From exports to consumption... Dueling opinions at JPMorgan... Bernanke hints at more easing... Merkel boosts European bailout fund... Why we're so bullish... Porter's neurological problems...
"Raise your hand if you think China will have a hard landing."
JPMorgan managing director and chairman of global markets for China, Jing Ulrich, polled the crowd at the Mines and Money conference in Hong Kong last week. Ulrich was essentially asking how many of the 500 attendees in the room believe China's government will be unable to control the giant Asian nation's current economic slowdown... resulting in a devastating rout in Chinese stocks.
Nobody raised his hand. Mind you, this room was full of mining executives from around the world. These guys depend on Chinese demand for their products. They know firsthand that Chinese commodity demand is slowing, but they're not predicting a crash (at least not in public).
Ulrich told the audience it wasn't alone in its optimism... She had posed the same question at another recent investment conference in the Asian trading hub Singapore... And only one of those 700 attendees raised his hand. (And after surveying the room, he quickly dropped his vote.)
Ulrich was adamant China would not have a hard landing. And we tend to agree with her... China's $3 trillion in foreign reserves is a big cushion. Still, when the majority is so strong in one direction, we're always wary.
Ulrich says the Chinese government has three goals for 2012: engineer a "soft landing" that avoids a recession, contain inflation and the escalation of house prices, and move toward a consumption economy.
China is no longer a net export economy... According to Ulrich, exports actually sapped 0.9% from China's 2011 gross domestic product (GDP). All of the current growth in the Chinese economy comes from consumption and gross capital formation (spending on infrastructure, housing, manufacturing, etc.). And the government is doing everything in its power to stimulate the latter two.
Chinese banks are starting to lend to first-time homebuyers. They're even offering 10%-15% discounts off market rates on mortgages. China currently has 12-14 months of housing inventory on the market. Transactions are increasing, but we probably won't see new construction in 2012. (Ulrich says this is bearish for commodity producers, but bullish for property developers, who will make money selling properties.)
Ulrich said we'll also see monetary easing, greater support of small businesses, income growth, tax reforms, and consumption incentives to bolster the economy. The availability of capital is more important in China than the cost of capital, she said. That's the opposite of the U.S. policy, where the Federal Reserve manipulates interest rates to manage the economy. To maintain inflation, Chinese banks will keep annual loan growth near the historical average of 15% a year.
The strength of China's banks will also ensure a soft landing... Ulrich says the Chinese banking sector is the most profitable in the world. "Some make more money than Apple," she joked. Chinese banks have 81 trillion yuan (almost $13 trillion) in total deposits. The entire Chinese GDP is 45 trillion yuan. "They will not go bankrupt," she said.
Ulrich also noted 40% of China's GDP is frozen in the form of reserves due to the government-mandated reserve ratio. Although the government cut the ratio twice last year, it still requires big banks hold 20.5% of their deposits in reserve and smaller banks keep 18.5%. The U.S. Federal Reserve requires our biggest banks (those with more than $71 million in assets) to keep 10% in reserve.
Finally, Ulrich noted China has 300 million residences (houses, apartments, condos, etc) for 1.3 billion people. With the switch to a consumer economy, the government aims to increase that number by 35 million residences for lower-income families by 2015.
But not everyone agrees with Ulrich about China's soft landing. In fact, some experts within her own company (JPMorgan) have contrary views. Veteran Barron's financial journalist Alan Abelson titled his latest Up and Down Wall Street column "Ouch! It's a Hard Landing." The subject of the piece is China's fall from dominance. And he quotes JPMorgan's chief Asian and emerging-market strategist, Adrian Mowat...
"China is in a hard landing... Car sales are down, cement production is down, steel production is down, construction stocks are down. It's not a debate anymore, it's a fact."
What isn't up for debate is China is slowing down. But we don't know if the landing will be hard or soft (though if you put a gun to our head, we'd choose soft). There are certain indicators you can watch for warnings in China... Brian Hunt outlined his favorite in last Friday's DailyWealth...
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Over the past month or so, China has issued worrisome statistics. Real estate prices have dropped a bit. And several national economic indicators are pointing lower. |
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You can check the "real time" status of the possible China slowdown by tracking shares of giant mining firms like BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). China is the world's most voracious consumer of commodities. If its economy stumbles, commodity consumption falls, and so do resource shares. |
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In the three-year chart below, we take a big picture look at Vale, one of the world's largest iron ore producers. The bulk of its sales go to China. As you can see, Vale suffered in 2011... but put in a bottom around $21 per share. If Vale punches through that low, we'll start thinking the China worry is the "real deal." |
There are easier trades in today's market than "short China." In particular, we like U.S. stocks. The S&P 500 advanced to 1,409 today (its highest level since May 2008) on today's comments from Federal Reserve Chairman Ben Bernanke. In a speech today, Bernanke said the drop in the unemployment rate encourages him. However, reducing the jobless rate further will require more expansion of production and consumer demand, which "can be supported by continued accommodative policies," he said. In other words… we're standing by, ready to print more money at the first sign of a hiccup.
In addition to a loose monetary policy, increasing mutual fund inflows and decreasing cost of credit (the two indicators mentioned below) lead Porter Stansberry to be bullish. From the latest issue of his Investment Advisory...
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I believe 2012 might be the best year for stocks that we've seen in more than a decade. I'd like to do all that I can to help you make as much money as possible – as that's the single best way to protect yourself from the falling value of the U.S. dollar (and every other major paper currency). |
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Normally, we put our market indicators at the rear of each month's issue. But this month, I'm dragging them front and center because I want you to understand why I'm so bullish on stocks right now – far more bullish than I've been at any time since late-2008/early-2009. |
Angela Merkel, Germany's chancellor, is also loosening monetary policy... Today, Merkel agreed to temporarily increase the European Union's bailout fund, the European Financial Stability Facility. Merkel, who previously resisted increases to the fund, approved an increase from 440 billion euros to 940 billion euros. We'd bet ongoing problems in Spain and Portugal will require even more than the $1.3 trillion already in place for bailouts.
There's a wave of credit hitting the markets... China, the U.S., and Germany are all easing. Interest rates are at record lows and potentially headed even lower. This is bullish for stocks... especially stocks with healthy dividends and the ability to raise prices in times of inflation. For some ideas on how to play this, re-read last Friday's Digest. And for the best way to safely make money in today's market, I'd urge you to sign up for Extreme Value. Dan Ferris' World Dominator portfolio is going to perform great this year. To learn more about how you can subscribe, click here...
New 52-week highs (as of 3/23/12): Constellation Brands (STZ), Coca-Cola (KO), and Prestige Brands Holdings (PBH).
Most of the feedback we received regarding Porter's back issues was positive and helpful. Thank you. However, there are always a few bad apples... We showcase them in today's mailbag. Send your feedback to feedback@stansberryresearch.com...
"While I immensely enjoy (and learn from) your newsletters, please stick to your extremely business-like professionalism. I am referring to your in-depth discussion of your unfortunate back problem. While I sympathize with your plight, I certainly don't need to read about it in such great detail. This isn't a personal blog, so please 'can' that kind of discussion." – Paid-up subscriber Gary Knight
"It is often quite evitent that you are having neurological problems." – Paid-up subscriber Douglas Gillisse
Regards,
Sean Goldsmith
New York, New York
March 26, 2012