Louis-Vincent Gave from Gavekal in Hong Kong delivered a speech called Market Movers: The Structure and the Cycle in 2018. He starts out saying he’s often been depicted as a China perma-bull. He notes that when considering an investment, you need to look into people’s incentives. In China the recent party congress dictated that the focus is shifting from economic growth to being more aware of healthcare, housing, and the environmental impact of decisions. For example – cement, steel, and textile prices are going up while supply is going down in China. The longer term result may be China not outperforming their growth estimates as they have consistently done in the past.
He also discussed the US markets and noted that recently stocks got hit, VIX rallied, but bonds hardly budged. He also pointed out that the US dollar has been moving lower while yields have moved up. This is a result of the FX market paying more attention to fiscal than monetary policy. Right now 95 cents of every dollar the US government spends goes to entitlements, military, or interest payments. He feels a lack of fiscal discipline will put pressure on the US dollar. The next result of this is other developed economies losing a competitive edge on the US.
Turning back to China, he notes they have an expansionist foreign policy. He calls this their imperialist ambition. He states that China is following the US playbook from post-World War II. China has been building infrastructure for other countries, but tying them to China through this work. In order to strengthen these ties China will need to have their trade denominated in RMB instead of US dollars. His quote, “You can’t be an empire on someone else’s dime”. A first step is an RMB denominated oil futures contract which will be launched shortly.
He finished up noting some similarities between the global economic environment today and 1987 (pre-crash). At a very high level the crash in 1987 occurred due to some actions from the Bundesbank. You can replace the Bundesbank with the Peoples Bank of China and the scenario seems to be playing out in today's markets.