I’m honestly not sure why the media focuses so much on ARK Invest CEO/CIO Cathie Wood… I’m certainly tired of writing about her.
But week in, week out — just like clockwork — she shows up on financial TV pumping up her holdings like an overexcited evangelical preacher spreading the gospel.
Now that’s her job, of course. Financial media appearances are free advertising for her products.
But she also gets paid based on both sales and performance, so there’s more to these appearances than just an unabashed passion for fintech, next-gen internet, genomic research, automation, robotics and other ongoing innovations.
Tuesday was no different as Cathie Wood and Chinese tech stocks made headlines, due to ARK Invest buying 164,889 shares of Chinese e-commerce platform JD.com Inc. (NYSE: JD) after its strong second quarter earnings beat.
That purchase effectively served as a boon for ALL Chinese tech stocks, however, sending competitors Alibaba Group Holdings (NYSE: BABA) and Meituan (OTC: MPNGF) up over 10%. Entertainment company Tencent Holdings (OTC: TCEHY) posted similar gains and agriculture platform Pinduoduo Inc. (NYSE: PDD) shooting up over 20%.
Source: Bloomberg
Weirdly, it’s an about-face for ARK, which reportedly sold all of its China exposure a month ago following the Chinese Communist Party’s crackdown on tech companies.
Granted, the powers that be in Beijing have “softened their tone” somewhat in the weeks since – many are also shareholders, after all.
But if history has taught us anything about China’s ruling class, it’s that they will say one thing, and then just do whatever they want.
Moreover, the risk of holding Chinese tech stocks isn’t limited to just the arbitrary whims of a Communist government…
Their entire economy is showing as many cracks as the Three Gorges Dam.
From Cathie Wood and Chinese Tech Stocks to Stagflation
Just like the United States, China just posted its highest rate of GDP growth in modern history.
Source: Bloomberg
Also just like the United States, China’s GDP growth is mathematically certain to decline from that peak.
Why?
Well for starters, it’s a manufacturing-based economy, and manufacturing activity is ready to roll over after hitting its fourth peak since the global financial crisis.
Source: Bloomberg
Moreover, that peak is being reflected in the Purchasing Manager’s Index (PMI) which is heading back toward zero growth — denoted by the value of 50 on the Index.
Source: Bloomberg
And Chinese consumers won’t be able to save them, as they are completely tapped out, with retail sales slowing at the fastest pace in history.
Source: Bloomberg
Worse, China’s business model is to import raw materials and export finished goods.
As I often remind subscribers, prices for raw materials — mostly commodities in this case — have been rising for nearly a year.
Source: Bloomberg
And that massive rise in prices is beginning to take its toll on imports, where year-on-year growth is rolling over.
Source: Bloomberg
Fewer imports indicate that manufacturing activity will continue to slow. And in turn, exports — which have already begun to decline — will decline further.
Source: Bloomberg
Add all that up, and you get an inflation forecast that is on the rise to problematic levels in the mid-2% range…
Source: Seawolf Research
And worse still, that rising inflation is accompanied by a GDP forecast that looks something like this… down, down, down to the lowest trending growth rate in China’s modern history.
Source: Seawolf Research
Rising inflation plus stagnating growth… apparently, stagflation is everywhere these days.
But the bottom line is that it doesn’t even matter what the Chinese government — or Cathie Wood — does to tech stocks in the near term if there’s incoming trouble for economic fundamentals.
And just for visualization purposes, the “Golden Dragon Index” — the Chinese tech-focused components of the Nasdaq — has already fallen over 50% from its February peak…
Source: Bloomberg
And that fundamental economic data indicates this monster downtrend isn’t anywhere near done yet.
Tuesday’s Cathie Wood-driven 10% gap-up in Chinese tech stocks is barely even a blip on that chart.
If she’s even remotely aware of any of this data, she’ll take those profits and walk away.
Because the smart money is going to short the hell out of this B.S. rally in large-cap China stocks, like those found in the iShares China Large-Cap ETF (NYSEArca: FXI), when the time is right… We’re just not quite there yet.
But soon…. Very soon.
All the best,
Matt Warder
