Listen to the full episode, here.
John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clement. Sam, say hello,
Sam Clement (00:36):
John – How are you doing?
John Norris (00:37):
Sam, I’m doing fantastically and I hope that you are.
Sam Clement (00:39):
I am.
John Norris (00:40):
Sam, you know, towards the end of September, all of a sudden, it seemed as though out of the blue (but really China watchers have been waiting for some kind of governmental response for some time), but even so, the Chinese government essentially threw the kitchen sink at the Chinese financial system saying, Hey, go out there and lend some money. Let’s go spend some money. And just literally trying to goose the banking system as much as they possibly can, ostensibly not just to give a B12 shot, some adrenaline to the economy, but to also stave off well, deflation.
Sam Clement (01:13):
Yeah, and I’ve heard the saying – ready, fire, aim – is kind of how they approach this, and that seems to be pretty accurate in the sense that when we’re talking about policy changes, and again, there’s differences, especially the separation of the Federal Reserve and the government, but we will tweak one thing, we’ll tweak this rate, and it’s over time, typically. Well they threw the kitchen sink at it, whether it’s reserve requirements,
John Norris (01:40):
Down.
Sam Clement (01:40):
Mortgage rates
John Norris (01:41):
Down.
Sam Clement (01:42):
I mean loans to buy back your stock. I mean, the amount’s up and the rates are down. I mean, it was across the board. Let’s get things going again, is kind of the feeling around it.
John Norris (01:54):
Well, I mean, very much the kitchen sink, but the real question is: will it work? And I would say in the short term, I mean it’s a B12 shot. Of course it’s going to work in the short term. You’re never going to just throw a bunch of money at a problem and have it not work. And as a result, I mean, my goodness, the Chinese stock market has taken off, Shanghai’s gone up like a bottle rocket since that time, the hangs thing. And Hong Kong has done incredibly well. And really emerging markets as a whole just took off the last five trading sessions of September. And the more I look at things, the more worried I actually get about China.
Sam Clement (02:29):
Well, and it’s not unique to China. These kind of stimulus packages that are more, again, this – ready fire aim – just throwing money at things that doesn’t tend to ever help the root problem. And that’s what you have to get at. And that’s a multi-decade issue that China is really dealing with. And so that’s where the questions start coming in. How long does this help? How much does it actually help, or how much of it is just this stimulus fervor in capital markets?
John Norris (03:00):
Well, I think you’re right on that, but when I see Beijing do everything it can in that sort of manner from the outside looking in, not knowing these people individually, certainly not having any sort of access to the thought process. It seemed to me to be almost panicking. And just in terms of just the breadth and scope of the package of stimuli that they threw out there, it seemed to me to be almost panicky, as I’ve already mentioned. And that scares me because I don’t think China, I don’t think Beijing’s necessarily giving us accurate economic information. Heck,I don’t think Washington’s given us completely accurate information. So why would I think the Chinese Communist Party is giving us accurate information? So I’m thinking they know something a little bit more than I do about just how bad it is. Otherwise they just wouldn’t be throwing money at it like this. So when I think that, and that’s me kind of being a worrywart, but then when I take a look and peel back more layers of the onion, they’ve got some structural issues over there that we can’t fully comprehend, namely, well, a shrinking population demographic headwinds like nobody’s business,
(04:13):
And then a complete collapse in the residential real estate market.
Sam Clement (04:16):
Well, and those two things are kind of what I was hinting at too, that this is a multi-decade issue. I mean, you can’t talk about population decline without talking about the one child policy. And as far as residential real estate goes, that’s really kind of a structural difference between China and the US, is the focus on real estate and the excitement. And again, that as well as a multi-decade issue, once they were allowed to really own real estate, the excitement around it and the percentage of people that own two, three, houses is much higher than it is here in the States, especially in terms of investment properties. That’s been the avenue that, really, mainstream Chinese investors have parked money in.
John Norris (04:57):
And that’s something that for U.S. investors, we might not get it. Our preferred risk asset has historically been stocks. For the Chinese investor that has historically been
Sam Clement (05:08):
Apartments
John Norris (05:09):
Apartments, or real estate or whatnot, when all of a sudden the Chinese were able to own their own property, at least in some form or fashion. That’s what they went for. People understand real estate, people understand apartment buildings, they understand houses. Stocks? I don’t know, that’s kind of out in the ether if you don’t live in a capitalist society, but you can understand people need a place to live. So they gobbled this stuff up, just enormous number of houses and housing units being put up there…while the population was still going up. Now the population’s going down, it’s like, well, who’s going to live in all these?
Sam Clement (05:47):
And we’re seeing that. We’ve seen developers, property developers go belly up in cities that what they would consider C or D -level cities that
John Norris (05:58):
Like a Birmingham –
Sam Clement (05:59):
Hundreds of thousands to millions of people and population is declining in a lot of these metropolitans, all these apartments were built, these complexes, have you.
John Norris (06:12):
And ultimately you have to have people live in them. And some of the stats that I’ve read and just some of the wild stabs of guesses, just how much money and household wealth has been lost due to their real estate bubble bursts, probably $18 trillion. And that’s just maybe even scratching the surface. It hasn’t even necessarily hit bottom yet because according to some people that I know that do business over in China, there’s not a bid for anything right now.
Sam Clement (06:40):
Sure.
John Norris (06:40):
You can’t give stuff away. So, whatever the market value you say your home is, sure, whatever, but you still won’t be able to sell it, which is going to depress consumer behavior. The biggest assets on your balance sheet really, for all intents and purposes, you can’t sell. Well, my gosh, I’m going to start hoarding money until I feel as though I can sell them and ideally sell them back to where I bought them.
Sam Clement (07:04):
And property taxes aren’t as big of a thing in China and aren’t as widespread as they are here. So you’re seeing a lot of these investors, these call them retail investors that for decades have been adding apartments to their portfolio. You know, just kind of sitting on them and it’s locked up capital. We have all these issues. And really they’re saying, I’m not really coming out of pocket for this on a monthly basis with property taxes as much. I’m just going to sit on this until I can at least recoup my investment. And so capital is being frozen, and there’s
John Norris (07:37):
That capital which has not been lost, has been frozen. That’s what you’re saying.
Sam Clement (07:41):
Yes. Opportunity costs – and that’s not a Chinese issue. That’s a human issue that people don’t really understand. Opportunity costs…. Almost everybody at times, if they’ve been in any sort of investment has said, I just would like to get back to where I…
John Norris (07:56):
Yeah, who hasn’t said that ?
Sam Clement (07:58):
Where I could break even.
John Norris (07:58):
Who wants to take a loss?
Sam Clement (08:01):
Right, but that’s a bad idea when it becomes extremely widespread. It’s one thing if a stock in your portfolio, you’re saying, Hey, I hope this stock gets back to break even.
John Norris (08:11):
I would say some of the stocks that got hammered during the tech bubble had a much better chance of getting back to where they were than some of these apartment complexes and some of these provincial places in China.
(08:21):
I just don’t see how this is coming back. And what’s interesting about this is a serious problem over there. We don’t read about it enough. The banking system is under an enormous state of flux. A lot of the smaller, more regional type banks, provincial level banks are just saddled with all of these non-performing assets, non-performing loans. And here come the central authorities, which you almost have to bow and scrape to a little bit. They’re coming out there saying: go make more loans.
Sam Clement (08:50):
More.
John Norris (08:51):
And so what is the Chinese banking system supposed to do? Lend money to people that don’t, one: have the ability to borrow anymore. And then two: don’t have the inclination to. So all this stimulus focus, primarily at the banking and financial sector, I think is going to feel good for a short period of time. But as you said, it’s not going to address a longer term problem in the Chinese economy, which is a freezing of capital due to massive losses in the real estate market. And then also a declining population. I can’t underscore that enough. I mean, when you mentioned the single-child policy, my goodness, I mean, hey, that’s great for a short period of time, but according to people that do such things for a living, replacement, for a couple is 2.1 children, the old one 10th of a child routine, great, but let’s just say it’s two. If all of a sudden you have decades, a couple of generations where you can only have one well, guess what?
(09:50):
You haven’t replaced yourself for two generations and you think you won’t have a population problem??
Sam Clement (09:55):
Right?
John Norris (09:56):
So how is the economy…
Sam Clement (09:58):
This isn’t like going to 1.9 for a couple years or something.
John Norris (10:02):
This is going from two to one.
Sam Clement (10:05):
Well, well, 50% below replacement level.
John Norris (10:09):
Yes.
Sam Clement (10:10):
This has the same compounding effect…
John Norris (10:11):
This is government policy. This isn’t people saying, I’m not going to do this. Well, they can always change their mind. This is government policy. You get in trouble with the communists if, all of a sudden you have more than one kid. And so all of a sudden, I’ve seen projection- China’s population’s expecting to decline, not just a little bit, but significantly. We can take a look at what, 2050. I’ve seen some stats if population falls below a billion to 900 million, 800 million some number. Hey, that’s still a lot of people. But when you see that number of people all of a sudden gone from your, country? Everyone else has got to work that much harder in order to maintain the same level of GDP. And we’ve seen exactly the same thing happen to a lesser degree in Japan. It’s only going to be worse in China.
Sam Clement (11:00):
And it has the same compounding effect that things do to the upside. And this something, you can’t flip it on a switch.
John Norris (11:11):
No. The switch at a minimum, the switch takes nine months.
Sam Clement (11:16):
And then you have this whole gap in a generation we’ve talked about. It seems like in the U.S. these economic cycles really tend to go along with when these generations peak in population.
John Norris (11:31):
We saw the nineties with the boomers.
Sam Clement (11:35):
We’ve seen it from the silent generation on, that these generations, as they start to peak, you see these bigger, we have smaller economic cycles, but these bigger economic cycles around the population cycle.
John Norris (11:46):
Yes.
Sam Clement (11:47):
So, how does that work when, in other countries, larger and larger populations and generations… there’s just this… this gap.
John Norris (11:56):
Well, there’s an enormous gap, and those people that are left in China moving forward are going to have to work that much harder to maintain the same level of GDP. It’s just the way it goes. That’s just the way it operates. But on top of that, another thing which I think is sitting on Chinese consumer confidence, which you probably won’t get a good answer for from, you know, the average person on the street in Shanghai. Is: over the last several years, I mean, you could even argue throughout all of Xi Jinping’s sort of leadership, the communist party in China is trying to get greater control over the economy. And as a result, they have done crackdown upon crackdown. Famously in 2022 and 23, the crackdown on the Chinese tech sector, estimated to take a trillion dollars worth of market capitalization out of that, sat on Tencent, sat on Alibaba, all that type of stuff. You’ve mentioned on this podcast before, how Chinese corporate earnings went from: this is how much we made, to: this is how much we have been supporting social policies.
Sam Clement (13:00):
Yes, these, government programs.
John Norris (13:02):
And so we’ve seen that. So the average consumer is not stupid. If the government is going to crack down on stuff, if they’re going to get this sector to tow the party line, this sector to tow the party line, if I have to operate in this particular manner, I’m not going to stick my neck out, man.
Sam Clement (13:19):
Right.
John Norris (13:20):
Because someone’s going to chop it off. And if that’s the way you feel, what is the likelihood that you are going to take additional risks necessary in order to generate wealth? You’re not going to!
Sam Clement (13:31):
No, but this isn’t unique to China. I mean, it’s the economic structure that has been put in place there. And this is, even with the population boom over the last several decades. And the economic growth that in large part came from that, we have not seen that trickle into capital markets over the last several decades. I mean, the charts of economic growth, GDP growth, to the market’s return, that tends to be pretty correlated here in the United States.
John Norris (14:01):
It would seem to be, it makes sense.
Sam Clement (14:02):
It’s not correlated almost at all over there. So that’s the problem. And when you tack on the one-child policy and the population cycle and what have you, it is not a good recipe. It wouldn’t be a good recipe here if our population had that big of a gap. And it’s even worse for financial markets, at least when you’re already not set up for them.
John Norris (14:30):
I mean, how can I argue with you?
Sam Clement (14:32):
I hope you wouldn’t.
John Norris (14:33):
No, I’m not going to trade perspectives here. But the thing is, the crux of the matter is in one of our predictions on our upcoming Macro & Market quarterly piece, we make it out there to be that the stimulus that the Chinese gave during the second quarter, it felt really good. The markets are going to like that, but during the fourth quarter, the average investor is going to realize there’s a heck of a lot more wrong with the Chinese economy than just a little liquidity. And so I do anticipate that the markets will give up a lot of what has been happening over the last week or so. So much so, that I was walking through the hallway today and I looked at the TV and Druckenmiller was out there talking about, and in no uncertain terms, blasted across the television screen: He doesn’t want anything to do with China.
(15:15):
Actually he is shorting US bonds. And he has no interest in being in China whatsoever. And it’s about time he came around. Because I have felt that way for quite a while. And here at Oakworth, we have not had any sort of direct Chinese exposure for a long period of time, including in emerging markets, exchange traded funds and mutual funds. So when I take a look at this, yeah, that stimulus kind of hurt relative performance for a week or two. However, in taking a look at what’s going on in China, taking a look at the underpinnings of that economy, financial system, the freakout nature from Beijing, and take a look at demographics, take a look at just the crackdown that the government has done on the private sector, I can’t make a good compelling argument that the Chinese economy is going to perform anywhere near what it did for decades. And I would have a hard time estimating that it could even pretend to get to that 5% level that Beijing is striving for in 2024, that they’re not going to get, I think 5% annualized over the next decade for China… it’s a pipe dream.
Sam Clement (16:20):
I agree. And again, so we, I think we’re in agreement that what they’ve done so far, one, it’s a 10th maybe of what in today’s dollars, what they did in 2009. But even on top of that, it’s not solving the issues. I’m sure more is coming. They’ve hinted more is coming.
John Norris (16:38):
Oh yeah, just throw money at it. Hey, we’ll take it.
Sam Clement (16:40):
Yeah. So a lot of it depends on one: how you’re investing in your timeline. I mean, Tepper has been on the other, David Tepper, speaking of Druckenmiller, you know, if what you’re doing is riding this kind of fervor, that’s one thing, but this doesn’t fix the underlying issues.
John Norris (16:56):
No.
Sam Clement (16:57):
So if you’re looking at that and the reasons that we’ve been underweight to emerging markets in China, this doesn’t change anything.
John Norris (17:06):
No, actually, for me, it reinforces it to me. Like I said last week of relative performances, Hang Seng, and Shanghai have gone through the roof based on the stimulus package. I wish that that hadn’t happened, but I’m fine with it. Short-term performance, because ultimately a lot of people that are buying, in particular, now at the highs or the recent highs, are going to get smoked when it comes back down because there’s absolutely no way… in taking a look at the Hang Seng index, taking a look at the forward P/E multiples on it, taking with the prospects for Chinese economic growth… I think you buy and now you’re a sucker.
Sam Clement (17:44):
Well, and a lot of the justification for it is people are pointing to – they have this much cash on their balance sheet and they’re worth this much.
John Norris (17:54):
Yeah, it doesn’t matter. Doesn’t mean if I’m going to spend it.
Sam Clement (17:57):
How do I get that cash though? Do I own a portion of that cash if a company…
John Norris (18:03):
Are you talking about the company…
Sam Clement (18:04):
The company’s on the balance sheet… You’re not investing directly into these companies, either. And then we’ve seen before what happens when the government wants to control these companies moreso.
John Norris (18:16):
Well, I remember back when Jack Ma brought Alibaba Public in the U.S. markets. I went through the sheets. I mean, I went through placement room around
Sam Clement (18:25):
Chinese Amazon. Sounds great.
John Norris (18:27):
Yeah, it sounds great. Who wouldn’t like that? 1.4 billion consumers that are growing rapidly, lots of disposable income, all that stuff. Who wouldn’t like that? Right? However, when I read the document, I’m going, what am I buying here? I wasn’t buying a darn thing. I was buying a derivatives contract
(18:44):
Because it was essentially: you have our promise that there is a promise and all that stuff that you can’t get out of China. It’s just like, I’ve got nothing. And yet we gobbled it up and people still trade it and what have you. But when push comes to shove, as we’ve mentioned here previously about the PRC, you know, rule of law? Do they have it? I don’t know. Things don’t seem to be terribly transparent over there. If the government wants you gone, you’ll be gone. I wouldn’t call that the rule of law. And strong individual property rights… I’m just not confident that Beijing has my back, particularly when their own economies is in the toilet. Are they going to have my back as a U.S. investor?
Sam Clement (19:33):
Well, it’s been shown that in the pecking order, investors as an entire class are not at the top of the priority list. U.S. investors aren’t even close to the top of the pecking order within that class. So the confidence you have to have longer term, I think, for us is just not there.
John Norris (19:54):
Well, listen, I agree with you 100%. Which then takes me to sort of another sort of side topic. What does Beijing do to assuage or otherwise diminish societal unrest? If people don’t feel good about the economy, their household incomes are going down, they aren’t enjoying the same lifestyle that they were enjoying previously…. If they don’t feel positive about the future, what is the Chinese Communist Party going to do in order to make sure that there’s not a bunch of civil war unrest, which, as we know the Chinese communists don’t like whatsoever?
Sam Clement (20:32):
Well, it’s hard to do when you can’t turn the ship on a dime. And that’s again, not unique to China. If the U.S. economy’s in the dumps, you can’t just throw a stimulus package and really call it a day.
(20:46):
Well, we tried to.
(20:46):
We’ve tried to. And it helps. Yeah, sure, there’s some fervor around it and what have you.
John Norris (20:52):
I mean, it’s kind of like giving a starving man a cupcake. Yeah, that helps. I’ve got a little bit of a sugar boost, but I’m still starving.
Sam Clement (20:59):
And at the end of the day, the Chinese issues are greater than a stimulus package. It is a multi-decade issue that has built up and built up and built up. And there’s generations that are missing people based on this one child policy.
John Norris (21:20):
Yes!
Sam Clement (21:22):
That can’t change. You can’t go back and have more kids 20 years ago.
John Norris (21:26):
You can’t create a bunch of 50 year olds out of the blue.
Sam Clement (21:28):
Correct. Or military age people They just aren’t there. You kind of have to just almost that same opportunity cost that people are holding onto with investments…We made a mistake there. How do we rectify it going forward and take our bruises?
John Norris (21:47):
Well, the thing about it’s, if nothing else, this is a perfect example of when the government tries to control society and the economy too much… Ultimately, you can have some growth in the short term, but ultimately it collapses upon itself. Because the more you try to squeeze something in your palms, the more it’s just going to squish out the side, I guess, if you will. And that’s exactly what’s going to happen to China, here. They came and went from nothing, no, no private property ownership, no incentive to do any sort of work; or collectivization, Deng Xiaoping got rid of most of that. And guess what? All of a sudden people go, I get to keep what I’m going. Hey, I like this. It’s pretty sweet. I’m going to go out and generate some more money. Now, however, when all of a sudden you get to a certain standard of living, the government tries to control things a little bit more,
(22:36):
you’ve seen all of your investments go up in smoke just because of bad investing and just, Hey, I want a bunch of apartment complexes I’m not going to live in. And you see everything that’s going on. I don’t see how they get out of this funk. And because of this, I don’t see how, moving forward over the next 10 years, China is not racked with some significant domestic civil unrest. I don’t see how they get away from it. And I’m talking about getting to the point where Tiananmen Square in 1989, seems almost like child play. Now, that’s a pretty bold statement. I’m talking about a decade. And if we’re still talking about Chinese civil unrest in a decade now, hey, that’d be great. However, I will guarantee you that, Sam, I’ll buy you a steak dinner if this, well, I owe you a few of them anyhow. I’ll buy you a steak dinner if we don’t see that. And I’m being dead serious on this, and that’s what causes my greatest concern. The more civil unrest that there is in Chinese society, the more the central government will try to galvanize the population. And the quicker I think it gets into a war and trying to invade Taiwan in order to galvanize domestic tranquility.
Sam Clement (23:44):
Well, that’s also not unique to China. That’s what governments do when there’s unrest.
John Norris (23:49):
Yeah. So I would say, I don’t know what the timeline is on the invasion of Taiwan. I would say that if we have another four years of atrophy in the U.S. Navy and another four years of growth in the PLA Navy, I would say, gosh, five years might be about right.
Sam Clement (24:08):
Sounds about right.
John Norris (24:08):
Alright. And we are going to get this because of collapse in the Chinese real estate market. Isn’t that weird how that works?
Sam Clement (24:15):
Funny how the world works.
John Norris (24:16):
Strange. Alright guys, thank you all so much for listening. I always love to hear from you all. So if you have any comments or questions, please by all means, let us know. You can always drop us a line at or you can leave us a review on the podcast outlet of your choice. As always, if you’re interested in reading more or hearing more of what we got to say or how we think, you can always go to oakworth.com, O-A-K-W-O-R-T H.com. Take a look underneath the Thought Leadership tab and find links to all kinds of exciting information, including links to previous Trading Perspectives podcasts, links to our newsletter / blog Common Cents, and links to our quarterly magazine and analysis called Macro and Market, which we are diligently working on, and should be going to the printers hopefully on middle of next week at the latest,
Sam Clement (24:59):
Coming up soon.
John Norris (24:59):
Coming up soon. And it’ll all be out there as well as articles from Mac Frasier and his advisory services group and others out there. So Sam, anything else you have to say on this important topic today? That’s all I’ve got. That’s all I’ve got today too. Y’all take care.