Escape From China

• Corporate America’s China blues
• The Fed will stand pat — but for how long?
• The buyback frenzy cools off
• Stupid real estate tricks
• Again with the “long, boring videos”

Corporate America’s China Blues

In the quarter-century since Washington adopted “permanent normal trade relations” with Beijing… corporate America hasn’t been this sour on doing business in China.

Since 1999, the American Chamber of Commerce in Shanghai has conducted an annual survey of its members, asking how they feel about their prospects for the next five years.

The 2023 edition of the survey finds barely half of respondents are feeling optimistic — the lowest on record, and a plunge from 78% only two years ago.

“2023 was supposed to be the year investor confidence and optimism bounced back after years of COVID disruptions and restrictions,” the report says — barely concealing its disappointment.

Whelp, our Jim Rickards said from the outset that the reopening of China was a “false dawn” — doomed to fizzle in the face of the country’s debt-choked real estate market and falling demand for Chinese exports.

Today’s Wall Street Journal, summarizing the Chamber report, bows to the inevitable: “China’s deepening economic slump is damaging the fortunes of big U.S. companies with deep roots there, with some growing increasingly pessimistic that its long-awaited post-pandemic boom will materialize.”

But it’s not just the sputtering of the Chinese economic growth engine — as the Journal story quietly acknowledges.

“China has been increasing data-security demands on foreign companies and cracking down on firms engaged in corporate due diligence.

“In July, Beijing imposed roughly $1.5 million in financial penalties on the Beijing arm of the U.S. due-diligence firm Mintz Group for allegedly conducting unapproved statistical work, months after local authorities detained the company’s staff members.”

Too, there was the Journal’s recent scoop about how government officials are under orders not to use Apple iPhones for work.

What’s happening now is something we anticipated nearly five years ago — something we cheekily called “The Day China Kicked out Apple and GM.”

Back then, China accounted for 18% of Apple’s iPhone sales. And General Motors was selling 25% more cars in China than in the United States. The U.S.-China trade war was only a few months old — but we already had a sense that it would last far beyond Donald Trump’s presidency.

But it’s not just the trade war…

At the same time, China’s decades-long march toward a market economy is clearly in retreat under Xi Jinping’s rule.

Companies that once had a more or less free hand to operate now have Xi’s apparatchiks breathing down their necks.

A turning point came in 2021 when the government outlawed an entire $120 billion for-profit industry — after-school tutoring for young Chinese seeking an edge on standardized tests. The government labeled it a “disorderly expansion of capital.”

So stifling is the new atmosphere that in early 2022 our former colleague George Gilder — long an enthusiast for Chinese tech names like Alibaba and Tencent — reluctantly gave up on them. The entrepreneurial spirit of China’s people is boundless, he said… but the will to power of China’s government became too much to bear.

One of the most startling — and loony — developments came last month when Bloomberg reported that China-based employees of U.S. financial firms like BlackRock and Franklin Templeton are required to attend Communist Party lectures.

“Some bank executives and business heads have to take around a third of working time to study Xi Thought, joining activities and courses or reading four books from Xi every month, according to people familiar with the matter. Attendance is mandatory this year and they also need to submit papers on what they’ve learned.”

No way will American executives put up with that kind of time suck indefinitely. The cost-benefit just isn’t going to pencil out.

We don’t know where it all ends — but our 2018 scenario of Beijing going full-on communist and nationalizing Apple’s and GM’s China operations seems a lot more plausible five years on.

This whole “decoupling” thing? It’s going to get messy. We’ll aim to keep you ahead of this boulder as it gathers speed going downhill…

The Fed Will Stand Pat — but for How Long?

Did someone at the Federal Reserve just call an audible?

With the Fed set to issue its latest proclamation on interest rates tomorrow, Jim Rickards has shifted his outlook. The Fed will pass on the opportunity to raise the fed funds rate this time.

For most of the last week, Jim was going against the grain — anticipating the Fed would embrace its inner hawk and jack up the rate another quarter percentage point.

But no longer. Jim is a practitioner of Bayesian analysis — a relentless process of updating a forecast to reflect new incoming information. “Based on my internal sources,” he says now, “the Fed will leave its target rate for fed funds unchanged.”

We’ll consider this Jim’s final answer. Since the Fed embarked on its rate-raising cycle 18 months ago, he’s nailed the direction and the magnitude of every move. No reason to think he’ll break the streak now.

Still, he hastens to add the rate-raising cycle is probably not over — and an increase is in store at the following meeting on Nov. 1.

That too is subject to revision. The Fed will issue its quarterly forecasts along with tomorrow’s announcement and that will be the first “tell” of its intentions through the rest of the year. Wall Street will, of course, be watching closely.

Ahead of tomorrow’s announcement, Wall Street is selling off for no obvious reason — other than, perhaps, relentlessly rising oil prices.

At last check, a barrel of West Texas Intermediate is up another $1.33 today to $92.81. It’s about to bust through the “double top” highs of October and November last year. The longer it stays above $90, the more likely we’re looking at $100 before the end of 2023.

Of course, rising oil prices will make the Fed’s job of containing inflation that much harder. The Fed can print dollars but it can’t print barrels of oil; all it can do is jack up interest rates in hopes of choking off demand. Rising oil prices make it more likely the Fed will keep rates, as the saying goes, “higher for longer.”

And with that, all the major U.S. stock indexes are in the red.

The S&P 500 is down two-thirds of a percent to 4,423. If that level holds by day’s end, it will be the weakest close in three weeks. The excitement surrounding Arm Holdings’ IPO last week is not carrying over to the IPO of Instacart today, set at $30 a share.

Bonds are also selling off, pushing yields higher. The yield on a 10-year Treasury note is at 4.33%, very near the highs of last month.

Precious metals, however, are hanging tough — gold at $1,933 and silver at $23.16. Likewise with Bitcoin, still over $27,000.

The lone economic number of the day suggests the housing market might start to loosen soon — but not yet.

Housing starts slumped 11.3% from July to August, a plunge that totally caught Wall Street economists off guard. In fact, the number of construction projects that broke ground last month was the lowest since the pandemic month of June 2020.

That said, permits — a better indicator of future activity — came in way better than expected. The number of permits issued jumped 6.9% last month to the highest level since October of last year.

The Buyback Frenzy Cools Off

One of the major tailwinds for the post-2009 bull market is losing its momentum.

“Share buybacks on the U.S. stock market have dropped to the slowest pace since the early stages of the COVID-19 pandemic,” says the Financial Times — “as rising interest rates undermine the incentive for companies to purchase their own shares.”

During the second quarter, the S&P 500 companies spent $175 billion on share repurchases — down 20% year-over-year.

As a reminder, buybacks are an easy way to juice a company’s share price: Say a company has a $100 billion market cap and a float of 10 billion shares at $10 each. If it buys back half a billion of those shares and the market cap stays the same, those shares are now worth $10.53 each.

For as long as interest rates were low, buybacks were a no-brainer. A company could take on new debt and come out ahead of the game. In the past we’ve cited the classic example of Intel in 2012 — borrowing $6 billion at rates as low as 1.35% and using the proceeds to retire shares paying a 4.3% dividend yield.

But with rising rates, the math no longer works. “When rates were zero it made sense for companies to issue long-dated, low-rate debt and use it to buy back shares. Now not so much,” Bank of America’s Jill Carey Hall tells the FT.

Especially if businesses are feeling the pressure to spend money decoupling their supply chains from China (see above).

In addition, Congress enacted and the president approved a 1% tax on buybacks last year. It’s not a huge deterrent, but it’s one more reason not to do a buyback when it might have made sense in the past.

In the short term, however, buyback activity tends to pick up in November and December as companies seek to square up their books by the end of the calendar year.

Stupid Real Estate Tricks

We know it’s hard to move properties these days with mortgage rates at their highest since the year 2000, but…

An old funeral home in Millbury, Massachusetts, just went on the market — 5,188 square feet, three bedrooms, 2½ baths on a three-quarter-acre lot.

“State records show the Greek Revival structure was built in 1850 or earlier,” reports Boston’s ABC affiliate. “The building's record with the Massachusetts Historical Commission identifies it as significant because of its architecture.”

OK, cool, and it certainly wouldn’t be the first funeral home converted to a private residence…

but what’s the story about it being haunted? Must be something really legendary, right?

"Not sure if it truly is haunted, but given the age, I suppose it's a possibility," confesses real estate agent Erika Kristal Eucker.

So… it’s just an attention-getting tactic? Lame.

Supposedly the listing goes live today with an asking price of $769,000 — but as deadline approaches, we don’t see it on the website of Ms. Eucker’s firm.

Again With the “Long, Boring Videos”

“I fall asleep waiting for you to get to the end of your great offers,” a reader writes on the topic of our sales messages.

“You use a thousand words when 50 would do. Why don't you say what you mean instead of going on and on?”

Along the same lines, another writes: “I still don’t know what the MASSIVE CHANGE is. I refuse to listen to never-ending pitches from your team members, when you could just put the information in a short email. So will you please do just that? Please send us a short email describing the massive changes, and then I will know what you are talking about. 

“To make clear, I will not listen to video pitches with no fast-forward ability, no timing information and most often a pitch at the very end for a new product that I will get anyway since I am a lifetime member. Otherwise, thanks for your great services.”

Dave responds: I’ve been in this line of work since 2007 and during that time I’ve witnessed epic changes on the marketing side of things — such as the advent of the “video sales letter” in 2010 and what seems like a revolution every five years in the way we find new customers.

But throughout there’s been one constant: “The more you tell, the more you sell.” In regular A/B tests of long copy versus short copy, long copy wins out almost all the time.

That said, recent analysis by our marketing team is finding a renewed interest in plain-text sales copy — accompanied by visuals that catch the eye but don’t distract from the core message.

So if you’re growing weary of those “long, boring videos,” I can promise you today there’s hope. Stay tuned!

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets