figured out that it would work.
The net effect is to install a turbocharger on existing drugs, greatly enhancing their curative effects. Stage three trials will be completed by 2016, when the company expects full FDA approval. The company has $125 million in cash and no debt.
I lost a wife to cancer 12 years ago, and received a crash update on the state of the science then. I have been following it ever since, awaiting my turn. If CytRx is able to pass the FDA gauntlet, then they have found the Holy Grail. Best of all, the shares have just suffered a 67% pullback, thanks to the spring biotech meltdown.
To learn more about the company and obtain the details, please visit their website: ?http://www.cytrx.com .
Curing of cancer during the 2020?s is a major part of my Golden Age scenario for the coming decade (click here for ?Here Comes the Next Golden Age?).
The kicker here is that there is not just one, but hundreds of companies developing ground-breaking treatments that will come out in the years ahead, many of them just across the bridge from me. This should collapse the cost of health care for the government, and the rest of us as well.
I knew I would live forever!
Remember that buying the shares of a drug company before final approval is always a crapshoot. The last time I did this was with Genentech?s (DNA) Avastin, because I was dating the senior researcher there at the time (tall, long legs, brilliant).
The shares doubled the day they got the green light, and Bank of America flipped from a ?SELL? to a ?BUY? recommendation for the stock on top of a $30 move, tail between legs. That was good.
As we parted ways, the CEO even pushed over his desert, from which his doctor forbade him for health reasons. I gobbled that up as well.
Is CytRx (CYTR) Another Ten Bagger?
For the first time in three years, China (FXI) has cut its prime lending rate by 50 basis points. The timing caught many analysts by surprise, as such move was not expected until the lunar new year in early February. Perhaps recent data showing collapsing exports prompted the Mandarins in Beijing to hurriedly move up the timetable.
The Middle Kingdom?s action is one of the most important developments in financial markets this year, since it represents a major sea change, and is hugely positive for the global economy. It could signal a coming year of additional incremental interest rate cuts and bank reserve reductions designed to keep the country above the ?red line? GDP growth rate of 8%. Observers were also stunned by the magnitude of the cut, 50 basis points, compared to the usual 25 basis point move seen by the People?s Bank of China.
I have been comfortably out of Chinese equities for more than a year, vowing not to return to the mainland until interest rates fell. Now the worm has turned. It may be time to take another look at companies like Build Your Dreams (BYDDF), which has risen by 50% since my undercover visit there last month. Other names like China Telecom, China Mobile, and Baidu (BIDU), are also starting to look interesting.
We Want Lower Interest Rates!