China’s BRI, Economic Data & the Market’s Strength

By Jeff Kelly on March 1, 2019

I attended a presentation on the China Belt and Road Initiative (BRI) this week. As timing would have it, the presentation was on Wednesday, the same day as the Congressional hearings for Michael Cohen and Jerome Powell. I watched the circus of Michael Cohen’s testimony and Chairman Powell field questions from members of Congress. I have no doubt that they are clueless about the function of the Federal Reserve and how our economic system works. While we continue on with the congressional games here is what the Belt and Road Initiative is hoping to accomplish:

The Belt and Road Initiative (BRI) is an ambitious effort to improve regional cooperation and connectivity on a trans-continental scale. The initiative aims to strengthen infrastructure, trade, and investment links between China and some 65 other countries that account collectively for over 30 percent of global GDP, 62 percent of population, and 75 percent of known energy reserves. The BRI consists primarily of the Silk Road Economic Belt, linking China to Central and South Asia and onward to Europe, and the New Maritime Silk Road, linking China to the nations of South East Asia, the Gulf Countries, North Africa, and on to Europe. Six other economic corridors have been identified to link other countries to the Belt and the Road. The scope of the initiative is still taking shape—more recently the initiative has been interpreted to be open to all countries as well as international and regional organizations.

Source: Heritage.org

At a time when we are pulling back from involvements around the world, China is stepping up to promote their influence. While they are beginning to encounter some pushback from countries worried about their reach, the Chinese have made huge headway. They have have participated in the construction and operation of a total of 42 ports in 34 countries. They have has also signed 38 bilateral and regional maritime agreements covering 47 countries along the Belt and Road trade routes. Through the company COSCO (not Costco), the Chinese currently own the container shipping port in Long Beach, California. They purchased the company which owned the Long Beach Port but are being forced to sell it due to security concerns. The terminal is not only one of the busiest at the Port of Long Beach, but in all of North America. This is but one example of the reach and breath of the BRI.

China continues it’s pursuit of the facilities and materials necessary to win in the future. It would be a welcome surprise if we began to plan for our future. Congress would need to take action on starting a plan instead of posturing for their respective bases.

Despite the failed North Korean summit, border clashes between nuclear powers India and Pakistan, the various hearings in Congress and very modest to poor economic data, the market has held its ground very well. The market has done nothing to indicate this rally is soon coming to an end. While the market was clearly extended, the last few days have seen some sideways action. This could lead to further gains. Enjoy this while it lasts, it won’t always be this way.

Before we move on to the charts from this week, I want to pass along the little disclaimer that the GDP numbers were released with on Thursday – “The Bureau emphasized that the fourth-quarter initial estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see “Source Data for the Initial Estimate” on page 3). Updated estimates for the fourth quarter, based on more complete data, will be released on March 28, 2019.” I think this means, “We guessed!”

Charts From The Week Past

Economic data is mixed but we are still getting a lot of 2018 numbers due to the government shutdown.

I’d weigh the February numbers more heavily and those are a bit weaker.

Source: Bloomberg

Home ownership is rising once again and it’s kind of unexpected.

This could help improve home sales.

Source: U.S. Census Bureau, Housing Vacancy Survey

This may provide some insight as to why people are starting to buy homes again.

The vacancy rate for rentals is at an all-time low.

Source: The Daily Shot, Federal Reserve

The fourth quarter GDP came in above expectations. However, much of that gain was due to a build-up in inventories.

This will be a headwind for the first quarter GDP.

Source: Macromavens

It doesn’t get much publicity anymore but France, Germany, Sweden, Netherlands and Switzerland still have negative yield on their 5-year sovereign bonds.

Japan does as well. This is not a great economic sign.

Sources: Bloomberg

Treasury prices have been remarkably docile in the past few months.

Perhaps it’s a bit too calm. Usually when we see volatility this low a period of much greater volatility ensues.

Source: Bank of America Corp.

Italy GDP, it’s not so bellissimo!

Sources: Istat, Wolfstreet

This is not my favorite valuation measure but the price-earnings ratios are pretty high.

Sources: Yale/Robert Shiller, Crescat Capital LLC

Here’s China’s credit growth.

If it has bottomed, that would be very good news for the world economies.

Sources: CEIC, Gavelkal Data/Macrobond

China’s Purchasing Managers Index is still not moving in the right direction.

Source: Bloomberg

Whatever the administration is selling, someone’s not buying. The U.S. trade balance has never been worse.

But maybe that’s the plan. Fool em’ saying it will get better because of the tariff man but no, it only gets worse.

Sources: DailyShot, Bloomberg

Australia has experienced a huge housing bubble that is just now popping.

There was virtually no mortgage growth in January.

Source: Reserve Bank of Australia

The rally in stocks has eliminated what few shorts there were in the markets.

These very low levels don’t usually last long.

Sources: FactSet, Goldman Sachs Global Investment Research

Existing home sales have dropped with little pause.

We expect the spring will show a significant uptick. The stocks of home builders have been performing well.

Sources: NAR, YCharts, Wolfstreet

A remarkable look at opioid deaths.

While the numbers for fentanyl and other synthetics are astounding, and the numbers for heroin and prescription opioids are equally as staggering.

Sources: Centers for Disease Control and Prevention

TED spread is the difference between three-month Treasury bill and three-month LIBOR based on US dollars. To put it another way, the TED spread is the difference between the interest rate on short-term US government debt and the interest rate on interbank loans. 

TED is an acronym for Treasury-EuroDollar rate. Lower spreads tend to indicate less stress in the system.

Sources: Topdown Charts, Thompson Reuters

China has far exceeded other countries in tourist spending abroad.

Dollars spent in other countries bring influence.

Source: The Economist

If we are ever to get a grip on the cost of healthcare, the insane growth in administration will need to end.

Does technology not work in healthcare?

Sources: Athena Health, BLS, National Center for Health Statistics, U.S. Census Bureau Population Survey

Truck tonnage continues to look great.

Source: ATA Truck Tonnage 

Month-over-month growth in home prices has declined since the tax bill limiting deductions was put in place last year.

Source: Bespoke

Home prices in low-tax areas are doing much better than those in high-tax areas since the passage of the tax bill last year.

Many of you in Denver will be surprised to know you live in a “low”-tax area.

Source: Bespoke

In California we are seeing continued claims soaring.

This could be something we see spreading nationally.

Source: U.S. Department of Labor

From 1904, “Financial Ideas Worth 5,000 to You.”

Only 10 cents!

Weekend Homework

The MBA Myth and the Cult of the CEO

Luke Gromen: The “Dollar End Game” has already begun! – Erik Townsend and Patrick Ceresna welcome back Luke Gromen to MacroVoices. Erik and Luke discuss:

• Underlying motives & timing
• Oil, Petrodollar, and global Treasury Holdings
• Drivers behind the strong dollar
• Vicious Cycle in US Balance of Payments
• Timing the dollar endgame
• How does the dollar bear market playout?
• Entitlements and the trends in populism
• Deflating the debt bubble
• How does gold play into the story?
• What are the range of possibilities for the debt crisis?

Throughline -The Forgotten War – This week’s summit with North Korea leads to one of this weeks recommended podcasts. This podcast takes us through the reasons for the Korean War and its aftermath. There is a lot of great background information here in a relatively short episode. What has fueled the hostility between these two countries for decades? The hosts revisit the tangled history that helps explain how we got to where we are today.

Have a great weekend.