China to outperform US stocks

S2N spotlight

The numbers are starting to show the effects of the trade wars. Calling them wars is appropriate, as that is what they have become: an assertion of power and dominance.

If you look at the Chinese 10-year bond yield, it is about to plunge to new lows. This indicates an economy that is cooling quicker than a London summer’s day. I see major fiscal stimulation coming to help the economy along. Not sure how interest rates stay so low, but if the rest of the world engineered zero interest rates, the Chinese can too. I guess we will continue to see a weak CNYUSD.

It looks like currency is weakening in line with the low interest rates, which no doubt will help China’s exports. Reminds me of the many currency war books that described China as the chief aggressor on this front. I guess you reap what you sow.

A few days ago, the WSJ wrote a powerful article called Xi Is Ratcheting Up China’s Pain Threshold for a Long Fight With Trump. The article quotes MIT professor of global economics Yasheng Huang, who says, “Chinese society has an incredibly high capacity for pain.”

I believe the ability of the Chinese people to endure hardship in the interests of the long game and their leaders’ desire to rebuild their image of power in line with their history is going to make them a very formidable adversary.

Nearly a year ago I made probably my most contrarian trade to go long China via the Hang Seng versus the US (S&P 500). I felt the Shanghai Exchange was too easily manipulated by the ruling power in China, so using the west friendly Hong Kong exchange would be fairer proxy.

The best way to read these charts is to look at the black ratio line in the subpane. The trade has worked almost from the day I called it (black line to drop), except for a pretty scary retest of the highs where I placed my stop loss.

Based on the prevailing valuations of the 2 indices (China CAPE 8 and cheap, US CAPE 34 and expensive) and the likely stimulation the Chinese government will throw at the problem, I remain a believer in this trade.

S2N observations

Over the last few weeks I have been watching the markets much closer than I usually do, which I don’t think is healthy. I try not to focus on each up and down, as most of it is noise offering no value, just distraction, but the moves have been pretty epic in size. However, the last few days things have been calming down a bit, which you can see in the lower VIX and Average True Range (ATR).

I say this with the chart of the 3 major US markets still below their 200-day moving averages. If this bear market is going to continue down, the setup is in place for an explosive next leg down.

There has been a lot going on in the crypto world, especially in the US. The 1st US state voted this week in favour of Bitcoin as a reserve asset, whatever that means. I think it means that they will be buying Bitcoin just like they might buy gold. Bitcoin has not moved much this week despite enormous inflows into Bitcoin ETFs last week and lots of positive news.

There have been a number of announcements of companies and pension funds doing the Michael Saylor number. That is to borrow money and buy as much Bitcoin as you can buy. Brazil’s largest bank, ITAU, is funding Oranje to buy $210 million in Bitcoin ala MicroStrategy. Howard Lutnick’s son is also doing a similar number.

I want to get more constructive on Bitcoin, but I am still struggling. I was a Bitcoin evangelist when I bought my first in 2013 at around $100 and have oscillated in and out of the religion since.

There are still too many blind believers in my not-so-humble opinion. I also need to say every time I ever use the Bitcoin core protocol, I not only sh1t myself that I will send the goodies to the wrong wallet address, but the cost for small amounts is crazy expensive.

I am pretty sure most of you are not even aware of one of the hottest debated subjects that is currently being voted on in the developer community, the proposal to remove certain limits in Bitcoin Core that control how much data people can attach to Bitcoin transactions using something called OP_RETURN.

I am by no means an expert, and this is highly technical; I have summarised some pros and cons below. What I want you to understand is that happening right under your nose is something that fundamentally could be changing Bitcoin forever, and none of this is being covered in the mainstream press and FinTwit community.

This is part of the same argument I make to people who say that Bitcoin will never have more than 21 million coins mined. You really cannot make that statement with absolute certainty, as it can be changed, and Bitcoin protocol is changing more often than you realise.

At lower levels I think Bitcoin is worth occupying 1-3% of your “wallet.”

S2N screener alert

The S&P 500 has been up 6 days in a row, something relatively rare.

The US 10-year bond yields have been down 6 days in a row, which is also pretty rare.

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