Polar Opposites

1700 words -a 5 minute commercial break read.

We write often about our Tri Polar World (TPW) thesis; after all, it’s in our name if not our DNA. Today though we want to discuss two of our three poles, Asia, led by China and the Americas led by the US. As we contemplated the one day splat that was DeepSeek it struck us that on many fronts, in fact, more and more as one thought about it, that China and the US are becoming polar opposites.

Here are just a few examples:

China needs to grow consumption/ rationalize production - US needs the opposite.

China is moving up the value added chain at speed – the US is becoming a primary product producer – “drill baby drill”.

China leads the new “industrial policy” space – US disbands its efforts.

China has fiscal space - the US doesn’t.

UST rates back up -  China Govt bond yields decline. 

US fears inflation – China fears deflation.

China is a giant bureaucracy – as an experienced China hand told me over lunch this week:  Captain Xi commands but orders take time to reach the engine room - US under Trump is focused on crushing its federal bureaucracy. 

Trump freezes Federal spending with his autograph - Xi wishes he could do that. 

US runs closed source AI - China’s DeepSeek is open source.

China expands its regional influence – US offers to take over Canada and plans to levy 25% tariffs on its closest neighbors.

China disciplines its oligarchs - US embraces its.

China leads the climate fight – US abandons it.

China is leading global organizations and deepening relations around the globe – US under Trump adopts China’s discarded “wolf warrior” diplomacy.

US risk assets are priced for perfection – China’s are priced for sale.

US financial assets are over owned - China’s equities are “uninvestable” and a no go zone.

China won’t let it’s stock market fall - US policy chaos risk caps its upside.

SPY just hit a new ATH, Qs made one a month ago - FXI peaked in Feb 2021 & offers 65% upside to a new ATH while KWEB is over 200% away from its 2021 high of $101.

This has been a pretty fun exercise – I know I missed several – feel free dear readers to send in your examples of more polar opposites. We would note that in our Global Multi Asset (GMA) model our China equity positions are among our leaders YTD, together with our European equity exposure. Europe’s Competitive Compass is the real deal, especially its proposal for a 28th regime for a pan-european legal entity which would help the EU to punch at its own weight, not several weight classes below as has been the norm. (More on Europe in the weeks ahead).

Its been cold recently; cold enough so that hibernation sets in where one doesn’t want to leave the house unless necessary. I broke the spell twice this week; once to meet up with a China expert for lunch and once to hear Ned Davis Research’s (NDR) global economic outlook over breakfast. We like NDR’s work for their long data histories and their efforts to tie economic outlooks to markets and especially to global equities via ACWi. This is particularly useful for us at TPW Advisory given our equity BM is ACWI not SPY.

NDR’s takeaways were right in our wheelhouse; their global composite PMI indicator is turning up supporting our Long Cycle thesis of continued global growth. Their US recession indicator is dead calm; NDR has 10 recession inputs it uses and sounds the alarm when 6 are triggered –  zero are flashing. 

Its 2025 outlook calls for continued solid global growth supported by solid DM consumer demand. Its global manufacturing indicator is turning up supported by the global easing cycle which has a one year lead. We and others (BofA) have noted the global easing cycle is well under way and likely to be sustained. NDR agrees and sees 75% of global CB’s in easing mode. Apollo just came out this morning noting it expects a significant upturn in the US ISM Manuf data out early next week. Industrials (XLI) have been signaling this break out for a while now.

NDR’s deck also had some very interesting charts on China’s potential GDP growth and productivity growth. There has been much talk about US productivity growth (we ourselves highlighted BTE productivity growth as global macro surprise #2 way back in our 2024 Outlook) but one doesn’t see much about China productivity growth which NDR calculates at roughly 5% pa, more than double US productivity growth which itself is more than double the rest of the DM economies.

The DeepSeeek news would seem to reflect exactly that type of productivity. Leo Lewis, who writes on Japan for the FT, had a great column this week on how DeepSeek illustrates China’s embrace of Japan’s “Kaizen” concept of continuous improvement. He notes for example, how Chinese companies are now hiring experienced Japanese kaizen hands as consultants – talk about Asian regional integration.

NDR also noted China’s potential growth at roughly 5% which makes sense intuitively given its shrinking work force as demographics bite. These insights suggest Chinese equities have room for both an earning led rebound together with a potential rerating and multiple expansion. Our China hand pointed out that the leading ecommerce companies in China have forward earnings growth of roughly 20% yet trade on PE to growth ratios which are  a fraction of Mag 7 valuation.

Our lunch mate pointed out that in their convos with US investors in particular there is rock bottom interest in China, noting that even the prime broker books of the top firms have virtually no China exposure, meaning that the so called fast money hedge fund community is not yet invested in Chinese equity. We surmised that this might have changed a tad given the strong performance of KWEB and FXI over the past week or so as the penny dropped that hey maybe one should have some exposure to Chinese tech companies. 

We also kicked around the whole tariff question, its timing, severity and likely impact on China asset values. Upon some reflection, it strikes me that the tariff question is driven by two factors – the first and not to be underestimated, is that Trump loves tariffs because he gets to talk about them like a King where his word is a command. Second, Trump, as always, needs money and tariffs are meant to bring in the bucks and allow for his signature tax cuts to not only be extended but deepened. Thus, the tariffs and tax cuts are linked providing a real sense of urgency given that much of the tax cuts expire at YE if not renewed.

This suggests that tariffs need to come quick, thus the talk about this weekend, and be either universal to generate the big money or very high on specific partners (here’s looking at you neighbor) in order to do same. This helps explain the internal back and forth over the tariff question. 

One would think that if Trump struggles to thread the tariff needle such that he generates lots of money yet doesn’t spike inflation, spook the bond market and crash the S&P then maybe he backs off, accepts less tariff cash, extends but doesn’t deepen the tax cuts, keeps the economy on side, rates under control and the S&P cool.

We are watching all this unfold from the perspective of one that is looking for fiscal stimulus in Germany and China to help broaden out the globe economic recovery, boost non US equity prices above their resistance levels and validate our expectation of a broadening out of both the global growth market and the global equity bull market. We note that this stimulus is driven by domestic needs (stagnation in Germany, deflation risk in China) but Trump tariff risk is also a factor.

Sp what comes first, the tariffs in order to start the clock on the tax cut bill or the non US  fiscal stimulus post Germany election in roughly 3 weeks & China’s NPC meeting in roughly 5-6 weeks. Trump needs to move on tariffs bc of the revenue impact on the tax bill; China is clearly waiting to see what Trump leads with before rolling out additional stimulus measures.

As always, we want to listen to what the markets are telling us. This week was like a month rolled into 5 days; the one day DeepSeek implosion that crashed the Momo folks, smacked the power players (our worst performing position Monday was our uranium holding) and generated headlines for days. We even had a midweek Fed meeting that passed by with barely a ripple. 

As folks read up on Jevons Paradox (us too) all breathed a sigh of relief realizing DeepSeek is a positive surprise, not negative, especially for those of us long KWEB. While Monday was a big down day for our GMA model it gained it all back and as of this writing is basically flat with last Friday’s close.

We continue to focus on the broadening out of risk markets, the continuation of the commodity breakout (we don’t expect tariffs on Canadian oil), the anticipated breakout of the non US equity BMs (ACWX, EFA and EEM) all of which are flirting with just that and the continued outlook for a USD rollover as capital repatriation becomes an important turn of phrase over the course of the year. 

We remain somewhat baffled by the US desire to wall itself off from imports of goods and wonder how long it will be before capital imports become problematic. Given that the US has massive current account and fiscal deficits that need to be funded this course of action doesn’t make a lot of sense to us.

Let’s hope the weekend provides some clarity in advance of our 7 am Bloomberg Surveillance show appearance first thing Monday morning! Make a note to grab that coffee and tune in! In the interim, please enjoy my latest Reuter’s article focused on the China opportunity.https://www.reuters.com/markets/asia/investors-who-sleep-china-may-wake-up-too-late-pelosky-2025-01-28/

The always exciting Duke – UNC hoops game is tomorrow night. Cooper Flagg is the real deal. GTHC, GTH!!!