China announced some monetary stimulus earlier in the week. While important, and somewhat helpful for Chinese stocks and bonds, it didn’t reverberate across the globe. Now China is embarking on fiscal stimulus, and signaling that there might be more to come – specifically to help the banks, which in turn should fuel the economy.

We had been very bullish Chinese stocks earlier this year (FXI and KWEB as ETFs), but backed off after they ran into resistance and the Chinese economy continued to struggle.

Now it is time to go back in. Again, nothing has changed regarding the view that China is not investible, but it is certainly tradable.

Rather than going against our “The Threat of Made By China 2025” theme, this fits the narrative, both from a long-term perspective, and also from a current trading standpoint.

The premise of the theory is quite simple:

• The Chinese economy is struggling, especially while real estate, the source of wealth for many, is in disarray.
• China can no longer rely on foreign companies manufacturing goods in China. That ship has sailed as the risk of losing IP is real, the ability to sell into China rarely materializes in the way that companies hoped for, and the COVID lockdowns taught many companies (the hard way) about how little control they had in China.
• As such, China must make and sell their own brands globally.

There has been some success in doing this. Certainly, in the domestic market, their own phone brands are thriving. I’ve also seen reports that BYD is the number one selling EV in Germany. Finally, and let’s be completely honest, how many people heard of Shein or Temu at this time last year? Now, even in the U.S., they seem to be gaining traction.

But, despite the progress in selling their own brands domestically (and more importantly, globally), the overall economy is still struggling.

So, the solution, which fits well, is to boost the domestic economy.

Give the domestic economy (supported by the government) the time needed to continue to try to sell products internationally. It makes sense.

So, with stimulus at home, this should give China breathing room and let many of their companies boost domestic sales, while trying to expand globally.

Added to that, most investors are underweight China as much as possible – so the potential for a “catch-up” trade is extreme! While small caps and domestic value stocks have had some nibbles, based on the Fed cutting, etc., this should pale in comparison to investors being forced to chase Chinese stocks (FXI and KWEB are my preferred methods – out of simplicity, more than anything else).

The Middle East

We may be seeing “escalation to de-escalate!” We discussed this as part of a full 10-minute interview on Bloomberg TV last week (starts at the 5-minute mark).

Again, the theory is quite simple:

• Hezbollah (and likely other enemies of Israel) are living in fear, wondering what else has been compromised (clearly can add pagers and walkie-talkies to cell phones, and even in-person meetings). There has to be real fear there and an inability to organize any response.
• I believe that Iran’s firing hundreds of missiles, drones, and rockets at Israel was meant to succeed. Many of our Geopolitical Intelligence Group members have argued that you don’t send that many weapons, coordinated with staggered launches to arrive at the same time, and expect an almost 100% failure rate. So, if Iran already took their best (or close to best) shot at retaliating, it would explain why they haven’t launched a full-scale attack on Isreal as retaliation for other Israeli actions. One major attack that failed can be spun as “we telegraphed it,” but a second attack that fails would expose critical weakness.

Plenty of reasons to be optimistic that “escalate to de-escalate” could work here.

The other message, being somewhat signaled by the Saudis today (by increasing production), is that the region, as a whole, did not completely back away from Israel (and progress on the Abraham Accords). Yes, relations cooled, but there was not a complete about face.

Nations in the region, especially the Saudis, are trying to develop economies that can do well after the age of fossil fuels comes to an end. The Saudis attempting to become “the data center capital of the world” is just one of their interesting initiatives.

While the problems in the Middle East haven’t impacted markets dramatically, a cessation of the current level of hostilities would be welcomed by the markets (and the people in the region and across the globe).

Our Own Economy

The Fed started cutting rates, which was largely built in. But, we also think there is the potential that economic data will be more resilient, especially on jobs, than the market is expecting. We discussed this in more detail in Sunday’s The “New” Cycle.

We remain concerned about valuation issues in the U.S.

I suspect that the steps China is taking to stimulate its economy will accrue mainly to Chinese entities.

So, while positive for the “global” economy, I’d move my chips into China rather than trying to benefit from this stimulus in less direct ways. It is still “just a trade” rather than an investment, but it could drive significant alpha, like it did early this year.

Also, I am looking forward to being on CNBC today at 2:40pm ET with Rick Santelli on the floor of the CBOT!

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