Blain’s Morning Porridge – May 22 2020 – Ailing Dragon Needs Us!

Blain’s Morning Porridge – 22nd May 2020 – The Ailing Dragon Needs Us! 

“The two aims of the Party are to conquer the whole surface of the earth and to extinguish once and for all the possibility of independent thought.”

40 million unemployed Americans. Pretty powerful piece of BBC reporting last night on 5-hour queues for upstate NY middle class food banks. “These people have now missed 5 or 6 paychecks and they need to eat”, said a charity worker. A protestor demanding reopening screamed into a microphone: “What is the point in saving people from coronavirus and then letting them starve instead?”  America looks divided.

It’s not just them. The mood is getting uglier. A chum at a leading investment firm has just been quietly told he won’t be getting paid the bonus he expected – it been worded as deferral, but looks permanent. He says he puffed up and cited his rights but got brutally slapped down: told he’s lucky to have a job, and if he complains or says anything he’s on furlough and out the door immediately thereafter. He’s terrified. He’s highly levered, has school fees to pay, and feels trapped. It’s made a bad social situation worse, stuck in a small London house with kids and a now very unhappy wife.

Repeat the same scenario some 20 million times around the globe – as the upper middle classes are “disciplined”.  Job losses are accumulating across the global economy. But don’t worry, your Pension plan, Super or 401 is doing just fine… for now…

A particularly cynical client reckons rising fear and job losses are as positive a reason to buy stocks as any he’s heard. Companies are grabbing the virus opportunity to rationalise, cut headcount, cut wages, and axe extraneous departments. As a result; bottom lines are improving as they become more efficient and productive! Everyone expects 2nd and 3rd quarter earning wipe-outs, but this is “capitalism in action” and earnings could surprise to the upside as costs as slashed.

When I commented y’day about the importance of “Social” in ESG investing I was branded a communist on the website. You can call me a complete Bolshevik; but companies planning to slash payroll to increase dividends in this landscape deserve strung up. Sadly.. it will happen. I guess we better get used to it…. Have you read 1984?

Meanwhile, Lufthansa is finally going to get its $9 bln German govt bailout. Emirates are looking to retire their A-380s. Ryanair expects passengers will flout quarantine rules and take holidays abroad anyway… I can just imagine: 2 weeks in Marbs followed by 3 months in the Costa Scrubs. 

But the first order news this morning is all about China… 

This morning the Chinese sent a signal round the globe when they didn’t set a target for economic growth for the first time in 30 years. The reality is the People’s Central Committee doesn’t want to reveal anything that hints at just how bad the economic reality is in China.

There are all kinds of theories about China – you have to cut thru them to focus on what’s real. Some say China is on a deliberate collision course with the US. It’s the end of the US empire as China becomes the new pre-eminent global superpower. A trade war with the US could soon turn into a hot war. Taiwan, Hong Kong, and the Sith China Seas and the Spratlys are flashpoints set to ignite. A slowing China/ the Virus is a weapon of deliberate economic warfare because of the damage and instability it will create across the West. Etc, etc…

The bottom line is China also suffers. I suspect the truth is the Communist party knows it’s in serious trouble honouring its compact with the people – keep them happy, make them rich and they don’t care who in power. The compact looks wobbly. This is going to be a massive test for China, and the chances of collateral damage are huge as its responses impact global trade, destabilise overseas entanglements and lead to conflict in international organisations where China and the US face each other.

Whatever I say about China, I bet I get called a shill or an agipropbot of the PCC for even suggesting the Chinese might love their children too.

The party would like us to believe China can achieve a face-saving V-Shaped recovery – but it looks unlikely. The economy took a massive hit (industrial production only recovered 4% in April after a 13.5% crash over Q1). 20% of the migrant workers who assemble everything from iPhones to Electric Scooters never returned to work. The domestic debt markets are as perilous as anywhere else.

While workers in the state sector are protected – it’s a declining piece of the Chinese economy. It’s been the Chinese private sector that’s driven growth, and it’s in exactly the same place as the rest of the global economy: being forced to shutter production and layoff workers – to a far greater extent than officials will admit. Incomes are falling, consumption is waning, and folk are focused on keeping what they have.

The issue for China is how to get the private sector working again before unemployment and declining wealth causes a social issue. They can no more afford a trade war with the west crippling any domestic recovery. Which is why the Chinese also announced this morning their intention to implement the new trade deal with the US. That’s a big de-escalation, but a gesture they had to make. It’s a big risk strategy that could embarrass the party – the main one being just how fast and loose will Trump play with new threats and demands in this election year.

The trade deal news has to weighed against the potential damage implementation of National Security Law in Hong Kong – also announced this morning. That is bound to trigger a new wave of protests and revulsion across the West. The party has done it because it’s a good unifier domestically. If there is one thing the Party has done well, its to have created a very patriotic nation where these terrible Hong Kong Western Stooges have made the ultimate insults to the flag and anthem, thus they are class enemies and must be purged.

And if discipling Hong Kong doesn’t unite the people.. then there is always the convenient lie about the patriotic duty to restore Taiwan to the motherland. (The truth is Taiwan was never really part of China except briefly – it could well become China’s Troubled Ireland if it ever does..)

All of which means XI has raised the stakes. If the government can’t deliver wealth and prosperity – social unrest and wider democracy calls become a real possibility. He needs to reopen trade to do that.

Interestingly, it’s clear the Party does take the people seriously – unlike the final days of the Soviet empire in the 1980s. One of the reasons China has become such a strong proponent of renewable energy and EVs is its scarred environment – the result of 50 years of industrial growth imperatives and coal power which did enormous environmental damage, poisoning the landscape, water course and public health. It’s a factor the government is now addressing to maintain its social compact.

This is going to be an interesting weekend in terms of how the China story plays out. Although the immediate market reaction has been negative, avoiding a global trade war would be a massive real positive development.

5 Things to Read Today

WSJ – Millions of Americans Skip Credit-Card and Car Payments

BBerg – Europe’s Bread Lines Get New Faces in Warning of Crisis to Come

BBerg – Highlights of China’s 2020 Economic Targets

FT – How Germany Changed its Mind about Europe

ZH – Japanic! Tokyo Tourism Tumbles 99.9% in April

Out of time, and have a great weekend! Back on Tuesday..

Bill Blain

Shard Capital