Mooning in the Middle Kingdom
Dear subscriber,
China announced its most aggressive stimulus plan since the pandemic last week.
It's a drastic attempt to juice the world's second-largest economy. And it includes an assortment of new policy measures, from rate cuts on lending and mortgages... to incentives on mergers and acquisitions.
China's Ministry of Finance also plans on issuing $285 billion in special sovereign bonds.
And when the big guns come out, stocks go up. As you can see, Chinese stocks are "mooning"...
It's an apt term (and one I borrowed from my colleague and senior analyst Alan Gula).
Over the two weeks spanning September 18 to October 2, an exchange-traded fund ("ETF") that tracks the CSI 300 Index (China's version of the S&P 500 Index) is up nearly 40%.
This two-week move in Chinese stocks beats the best ever two-week move in U.S. stocks, which took place in March 2009 after the global financial crisis...
That's impressive. But China's stock market has been beaten down for years. In the grand scheme of things, this spike only closes a fraction of the losses in China's market since 2021...
The question, of course, is whether this move is a short-term pop... or the start of a new bull market for the "Middle Kingdom."
The Chinese government wants a big turnaround. Yet, if you dig into China's strategy a bit, I'm not so sure this rally can continue...
China's stimulus package took three main measures...
- A set of monetary-policy tools to support the stock market, including more borrowing measures that allow big institutions to buy stocks
- Lower reserve requirements for banks, along with a lower prime interest rate (analogous to our federal-funds rate)
- A cut in mortgage rates on existing homes and reduced downpayment requirements for second homes
The nation's property market is in real trouble. For years, China provided lending to housing developers... and they overbuilt. Then, China put restrictions on the purchase of second homes or apartments as investment properties, and prices started to fall.
Just about every analyst who covers China will tell you that this $285 billion stimulus package is nowhere near large enough to revive the property market on its own.
The new lending facilities should free up about 1 trillion yuan, but China's outstanding mortgage market totals nearly 38 trillion yuan.
China knows that. It's why part of the focus is on the stock market. China hopes to use rising share prices to create confidence in the economy... without paying full freight.
It's step one in the government's stimulus playbook: If you can signal economic support, then you may be able to get people spending again... and enough so that you won't actually have to pay for the stimulus.
When former President of the European Central Bank Mario Draghi promised they'd do "whatever it takes" to revive the euro in 2012, his words carried as much value as billions in actual stimulus...
It's a confidence game in the property market as well. The Chinese public can purchase properties, but they need to believe doing so is a good move for their own future.
As Brian Tycangco, our Stansberry Research analyst in the Philippines who ran our China-focused investment advisory for years, told me this week...
The government is trying to build confidence in its property markets. And confidence fixes a lot. The people have the capacity to buy property. Chinese citizens have massive savings. They just need a reason to believe that buying is a good idea.
I expressed a similar idea last week and the week before when discussing the U.S. economy. Whether China's gambit works depends on the sentiment of its consumers.
In my view, this isn't enough. If China truly wants to revive its economy and markets, it will need to do more to prove its commitment to freer markets and stimulus. And it may do just that.
But the "to the moon" rally in Chinese stocks needs to calm down a bit before this is an actual opportunity for long-term investors. We'll be watching.
What Our Experts Are Reading and Sharing...
The U.S. port strike has reached a tentative agreement. Still, it's a reminder of the fragility of our supply chain. Most manufacturers could have managed to handle a few days. But if another strike were to go for weeks, it would mean trouble in material deliveries and the shipment of goods. According to the website Supply Chain Dive, chemical manufacturers would be the most likely to suffer.
At the Grant's Interest Rate Observer annual fall investment conference this week, billionaire hedge funder Bill Ackman gave a fun "stock pitch" for Harvard University. It included a sort of buy-or-sell rating on the future of the institution. Here's our Whitney Tilson with his notes. (Not incidentally, Whitney and Bill were college buddies at Harvard.)
The Wall Street Journal recently gave a huge data dump on how much the American economy is reliant on government aid. The amount, which is largely driven by Social Security, Medicare, and Medicaid, is sobering – and something to keep in mind come next month's election.
New Research in The Stansberry Investor Suite...
While China tries to engineer its next boom, we've found another boom right here at home...
This one doesn't come from government stimulus, though. It comes from pure supply and demand.
The American oil industry has gone through a few cycles over the years. Now, it may be starting its most profitable one ever. We're calling it Shale 3.0.
It's not hard to track the supply of oil. You simply watch the way capital is moving into drilling and exploration. And today, it's giving us a bullish sign for the U.S. oil industry.
Right now, the team at Stansberry’s Investment Advisory has homed in on one of the nation's best, most profitable oil producers... in one of the lowest-cost oil and gas regions in the entire world.
This company just completed a legendary merger – which our team calls the "perfect marriage" – that nearly doubled its size. And Stansberry's Investment Advisory sees a path for its share price to double as well.
As a Stansberry Investor Suite subscriber, you can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our new special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
What do you think about This Week on Wall Street? Send any and all feedback to thisweek@stansberryresearch.com. We read every e-mail you send in.