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
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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
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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 $144 billion credit line for FAW, a northeast SOE Cut tax on new vehicles by 50% Considering a reduction in VAT Cumulative roughly 2.5% of GDP
Past Performance Is Not Necessarily Indicative Of Future Results.
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YUAN PER US DOLLAR (INVERTED SCALE)
0.17 0.165 0.16
0.155 0.15 0.145 0.14 0.135 0.13 0.125 0.12
Oct 2018 Past Performance Is Not Necessarily Indicative Of Future Results.
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AVERAGE PRICE FOR NEW RESIDENTIAL BUILDINGS IN CHINA % CHANGE FROM YEAR AGO
AVERAGE PRICE FOR NEW RESIDENTIAL BUILDING IN CHINA
12.5
10.0
7.5
%
5.0
2.5
0.0
-2.5
-5.0
-7.5 1/1/2006
1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017
1/1/2018
Sep-18 Past Performance Is Not Necessarily Indicative Of Future Results.
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CHINA SOCIAL FINANCING 12 MONTH AVERAGE
1750
1500
1250
1000
750
500
250 2006
2007
2008
2009
2010
2011
2012
2013
2014
Past Performance Is Not Necessarily Indicative Of Future Results.
2015
2016
2017
2018
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CHINESE RAILROAD FREIGHT VS ELECTRICITY PRODUCTION 3 MONTH AVERAGE % CHANGE FROM YEAR AGO 3 MONTH AVERAGE
30.0% 25.0% 20.0% 15.0% 10.0% 5.0%
0.0% -5.0% -10.0% -15.0% -20.0%
RAIL
ELECTRICITY PRODUCTION
Past Performance Is Not Necessarily Indicative Of Future Results.
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CHINA EXPORTS VS IMPORTS
6 MONTH AVERAGE %CH FROM 6 MONTH AVERAGE YEAR AGO 66.0%
49.5%
33.0%
16.5%
0.0%
-16.5%
-33.0% Jan-00
Jan-03
Jan-06
Jan-09 EXPORTS
Jan-12 IMPORTS
Past Performance Is Not Necessarily Indicative Of Future Results.
Jan-15
Jan-18
Sep-18 25
CHINA NOMINAL GDP GROWTH IN US$ 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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