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Blain: “The Recent Move Is More Short-Covering Than Fundamentals”

Courtesy of ZeroHedge. View original post here.

Blain’s Morning Porridge, submitted by Bill Blain of Mint Partners

“Ankh-Morpork had dallied with many forms of government and had ended up with that form of democracy known as One Man, One Vote. The Patrician was the Man; he had the Vote.”

Expect A Cautious Week

There is, of course, only one way to start this morning’s comment, and it’s a discussion about broken horse drawn two-wheeled vehicles… Scotland’s trouncing of England at Murrayfield on Saturday was just sublime. English supporters are invited to submit excuses and I shall publish the best ones through the week.

Meanwhile, it’s snowing here in London which means inevitable panic, the complete stoppage of our entire transport infrastructure, nothing else on the newswires except snowmaggedon stories, and in-depth analysis of how 2 mm of snow causes the effective end of the world – until it melts, at which point we will all drown.

Back to markets, and it’s a big week for European and US data – numbers that might or might not confirm, or otherwise, the synchronous global growth and global tightening story. However, everything will be overlaid with caution in Europe with the Italian Election and German coalition vote coming up.

In terms of Friday’s stronger US stocks – my stock pickers are nervous. They think it looks more like short-covering than fundamental strength. Conclusion? Expect a cautious week.

In the news, we’ve got Warren Buffett thanking Trump for a $29 bln tax-windfall from the recent Tax-reform. Buffett has said he’d not have recommend the reform, but he may as well take and bank it.

China is interesting.

It should not be a massive surprise to anyone that President Xi Jinping has set himself up for a life presidency – and critically hanging on to the post of General Secretary – by removing any term limits. He’s been steadily accumulating power and control over the past few years and removing rivals via the time-tested route of “corruption” charges. The language has shifted back to the days of Chairman Mao – the Great Helmsman – and sounds more like North Korea than a premier global economic power.

Does it matter? Xi makes all the right noises about Free Trade, market economies, and his sponsorship of regional growth, silk-road infrastructure and such appeals to investors. However, the market risks are significant.

China has changed dramatically in the last 30 years – and clocks don’t run backwards. The state has invested billions to create a savvy internet connected society with “Chinese Characteristics” – in other words, a Chinese internet delivering the state message. However, Chinese society has changed: it’s wealthier, better travelled, socially mobile, and has massively increased access to education (something the Chinese value higher than the west understands), creating a massive hunger for “more” among the burgeoning middle class. Some of that can be deflected by addressing social needs – hence the Government’s focus on solving environmental issues.

Concentrating political power back into a smaller number of aging hands could fuel dissent – running the risk of rising instability at a time when the Chinese economy is going to be struggling with the effects of the corporate debt load and “unwise” lending over the last 10-years. We haven’t seen political crisis in Russia where Putin has been able to re-establish his life presidency by appealing to Russian nationalism and the appeal of a strong leader to address the destructive legacy left by the collapse of Soviet Communism.

It’s a very different story and vibe in China. We’ve been 40 years of explosive growth and increasing wealth. China now faces a number of potential threats:

  • i) The demographic time-bomb: the well-known threat that China gets old before it gets rich as a result of one-child families and social mobily. This can partially be addressed by automation and education, but doesn’t solve the problem of too many men chasing too few women.
  • ii) The debt crisis: addressing years of poorly planned state spending and corporate borrowing.
  • iii) Political aspirations: its been nearly 30 years since the last outbreak of political activism in China – but the keeping the population content by delivering serious social improvement, jobs and living standards, might not be enough to overcome rising political expectations from the middle classes if they perceive their government reverting to an earlier time.

China watchers tell me there is nothing to worry about… but remember the mantra: the moment to sell is 10 minutes before you think about it.


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