What the hell is going on over in China?? First, they detonated their real estate sector. Remember how homes are for living in, not speculating?? Then, they locked down for germs (you can’t be a superpower if you’re scared of the common cold). Finally, they crowned Xi as king, right after the party congress/purge. It’s been a strange couple of years over in China.
Without housing, the economy has doubled down on exporting stuff, even going up the value chain. Have you seen the amazing cars they make?? Unfortunately, by ramping exports they’ve pissed off their trading partners. Suddenly everyone is talking about tariffs. When you’re a little country and you run a surplus, no one cares. When you’re China, and running a $1 trillion annual surplus, everyone hates you, as you’re stealing their growth. Besides, there’s only so much that you can export, especially when you become bigger than your customers. As a result, the Chinese economy has been weaker than desired.
Anyway, one day, Chairman Xi wakes up and decides that a change is needed. As king, everyone sorta rolls with it and agrees. So, what does Xi want?? Who the hell knows. We’ve always been of the view that your average fortune cookie has more insight than Chinese government data. Even the so-called experts, mostly just seem to be guessing. So, we’ve tried to step into Xi’s shoes and think through what he wants.
Big picture, he just purged a lot of excess from the system and did it without blowing up the banks (yet). Now he’s ready for the economy to run hotter, BUT without creating a property bubble, BUT without having to build bridges to nowhere, BUT without fueling it all with debt like last time. He wants the economy to pivot. Pivot to what?? Who knows?? He also wants the economy to solve for national strategic goals. He wants a more balanced economy, one that’s less reliant on exports. At the same time, he’s scared that if he goes too fast, he’ll create the sort of runaway economy that we had in 2021, where everyone was trading shit-coins instead of going to work.
Is it possible to actually solve for these goals, many of which are somewhat contradictory?? Maybe. Will it be easy?? Fuk no!!
So, what’s the easiest way to make this all sorta work?? How do you light a fire under things and hope it all congeals??
Well, you need to make the peasants to excited about the economy. You need people willing to spend. You need rich guys who want to invest domestically, instead of buying their 9th villa in Vancouver. How do you make all of this come together after you’ve spent a decade, mostly purging successful guys. We think that you start by making stonks go up. Making money, trumps common sense. A decade ago, rich guys sent their money and kids overseas. You need them both to return. You need them to want to return. You need guys to be making money. You want a bull market.
Thing is, you don’t want stocks going up so fast that you create a bubble, but you want them moving fast enough that no one can ignore it. You can let them blast higher and get attention early on, but you really want it to grind higher. You structure this bull market in a way that locals get rich, because they buy shares, and then go on with their lives. Meanwhile, most foreigners are ‘smart’ enough to ‘know’ that you can trade China, but you NEVER invest. You make things volatile and confusing. You make it so that foreigners buy the rips, and sell out to locals on the dips. You want a stock market that locals cannot ignore—especially if their friends are making money. You bind the peasants in a common dream of stonks going up.
In summary, we think Xi wants stonks to go up. If you’ve watched a few of the press conferences (we have), and they’ve come across as disjointed and confused, then you’re only sort of paying attention. They’re disjointed because these guys have never done this before. Xi said ‘make it go up’ and his minions, who have no idea what investors want, are trying to figure things out on the fly.
Remember in 2009 when David Tepper went on CNBC and said something to the effect of “They’re throwing an alphabet-soup of stuff at the economy, and it isn’t working (yet). If it works, stocks go up. If it doesn’t work, they’ll just do more, and stocks will go up. Guessing the absolute price to enter won’t matter. All you need to know is that they want stocks to go up. They’re the government and they’ll probably overshoot because it will be popular. So just buy stocks, and know that they’ve got your back.”
OK, so maybe we took some liberties with this Tepper monologue. 2009 was a scary time and we were shell-shocked ourselves, but when he said it, a light bulb went off. Just buy CUSIPS; don’t ask questions.
We think that’s where China is today. We just had an explosive rally higher. Two weeks ago, everyone was an expert on buying China. Now, on the pullback, everyone has convinced themselves that it won’t work, that there’s not enough stimulus, that not enough is being done, that the various ministers are clueless. Remember this guy…??
It’s amazing how far sentiment has swung. China has made a commitment to making this work. No different from the US government in 2009. This is their “Whatever It Takes” moment. If they don’t do enough, they’re going to do more. They don’t want it to moon out of control, but they want it going up. We’ve waited for sentiment to wash out a bit. We think that somewhere around here is the spot (give or take). Let’s just say that we’ve been pulling all-nighters in front of the trading screens, and we’re piling up the buy tickets….
So, what’s on our blotter???
With a handful of exceptions, Chinese stocks have been miserable investments. This is because they’re in sectors that are plagued with overcapacity. We want to buy things that will have earnings and be protected from competition. At the same time, we don’t think the old playbook works. Xi doesn’t want more ghost cities—he wants a consumer economy that can absorb the $1 trillion in trade surpluses. We don’t want to play iron ore or steel (though they’ll probably do OK). Instead, we want to bet on two sectors; stonks and the consumer. We think the big tech names do fine—we’re long a basket of them. However, we think that buying those, is to ignore Confucious above. They’re in vicious wars over market share. We want industries that are less likely to be cutthroat—industries that are not seeing new capacity. Preferably, we want industries that are pet projects of the government. We like the Macau Casinos (they want to rival Vegas, but closer). We like the stonk brokers (if they want the local guys to speculate a bit, they’re almost certainly going to overdo it). We want liquid securities, the sorts that foreign guys know and love—the types that are going to become consensus out in Sagaponack. We’ve been around the block a few times, and there’s no party quite like a liquidity fueled Chinese Beta rally. However, we value liquidity, as we know it’s going to be volatile—we plan to ride the waves, often selling volatility along the way…
Every macro fund is under-weight China. Just getting to equal-weight will take serious buying. In the last week of Q3, almost every macro PM underperformed the benchmark, often by a scary amount. Now they have three months to sort it out. Remember, as a PM, you can do all sorts of random (questionably illegal and/or immoral) sh*t and be held up as a god, but underperformance will end your career. PMs will go from under-weight to over-weight if China keeps out-performing. It’s a process, but it has the potential to get stupid at times. KWEB went from a $25 handle to a $38 handle in ten trading sessions. For a broad-based index of mega-cap tech, that’s the definition of stupid. We think these moves can repeat—with plenty of volatility along the way.
We’re China skeptics. We’re pretty sure that the Chinese will rug-pull the market eventually—they always do. We still have Sberbank shares staring back at us. We know how it feels to get things wrong. We also know that when the king says to make the market go up, the ministers will make it go up. If it doesn’t go up, they’ll just do more. They’ve drawn a line under things. This is their “whatever it takes…” moment. We don’t think they’re going to let us drown, not yet at least…