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#32 S2N: Ray gives China the green light

#32 S2N: Ray gives China the green light

micksonmatch
April 02, 2024

In today’s issue:

Ray gives the green light to invest in China
A quarterly review
Liquidity is draining
Global government debt grows
Update on Trumps Truth Social

Today’s Spotlight

I have a general rule not to listen to people who I think are frauds. I cannot tolerate people who behave and say one thing to win favour but are completely different people when they have nothing to gain. These types of people are often the nicest in public but monsters in private.

I have a different set of standards when it comes to learning from traders, investors, or other high-performance personalities. Ray Dalio is an interesting guy because he straddles a public figure who preaches “Principles,” a best-selling book that describes his philosophy of life and investing. This places Ray in 2 opposing camps for me. I have been following Ray Dalio for decades. He founded and ran Bridgewater, the world’s largest hedge fund.

I recall meeting a hedge fund manager in Los Angeles who told me that he knew Ray personally and that he was a horrible guy. I kind of just dismissed the guy. I then followed the repeated succession plans Ray kept changing, as it seemed he could just not let go of Bridgewater. I read in the media about the high-profile labour dismissals and the accompanying lawsuits. I suspected something may be a little off with the guy. Then I read the book “The Fund.” I couldn’t put it down. Through a series of reveals from inside sources, the author completely character-assassinates Ray.

I believe the bulk of what is written in the book but despite it all, I still respect the genius of Ray Dalio. Lets dive in.

Despite the fact that China is seen as the enemy to the west and is run by a communist dictatorship. China is the second-largest economy in the world, with, give or take a little, the largest population in the world. China cannot be ignored in a portfolio that is looking for diversification.

One of the oldest and wisest of sayings is to invest when there is blood on the street. There has been a lot of red ink spilt in the Chinese stock market over the last few years. You can see that the market is currently about 50% of its 2008 highs, despite the fact that the world stock markets are enjoying one of the great bull runs. I have included the Hang Seng (Hong Kong’s) stock market as it is a proxy for many Chinese companies and has a much longer history for that region.

I have been carrying on quite a lot about the poor state of the Chinese economy and the huge amount of underwater debt that it is swimming in. While I think it is bad, I also think a lot of pain has already been felt in the Chinese-linked stock markets. What I don’t think is fully appreciated are the consequences to the rest of the world equity markets what a sick China means for the world economy.

This is where I agree with Dalio. I think the Chinese government will dabble in their own form of quantitative easing and provide the necessary liquidity to prevent a hard landing. So for me, I would say building exposure to the Shanghai Composite and Hang Seng is a smart move.

S2N Insights

Q1 in Review

I thought it would be good to take a look at a few charts to get a sense of how the first quarter has been for the key markets we are following.

It has been a very good start to the year for the SP500 and Gold. What is interesting is that bonds are negative for the year, extending there drawdown to the longest in history. I think a deep dive on this is warranted later in the week.

As we have been talking about cocoa prices and NVIDIA, I thought I would share them as well.

Liquidity is being drained steadily

I have mentioned in previous letters that the Fed is trying to drain its reverse repo programme as part of the QT (quantitative tightening). The programme has now dipped below $500 billion. The plan is to bring it down to zero. This is a big deal, as we know that the Fed’s accommodative policies of the past have been very beneficial to the real estate and stock markets. We should continue to monitor the liquidity scene. Taking away too much too quickly could cause a very sharp, unexpected move in the markets. I would say if I haven’t warned of a shock, be warned; there is a growing possibility of a sharp pullback.

Global Government Debt

I came across this chart today and thought it was worth sharing. Someone has to pay for this. Money doesn’t grow on trees.

The Truth of the Deal (update)

I am having some fun with the updates on Trump’s Truth Social. The company released its Q4 numbers and rightfully, the market got a fright. It dropped 20% on the news that the business nearly ran out of cash and only survived with the $300 million it raised from the IPO. After reaching a valuation of $10 billion it is back to $6 billion. This is valuation is supported by 1 million daily active users $4 million in revenue and a net loss of $58 million.