China

The “engineering a crisis” framework was laid out by David Beckworth (prominent Mercatus economist) some years back, using 2014’s tighter monetary policy backdrop to explain the movement (subsequently) in commodity prices, interest rates, and China.

And the set up of the major macro market variables today does have a solid similarity to it. Recall that China pegs to the US dollar, and as such, de-facto imports US monetary policy, regardless of domestic conditions.

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The interest rate spread, such that it matters, has narrowed enormously. The currency devaluations (todays major announcement, and reason for the post) are now occurring.

The imported tighter mon pol through the peg and through US financial conditions, is coming at a maximally inopportune time given property sector collapse…

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…and given the COVID zero approach.

The tradeables sector (China’s manufacturing powerhouse) cannot, otherwise, plausibly said to be “choked off”, in response to a stronger yuan, given otherwise strong exports growth, but for right now, with lockdowns, little moves, and pressures are building.

And all that stimulus that we are hearing about, would be perfectly exciting/supportive…

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to a long-commods thesis…if those prices weren’t already through the roof, with almost all producers, including those most ill-advantageously positioned on the cost curve.

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Incentive prices are still enormous. As such, it is very hard to see any reason to get behind either commodities directly, or their producers, at current valuations.

If the stimulus works, lockdowns are swift, and over shortly, then presently high prices are maintained. If not, they collapse, likely taking elevated stocks with them.

That seems asymmetric, in nature, to us, and hence we maintain our underweights to metals and mining, and (since our recent exits) energy too.

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