Comments
Transcript
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GBUSD/CNY down ~7% over 4 months.
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MNExceptional gems embedded in the conversation. Keep it up RV! "Algos are not designed to think ........ they are designed to react!"
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WBJapan and South Korea are NOT having a trade war, per se. It's an argument about payment to Comfort Women/Slave Labor from 74 years ago. https://foreignpolicy.com/2019/07/15/why-are-japan-and-south-korea-in-a-trade-fight-moon-abe-chips-wwii/ "The immediate trigger for the trade war appears to be a South Korean court case late last year, which ruled that Japan’s biggest steelmaker, Nippon Steel, used forced labor during the war and ordered the firm to compensate some South Korean survivors with about $89,000 each. (The court seized shares that Nippon Steel has in a South Korean firm but hasn’t sold them yet.) A similar case last year ruled against Mitsubishi Heavy Industries, and other cases against scores of other Japanese firms are being heard in lower courts. Japan argues that it has already made amends with a monetary settlement in the 1965 accord that reestablished diplomatic relations between the two countries, but South Korean courts don’t see it that way."
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JJJust listening to this here Aug, 8 2019.. unbelievable call!!
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VHJust Brilliant Donald J. Trump @realDonaldTrump · "China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!"
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MNbeautiful call Mr clark!
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IHHe was right, sooner than many thought!
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CBUnfortunately for Russ the market can remain irrational longer than he can remain solvent...
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NRGet Russell and Michael Green in the same room.
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IPLoved the interview, I don't like the sponsorship thing, when I first subscribed I did it because there were no sponsors, therefore no conflict of interest.... I hope you can rethink this and go back to the old model, less interviews if necessary , but conflict of interest is terribile. I'm angry with macro voices for the same reason....
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SSExcellent interview (yet again). I'm not a finance/economics guy, but with a devaluation, how does China stem a massive capital outflow offsetting gains in exports? Am I misunderstanding the situation and FX dynamics?
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SBThe thing to understand about the Chinese housing market is that new property is typically bought by young men, as property ownership is effectively a prerequisite for attracting a future bride (or even a girlfriend). In that way, it is very different from western housing markets. Should housing get to be unaffordable in China, expect social unrest.
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DFIf I remember correctly I think one of the very first Real Vision interviews ever was Mark Hart talking about the Chinese devaluing the renminbi. That was a few years ago now :-)
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MRLiquidity this, liquidity that. C'mon guys. You're talking about China. A foundation of China's business plan, as Clark said, is a stable currency. China lets the U.S. monkey with increasingly superfluous levers while they work their plan. Phase One is complete, the development of a state-of-the-art manufacturing industry. Phase Two, creating a domestic market is also going well, though is experiencing problems, as Clark again pointed out, like real estate bubbles in the cities (and ghost cities in the burbs). Phrase Three, where China builds the distribution channel (belt n road) is not going well. Simply put, the world is in a recession. Raoul doesn't need to convince me ;) Minorities, ethnic groups in China and smaller countries on the spice road are fighting exploitation. Automation is destroying jobs faster than society can recreate them. Opportunity inequality is breaking apart societies everywhere, form the U.S. to China. Sure, cheap money is distorting the markets, but even without it many economic trends would remain. Clark mentioned the Japanese trade war with South Korea. THAT was the topic for RealVision to pounce on. Or, his comparison in regard to Chinese corporate debt and industry concentration (or lack of it). In short, people don't buy liquidity or currency. They buy products (at least from China). The more China can lock in commodity sources and the more infrastructure it builds to get those goods to the rest of the world without others blocking it the more powerful they become. Will it be the U.S. sneezes and the world gets a cold, or China? Will China's go-it-alone becomes their undoing? Will U.S. fiscal policy be its undoing? Tons of fascinating questions that could have been asked. Maybe next time.
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WSIf we subscribe to the view that China is a mafia state, why would we credit them with the ability to play chess whilst we play checkers? All data flowing to the CCP has a political slant. Regional party heads “paint the tape” for logical reasons. They wish to survive and maintain stability. Our system is worse, theirs, in the words of my son, are worser.......
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mpYou have on another bearish PM but the interviewer never asks how exactly are you positioned. Why? Ask exactly his bets, shorts etc. put him on the spot. I doubt he has any position. Also no clue on this guys performance over the past etc. really no value add.
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bsEven though I wish Russell is correct I think we are missing the fact that central banks are controlling the bond markets (and by extension) equities....FX is slowly also getting controlled by governments .....
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REAs I said in another comment on another video, I do NOT believe equities are saying inflation. Cyclical equities at all time lows vs. defensives. Small caps are at cycle lows vs. large caps. ROW (look at Germany and Japan) vs. US at cycle lows. These are all indicators that the equity market is giving the same message as the bond market and the currency markets.
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DHRussell is always a great interview. And he offered some positioning advice.
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JHRaoul - can you comment on / discuss in a brief video presentation perhaps...how a Chinese deval. could impact / be impacted by your Doom Loop thesis? Thanks again; I am greatly enjoying this series.
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SAGreat interview.
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JGWonderful interview. The programming on RealVision just keeps exceeding expectations. I think the key insight of this interview was the comment by Mr Clark that central banks can't control currencies and China may be weighing the possibility that a Trump reelection is the outcome if things keeps moving along. Perhaps the ripping off the band-aid approach makes more sense as a real disruption would jeopardize that reelection.
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ABInterviewer nott godd!! Very looooooong questions!!
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SBFantastic. Please invite Russell back.
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JHAlways great listening to Russell - he is clearly a v. sharp guy who has a deep historical understanding of markets. He seemed to scare the pants of Roger at the end! lol. The story that's the same in this credit cycle: we are in yet another credit bubble, it would appear, in many developed markets (and in China); and The story that's different: this time, central banks and governments are both complicit in the perpetuation of this illusion, and so will throw their full weight behind ensuring things go well for themselves. China, however, is a red herring indeed, and its central bank will almost surely not cooperate with the Fed / ECB / BoJ and others if the latters' actions go against their own domestic interests. My humble prediction: someone's currency is gonna get taken to the cleaners...and China is playing chess, while the US is playing checkers. I know who my money's on in the long run.
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RAI really enjoyed Russell Clark’s prior RV interview and very much enjoyed this one as well. Great “handoff” Raoul to Roger and taking the moment to do so. Roger is an excellent interviewer and an excellent resource for RV and we the viewers, IMO. Roger, Justine and Ed Harrison have really proven to be a cut above....we are always in good hands with them to tease out the salient points from the interviewees and keep the pace just right.
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lDinterviewer: so you think its going to blow any minute Mr Clark: (big intake of breath) yes hahah love'd that great chat
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IDHave we seen i bull yet in this RECESSION WATCH series ? Would be nice to see both sides. And i think it was advertised that way.
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DSRaul and the team kudos on this entire series. You outdid yourselves on this production!
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ETAlways enjoy watching Russel Clarke's interviews! Also for background: A Short Seller Bets It All on a Spectacular Market Crash - Horseman Capital’s Russell Clark has been bearish for more than seven years. And if he’s wrong? “This could be my farewell interview,” he says. Link: https://www.bloomberg.com/news/articles/2019-05-10/a-short-seller-bets-it-all-on-a-spectacular-market-crash
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NvAlways thought-provoking
RUSSELL CLARK: If everyone else could devalue, why can't China devalue? The reason why is because they've chosen not to. If you're changing the trade rules, we're going to change the currency rules. We'll go home on Friday. And over the weekend, the Chinese go, all right, that's it, we're going to rip the band aid off. And we come in and the renminbi is at nine. RAOUL PAL: When we're looking at something like a recession, we need a global perspective. Now, with so much programming in these two weeks, it's difficult for me to be everywhere at one time. So, I need somebody to go and do my interviews in London and Roger is the obvious fit for me. Roger and I've known each other for 20-odd years. He knows how I think, and he knows how I'm thinking about this recession. So, I wanted him to go and interview Russell Clark.
Now, Russell is one of the best-known fund managers in London. He's an extraordinary brain. And he's one of the people we really love on Real Vision, because he has a different perspective. He always has something unique. And see, Russell has this theory about China that really is quite out there. And his viewpoint is that it all starts with a Chinese devaluation of the RMB. And then leads into broader knock-on effects. It's a brave call, and something I really wanted Rogers to dig in with Russell about to get to the bottom of and see how that might affect some of this recession watch view that I've got. ROGER HIRST: Russell, welcome back again to Real Vision. Great to have you on.
RUSSELL CLARK: Thanks for having me.
ROGER HIRST: We're talking about China within the context of recession, because we're in recession week. Now, you've been looking at China for a long time, you've been looking at a slowdown in China for a long time. Could you put it in context, how long that slowdown has been going on? How deep it is compared to the headline data that no one trusts? And what you're looking at to generate that view on China's current position, it's effectively drove momentum.
RUSSELL CLARK: So, China's always a slightly tricky market, because the data and also a lot of the financial markets and laws are sophisticated as they are in particularly in the US. And so, you still have to tease out a little bit. So, to give context to the China story of the moment, if you go back to, I think, the '14, '15, '16 periods where fears of China were at a peak, what you saw was being up into slowdown, was you started to see problems in its corporate debt market. A lot of that was driven by the slowdown in commodities, so lower oil prices, lower steel prices, lower iron ore price and lower coal prices.
And just to remind people, in the aftermath of the financial crisis, China has gone into wealth management product, P2P lending boom. And a lot of these products were based on getting high yields out of like coal mines and iron ore and steel factories. So, as you started to see margins in that industry collapse, credit problems start to emerge in China. And they started to become self-feeding, which then create pressure on the currency, which then create deflationary pressure through the whole global system.
And ultimately, that was what got priced in the early '15 and '16. And then the Chinese authorities responded through two things. One is a forcibly reduced loan capacity in all industries, and then do the fiscal push. And so, what this did was that for the survivors, it created huge cash flow, huge profitability, and cauterize the corporate bond problem. So, you knew who was going to be the loser and who's going to be the winner. And so, you could stack uncertainty back into investing and the way we went.
Now, what is unusual in China at the moment is, if you look at markets like the auto market, there's a clear sign of a slowdown. And it's been slowing for a while. If you look at the import-export dollar out of markets like Korea, they're exposed to China, have slowed down massively down near the 15% to 20% year on year. The weird thing is, if you then look at things like Chinese steel production have actually accelerated to be up 10% year on year. And so, what you can see is the external environment, probably driven by the tariffs and trade barriers being erected out of the Trump administration has certainly slowed growth in China and had the same problem.
The same time, the Chinese authorities have responded to that for domestic stimulation. So, you see iron ore, steel productions at very high levels, and also housing prices have been very, very strong. The problem you've got with that, when you really cut into it, is what you're seeing in the Chinese steel market and what you're seeing globally, is that all of the profits from increasing steel production is going directly to a strained mining corporations. So, the margin on cash production in China, even though they've gone to record levels, has actually dropped to zero, virtually. And so, the stimulus of the Chinese authorities are applying to the economy to counteract slowing trade, it's actually not feeding through to the domestic economy.
As likewise, as we've property markets, this has always been an issue for me, I think we saw it in London back in '15-'16 period, and you start to see in Hong Kong is that you can keep getting house prices up to create a wealth effect. But at a certain point, it gets to this point where people go, well, actually, I have to save so much money to buy a house, I'm not going to save. It almost becomes irrespective. I'm related to their wealth. And in fact, for people who do want to buy a house have to save so much money, and interest rates are so low, it just becomes a pipe train, and actually becomes a negative for the economy.
So, I think that's high house prices is definitely a driver of like Brexit votes, for example, I think it's a driver of the unrest we're seeing in Hong Kong at the moment. When you remove the prospect of homeownership from so many young people has negative, I think we're really at that point in China, where the traditional stimulus that they've used for the last 10 to 15 years doesn't work. And so, then creates all other issues, which we're starting to see come to the fore.
ROGER HIRST: And how much of that change do you think is the liquidity injections, the use of credit 14%, 15% of GDP annually pretty much for a long time? And how much of this slowdown is, is a slowdown that's out of their control. This slowdown, it's intentional, they've always talked about moving away from the growth of any cost model to something which is more domestic, may be forced into that because of other external issues? But some of these slowdowns that we're seeing, could that be attributed to a change in direction and a redirection of the internal liquidity away from just a growth model towards maybe shoring up some of these excesses within business? And therefore, what we're seeing here is not so much necessarily a catastrophic slowdown in China, but a slowdown in China and a redirection in China has a massive impact on the rest of the world that got reliance on this one models of pre-2018.
RUSSELL CLARK: So, what's interesting to China, and it's something we've seen replicated across the entire world is when growth is good, what we've seen is central banks or governments try and win us off this QE model. Well, so unlimited credit to try and get growth going, same was in China, they crack down on P2P lending, they try and reduce steel production to rebalance. Because if you want to be a modern economy, your steel industry should be shrinking, not growing. Does that make sense? I know, it's always hard for people who worked in coal mines or steel factories, but actually, modern economies are not built on the back of endless steel production growth.
And the problem is, because we have so much credit around that whenever any government or central bank has looked to move away from stimulation, you always see a big slowdown and lower asset prices about six months to a year later. They realize excess to steel production was bad, that excess of house speculations is bad and P2P lending was bad. So, they did crack down P2P lending. But when you look at like debt to GDP, which is beginning to flatline for a couple years, it started to accelerate up again.
And this basically being the model of growth for last 15 to 20 years is that growth, it costs regardless a long term consequences. And the model of that is the Japanese experience just doesn't work. There are differences in different countries, but just doesn't work, in my experience.
ROGER HIRST: With China, it's been interesting, because we- I don't know, how many China bears has been over the time. And it's always a feeling that they have this access in pretty much every area, but I guess to the things they've been able to- not so much control, they're always worried about is obviously the FX reserves, as long as that's stable, which has been at 3 trillion for a while. And inflation is the other one in a semi-closed economy because of stuffing in liquidity. You're worried about inflation, but there's been no inflation.
So, can't China, in a way, continue to transition if we're going to call it that? Stuffing loads of liquidity as long as they keep one eye on that inflation figure, as long as inflation is relatively static, and they're not pushing the yields down so low that it causes more money to want to get out of the country? Are they going to confound us? And so, it goes back to scenario where China within the global system is a big worry, because it's changing. And we're feeling that. You can see it in Germany. You can see it in Taiwan.
But China itself might manage its way through this. What is it that's in there that's- what worries you is the stuff that you can see in some of the data? Or was it some of the externalities because you've seen a few currency pairs, things like that, and were going there's clearly some problems here?
RUSSELL CLARK: Now, the numbers of lead indicators on China back in the '14-'15 period got very, very weak. And the market was still believing in the China story. Market still believe in the China story, evaporated through late '15, early '16. And then the Chinese changed policy, a number of indicators turned positive again. Now, what's happened this year, probably around when Raoul got very, very bearish was you start to see strange movements in the currency markets, which is always what I like to keep a close eye on.
So, you've had a lot of very strange moves. So, this time, with more interesting, obvious ones, for probably for most reviewers, is the Australian dollar has continued to be weak, even as iron ore prices have gone to five-year highs. So, Australia is now running like the largest current account surplus ever, which historically is a very bullish signal. And yet the Aussie dollar continues to be weak. I think in a way because it's a lead indicator on what the renminbi is doing.
And when you look into the guts of like iron ore and the steel industry, what you're seeing is almost the Aussie dollar's falling steel prices, which are generally falling more than iron ore prices are coming up. Which makes sense to me, because the market's looking through the current strength in iron ore and going, you know what, actually, it's not real. It's a supply issue. But it's not being driven by demand. When something is not driven by demand, it's very hard to be bullish, because supply issues get resolved.
ROGER HIRST: And people, I think, at the beginning of the year, where everyone's looked at that massive injection and reflation to the big story in January, everyone's, oh, China is doing it again. And as you said, the Aussie dollar didn't really react to it not like 2016, mining stocks didn't. And if you look at things like copper, sitting on this quite a technical level, a big neckline looks like it's going to break down. So, the market's believe in copper not iron ore. And so, what was it that was wrong about the reflation? So, if you haven't looked that liquidity and position for reductive 2016, and we didn't get anything close to it?
RUSSELL CLARK: Yeah, look, like I said, if you're in classic emerging markets- so Turkey is a good example. Like if you push through the liquidity, and people don't believe in the economy, liquidity just goes out the other side. So, just talking currency depreciation, and which creates more inflation, but it's deflationary for your trade [inaudible] if that makes sense. Even like Turkey has been putting liquidity into the system, it doesn't actually benefit anyone, just currency weakness.
And in a way, I think that's what- if you look at what the Aussie dollar is doing and so the other currencies are tightly traded with the renminbi which is Korean won and Taiwan dollar, both suddenly have been weakening. Again, the signal that the money is just flowing out, which makes sense, because you have a very different attitude towards trade out of US, much more than to use tariffs, you had some very, very high interesting trade policy out of Japan, with Korea, I'm not sure if has been widely followed. But the Japanese banned the export of some semiconductor materials to Korea as part of like a trade war. They did just after the G20. So, when people went talking about that it could be a quite significant issue. Who knows?
But you've got a lot of very- so, the currencies are saying deflation. And the equities are saying inflation. And the bond market is saying deflation. And so, this the dichotomy you have is that which one of those is true.
ROGER HIRST: And people- and you talked about currencies, then one of the things that Raoul talks about is the second level on renminbi, and whether China will or won't- not obviously devalue, but actually let its currency go because that has enormous implications. The Asian dollar index is basically renminbi, but the Hong Kong dollar looks like it could break down. It's related to emerging market equities. So, in some ways, the big arbiter for the global economy or potentially the touch point for something quite naughty happening in the global economy could be the Chinese go, okay, actually, we are going to let the renminbi go. What's your view because you've got some strong views on the renminbi and what they should be doing?
RUSSELL CLARK: Well, looking at, I think, since the financial crisis, China has been the rock around which everything's being built, because they've been willing to keep their exchange rate very strong, and do huge amounts of fiscal stimulus and push up property prices to act as like a consumption, source of consumption for the world. And their currency was actually very cheap in 2008, and then as