China Explainer, Part II (and U.S. Inflation, Jobs, and Fertilizer)
The spice of the day... Inflation and jobs numbers... Tampa Bay avoids a direct hit... A concentration of fertilizer... The China Explainer, Part II... War in Taiwan?... Unconventional data collecting, and more...
We'll get to our promised China conversation in a moment...
But first we must talk about market action today...
After the benchmark S&P 500 Index and the Dow Jones Industrial Average hit new all-time highs yesterday, the major U.S. indexes were all down today. Meantime, oil prices were nearly 4% higher, and long-term bond yields rose again, too.
The spice of the day was a combination of new inflation and jobs data.
The consumer price index report for September was slightly above Wall Street expectations, but still "normal," showing 0.2% month-over-month growth (and a 2.4% year-over-year increase). Meanwhile, initial jobless claims last week rose by 33,000 to 258,000... Some of these were tied to Hurricane Helene's destruction as well as Boeing's worker strike.
All the while, Florida is reeling from its latest hurricane...
Not as bad as it could've been...
Florida Governor Ron DeSantis summed up Hurricane Milton like this: "The storm was significant, but thankfully, this was not the worst-case scenario."
The hurricane weakened some before making landfall last night, and it missed a direct hit on Tampa Bay by roughly 50 miles to the south. Still, the storm delivered substantial flooding and damage to parts of Florida's Gulf Coast and spawned tornadoes elsewhere in the state.
We'll get a better sense of what insured losses and other federal and state costs might look like in the days and weeks ahead. But we already know that Hurricane Milton, and the threat of worse effects, has already disrupted normal commerce in the region.
I (Corey McLaughlin) suspect many of you, especially the farmers in our readership, know this already, but...
Milton was a big deal for the world's supply of fertilizer...
As of this writing, Port Tampa Bay is closed due to the hurricane. And about 27% of America's fertilizer exports go through this port.
And, as global news service Reuters reported yesterday, the Tampa Bay area includes 42% of America's ammonium phosphate, 32% of our phosphate rock, and half of U.S. wet-processed phosphoric acid production capacity.
Tampa-based Mosaic (MOS), which mines phosphate rock and produces roughly three-quarters of North America's phosphate fertilizers, idled operations yesterday. (We reached out to the company today and will report back if we hear anything about Milton's impact on its business.)
The company was already dealing with the effects of Hurricane Helene two weeks ago, which interrupted its regular operations. Its Riverview, Florida facility (in the Tampa region) took in significant storm surge, which the company said would curtail production for up to 10 days.
Fortunately, local river-gauge data shows the flooding wasn't as significant last night, but the area was still without power as of this afternoon.
The China Explainer, Part II...
Switching gears now, let's pick up with the rest of our conversation with KraneShares chief investment officer Brendan Ahern. You can read Part I of our edited interview here.
As we mentioned yesterday, KraneShares runs a few China-focused exchange-traded funds ("ETFs"), among other investment vehicles. It has around $10 billion of assets under management, with roughly half in its flagship KraneShares CSI China Internet Fund (KWEB).
Brendan, to understate it, knows his stuff about China's economy and stock market.
He joined Dan Ferris and me on this week's Stansberry Investor Hour podcast to discuss the recent large-scale stimulus from the Chinese central bank, how Chinese stocks have reacted, his outlook for what might be next, and more. Let's get to that right now...
Dan: Do you have any view on the prospects for war in Taiwan?
Brendan: The most important thing is that China saw what happened to Russia [with sanctions], and that is why we don't believe they will invade Taiwan militarily. China's economy is very geared to the West. They're very dependent upon export-driven manufacturing.
Russia had nothing to lose because it's not integrated in the global economy. Yes, they've got oil and some metals. China cannot afford not to export to Europe, to the United States. Their economy would just collapse.
The other reason we've been very skeptical is the U.S. Navy. The U.S. spends more on defense than the next nine countries, including China.
We have 16 aircraft carriers. They have two, one of which is a rust bucket... If you parked one of our 16 aircraft carriers in the Strait of Malacca outside of Singapore, China would starve without Middle East oil. The economy would collapse.
The U.S. government is very clearly going to support Taiwan, and I think that's a huge deterrent. I don't know why there's such skepticism about the U.S. Our great military is a great deterrent for China doing something militarily.
In the long run, it's a patriotic issue in China. Taiwan was part of China and they want it back in the long run. But you do the mental math, and it doesn't make any sense to do it militarily.
It's a complicated issue. It goes back to the Opium War, 1860, the British, the French, the Russians, Americans. U.S. Marines were based in Shanghai less than 100 years ago. We owned a piece of Shanghai because after the Opium War the emperor was dethroned, and we got a piece of it.
[But] no one in Taiwan has lived under Chinese rule since 1901, when the Japanese invaded, which was part of the events that led to World War II. It's a really complicated issue.
Taiwan is an issue of patriotism in China and for the Chinese government. They have a constituency that says "this should be ours," and they have to speak to that domestic constituency.
At the same time, there is a recognition that Taiwan has been off on its own for a while. The experience of China, the British giving Hong Kong back and the problems that have come, [play a role]. Ultimately, China needs stability.
And you look at a map of China, and we've got them surrounded. Some of the biggest military bases for the U.S. [are in] South Korea, Japan, the Philippines, Australia...
China is surrounded to some degree, and more importantly, their economy is geared to the West. They need us, we need them, and that should be a great deterrent that cooler heads prevail.
Corey: All things being equal, say there's no war threat or horrible real estate situation in China... What does the Chinese economy have going for it? If the recently announced stimulus or what's to come works as planned, how do you see it playing out?
Brendan: I think the next leg of stimulus will be geared to the domestic-consumption story, and I think that'll benefit a lot of U.S. multinationals in China. If you can get consumer confidence, people will start spending more, but then certainly a lot of domestic companies are great beneficiaries.
The e-commerce companies that do 26% of retail sales... as consumer confidence rises, people will travel more domestically, internationally, they'll eat out more, they'll spend more on apparel, cosmetics. There's a whole host of domestic as well as international companies that will benefit from the rise of domestic consumption.
Then I think we can anticipate that this export-driven manufacturing will slow as the global economy slows as the U.S. economy is slowing a bit. There'll be less demand for those goods.
I think we'll see a little bit of handing the baton within the domestic economy from export-driven manufacturing to this domestic-consumption story.
Dan: I want to go back to your point about KraneShares being data driven. When somebody says data driven at this point, I'm like, yeah... you and everybody else. How do you distinguish Krane from what anybody else might do?
Brendan: A lot of people argue the data is all made up [in China]. A lot of these companies are audited by the Big Four U.S. accounting firms. That's just the facts. I think what a lot of investors don't recognize is that [a smartphone] is a mobile surveillance device.
When I drive down the street and I decide to go to Walmart instead of Target, that data is being packaged and sold to the largest U.S. asset managers and hedge funds. These free apps on your phone, why are they free? Because in that 15 pages you scroll through, you're giving that app free rein to your phone.
And that's true in China. Every month, we're getting data on what people are buying, what video games are being downloaded the most in China. China has this new game that's become a huge sensation, and we know it's doing so well because they're selling the data.
That's true for the e-commerce companies. They're selling all of this data, so we don't need government data, because you have firms that aggregate it up. They're screen scraping the Internet in China.
My favorite, and we don't use it, but there's this company called SpaceKnow. They fly satellites all over the world taking photos of factories, and train-station parking lots, and malls. You can go to them and say, "How many cars is Tesla going to build in Fremont, California versus Shanghai?", and they can do that based on how much steel and aluminum is sitting in the storage areas.
There's all this data out there that's available that's not from the government. It's from research firms and these companies that aggregate app data and are screen scraping, and it gives us a really good indication of what's really going on there. So forget the GDP data... you don't need it. It's 2024, and I don't think most investors understand that.
Corey: That reminds me of driving past the Port of Baltimore here and looking at how many cars are there or not to see what's going on with the auto industry...
Brendan: There are hedge funds and data firms that are paying someone to sit out there and count it, putting a drone over it. And that's true outside the Port of Dalian or Shanghai. There are people that their job is to sit and [look at], how big was that boat, how many containers were on it. Things have really evolved from being "I need the National Bureau of Statistics to tell me what retail sales was every month." I knew that weeks ago, real time.
Dan: How do you use that data to your advantage?
Brendan: We're producing research that's leveraging that. Most of us get our China views from Western media. They are paid to get clicks. We want to provide a perspective of what's really happening. And, yeah, we're investors. The only way I get paid is if people buy our ETFs. At the same time, we're small-business owners.
Every piece of idealism in me has been snuffed out in trying to build a company... But I have kids, and they have to grow up in a world with China, and maybe we're building a little bit of a bridge. If we can communicate with Chinese companies, maybe the politicians should as well.
For our entire interview – and some more about China...
Believe it not, the excerpts we shared the past two days aren't the entirety of our discussion. You can watch or listen to our entire interview with Brendan on our YouTube page, at InvestorHour.com, or on popular podcast platforms like Spotify or iTunes...
And if you want even more information and insight about China – and a whole lot more expert discussion on the economy and markets, and exclusive recommendations – you might want to consider a Livestream Pass to our annual Stansberry Conference this month.
Among dozens of presentations from invited guests and our editors and analysts, Brendan will sit down for a chat with Terry Branstad – the U.S. ambassador to China from 2017 to 2020 under Donald Trump – and David Adelman, a former U.S. ambassador to Singapore who now works for KraneShares.
This year's conference will also feature our founder Porter Stansberry interviewing acclaimed author Michael Lewis, of Liar's Poker, Moneyball, and Going Infinite fame... plus visits from former Texas Governor Rick Perry and two Pulitzer Prize winners, just to name a few.
You can find more details about our entire event lineup and how to get livestream access here.
New 52-week highs (as of 10/9/24): Automatic Data Processing (ADP), Alpha Architect 1-3 Month Box Fund (BOXX), Brown & Brown (BRO), BWX Technologies (BWXT), Ciena (CIEN), Carlisle (CSL), Cintas (CTAS), Commvault Systems (CVLT), Fair Isaac (FICO), Comfort Systems USA (FIX), Home Depot (HD), Houlihan Lokey (HLI), iShares U.S. Aerospace & Defense Fund (ITA), Cheniere Energy (LNG), Motorola Solutions (MSI), Oracle (ORCL), PayPal (PYPL), ProShares Ultra S&P 500 (SSO), Toast (TOST), Trane Technologies (TT), The Trade Desk (TTD), Veralto (VLTO), Vanguard S&P 500 Fund (VOO), Vertiv (VRT), and Zebra Technologies (ZBRA).
In today's mailbag, feedback on yesterday's edition about the Chinese economy and stocks, and another thought about an "inverse" Fed fund... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I haven't bought anything Chinese in the past 30 years, least of all Chinese stocks. I just don't trust the bastards." – Subscriber T.O.
"Anyone remember the inverse floaters from 1994? Bankrupted Orange County treasury fund in California. Pure toxic crap sold by Wall Street – one broker played a material role. How soon we forget?" – Stansberry Alliance member Mike O.
Corey McLaughlin comment: Thanks, Mike.
Here's an excerpt from the postmortem report on that situation from the California state auditor. It pinned the blame on the former Orange County treasurer for borrowing billions against the county's portfolio via "inverse floaters" – derivatives the treasurer was betting would rise in value if interest rates fell.
Instead, they didn't, as the state auditor said...
When interest rates rose during 1994, many of the derivatives purchased... fell precipitously. By November 30, 1994, shortly before Orange County's (county) bankruptcy, the former treasurer had leveraged the investment pool more than 2.7 times and had more than 40 percent of his investments in highly volatile inverse floaters and other structured securities sensitive to interest rate fluctuations...
The former treasurer's imprudent and reckless investment practices ultimately led to a $1.69 billion loss to the county and 190 other public agencies and caused widespread repercussions, including the loss of jobs, potential reduction of critical local government services, and possible cuts in education funding.
The county went bankrupt because of greed and one man's overleveraged bets on falling interest rates gone wrong. It has happened before... and probably will again. Leverage can kill the uninformed, cocksure, or misguided. Don't be a victim.
All the best,
Corey McLaughlin
Baltimore, Maryland
October 10, 2024