That Escalated Quickly


I published this note today on the website, and it’s making a bi of a splash. We’ll publicize it more actively tomorrow, but wanted to give you a headstart, including a copy of the PDF.

From a narrative perspective, China is fighting this war against nCov2019 exactly like the US fought its war against North Vietnam.

It’s what the Best and the Brightest always do … they convince themselves that the people can’t handle the truth, particularly if the truth ain’t such good news. They convince themselves that they can buy enough time to win the real-world war by designing and employing a carefully constructed “communication strategy” to win the narrative-world war.

That strategy proved to be a social and political disaster for the United States, as the cartoon tail (gotta get more NV casualties for Cronkite to report) ended up wagging the policy dog (send out more counterproductive search-and-destroy missions).

I think exactly the same thing is happening in China, and I think the social and political repercussions will be exactly as disastrous.

I believe that the Chinese government is massively under-reporting infection data in the pandemic regions of Hubei and Zhejiang provinces. Worse, I also believe that Chinese epidemic-fighting policy – just like American war-fighting policy in the Vietnam War – is now being driven by the narrative requirement to find and count the “right number” of coronavirus casualties. And I think I’ve got pretty strong evidence this is the case.

It’s a good note. I think you’ll like it (and I’m all ears to how anyone thinks this plays out in markets).

Also …

I’ll have more from our narrative Monitors in next week’s email, but I think we’ve got a really important finding in regards to the Inflation narrative. Last month I highlighted an inflection point in the structural Attention measure for Inflation (how much financial media drumbeating exists for Inflation relative to other big macro narratives).

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So here’s the Attention data for Inflation this month.

Wow! Now to be clear, the narrative *substance* of all this narrative attention is NOT “oh, my god, inflation is starting to get out of hand.” On the contrary, the biggest cluster in the inflation narrative (and the source of a lot of the attention increase) is the equivalent of a prayer to the Fed in the wake of the coronavirus outbreak in China. It’s a wail about global growth and a hope that the Fed will ease in response (and with “inflation being so low”, why not?). So I don’t want to get too worked up about the spike here. In the absence of the coronavirus growth scare, I think the narrative attention score would be up this month – and “for the right reasons” – but not at these highly elevated levels. Which is a good thing. If narrative attention were this high because of an “inflation out of control” cluster, then it would be too late to position yourself effectively for a trade. As it stands, I think you’ve got time.

Also of note (and also supportive of the gradual development of this trade), it’s very notable that for the first time in a loooong time, the gold / precious metals cluster is now near the center of the overall narrative map (it’s usually way off to itself on the periphery of the map) and is directly connected to the other central clusters. This is quite bullish for gold.


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Since you (sort of) asked, here is how I think this plays out in markets. We’re currently, as you’ve described, in the middle of this Vietnam War ‘number’ counting game as part of the ‘communication strategy’. In the short term in China, we’ve seen capital controls, short selling bans, liquidity injections via repos, and State narratives attempting to perpetuate the idea that ‘all is almost well, soon we’ll be back to work’. The Chinese economy has been bumbling along, and the Shanghai composite has returned negative gains over 5 and 3 year periods. Industrial/manufacturing production has zigged and zagged the past 5 years, as has Services PMI, but growth is not showing any positive inflection. My point – purely financial stimulation has lost its ability to engineer the Chinese economy and markets out of its 5 year doldrum. Once (if) this virus is contained on mainland China, and ‘all clear’ is announced, I expect a massive attempt at fiscal economic stimulus. This could make the 2010 initiative look like the kid brother of what is likely to come. Remember this quote from 2010: “World Bank President Robert Zoellick declared that he was ‘delighted’ and believed that China was ‘well positioned given its current account surplus and budget position to have fiscal expansion.'[8] News of the announcement of the stimulus package sent markets up across the world.” Yes, the Chinese economy has changed since 2010, with a focus on growth in services and away from industrial production. But this is the… Read more »

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