Date: 10/25/2022
Author: Mr. X
I’m happy to report that Rogue Investing Daily subscribers scored another triple digit win.
On August 2, subscribers were told to consider purchasing Direxion Daily FTSE China Bear 3X Shares [YANG]. It entered the RID Model Portfolio at $16.33. Yesterday, I sent out a special trade alert telling subscribers to sell half of their holdings. Just after the alert was sent, the price was at about $36.33.
This represents a gain of 122.474% on a trade that lasted less than three months.
The reason why I say to only sell half in situations like this is because I want to nail down what my colleague Corey Snyder calls “house money.” It ensures that the trade is successful, no matter what else happens. It allows the possibility of future gains.
Obviously, every investor has his own financial situation and I can’t tell people to buy or sell everything because I don’t know someone’s circumstances. Someone might want to sell the whole position and pocket the cash now. Who could blame them?
However, in this case, I think these China trades have further to rise – or, more accurately, that China has further to fall.
To give you all an inside look, YANG is not the only other bearish China play in the RID Model Portfolio. There’s also ProShares UltraShort FTSE China 50 [FXP]. We entered that position in the RID Model Portfolio on May 16 at a price of $44.85. It closed Monday at $71.38, just shy of a 60% gain so far. Those who are still holding YANG and haven’t sold are up over 120%.
This was a pure fundamentals play driven by politics, not technical signals. I usually don’t recommend this approach, but sometimes it’s just there.
China’s official goal for GDP growth this year is set at over 5%, but it is virtually certain it will not reach it. The Chinese “Zero-COVID” policy is impossible and ineffective, meaning production is being halted every time there is even a small outbreak. Scenes of absolute chaos – including people running to secure food before they are essentially imprisoned in their houses and apartments – show that this policy is inflicting tremendous harm on the Chinese people.
It’s a departure from about two years ago, when China’s authoritarian model seemed superior to America’s more lax policies. However, you can’t simply restrict the economy entirely for a disease like this. While not minimizing the harm of COVID-19 and acknowledging that many of us know people who have died from it, the fatality rate does not justify a complete halt of all production.
More to the point, a lockdown of this kind also inflicts human costs.
Depression, obesity that leads to other diseases, skipped doctor visits like cancer screenings, economic deprivation that leads to substance abuse, and numerous other secondhand effects result from total lockdowns. It’s not just that it stops the economy; it inflicts real harm on people who are caught in it. People are dead now because they didn’t go to doctor’s appointments during lockdowns and so treatable diseases were allowed to progress until it was too late. Even if the vaccines have literally zero side effects, these lockdown costs still exist.
In politics, people want there to be a perfect solution. There is no such thing.
It is always a calculation of cost and benefit. People are going to be hurt no matter what you do and good leaders understand how to minimize harm while maximizing gain.
However, all political elites fundamentally are concerned with their own power. That is what they pursue in all cases. I take this to be a universal rule.
Sometimes, a ruler’s interest may coincide with that of his people, sometimes it may not. Yet by definition, a leader willing to do what it takes to stay in power is going to conflate his interests with that of the country.
President Xi Jinping is such a leader. Now secure with a third term, he has used the COVID-19 crisis to impose a new system of control on the Chinese people. He’s successfully quashed an abortive attempt in Hong Kong to win more freedom from Beijing. He’s also won the backing of the Communist Party to a full commitment of getting back the “rogue province” of Taiwan.
The People’s Republic has not and likely will not renounce the potential use of force for such a goal.
China’s quarterly economic growth, delayed for an unknown reason, were higher than what analysts expected. From July to September, GDP rose 3.9% year-on-year, topping the 3.4% most analysts expected. Yet I see major dangers.
The United States is pushing a sweeping crackdown on exporting advanced technology to China, especially semiconductors. The Department of Commerce has banned the transfer of advanced semiconductor technology to China and it’s not just American companies that are affected. Companies and even individual workers are being forced to make a choice. This is a far more intense trade war than anything the “America First” Trump Administration ever did.
Move Fast. Keep Winning.
It’s especially worrisome because of the reliance of the world semiconductor industry on Taiwan Semiconductor Manufacturing. It was the first Taiwanese company listed on the New York Stock Exchange, where it can be found under the ticker name TSM. In May 2019, I wrote a special report on the company and by January 2020, the stock was up by about 160%
However, it’s not doing so well now, because it is being torn between China and the United States. TSM was down almost 4% yesterday and it’s lost more than 52% YTD. It may look cheap, considering its global importance, but I’d suggest caution before moving in. This isn’t 2019-2020.
The company’s very importance means that its acquisition is a strategic goal for the People’s Republic, and they aren’t going to get it by using yuan. It will come to blood.
The Biden Administration is putting intense economic pressure on China. It’s also warning that the Chinese military is rapidly building its capability to invade the island, possibly even by next year (though that is doubtful.)
President Joe Biden said the quiet part out loud a few weeks ago when he blurted out that American troops would defend against a Taiwanese invasion – casting aside decades of “strategic ambiguity” that allowed both China and the United States to work together while ignoring the one issue neither could back down on.
So consider this from President Xi Jinping’s point of view.
You have established total political control and are arguably the most powerful Chinese politician since Mao.
However, there are scattered protests throughout the country because of your handling of COVID-19.
The whole world saw former president Hu Jintao escorted out of the recent Communist Party Congress. While they didn’t kill him, a lot of people were probably reminded of the infamous meeting when Saddam Hussein publicly purged his enemies during a Baath party meeting. The prospect of political instability weighed far more on investors than slightly better than expected GDP figures. Besides… can you even trust those GDP figures?
Perhaps everything was innocent and Hu Jintao simply wasn’t feeling well. Yet consider President Xinping’s international position.
The United States has now declared a trade war and is openly trying to sabotage your economy by denying you access to advanced technology. It’s not the behavior of a friendly nation. It’s reminiscent of America cutting off oil to Japan before Pearl Harbor.
Your most significant ally, Russia, is bogged down in Ukraine because the entire Western world is fighting a proxy war with Moscow.
In the Pacific, the United States sails through the Strait of Taiwan with impunity and is building a coalition of nations to oppose your expansion. One of the effects of the assassination of former Japanese Prime Minister Shinzo Abe is that it’s made Japanese rearmament take on new importance.
Time is not on your side. The one thing you really need is on an island that you think belongs to you anyway. The West is emptying its weapons stores in Eastern Europe. Beyond the American fleet, it may not have the resources to contest a full-scale invasion. Of course, if the war in Ukraine ends (or Vladimir Putin’s regime falls and he’s replaced by someone who essentially admits defeat), your international position becomes far less tenable. So if you’re going to act, you want to act now.
Worst of all, the Communist Party’s legitimacy is built upon delivering reliable economic growth. You can no longer do that because of the zero-COVID policy and because of American trade sanctions. What’s left to keep the Mandate of Heaven?
Only nationalism – and the dream of reunifying all of China with the triumphant acquisition of Taiwan.
Of course, President Putin probably had that same dream when he tried to capture Kyiv. President Jinping won’t be so foolish as to think Taiwan and its allies won’t fight, but he is running out of options. Besides, if Taiwan ever flatly declares independence, China must respond lest it look impotent. It already looks weak after its muted response to Speaker of the House Nancy Pelosi’s visit to Taiwan.
Why am I bearish on China? Its property market is a disaster. Western media is treating the country almost like Russia. It faces a demographic crisis and diplomatic isolation. The Communist Party is losing its credibility on economics and so must win a geopolitical battle or reconcile itself to decline.
It may not be tomorrow, or this year, or even next year. However, at some point, China will need to strike at Taiwan or risk losing its credibility with the Chinese people. That will bring economic ruin on the country. Alternatively, economic ruin may arrive first (probably via the property crisis) and that will push the government into desperate action.
China has not done much to help its ally Russia in the war in Ukraine. It is fearful of American sanctions. Yet at some point, Beijing must calculate that it is being targeted for destruction no matter what it does. The question is a risky, desperate action or a slow defeat. If I’m a man with the willpower of Xi Jinping, I choose the former rather than another century of humiliation. My first step towards doing that is recognizing that Russia and China share a common fate and acting accordingly.
And when that happens, YANG and FXP will just be getting started.
Look, no one is right about everything. But I was right about Russia invading. I was right about the importance of TSM. I was right about China shorts leading to a triple digit gain.
And I think I’m right about China becoming far more aggressive.
For once, I hope I’m wrong.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
