CHINA, TARIFFS AND THE ELECTION: Impacts on the World Energy and Commodities Markets

McVEAN Trading & Investments, LLC

CHINA, TARIFFS AND THE ELECTION: Impacts on the World Energy and Commodities Markets November 1, 2018 NEW YORK, CITY

Michael Drury Chief Economist McVean Trading and Investments, LLC

Past Performance Is Not Necessarily Indicative Of Future Results.

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U.S. NATIONAL ECONOMY CIRCA 1982

SUNBELT

Past Performance Is Not Necessarily Indicative Of Future Results.

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GLOBAL ECONOMY TODAY

SUBURBS

RUST BELT

Past Performance Is Not Necessarily Indicative Of Future Results.

SUNBELT

2

SHARES OF GLOBAL GDP

50%

SHARES OF GLOBAL GDP 45%

40% 35% 30% 25% 20% 15% 10% 5% 0% 1990

2000 US

EU+JAPAN

2007 NEW ASIA

2017

OTHER

Source: IMF/McVean

Past Performance Is Not Necessarily Indicative Of Future Results.

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2018 GLOBAL GDP $86.0 TRILLION

NAFTA $23.2T

EUROPE $19.2T

US $20.3T

EUROZONE $13.4T

JAPAN+SOUTH KOREA+TAIWAN $7.3T CHINA $13.4T

HK + MACAU+ OPEC+ BRAZIL+ RUSSIA+ AUSTRALIA+ ARGENTINA $10.5T

OTHER $11.4T

Source: IMF/McVean Past Performance Is Not Necessarily Indicative Of Future Results.

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NAFTA AND WTO HAD LITTLE EFFECT ON TRADE SHARE OF US IMPORTS 40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

1992

2000 NAFTA

WESTERN EUROPE

2008 PACIFIC RIM

Past Performance Is Not Necessarily Indicative Of Future Results.

2016 OTHER

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CHEAPER IS WHAT DRIVES IMPORTS SHARE OF US IMPORTS 60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0% 1992

1994

1996

1998

2000

CHINA & MEXICO

2002

2004

2006

2008

2010

2012

2014

2016

CANADA, JAPAN & EUROPE

Past Performance Is Not Necessarily Indicative Of Future Results.

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TRADE TRILEMMA: WHAT ARE WE FIGHTING FOR? REDUCE TRADE DEFICIT TRUMP

OPEN MARKETS COHN TILLERSON MNUCHIN ROSS K-STREET

KUDLOW REPUBLICANS DEMOCRATS

Past Performance Is Not Necessarily Indicative Of Future Results.

COLD WAR PENCE BOLTON POMPEO LIGHTHEIZER MATTIS HALEY

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US HOUSE SCORECARD DEMOCRATS NEED 23 TO GAIN CONTROL 14 FLIPS

Likely Democrat

Net 3 from PA reapportionment

15 R

9 from Blue states 6 from Red states 11 have only D vote

1D

5 from Blue states

8R

4 from Red states

Lean Republican

11 R

3 from Blue states 8 from Red states 6 have 3 R votes

Likely Republican

2 FLIPS

Lean Democrat

Toss Up

Expected D swing 27.5

Based on projections by Real Clear Politics, Charlie Cook and Larry Sabato and 538 Past Performance Is Not Necessarily Indicative Of Future Results.Source

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POTENTIAL CONGRESS OUTCOMES

BOTH HOUSE & SENATE FLIP 12.5%

NEITHER HOUSE OR SENATE FLIP 12.5%

ONLY HOUSE FLIPS 75%

Past Performance Is Not Necessarily Indicative Of Future Results.

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WHO SUFFERS? WHO PAYS?

YOU START WITH THE LOW HANGING FRUIT SOLAR & WASHING MACHINES

STEEL & ALUMINUM

25% ON $50 B

10% ON $200B

$36B, THEN $14B

25% ON JAN 1 INDUSTRIAL PARTS & CHEMICALS

CHINA TIT FOR TAT RESPONSE

25% ON $50 B MOSTLY AGRICULTURE

10% TO 25% ON $60 B

Past Performance Is Not Necessarily Indicative Of Future Results.

25% ON $257B TECHNOLOGY & NECESSITIES CONSUMER PRODUCTS, CAPITAL GOODS

???

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CHINA SHIFTS TO DOMESTIC FOCUS CHINESE EXPORTS VS IMPORTS AS A % OF GDP

38%

33%

28%

23%

18%

13% Mar-01

Mar-03

Mar-05

Mar-07

Mar-09 EXPORTS

Mar-11

Mar-13

Mar-15

Mar-17

IMPORTS

Past Performance Is Not Necessarily Indicative Of Future Results.

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TRADE NOT BIG ENOUGH TO DERAIL ECONOMY CHINESE TRADE GAP AS A % OF GDP

9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Mar-01

Mar-03

Mar-05

Mar-07

Mar-09

Mar-11

Mar-13

Mar-15

Past Performance Is Not Necessarily Indicative Of Future Results.

Mar-17

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PRIVATE SECTOR BEARS THE BURDEN

Past Performance Is Not Necessarily Indicative Of Future Results.

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2016 CHINA + HONG KONG EXPORT PIE $2.0 TRILLION

PACIFIC RIM 30%

PAC RIM EUROPE NORTH AMERICA SOUTH ASIA MENA LATIN AMERICA

OTHER

NORTH AMERICA 22%

EUROPE 24%

Past Performance Is Not Necessarily Indicative Of Future Results.

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ONE BELT, ONE ROAD

Past Performance Is Not Necessarily Indicative Of Future Results.

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TRADE WAR IN PERSPECTIVE • US put 25% tariffs on $50 B in Chinese goods = $12.5 B • New $200 B @ 10% = $20 B, going to 25% and $50 B on Jan 1 • $267 B more waiting. Total tariffs could reach $130 B • US firms and consumers reduce effect by avoiding tariffs • Tax cuts plus spending increases were over $300 B • • • • •

US Supreme Court says states may tax internet = $13 B Trump reduces payments on Obamacare = $10.2 B Fed raised 25 bp on $5 trillion in short term debt = $12.5 B Price of oil changes $5 a barrel on 8 mbd imports = $14.6 B Index capital gains for inflation = $10 B to $20 B

Past Performance Is Not Necessarily Indicative Of Future Results.

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2017 CHINA TRADE BALANCE SCRATCH SHEET • • • • • • •

EXPORTS TO US - IMPORTS FROM US CHINA TRADE SURPLUS ADJUSTMENTS -TRANSSHIPPED EXPORTS -US SERVICE SURPLUS WITH CHINA -US TOTAL TRADE SURPLUS WITH HK

• ADJUSTED CHINA-US TRADE SURPLUS

Past Performance Is Not Necessarily Indicative Of Future Results.

$505 BILLION $130 BILLION $375 BILLION $170 BILLION $ 38 BILLION $ 30 BILLION

$137 BILLION

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CHINA DRIP, DRIP, DRIP STIMULUS • • • • • • • • • • •

Infrastructure -- mostly high speed rail -- raised by $199 billion Export rebates increased by $6.6 billion Middle class income taxes cut by $7.4 billion Small business loans increased by $10 billion for next 3 years Banks allowed to by stock in wealth management accounts Insurance companies may be allowed to buy stock Lowered reserve requirement by 1% allowing $110B new loans Guaranteed $144 billion credit line for FAW, a northeast SOE Cut tax on new vehicles by 50% Considering a reduction in VAT Cumulative roughly 2.5% of GDP

Past Performance Is Not Necessarily Indicative Of Future Results.

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YUAN PER US DOLLAR (INVERTED SCALE)

0.17 0.165 0.16

0.155 0.15 0.145 0.14 0.135 0.13 0.125 0.12

Oct 2018 Past Performance Is Not Necessarily Indicative Of Future Results.

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AVERAGE PRICE FOR NEW RESIDENTIAL BUILDINGS IN CHINA % CHANGE FROM YEAR AGO

AVERAGE PRICE FOR NEW RESIDENTIAL BUILDING IN CHINA

12.5

10.0

7.5

%

5.0

2.5

0.0

-2.5

-5.0

-7.5 1/1/2006

1/1/2007

1/1/2008

1/1/2009

1/1/2010

1/1/2011

1/1/2012

1/1/2013

1/1/2014

1/1/2015

1/1/2016

1/1/2017

1/1/2018

Sep-18 Past Performance Is Not Necessarily Indicative Of Future Results.

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CHINA SOCIAL FINANCING 12 MONTH AVERAGE

1750

1500

1250

1000

750

500

250 2006

2007

2008

2009

2010

2011

2012

2013

2014

Past Performance Is Not Necessarily Indicative Of Future Results.

2015

2016

2017

2018

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CHINESE RAILROAD FREIGHT VS ELECTRICITY PRODUCTION 3 MONTH AVERAGE % CHANGE FROM YEAR AGO 3 MONTH AVERAGE

30.0% 25.0% 20.0% 15.0% 10.0% 5.0%

0.0% -5.0% -10.0% -15.0% -20.0%

RAIL

ELECTRICITY PRODUCTION

Past Performance Is Not Necessarily Indicative Of Future Results.

Sep-18 24

CHINA EXPORTS VS IMPORTS

6 MONTH AVERAGE %CH FROM 6 MONTH AVERAGE YEAR AGO 66.0%

49.5%

33.0%

16.5%

0.0%

-16.5%

-33.0% Jan-00

Jan-03

Jan-06

Jan-09 EXPORTS

Jan-12 IMPORTS

Past Performance Is Not Necessarily Indicative Of Future Results.

Jan-15

Jan-18

Sep-18 25

CHINA NOMINAL GDP GROWTH IN US$ CURRENT QUARTER % CHANGE FROM YEAR AGO

36%

32%

28%

24%

20%

16%

12%

8%

4%

0% Mar-03

Mar-06

Mar-09

Mar-12

Mar-15

Mar-18

Mar-21

Q3 18 Past Performance Is Not Necessarily Indicative Of Future Results.

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COPPER VS CRUDE

450

160

400

140

350

120 300 100

250 80 200 60

150 40

100

50

20

Copper

WTI Crude Oil

Oct-18 Past Performance Is Not Necessarily Indicative Of Future Results.

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CRUDE OIL VS NATURAL GAS 140

16

14

120

12 100

10 80 8 60 6

40 4

20

2

0 1/4/2002 1/4/2003 1/4/2004 1/4/2005 1/4/2006 1/4/2007 1/4/2008 1/4/2009 1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/4/2017 1/4/2018

WEST TEXAS INTERMEDIATE

0

NATURAL GAS

Oct-18 Past Performance Is Not Necessarily Indicative Of Future Results.

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