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 here before we start the video.

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So check out the last coupon code which will officially expire on January 30th and that's it. No more coupons! All right 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 make sure to take advantage of the last coupon code ever linked below.