An Answer to Your Biggest Worry About China

North Korea is back in the headlines... Why 'trade war' fears are overblown... An answer to your biggest worry about China... 'Can Chinese stocks go up if the U.S. goes down?'... Just seven days until this once-in-a-lifetime shift begins...

Well, that didn't last long...

U.S. stocks fell again today following a new round of tensions between the White House and North Korea.

Yesterday, President Donald Trump said that his highly publicized meeting with North Korean dictator Kim Jong Un next month "may not work out," following several recent threats from his regime.

This morning, the president made it official. As the Wall Street Journal reported...

President Donald Trump on Thursday aborted plans for a summit with North Korean leader Kim Jong Un as the White House considered a fresh round of sanctions on Pyongyang, citing "open hostility" from the North Korean regime.

While lamenting the cancellation – which he carried out without informing allies – as a "missed opportunity" and a "truly sad moment in history," the president held open the possibility that the summit could still take place.

He also said U.S. forces are "ready if necessary" and that he had spoken to South Korean and Japanese officials about a military response "if such an unfortunate situation is forced upon us."

The news was a sharp departure from recent weeks, when both parties had taken on more conciliatory tones.

Yesterday, we noted a similar shift in the administration's rhetoric on China...

Less than one week after Treasury Secretary Steven Mnuchin said the prospect of a trade war was "on hold," the president again stoked fears on Wednesday, saying he was "not satisfied" with the progress on trade talks so far.

As we've discussed, no one "wins" a true trade war. It would be a net negative for both the U.S. and China, so we remain cautiously optimistic that cooler heads will prevail.

But we should also remind you that even if we're wrong and the situation escalates, it won't necessarily be the problem for Chinese stocks many folks assume.

As we noted last month, our colleague Steve Sjuggerud's research shows it could be U.S. companies rather than Chinese companies that are hurt the most. In fact, most domestic Chinese companies have almost no dependency on the U.S. at all.

In short, a potential trade war is no reason to worry about Chinese stocks.

Of course, we know many folks aren't just worried about the implications of a potential trade war...

You may also be worried that Chinese stocks could suffer in the coming "Melt Down" – the severe bear market both Porter and Steve expect to begin within the next year or two. In yesterday's Digest mailbag, we published an e-mail from paid-up subscriber Garrett S. that summarized this fear...

If the Chinese stocks are estimated to increase in value... how does this reconcile with the [imminently] approaching bear market in the United States? Since the world economies are intertwined... won't this trigger mass amounts of people pulling money out of their market? And since Chinese stocks will now be included in the MCSI indexes, won't the Chinese market take a hit when the U.S. economy goes into downtrend?

In other words... Do we honestly believe Chinese stocks can continue to go higher if U.S. stocks are crashing?

This is a valid concern...

In fact, Steve felt it was so important, he decided to dedicate this morning's edition of our free DailyWealth e-letter to addressing it for all Stansberry Research readers.

In short, the answer isn't as "black and white" as you might assume...

One, it's important to remember one of the biggest reasons Steve first turned bullish on Chinese stocks...

As regular Digest readers know, a key part of his bullish thesis is index provider MSCI's 2017 decision to include Chinese stocks in its emerging markets index.

This decision represents a massive shift in the global financial markets. Hundreds of billions of dollars will be forced to move into these stocks over the next several years, even if U.S stocks eventually enter a bear market.

It's as close to a "sure thing" as you're likely to find in the world of investing... and it will provide a powerful tailwind for Chinese stocks, regardless of what else is going on in the global markets. (More on this in a moment.)

But this isn't the only reason Steve believes Chinese stocks can weather a severe bear market in the U.S...

You see, it has actually happened before. History proves that it absolutely is possible for Chinese stocks to rally even if U.S. stocks are crashing. As he explained this morning...

Let's look at the last time U.S. stocks had a "Melt Down"... and what happened to Chinese A-shares during that crash...

U.S. stocks peaked in March 2000. After the peak, the Nasdaq Composite Index lost 70% of its value by September 2001.

This chart shows what happened to Chinese A-shares during the final inning of the last great "Melt Up"... and the subsequent bust. Take a look:

As you can see, both Chinese and U.S. stocks soared during the last three months of the 'Melt Up'...

But that's where the similarities ended. More from Steve...

The Melt Down in U.S. stocks arrived in March 2000. The Nasdaq crashed. But look at what happened to Chinese stocks... They kept going up!

During the biggest U.S. stock crash of our lifetimes, Chinese stocks soared 64% – to all-time highs.

When Chinese stocks move, they REALLY MOVE – regardless of what's going on in the U.S.

Three separate times in the last dozen years, the entire index of Chinese A-shares has delivered triple-digit returns within 18 months.

Of course, Chinese stocks don't always go up when U.S. stocks go down...

But the important point to understand is that Chinese stocks have historically had a low "correlation" to U.S. stocks. And despite China's growing role in the global economy in recent years, its markets remain the least correlated to the U.S. of all the major stock markets today. As Steve explained...

When U.S. stocks fall, European stocks will likely fall. Japanese stocks will likely fall, too – but Japanese stocks are less likely to fall than European stocks. They are slightly less correlated to U.S. stocks, based on history. Chinese stocks are yet another step removed beyond Japan...

Simply put, China's stock market is not as affected by what happens in the U.S. stock market, compared with most other countries...

Could Chinese stocks fall if (and when) the U.S. stock market falls? Absolutely! But they don't have to. And they will probably fall less than other assets.

To Steve, the bottom line is simple...

History shows Chinese stocks often "zig" when the U.S. and other major markets "zag." Meanwhile, a true once-in-a-lifetime shift means hundreds of billions of dollars will have to move into these stocks over the next five years.

This is an incredibly bullish combination... And it makes Chinese stocks among the best investment opportunities in the world today.

Despite the huge returns his subscribers have earned over the past two years, Steve believes the biggest gains are still ahead...

That's because MSCI's shift hasn't actually begun yet. As longtime readers know, the decision was announced last June... But it doesn't take effect until next Thursday, May 31.

On that date, the first "wave" of money will begin to flow into these stocks... which means you still have a few more days to get your money there first.

Better yet, Steve has identified two stocks in particular that could absolutely soar once this shift begins... And he has prepared a free presentation to explain this time-sensitive opportunity in detail. Click here to read it now. (Please note, this link does not lead to a long promotional video.)

New 52-week highs (as of 5/23/18): Automatic Data Processing (ADP), Intel (INTC), Microsoft (MSFT), and Ralph Lauren (RL).

In today's mailbag: Kudos for Steve... another worry about Chinese stocks... and several readers respond to American Consequences Editor in Chief P.J. O'Rourke's take on education. Send your notes to feedback@stansberryresearch.com.

"Dear Steve, I just wanna take a moment to appreciate everything you do. It took me a lot of work to appreciate value investing, and to understand global macro to some extent. Then you would trot out simple correlations, like a perma-bull always validating his thesis. It annoyed me because I knew that you were doing a lot right, and still had the word 'cheap' in your core investment tenet.

"But now I get it. You focus on the most important flows of funds in a scientific manner, and you're just very consistent about it. Now it is extraordinary the consistency with which I can buy stuff in all sorts of sectors and they just go up! Cheers." – Paid-up subscriber Carlos C.

"Sjuggerud is a brilliant analyst (as are [Porter] and heart-healthy Eifrig), but I fear that [President] Trump with his flashy America-first agenda is hurting prospects for investing in China A-shares. That's Sjuggerud's missing ingredient." – Paid-up subscriber James G.

Brill comment: As we mentioned earlier, Steve still thinks fears of a true "trade war" are overblown. But his research suggests that even in a worst-case scenario, his favorite Chinese stocks would do just fine. And he considers the recent selloff a fantastic buying opportunity.

"The following is in response to today's American Consequences post on student debt. Virtually every article written on the subject of student debt overlooks perhaps the most serious cause – that of student spending irresponsibility.

"I am a now-retired college professor who taught at two MAJOR Midwestern universities. Over the years, I had approximately 16,000 (give or take a few thousand) students pass through my classrooms. In some instances, I came to get to know the students reasonably well and in almost every case, the student had a better and newer cell phone than did I, had newer and better and more up-to-date stylish clothes than did I, and many even drove nicer cars than did I!

"How did that happen? Reckless overspending by the students themselves and easy credit from the student loans is the answer. And that is the cause of much of the massive student load debt they are now facing. Had their parents done a better and more responsible job of teaching them fiscal responsibility, we as a nation and they as former students would not be in this current mess. Consequently, I do not have much sympathy for those facing this massive burden.

"I could go on and say 'Back when I was a student and had to take out student loans...' but I won't bore you with such out-of-date drivel." – Paid-up subscriber Bob R.

"PJ – Are you sure it's 'her' money? Maybe their money would be more accurate. Annoying AMWAY sales people helped her husband to become so very wealthy, not her. Reports are she lost over 100 million of 'their' money on the reported blood analysis company out West. How smart was that? Maybe Porter can afford to bleed away 100 million, not me or you I bet." – Paid-up subscriber Steve G.

P.J. O'Rourke comment: Steve, if you want to play "Gotcha!" OK. The "Fallacy of the Irrelevant Conclusion" (or, as it's known in formal logic, ignoratio elenchi) occurs whenever someone advances as an argument something that has nothing to do with the point being argued. You want to open a whole can of worms. We want to squish one specific worm – the Educational Establishment.

Regards,

Justin Brill
Baltimore, Maryland
May 24, 2018