Today, we’re revisiting a piece on China trade data I wrote last July with the intent to see how things have changed.
Spoiler alert: Although data has been updated, not much is different. The near-term outlook remains bearish, and longer-term projections show a decreasing willingness for global trade partners to put up with China’s controlling nature.
But with this week’s debacle in Afghanistan, along with rampant speculation that the fallout will somehow work out well for the Middle Kingdom, I felt the need to update this data — if only so I could update my own perspective.
And while that perspective hasn’t changed much, that doesn’t mean it won’t next time… or the time after that.
After all, if we’re not constantly challenging our own assumptions about the world, then by mere definition, we’re going to stop learning.
And on that front at least, I can’t stop, won’t stop…
A Philosophical Backdrop
Back in my musician days, our tour schedule tended to be weighted toward the college semester, as those were our strongest markets. And as a result, we usually had a lot of time off in the summer to spend with family and friends.
For me, that meant I’d watch a lot of baseball, play a lot of golf — not well — and go see as many different types of shows as I could. For my parents, “shows” pretty much just meant tickets to West Virginia Public Theatre’s summer series.
Typically, WVPT was heavy on musicals. It was a decent summer gig for musician friends of mine, but there were always a handful of plays, concerts and special performances sprinkled throughout as well.
Over the years, I’m not even sure how many we went to, but it was… a lot.
All were good. Some were great. But only one left a lasting impression…
And that was actor Hal Holbrook’s Tony-winning, one-man portrayal of Samuel Clemens that made his career, and ran for decades until Holbrook’s retirement in 2017… “Mark Twain Tonight!”
Sometimes, People Just Don’t Get It
The show left a lasting impression on me largely because of what didn’t happen, as opposed to what did.
In it, Holbrook weaves seamlessly through a variety of Twain’s collected works — reciting the passages, narrating the transitions in between and punctuating prose with the occasional punchline to thunderous applause.
And while I can’t remember what passage he was reciting, about halfway through the show, he clearly arrived at the end of a piece — which was pretty funny — and stopped talking. I brought my hands up to start clapping, but I was stunned to hear…
Silence.
He nodded toward the audience, clearly acknowledging them graciously for paying attention. I raised my hands to clap again, and…
Nothing.
Holbrook then walked up to the open book sitting on the lectern at the front of the stage, and closed it.
At this point, I’m looking around at my parents and my brother in bewilderment, thinking, “Don’t the people here know they’re supposed to applaud?”
Zip. Zilch. Nada. Bupkus. Niente.
Unfazed, Holbrook shrugged and continued while my Dad leaned over and whispered, “I guess sometimes people just don’t get it.”
Ain’t that the truth.
Disraeli Does Tie Back Into Statistics
The piece that Holbrook followed up with — and I’ll never know whether it was coincidental or intentional — is one of my all-time favorite quotes. But prior to this performance, I actually never knew who said it…
“Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: There are three kinds of lies: lies, damned lies and statistics.”
Turns out, it wasn’t even former U.K. Prime Minister Benjamin Disraeli who coined the phrase “lies, damned lies and statistics” — it was likely an anonymous writer. But the phrase I had grown to love in the context of baseball was now forever emblazoned at the front of my mind for all kinds of different contexts.
At its core, the phrase is meant to convey the power of persuasion that numbers convey. Often, they can help transform relatively weak arguments into relatively strong ones. But, for instance, when perspective is manipulated, “statistics” can be used to bolster a completely fabricated point of view.
In the years since that quote came into being, however, statistics have grown into a field of study all their own. And if you’ve graduated from college in the past 30 years with any sort of emphasis on math, science or the social sciences, you likely have the skill set necessary to detect — or generate, if you’re so inclined — B.S.
So if you’re a natural skeptic like me, and you also have this skill set, you knew that President Donald Trump’s comments on the coronavirus death rate were total B.S. We have known for some time the death rate for COVID-19 hasn’t materially changed, except in instances where health care facilities became overwhelmed.
Similarly, given the natural skepticism and the skill set, you know for damned sure that China’s economy did not increase 7% year on year like they say it did.
The China Syndrome
How do we know China trade data is bad?
Well for starters, China’s retail sales numbers tanked this week relative to expectations.
Source: Bloomberg
Then, let’s look at China’s major trade partners:
Source: Bloomberg
Just going down the list, we have the United States, who is mad at them. Then we have Japan, who is mad at them. Then South Korea, who is edging into recession… and also a little mad. And while the Germans have been frustratingly accommodative, Australia is definitely mad at them.
Just those four countries constitute $1.4 trillion in annual trade — over 30% of China’s total output.
We know for a fact that exports of Chinese goods to the U.S. have recovered somewhat — but not to pre-pandemic levels… and we can see it.
Source: Bloomberg
We know that Japanese imports of Chinese goods have recovered, but not meaningfully…
Source: Bloomberg
And while South Korean imports of Chinese goods are up a little…
Source: Bloomberg
Exports to China from these countries are all stagnating relative to pre-pandemic levels.
Source: Bloomberg
With exports and imports both down, let’s look at the other components of GDP, as defined by the equation GDP = Consumption + Government Spending + Investment + Net exports.
Did consumption increase? Nope.
Source: Bloomberg
Did government spending increase? Nope. In fact, they stopped reporting it last year.
Source: Bloomberg
Did Investment increase? Not meaningfully.
Source: Bloomberg
So precious little increased year on year…and they expect us to believe they’re up over 7%.
To create a backstory for what they know will eventually come out, the ruling Communist Party has poured on the histrionics, backlogging ports with security measures. And to add comical insult to actual injury, stringent COVID-19 testing at the facilities are supposedly being implemented to fight coronavirus in — I kid you not — shrimp shipments from Ecuador.
And now with its biggest trading partners mired in recession and intergovernmental relations deteriorating, the likelihood that China can keep the lid on its flailing economy is somewhere between slim and none.
As such, it’s a reasonable time to once again target a short position on the iShares China Large-Cap ETF (NYSEArca: FXI). Now’s not the time, as the stock is on the decline, but feel free to short on any rip.
Again, for clarity: Now is not the time.
If there’s a main risk here, it’s that the market won’t know what to do with all this information. Should that prove to be the case, then it will likely behave like the audience at the end of that Mark Twain soliloquy… and just sit there.
But if there’s one thing I learned from Hal Holbrook’s performance, it’s that you can’t let things like that faze you.
Just take a deep breath, move on… and talk about the next set of statistics.
All the best,
Matt Warder
