“It Appears China Has Sent The World A Prodigious False Reflation Signal”

Some material observations on China’s latest inflation data from Axiom’s Gordon Johnson.

QUICK THOUGHT: Overnight, China released CPI (a measure of the prices consumers are paying) and PPI (a measure of the prices producers, or the guys that make the stuff the consumers buy, are paying). In short, China’s PPI soared to +7.8% y/y (vs. +6.5% y/y last month), while CPI cratered to just +0.8% y/y, following last month’s +2.5% y/y growth.

OUR VIEW: As we have espoused for some time now, we believe the strength in China’s metals prices (which also drive global metals prices) has been driven by speculation at all levels to include steel/iron-ore mills, traders, and port stockers, all of whom are sitting on/near record levels of inventory at present (due to both hopes around Trump pushing global demand for metals [we firmly believe this view is wrong as China, not the US, is the majority consumer of many of the metals the define our coverage universe], and a reflation trade in China taking hold). We also believe a number of supply-side policy errors in China (see coking coal prices) have contributed to the rise in commodity prices – evidenced by comments from the NDRC earlier this week, where they stated that they will not re-impose the 276 day production limits that caused coking coal prices to spike last year, it appears that the technocrats in the ruling Chinese communist party see the error in their supply side efforts from last year.

Yet, as evidenced by the sharp contraction in China’s y/y PPI growth in Feb. ’17 (down to JUST +0.8%, from +2.5% in Jan. ’17), it appears that there is virtually no price pass through anywhere in the production chain in China. At risk of stating the obvious, this is not sustainable, as the people who actually sell the stuff that requires the steel, iron ore, coking coal, copper, etc. are seeing their margins squeezed as a result of rampant speculation in commodity markets (fueled by excess liquidity “sloshing” around), NOT END MARKET DEMAND.

This also suggests, as evidenced by China’s release of its Total Social Financing for Feb. ’17 this morning (where the actual number of CNY1.150tn missed the Consensus estimate of CNY1.450tn), further hopes for credit impulses from the PBoC will prove futile – credit is the life’s blood of China’s economy.

In short, we believe this year’s playbook is the opposite of last year. That is, last year, in the first three months of the year, the bears (us included) were calling for further declines in industrial/commodity stocks, after they had been annihilated in 2H15, ignoring the many loosening efforts that had been put in place in China starting in Sep. ’15. Contrastingly, however, in Sep. ’16 China began to tighten everything from housing to futures trading, and even more recently put restrictions on Wealth Management Products (“WMPs”) and, in an unprecedented move, the asset management industry (link). Still, today, investors are ignoring these measures, which we did last year, causing us to miss the trade of the decade (i.e., being long everything tied to commodities); thus, this year, we are not ignoring these signals from the Chinese government; net, net we feel this year is going to be defined by a massive destocking of inventory across a number of metals in China (steel, iron ore, copper, coking coal, etc.) creating the potential shorting opportunity of the decade – China, NOT THE US/Trump, is what matters for global steel and mining/industrial stocks (we feel many investors have lost focus of this fact).

HOW TO PLAY THIS THEME? On this theme, we think now is the time to be putting money to work shorting Rio Tinto (RIO; SELL) Fortescue (FMG: SELL), Cliffs Natural Resources (CLF; SELL), Caterpillar (CAT; SELL), US Steel (X; SELL), United Rentals (URI; SELL), GATX (GATX; SELL), and Trinity (TRN; SELL). We believe many still expect reflation to define this year; however, as the DATA today in China suggests, we believe these views are going to be met with a harsh reality. Caveat emptor. 

Exhibit 1: China CPI vs. China PPI – rarely, since 2008, has CPI exceeded PPI

Source: China National Bureau of Statistics, Axiom Capital research.

Exhibit 2: Components China CPI

Source: Macrobusiness, China National Bureau of Statistics, Axiom Capital research.

Exhibit 3: Components China PPI

Source: Macrobusiness, China National Bureau of Statistics, Axiom Capital research.

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Nigel Farage Visits Julian Assange In Ecuadorian Embassy In London

In a move that will likely spark further allegations of political partiality by the Wikileaks founder, BuzzFeed reports Nigel Farage visited the Ecuadorian embassy in west London on Thursday which is the location of the self-exiled Wikileaks founder Julian Assange, where he has been living since he claimed asylum in 2012.

Ecuador granted Assange asylum almost five years ago to prevent him being deported to Sweden to be questioned over sexual assault allegations. The Wikileaks founder has been stranded there ever since, with British police keeping the building under close surveillance.

The former UKIP leader spent around 40 minutes in the building and left at noon, accompanied by an aide. It is difficult to envision what Farage may have done in the embassy aside from visit its famous exiled resident.

When asked by BuzzFeed News for the reason for his visit as he left to get into a car, Farage said he couldn’t remember what he was doing in the building. Asked specifically if he had gone to the Knightsbridge building to meet with Assange, Farage said: “I never discuss where I go or who I see”.

While there are no known links between Farage and Assange, some have accussed Wikileaks of being pro-Trump during and after the US election, while Farage has grown close to the American president, and visited the White House last month. The Ecuadorian embassy did not comment on the visit.

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Trump Vows “Full-Court Press” As Opposition To ‘RyanCare’ Mounts

As the U.S. House of Representative marks up Paul Ryan’s American Healthcare Act, the battle between the moderate and conservative factions of the Republican Party continues to mount behind the scenes all while opposition from a variety of advocacy groups is also growing.  “This is what good, conservative health-care reform looks like,” House Speaker Paul Ryan said Wednesday. “It is bold and long overdue. And it is us fulfilling our promises.”

Despite the public bickering, Republicans scored a victory early Thursday, pushing a measure through the House Ways and Means Committee repealing tax penalties on people who don’t buy insurance but otherwise progress on the bill has been slow.

As the Wall Street Journal notes, Ryan and House Republicans have to thread a very fine needle on healthcare legislation that appeals to a sufficient number of  conservatives to pass the House while not alienating the more moderate factions of the party in the Senate.

House Republican leaders are under pressure to ease passage through the House by making changes that appease conservatives who want a more aggressive repeal of the ACA. Those changes risk further jeopardizing support in the Senate, where centrist Republicans have said they are concerned the proposal will cause too many people to lose coverage, particularly those with low incomes.


Underscoring the Senate’s central role, a group of Republican governors representing states that expanded Medicaid under the existing law have largely given up on lobbying the House and instead are focusing their efforts on the Senate, according to two people familiar with their thinking.

“Yes, I do not think it will be well received in the Senate,’’ Sen.
Susan Collins (R., Maine) told Yahoo News. “But I do want to emphasize
that it’s still a work in progress. … So, who knows, maybe it’ll
eventually get better.’’ She also signaled she would oppose measures in
the House bill to end funding for Planned Parenthood.


The GOP proposal topples many central provisions of Obamacare, including a requirement that most Americans buy health coverage or pay a penalty. The plan would end tax credits provided to lower-income people on the ACA’s exchanges and replace them with new tax credits for a broader set of people who don’t get insurance through their work.

The credits would be pegged to age and would phase out for higher-income earners. In many cases, analysts say, the credits would be less generous for older and low-income consumers, and for people in areas with high health costs, than the subsidies offered under current law.

The bill would repeal the majority of the health law’s taxes starting in 2018 and freeze federal funding in 2020 for the 31 states that expanded Medicaid. It would also overhaul and reduce federal funding for Medicaid.

But opposition is mounting from groups representing hospitals, doctors and seniors which are urging House Republican leaders to put the brakes on their plan to overhaul the Affordable Care Act, saying it risks stripping too many people of insurance and in some cases would hurt industry finances.

America’s Essential Hospitals, whose members serve large numbers of uninsured patients, sent a letter on Wednesday to House leaders saying it was ill advised to consider the legislation without an estimate of the costs and coverage implications from the Congressional Budget Office, the independent office that assesses legislation for Congress. Those assessments won’t arrive for several days. The hospital group also said some provisions would hurt patients.


“America’s Essential Hospitals cannot support the legislation to be considered by the committee,” Dr. Bruce Siegel, president and chief executive, said in the letter.


The American Medical Association, a physician group, said in a letter to Congress on Tuesday that it is unable to support the GOP bill because of “the expected decline in health insurance coverage and the potential harm it would cause to vulnerable patient populations.”


And a major association of insurers, America’s Health Insurance Plans, warned in a letter that the bill could damage the insurance market and hurt Medicaid enrollees.

Meanwhile, President Trump has promised a full-court press to rally support for RyanCare while reportedly saying that if the House GOP’s ObamaCare repeal and replace plan fails to pass, then he’ll simply let ObamaCare fail and will blame the Democrats.

“Trump said he will have football stadium events in states where he won by 10-12 points and he is going to dare people to vote against him,” a source at the meeting said.


“We’re going to have a full-court press,” Mr. Spicer told reporters. “You will see a lot of travel and a lot of activity by the president and all of the administration.”

Grab your popcorn, this fight should get fun.

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Euro, Bund Yields Spike As Draghi “No Longer Sees Urgency In Taking Further Actions”

ECB President Draghi said the “balance of risks to growth has improved” and noted that The ECB had “removed reference to signal a sense of urgency.” This combined with the removal of references to the use of all instruments has sparked EUR strength and…

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