Our macro specialist is done with China for now … glaring U.S. dependence … how a “retooling” of the U.S. economy will create investment wealth
Say farewell to China.
Back in August, our macro investing specialist, Eric Fry, recommended that his Speculator subscribers make a complete exit from all China-based positions.
This was a sharp reversal.
After all, Chinese plays have produced some solid winners for Speculator subscribers in recent months.
There was the nearly-150% winner from Daqo New Energy … 73% from Baidu … and 138% gains on a portion of their Vipshop trade.
And looking broader, what about the overall China growth story?
You’ve certainly heard about the rise of the Chinese economy. Data released by the World Bank and IMF predict it will overtake the U.S. economy within the next four years.
So, what’s behind Eric’s sudden hardline against Chinese investments?
From a Speculator update back in August:
During the last few weeks, Chinese stocks have become acutely sensitive to headline risk.
With each passing day, new headlines cross the wires about rising hostilities between the United States and China … or about Chinese stocks getting the boot from U.S. stock exchanges … or about the enormous national security risk the Chinese social media app TiKTok poses … or about America branding most of China’s territorial claims in the South China Sea as “unlawful.”
And let’s not forget the ongoing barrage of headlines about Huawei, the powerhouse Chinese telecom company …
Not only do these disturbing headlines never end, but they are becoming more numerous by the day …
The barrage of bad headlines is creating a stiff headwind for Chinese stocks, while also raising the odds of a “Black Swan” event that puts severe downward pressure on them.
Given this heightened risk, Eric recommended a complete exit of all Chinese positions.
As you’ll read today, there’s a growing awareness of U.S. dependence on China for all sorts of goods and services. As relations between the two countries grow icy, this dependence is becoming a vulnerability that the U.S. government wants to address.
Today, let’s turn to Eric’s Smart Money update from last week to see how we got here.
We’ll then look at three sectors that Eric believes will see billions of dollars in investment capital as the U.S. retools its economy to regain some economic independence from China.
Let’s jump in.
***A rapid and controversial ascendency
Eric picks up on the China-story in the 1990s, when the country rejoined the global economy. He notes that since then, it has been doing everything it can do get an edge over the United States, as well as the rest of the Western world.
From Eric:
In many ways, it has succeeded.
China did so by subsidizing many of its industries and allowing them to run at a loss so they could undercut and destroy U.S. factories, jobs, and vital industries.
For example, did you know that 80% of the antibiotics we consume in the United States come from China?
Did you know that we can’t make penicillin anymore in the United States? Chinese producers sold it at such low prices that they drove out all the domestic producers.
To illustrate Eric’s point, we need look back no further than 2018.
To help offset a slowing economy, subsidy payments by Beijing and local governments to listed Chinese companies rose 14% year-on-year to $22.3 billion. That was a record level.
And on the topic of U.S. reliance on Chinese medicine manufacturing, The Wall Street Journal reported in August how China makes about 70% of the acetaminophen used in the U.S.
That posed a problem this spring when there was a shortage of the drug as Chinese factories and exports shut down during that country’s quarantine.
From the WSJ:
Other important pharmaceutical ingredients made in China include the blood anticoagulant heparin, of which 80% of the global supply is made in China, and even higher levels of the world’s antibiotics, according to estimates from industry experts at the Council on Foreign Relations …
The WSJ went on to state “some Chinese political thinkers have become more vocal about advocating the use of medical supplies for political advantage.”
***This reliance on China for drugs reveals a weak spot in the U.S. economy, but the growing iciness between the countries is rooted in something else
Simply put, much of the economic tension between the U.S. and China stems from theft.
Back to Eric:
… you have more than a decade of theft of valuable American intellectual property … things like blueprints, computer codes, business plans, and proprietary formulas.
A recent survey showed more than 20% of North American companies believe China has stolen intellectual property from them.
It’s estimated that China has stolen more than $1 trillion worth of U.S. intellectual property!
Back in February, ZDNet reported that the FBI was investigating more than 1,000 cases of Chinese theft of U.S. technology.
From ZDNet:
“The threat from China is real, it’s persistent, it’s well-orchestrated, it’s well-resourced, and it’s not going away anytime soon,” John Demers, Assistant Attorney General for National Security, opened the conference.
“This one to me really stands out as the greatest long-term threat to our nation’s information and intellectual property, and to our economic vitality,” said FBI Director Christopher Wray.
***Economic and military vulnerabilities highlight national security risk
One corner of the U.S. economy showing heightened vulnerability to China is the rare earth metals sector.
For readers less familiar, rare earth metals (or elements) are a group of 17 metals that form under the earth’s surface and can be difficult to find and extract.
These metals contain unique magnetic, heat-resistant, and phosphorescent properties that make them critical to the technology and defense industries.
Here’s Eric with more:
Rare earth metals are vital to the production of solar panels, electric cars batteries, computers, missile guidance systems, radar, and satellites.
According to the U.S Geological Survey, China produced 38% of the world’s rare earth elements in 1993 … and 33% of the supply came from the United States. Smaller percentages came from Australia, Malaysia, Canada, and India.
However, by 2008, China accounted for more than 90% of global rare earth element production. And by 2011, China accounted for 97% of global production.
They are a highly strategic resource for our modern military — and we have to buy 80% of them from China.
***Waking up to the reality of U.S. dependence on China — and what it means for a “retooling” of the U.S. economy
Eric writes that over the past 30 years, through indifference, ignorance, greed, and/or outright cowardice, we’ve allowed China to undermine the foundation of our country.
Yet, thanks in part to the ongoing COVID-19 crisis, we are realizing the extent of this financial war with China — and how dependent we are upon them.
This awareness is highlighting the vast changes the U.S. must enact to make our economy more robust and less dependent on China.
Back to Eric:
Just as the United States must make sweeping changes to our economy … you have the opportunity to do the same to your portfolio.
After all, as the federal government makes sweeping changes to the $20 trillion U.S. economy, it will create enormous moneymaking opportunities for smart entrepreneurs and investors.
***The three sectors Eric is looking at today
Exiting all Chinese investments was Eric playing defense.
But what about offense?
Back to Eric:
… you can invest in three key “retooling” initiatives the United States is undertaking right now … and make a great deal of money in the process …
Each of these retooling efforts focuses on a major national weakness, or “stress point” … aspects of our economic infrastructure we have to “shore up” to win against China.
Billions and perhaps even trillions of dollars will be spent on these repairs.
That’s why you can also consider those stress points — rare earths, infrastructure, and cybersecurity — three major profit opportunities.
Returning to the opportunity in rare earths, just yesterday, The Wall Street Journal reported “the U.S. government is ramping up efforts to secure minerals critical to modern technology but whose supply is dominated by China — a stranglehold that miners warn could take years to break.”
Continuing with yesterday’s WSJ:
In recent years, the U.S. and other Western nations have invested in projects and approved licenses to mine these resources — essential for the production of electric vehicles, cellphones and wind turbines — an effort these countries are now accelerating given how far they still trail China.
Last week President Trump signed an executive order declaring a national emergency and authorizing the use of the Defense Production Act to speed the development of mines …
Miners say they think Mr. Trump’s executive order could encourage a stronger U.S. industry in critical minerals, not least because investors are more likely to back companies they believe the government supports. Shares in companies that mine or want to mine critical materials rose on the news of the order.
In the coming weeks, we’ll be diving into more details as Eric updates us on the opportunities.
For now, look at whatever Chinese holdings are in your portfolio.
To what extent could they be negatively impacted if billions of U.S. capital flows into the American rare earths, infrastructure, and cybersecurity sectors?
We’ll continue to keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
