Lies, Damn Lies, and Statistics: China Can’t Hide Trade Weakness
Back in my musician days, our tour schedule tended to be weighted toward the college semester, as those were our strongest markets. And as a result, we usually had a lot of time off in the summer to spend with family and friends.
For me, that meant I’d watch a lot of baseball, play a lot of golf (terribly), and go see as many different types of shows as I could. For my parents, “shows” pretty much just meant tickets to West Virginia Public Theatre’s summer series.
Typically, WVPT was heavy on musicals – it was a decent summer gig for musician friends of mine – but there was always a handful of plays, concerts, and special performances sprinkled in throughout as well.
Over the years, I’m not even sure how many we went to, but it was… a lot.
All were good. Some were great. But only one left a lasting impression…
And that was actor Hal Holbrook’s Tony-winning one-man portrayal of Samuel Clemens that made his career, and ran for decades until Holbrook’s retirement in 2017… Mark Twain Tonight!
Sometimes, People Just Don’t Get It
The show left a lasting impression on me largely because of what didn’t happen than what did.
In it, Holbrook weaves seamlessly through a variety of Twain’s collected works – reciting the passages, narrating the transitions in between, and punctuating prose with the occasional punchline to thunderous applause.
And while I can’t remember what passage he was reciting, about halfway through the show, he clearly arrived at the end of a piece (which was pretty funny) and stopped talking. I brought my hands up to start clapping, but I was stunned to hear…
Silence.
He nodded toward the audience, clearly acknowledging them graciously for paying attention. I raised my hands to clap again, and…
Nothing.
Holbrook then walked up to the open book sitting on the lectern at the front of the stage, and closed it.
At this point, I’m looking around at my parents and my brother in bewilderment, thinking, “don’t the people here know they’re supposed to applaud?”
Zip. Zilch. Nada. Bupkus. Niente.
Unfazed, Holbrook shrugged and continued, while my Dad leaned over and whispered, “I guess sometimes people just don’t get it.”
Ain’t that the truth.
Disraeli Does Tie Back Into Statistics
The piece that Holbrook followed up with – and I’ll never know whether it was coincidental or intentional – is one of my all-time favorite quotes. But prior to this performance, I actually never knew who said it…
Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: “There are three kinds of lies: lies, damned lies, and statistics.”
Turns out, it wasn’t even former UK Prime Minister Benjamin Disraeli who coined the phrase “lies, damned lies, and statistics” – it was likely an anonymous writer. But the phrase I had grown to love in the context of baseball (Happy Opening Day, everyone!) was now forever emblazoned at the front of my mind for all kinds of different contexts.
At its core, the phrase is meant to convey the power of persuasion that numbers convey. Often, they can help transform relatively weak arguments into relatively strong ones. But for instance, when perspective is manipulated, “statistics” can be used to bolster a completely fabricated point of view.
In the years since that quote came into being, however, statistics have grown into a field of study all their own. And if you’ve graduated from college in the past 30 years with any sort of emphasis on pure math, pure science, or the social sciences, you likely have the skill set necessary to detect – or generate, if you’re so inclined – BS.
So if you’re a natural skeptic like me, and you also have this skill set, you know that President Trump’s comments on the coronavirus death rate are BS. We have known for some time the death rate for COVID-19 hasn’t materially changed, except in instances where health care facilities became overwhelmed.
Similarly, given the natural skepticism and the skill set, you know for damned sure that China’s economy did not increase 3.2% year-on-year like they say it did.
The China Syndrome
For starters, let’s look at China’s major trade partners:
Source: Bloomberg
Just going down the list, we have the United States, who is mad at them. Then we have Japan, who is mad at them. Then South Korea, who is in recession… and also a little mad. And while the Germans have been frustratingly accommodative, Australia is definitely mad at them.
Just those four countries constitute US$1.4 trillion in annual trade – over 30% of China’s total output.
We know for a fact that exports of Chinese goods to the US have declined on a year-on-year basis – we have the data, and we can see it.
Source: Bloomberg
We know that Japanese imports of Chinese goods are down…
Source: Bloomberg
We know that South Korean imports of Chinese goods are down a little…
Source: Bloomberg
And we know Australian imports from China are down pretty significantly…
Source: Bloomberg
And when we look at the import side, they’re all down year-on-year too.
Source: Bloomberg
With exports/imports both down, let’s look at the other components of GDP, as defined by the equation GDP = Consumption + Government Spending + Investment + Net eXports.
Did consumption increase? Nope.
Source: Bloomberg
Did government spending increase? Nope.
Source: Bloomberg
Did Investment increase? Nope.
Source: Bloomberg
So literally nothing increased year-on-year… and they expect us to believe they’re up 3.2%.
To create a backstory for what they know will eventually come out, the ruling Communist Party has poured on the histrionics, backlogging ports with security measures. And to add comical insult to actual injury, stringent COVID-19 testing at the facilities are supposedly being implemented to fighting coronavirus in – I kid you not – shrimp shipments from Ecuador.
And now with their biggest trading partners both mired in recession – US unemployment numbers ticked up today – and intergovernmental relations deteriorating, the likelihood that China can keep the lid on their flailing economy is somewhere between slim and none.
And that’s before we account for any additional trouble with the Three Gorges Dam.
As such, it’s a reasonable time to establish a short position on the iShares China Large-Cap ETF (NYSEArca: FXI) if you are capable of doing so. Adding a ¼ stake to Direxion’s Daily MSCI Emerging Markets Bear 3X Shares ETF (NYSEArca: EDZ) is also pretty reasonable to do as well, as it is China-heavy, and attractively priced.
If there’s a main risk here, it’s that the market won’t know what to do with all this information. Should that prove to be the case, then it will likely behave like the audience at the end of that Mark Twain soliloquy… and just sit there.
But if there’s one thing I learned from Hal Holbrook’s performance there, it’s that you can’t let things like that faze you.
Just take a deep breath, move on… and talk about the next set of statistics.
All the best,
Matt Warder
