Will China's Reopening Skyrocket Inflation & Re-Crash Markets | Stagflation Disaster.

will the great Chinese reopening in 2023

lead to insane inflation in the United

States and therefore a resumption of

interest rate hikes at large levels from

the Federal Reserve crushing our economy

even worse in other words meaning the

Chinese economy takes off and Booms

while the American economy goes into

depression under high inflation and

China ends up taking over the world in

this video we are going to analyze

exactly that hey everyone meet Kevin

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folks let's talk about China first what

we're going to do is we're going to go

through a financial times piece on the

risks associated with the Chinese

reopening we'll talk about Bloomberg's

take on this we'll talk about the

economists and Morgan Stanley and then

we'll end with the oecd chief my opinion

and some trades potentially related to

this so what we have here is after

almost three years of self-isolation the

financial times tells us that few

expected presidents Xi Jinping to

basically flip-flop on covet zero so

quickly remember that we essentially

went from covet zero restrictions

massive lockdowns factory shutdowns

throughout the past almost three years

to almost nothing very few preparations

in terms of vaccinations for those who

want or potentially need them very few

preparation in terms of having enough

just even fever medication on the

shelves and available for individual to

buy and this has led to a substantial

drop in Subway traffic in China and a

very very deep slowdown in China however

now things are starting to rotate out of

that Darkness we're starting to see

signs of that disruption fading worker

shortages are easing as people go back

to work and people in China are starting

to spend money again now many are

reporting that China could grow as much

as 5.5 percent in 2023 that's up from

three percent in 2022 kind of shocking

that China was even able to grow at all

in 2022 but then again this is down from

some of the higher growth rates that

we've seen previously at China

especially since China has been

exploding over the last 40 years

actually potentially even longer since

basically the end of The Mao Zedong era

now what you're finding is as people are

becoming less sick we're starting to see

a surge in bookings on travel and we're

starting to see stronger demand for

goods and services this could

potentially create issues in America see

China is the world's largest consumer of

Commodities that means they are big

buyers of things like Industrial Metals

call it copper iron ore or or other

metals especially related to China's

property sector but they're also big

consumers of oil accounting for as much

as about 15 to 17 percent of global oil

production and this is leading some to

say that's it oils go into 100 bucks a

barrel this is a problem for America

because think about it if on one hand a

Chinese reopening could mean more people

at work which means factories are open

and China is able to manufacture more

goods and provide those goods without

disruptions for chips Autos or otherwise

while that is good if it's matched by an

offsetting amount of demand from China

and we still have demand coming from the

rest of the world is it possible that

the Chinese reopening could lead to a

massive inflationary Boom for the rest

of the world and this is what find the

financial times as inflation see if

China's rebound keeps Energy prices

elevated just through oil let's say or

even competition with Europe for natural

gas demand next year then inflationary

pressures may take longer to wind down

and central banks may be forced to

tighten even more the World Bank

actually call suggests that any new

adverse development based on how fragile

things are could push us right back into

a global recessionary environment if

we're not already in a global

recessionary environment so now we've

got to ask ourselves okay so that's a

lot of fear what do other organizations

think like Bloomberg what do they say

and then what happens when we get to

some organizations that actually try to

start connecting the dot well Bloomberg

tries to give us a little bit of that

the head of the IMF last week so suggest

that China getting out of covet zero was

the single most important factor for

Global growth in 2023 and it's seen as a

positive contributor for Global growth

that's awesome but a positive

contributor for Global growth could be a

bad thing for inflation in fact take a

look at this how the Public Health

crisis plays out remains to be seen and

it could leave a long Shadow over

consumer confidence the big slump in

property prices will weigh against a

consumer rebound and government stimulus

so far has been relatively restrained

now this is actually a very interesting

argument because it basically says hey

look even though we think and it makes

logical sense that a Chinese reopening

could push inflation up dramatically

let's be clear just because China is

starting to loosen restrictions against

the property Market doesn't mean that

people who have now suffered a 30 to 50

percent decline in property values are

all that excited to get back into real

estate and it also does doesn't mean

that lenders who are now once bitten

won't be twice shy and be a lot more

cautious with their lending and because

property prices haven't actually

rebounded yet it's possible consumers

won't spend as much as we think they

actually might remember at least in the

United States we have people like Mr

Robert Schiller a Princeton Economist

who says that the biggest reduction in

consumer spending doesn't come from when

stocks goes down or when stocks go down

it actually comes from when real estate

values fall and real estate values have

absolutely crashed in China on top of

that the government is not as

stimulative or as friendly to stimulus

as America has been during the covet

pandemic this potentially means that

sure there could be a Chinese reopening

but it might not be as stimulatively

wild as what we saw in America and

Europe in 2021

and and this is why you have the chief

Economist at TS Lombard saying when the

covet situation settles down enough for

China to truly reopen probably around

March for more of a full reopening the

reopening boom lit will disappoint in

comparison to the developed Market

response that's a comparison to the

United States and Europe now they say

that's because Chinese domestic stimulus

has been pale in comparison to to the

west and the pool of wealth to support

pent-up demand is much smaller in China

than what it was in America now that's

really interesting and it's worth just

taking a moment to reflect on what we're

thinking here so far first we think that

China uses a lot of oil they could push

oil back up to 100 bucks a barrel they

could also put pressure on commodities

prices but this assumes that at the same

time as Chinese are going back to work

they're able to spend like crazy like

Europeans and Americans were and at

least according to this Bloomberg piece

that might not actually be the case so

you could actually have a situation

where the Chinese go back to work but

they too are also Shell Shocked to where

yes some spending goes up like maybe

travel spending but in aggregate Chinese

become a lot more inward focused where

going back to work making more money but

we just went through three years of

covet zero hell and our property Market

dropping 30 to 50 percent let's just

hoard some cash for a moment and rather

than just spend it all like crazy like

Americans and Europeans did after the

reopening let's be a little bit more

cautious and careful and that could

actually give you the best of both

scenarios where you have Chinese at work

manufacturing helping with Supply chains

but also not consuming more than they're

contributing to production that means

Supply up demand up but not as much as

Supply which means prices across the

world could actually continue to dis in

inflate that's good but we still have

the risk that that scenario of hopium

does not actually play out so it's worth

looking at a little bit more analysis

let's consider what the economist is

calling the biggest economic event of

2023 and that is the Chinese reopening

China's reopening will be the biggest

economic event of 2023 and they suggest

that such a sharp Rebound in such a huge

economy means that China alone could

power much of the global growth we will

see over the next year and since this is

a country that also buys a fifth of the

world's world's oil

half of the world's copper nickel and

zinc and more than three-fifths that's

60 percent of the world's iron ore could

lead to some higher inflation this is

where the economist talks again about

these painful side effects that could

come as a result of China's recovery

thanks to higher inflation leading to

higher interest rates and price

pressures

they suggest that countries that import

Commodities specifically countries in

the west like European countries or the

United States actually end up having the

greatest risk of a Commodities driven

price disruption and here's just another

reiteration of a company like Goldman

Sachs suggesting oil is likely to go to

100 bucks a gallon Europe's likely to

face competition for natural gas and one

of the factors that could hurt as well

is countries May or or companies may be

concerned about actually producing in

China again in this reopening because of

how uncertain things can be in China

when the government has its own goals

this suggested by The Economist is an

argument that says maybe companies will

actually manufacture Goods in other

countries even if it's more expensive

which unfortunately is inflationary

that's not good so again The Economist

is really making this argument much like

the financial times that

oh man company or countries and

companies that import Commodities could

see some pricing shock due to a Chinese

reopening because that raw material is

getting sucked in so now we're really

narrowing down where the inflation might

be it might be in energies and

commodities which is really interesting

for potential trades something we'll

talk about in just a moment and

commodities and energy are a big input

cost for inflation in America now

inflation in America could potentially

be offset by hopefully a sudden decline

that we're expecting in Housing Services

costs like rents and owners equivalent

rents and maybe those will offset higher

commodity prices but still I think the

last thing most of us in America want

are any kind of indicators that

inflation is going up we just want to

hear it's going down and this is where

we get a flip side argument and this

flip side argument comes from Morgan

Stanley though this piece is a little

bit older older Morgan Stanley has

maintained this belief Morgan Stanley

suggests that as China reopens there

will be a simultaneous flow through of

better demand and stronger Supply this

is like what I was saying Supply up

demand up but Supply up hopefully more

Morgan Stanley believes that this supply

of demand up will actually offset the

stagflationary feelings that we've had

in 2022

instead Morgan Stanley thinks that on

net China's reopening is likely to help

the United States disinflate as core pce

inflation ends up hopefully decreasing

to four percent or even lower by

mid-2023 that's what Morgan Stanley is

suggesting due to improving Supply and

deflating demand fading core Goods

inflation will more than offset the

near-term uplifted inflation pressures

from commodities prices as the biggest

consumer goods in Porter in the U.S and

largest part of the global auto supply

chain China will still be a great

influence on this so in other words

China's reopening helps growth and

Morgan Stanley makes the argument that

don't worry having Chinese back at work

will be more disinflationary than any of

these supply chain disruptions or I

should say Commodities disruptions we

get because prices of Commodities start

Rising

okay so how do we piece all of this

together well maybe maybe in an

interview today the oecd chief Economist

Mathias conman gives us a little bit of

an Insight now the oecd is the

organization for economic cooperation

and development it's a 38 country body

of which of course the United States is

a part of they're an economic Think Tank

and basically an organization that tries

to Foster simpler taxation rules and

help multinational organizations and

companies work between these countries

and these 38 countries or countries like

France Germany Austria Italy Hungary

Finland United States of course you've

got Korea in here Mexico chile Colombia

United Kingdom Canada Japan so on and so

forth notably though China is actually

not part of this group so in other words

the oecd

you know it's kind of like hey everyone

but China and what's interesting about

that is in my opinion they don't

necessarily have to be beholden to the

Chinese narrative and maybe they could

be a little bit more uh neutral or if

anything biased towards the west and

what is their take well their take is

that quote China's reopening will be

overwhelmingly positive to help tackle

Global inflation that the reopening will

help Supply chains function

substantially better and yes is it

possible that China's reopening could be

inflationary absolutely but the overall

surge of inflation that the West

experienced was not solely due to

commodity price issues it was actually

due to a supply shock and therefore by

re-establishing Supply chains that

couldn't function China coming back into

the global markets making sure those

Supply chains are functioning again and

should be an overwhelmingly positive

contributor to Bringing inflation down

so this economist thinks absolutely

positive on net but ultimately we have

arguments on both sides yeah oil and

commodities could go up but they're

going to get pulled down by recessionary

well a recessionary environment in the

west the United States and Europe will

probably lead to a lowering of commodity

demand and oil demand in the short term

sure does that get propped up as China

reopens yeah of course but if that means

looser Supply chains again that could

just push inflation right back down so

TBD what I wanted to do was a little bit

of my own research and provide a little

bit of my own opinion on this so what I

wanted to do was outline China's GDP

with oil prices or overlay those two on

a map on a chart and my thesis is that

well if China's GDP spikes then their

oil demand would spike and if oil demand

spikes as China's GDP spikes then it

would suggest that yeah we might see

some inflationary problems over the next

few months as China reopens because oh

China reopening oil demand up oh here we

go China's GDP up oil demand up oh so

technically we should be seeing some of

that influence in historical data and if

China's GDP Falls we should see oil fall

at least somewhat right it doesn't have

to be perfect because obviously there

are a lot of things that influence the

price of oil

but what I got was something that was

absolutely well pretty clear to me and

here you could see that I mean just take

a look and start picking some areas

here's China's GDP falling and all of a

sudden you have this massive surge in

oil prices which it doesn't really

correspond to much of a movement in

China's GDP at all the green line by the

way being Western crude the red line

being European Brent oil crude and a

blue line again being China's GDP so

let's go to a different area what do we

have here in the 2015 era a slight

slowdown in GDP in China but this

massive massive plummet in oil prices

that doesn't actually correspond with

this nominal rise again in Chinese GDP

because this Norm nominal ryzen GDP

should just bring you back to where Oil

was close to relatively the black line

but it doesn't oil skyrockets so in my

opinion it's really difficult to see any

kind of pattern here and I know we like

to see patterns often as humans where

there are none but this to me is just an

example where there's no clear indicator

that oil going up means China's GDP is

skyrocketing nor does it mean that as

all of a sudden oil is plummeting like

it did here China's GDP is moving at all

which it wasn't so in my opinion oil

prices probably if this chart is true

going forward

oil prices probably have nothing to do

with China sure I I it makes sense that

if China makes up 15 to 18 percent of

oil demand that makes sense that China

would have something to do with price

right like if oil was completely at

capacity and then all of a sudden you

introduced 18 more demand you'd probably

expect oil prices to go up at least 18

right but then you wonder does it

potentially mean that all of a sudden

OPEC and uh Drillers are just going to

produce more to offset that and compete

for that increased Chinese oil demand so

for me it seems like there are so many

things that are in or affecting oil

prices

Chinese demand either being present or

not probably doesn't make a difference

on top of that consider that for the

past 40 years inflation has been

plummeting since the early 80s inflation

has been straight down in America and

Europe to the point where right before

our great uh covet crisis here Europe

went to negative interest rates the West

has been suffering if you will or

enjoying the great moderation of

inflation for the last 40 years and

China has boomed in the last 40 years

China has been booming for with the

exception of the last three years 37 out

of the last 40 years and inflation has

done nothing but trended down so my sort

of summary and then we'll talk trades on

all of this my thesis putting together

all of this information is yes

absolutely there is going to be an

increase in oil demand when China

reopens and absolutely there is going to

be a reopening of goods and service

demand in China we actually call that

gas in the economic world uh see it

looks like gas goods and services anyway

uh so yes there will be this sort of

increase but is it not then likely that

at the same time as we potentially have

more demand in China we actually well

exceed that Demand with more gas Goods

in Service Supply

because Chinese potentially as

individuals didn't receive as much

stimulus saw their wealth get destroyed

thanks to the property crisis in excess

of 30 to 50 percent declines and are now

maybe shell-shocked with less

stimulative support leading Supply to

actually improve substantially more than

demand I believe that makes logical

sense now that doesn't mean markets have

to be logical but I believe this makes

logical sense I also believe that it

makes logical sense that oil prices have

way less to do with

what's going on in China

then what oil prices have to do with

OPEC and rig counts rig counts is

actually very interesting because

something that happened after the

pandemic is a lot of rigs went offline

because oil prices went negative at one

point which is kind of wild to think

about uh but one of the things we've

seen is this slow Nike Swoosh style

recovery of rate counts in America and

I'll show you this on a five-year chart

so you can see roughly what I'm looking

at this is that five year chart for rig

counts we since the end of 2020 where we

roughly I'd say mid 2020 Q3 2020 where

rig count bottomed out at only about 180

rigs online we've seen rig count recover

to

618 rigs we're almost back at the 680

level where we were right before the

pandemic not quite yet where we weren't

2018 were rigs online were that 800

range but what's remarkable about this

is it shows that if oil prices do start

trending up again we probably have that

excess capacity to bring more rigs

online in fact I believe the only reason

we've actually seen a flattening in rigs

coming online here is because oil prices

have started to moderate somewhat oil

prices have started to come down from

where we were over a hundred to now in

the mid 80s sure oil prices are on the

higher side or of where they have been

all year here in 2023 but we can simply

foreign

but I'm a big believer that oil

companies are smart and when oil prices

go up they open up more Rigs and they

produce more one of the only reasons oil

counts didn't v-shape recovery as

quickly as the stock market did in 2020

is because a lot of oil companies took

on an insane amount of debt during 2020

just to survive and they've used a lot

of their profits over the last few

quarters and I would say a year and a

half or so to pay down as much debt as

possible or to buy back their stocks and

become as solvent as possible to be

prepared for the next shocks now that's

not popular for politics but it is to

say that look

oil companies are preparing for whatever

should happen with oil prices oil prices

come down they're less in debt oil

prices go up they can open more rigs so

while my chart here is not a technical

chart my personal thesis is that China's

reopening is going to be vastly good for

the world that I don't believe Chinese

individuals are going to create more

demand than the supply they are able to

provide and China's reopening will

actually be a net positive towards

inflation any kind of increase in oil

prices I believe will be short-lived as

more Supply comes on to take advantage

of the once again higher prices in oil

and I think that is really reiterated by

what we've seen here where we've been on

this trend of really Rising rate counts

but as soon as we started hitting Q3 Q4

2022 and oil prices started coming down

that perfect trend of rig counts only

going up has actually started to flatten

in this region right here and I believe

all it would take is ninety dollar per

gallon oil again to start seeing this

rate count Rising again which once again

means more Supply prices down it's

incredible but what does this mean for

trades because this is all relatively

complicated when we put this together

well I believe that if you are to go

long oil or long oil companies I think

you have a short window to do that if I

were a Trader and I was willing to bet

that oil was going to go to a hundred

dollars I would make my bet I'd probably

close my bat I'd make my bet here at say

85 I'd probably close my bat around 95

to 98 and either way I would close my

bat no later than probably April or May

that'd be my thesis for oil it's not a

play that I personally am super excited

about making because there's also the

potential that we just don't end up

getting that surge of oil demand from

China or that that surge has already

been priced in and if the surge doesn't

materialize the way the oil markets

think oil instead of going to 100 is

actually more likely to go to 60. that I

think is a higher likelihood and hence

why it wouldn't be a trade that I would

want to make now Morgan Stanley suggests

hey you have to be careful as while

maybe the inflationary fears are going

away it might still be too soon to go

into deflationary trades like growth

trades and the reason for that is we

still don't have the answers we're still

in enough of an unknown environment

uh in terms of what's going to end up

playing out however

most people say the only real leftover

factor for stocks are Q4 earnings but

Goldman Sachs researchers tell us that

stock markets tend to bottom out six to

nine months before the bottom in

earnings

so

maybe Q4 q1 end up being earnings

bottoms but those are actually part

already of the stock market's recovery

where we'll be able to look back in a

few years from now and say ah Q4 2022

was the earnings bottom and look that

also happened to be where stocks

bottomed out and they just slowly

trended up from there and that's kind of

roughly what we've seen in the charts if

you look at the charts now you see the

bottom really over here the end of Q4

the beginning of q1 slightly off of that

October bottom so if the bottom is

really going to be somewhere in this

range let's just assume for a moment

it's not going to plummet more which

would mean we haven't really hit the

earnings bottom yet right but if the

bottom is somewhere between October on

the NASDAQ here and now uh in the NASDAQ

well if we add six to nine months we're

really looking at somewhere around June

or July as potentially the earnings

bottom but then the stock market would

have already bottomed around now that's

a thesis of course not a guarantee so

we'll see It'll be fascinating but

personally do I believe that China's

great inflation is going to lead to a

disaster in the United States no is it

going to lead to substantial volatility

and commodities prices and oil prices oh

yeah but if that demand doesn't

materialize I think those prices are

mostly already built in you actually

have substantially more downside for

chinese-related Commodities be it copper

oil or iron ore than you do upside we'll

see it's a bit of a contrarian bet but

cheaper commodity prices would actually

lead to even more deflation we'll see

how it plays out let me know what you

think in the comments down below and

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