China Contagion, Powell's Speech And Nvidia - Make Or Break Moments For The Market?

China Contagion - Plus, What About Taiwan?

Chinese GDP growth in the first half of 2023 was 6.3% (year-over-year). In 2022, coming off a period of draconian measures to fight Covid-19, they managed to post a 3% growth number. These look like pretty respectable numbers to me. But that is history. Their property sector seems to be coming apart (finally). Country Garden (OTCPK:CTRYF, OTCPK:CTRYY) is on the brink of default, and Evergrande Group (OTC:EGRNF) filed for "US bankruptcy protection as China economic fears mount."

As it pertains to concerns over China's property sector, I might point out that like the United States, they are a sovereign country. They have their own currency, the yuan. They also have their own printing presses and template remedial actions used by Western governments in times of financial stress, i.e., they know how to use them. It would also appear that they have wiggle room, with Chinese government debt at about 85% of World Bank Open Data.

Here's another chilling China headline from Wednesday, August 23: "China's deflation could spill over into a global concern, economists say" (you will need a CNBC subscription to access) Per the article, "China's headline consumer price index fell 0.3% year-on-year in July to register deflation for the first time in two years..." I'm not sure why any of this is a problem. Why? The US bought $537 billion in imports from China last year. Would it not be desirable to pay less this year? Global inflation and US inflation have been huge concerns. If the US printed a minus 3% CPI number for August, the market would go wild... or maybe not. The pundits would begin to worry about disinflation and recession or, even worse, deflation and depression. I say, bring on the contagion!

The Lingering Concern About Taiwan

The thought of China actually making a military move on Taiwan is indeed a sobering one. It certainly is one that the pundits like to latch on to as a reason to be fearful. I suggest that the Chinese are not stupid or crazy. All they have to do is look at the world of hurt that Vladimir Putin has brought down on Russia for his unprovoked attack and subsequent ongoing war in Ukraine. Remember, the US and most of the world (total Chinese exports 2022, $3.5 trillion) import from China (our share in 2022 was over $500 billion). By the way, 30% of what we sell them are agricultural products. An attack on Taiwan could turn out to be an economic disaster for China. If we lost China as a market, it would amount to only 7.5% of our $2.1 trillion 2022 exports to the world. I'm certain if Putin had it to do all over again, he would not invade Ukraine. He thought it would be a cakewalk and totally underestimated world reaction. Taiwan would not be a cakewalk.

The reason I bring all of this up is that there appears to be an increasing effort out there in media world to shine a light on problems in China as a reason for caution or a negative for the US market. My take is that they are not.

"Nvidia Beats Big, and Powell Doesn't Rock the Boat. Why That's Ominous for Stocks."

When I saw the above, a headline in a well-respected national financial magazine, I was gobsmacked because it did not make sense on the surface and because it begged my usual question, "Why can't good news be good news?" The author's answer was forthcoming: "Between Nvidia's (NVDA) blowout earnings and an unsurprising Jackson Hole, the stock market should have gotten everything it needed to end talk of a correction. That fact that it didn't suggests that there is probably more downside ahead." This comment is not new news because we all know there is always downside ahead at some point.

Importantly, the only time I've ever seen when there is an absence of "correction talk" is in the euphoria stage (Templeton) of a secular bull market... the top... everybody's in and optimistic about a rosy future. This would definitely be ominous, in my mind. Fortunately, we've not seen anything close to that in the past 15 years, a period where the market has fared pretty well. I'm not quite certain why a person with any market savvy would conclude that a lack of skepticism or fear in the market would be a good thing. It is that fear and skepticism, the proverbial "wall of worry," that bull markets grow on.

Fear, distrust and skepticism are key ingredients in keeping the secular bull market alive!

What do you think?

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