🗞 Once in Your Life

WHILE YOU POUR THE JOE… ☕️
Hole in One

Last week at Jackson Hole, Jerome Powell (the Federal Reserve Chairman) did exactly what we expected him to do, which very little.

Markets were expecting him to give some direction as to where and by how much the next interest rate move will be. Interest rate cuts are pretty much priced in, but the magnitude might be off.

Here's a breakdown of what happened:

• Powell said, "The time has come" to adjust policy, which might be good, but again, the question is how good?

• They do not welcome nor seek a further deterioration in the job market, which makes sense after the BLS's downward revision of 818k. 📉 

• More data is needed to make sure that interest rates aren't premature.

So, less than a month away from the September 18th meeting, we have inflation and PMI data coming up, with a healthy mix of employment through the NFP. 📆 

These are always important, but now they might be 10x as important this time around since the Fed has overpromised, and now he has to deliver (or risk a market crash).

Speaking of important decisions, let's get on with today's email 📧…

ECONOMICS 101
Velocidollars

Looking at the macroeconomic indicators, which are boring and slow to come, but just as important, there is one major warning sign coming to a stock market near you.

I know. We’ve posted a lot about the yield curve and other indicators showing a slowdown in the U.S. economy and why the S&P 500 is now overdue for a selloff.

Typically, the S&P 500 has a 12-18 month lag to the manufacturing PMI index. But that index has been contracting for 21 months now, meaning we are definitely in overdue correction territory.

More than that, the yield curve has been inverted for a similar amount of time now, and this is 100% indicative of a recession 📉 in the near future.

Even after Jackson Hole, the Fed couldn’t ease credit markets and liquidity measures. The yield curve returning to positive territory means a lot of money is about to be taken out of the economy.

Here’s the yield curve right before we throw you off track with the next set of data:

Okay, so if money is a leading indicator of where the economy might be headed, let’s take a look at money itself.

Money supply specifically (which is defined as M2). After declines through 2022-2023 as the Fed started raising interest rates, money is being printed again.

Back on an annual expansion means that the economy is looking to get leveraged once again, but that’s not necessarily a good thing, as it has yet to be de-levered from all the money printing of COVID-19.

How do we know this? There is one often-forgotten indicator called the Velocity of Money. 🏎️ 

Calculated as M2 Supply / GDP, this indicator can help you gauge the economy's current state and potential future direction.

Check out what it looked like during 2008 and COVID-19. Right after, the S&P saw a multi-year rally. The opposite is true when velocity goes past normal deviations (green and red lines); market crashes typically come after.

Noticing we are at the fastest velocity today (explaining all the new-money types spurring from everywhere), we are setting ourselves up for the biggest potential crash in our economy.

Knowing this, some of the futures market commercials (banks and other issuers) have been dumping their S&P 500 inventory onto breakout buyers.

That explains the lower volume we’ve experienced lately as the market makes new highs, which is not good.

Yep, volume for the past quarter in the $SPY ETF, in the past two weeks, has been one of the slowest in the whole quarter, meaning these higher prices are not attracting much business.

Just like an overpriced hotel, it needs to drop prices to get business going again.

TRADE OF THE DECADE
尽可能多地购买 (Buy all you can… I think)

Look, it’s no secret, Alibaba is my biggest holding right now. I’ve been buying it steadily for 2 years, with an average cost of $79.45, which is insanely cheap (makes me happy).

There are many catalysts for this investment to pay off, like the company delivering better and better figures each quarter and the stock remaining at ridiculously low prices.

Recently, the stock started trading higher after its second-quarter 2024 earnings result, which called on investors like Michael Burry and George Soros to buy it.

However, I do not rely on the approval of mega investors. Don’t get me wrong; it’s nice, but it doesn’t make or break our case.

There is one major move that only a few people are aware of today, and it has just started to take on water.

This misunderstood economy, China, is going to take over before the decade is over. I’ve been making this call for years, and other mega investors agree, which (again) is not a make or break, but it’s great validation.

Let me explain what this means:

• Most people in China only invest in property, and less than 25% of Chinese citizens invest in the stock market.

• China realized that its people are growing wealthy faster than they expected, so property investing will explode to unsustainable levels unless something changes.

• The decision was to start adopting the American 401(k) model, where the stock market has a guaranteed buyer every month.

Now, before making an index like the iShares MSCI China ETF (NASDAQ: MCHI) the main choice, China is going to list its best companies one by one as primary listings.

Primary listings mean that citizens can now invest directly in stock, allowing for billions of dollars sitting on the sidelines to now be put to work into stocks like Alibaba.

Other asset managers, such as MSCI and Vanguard or the almighty BlackRock, could potentially follow this trend as well.

If the world’s money managers are forced to add some of their capital to China’s market, and most working Chinese citizens are then enticed to invest their retirement funds in the stock market rather than property, the results could be massive.

Trillions of dollars will now chase the limited amount of blue-chip quality companies in China. Big demand + Low supply = Skyrocketing prices.

But, without getting into the fantasy of how much money could be made, here’s a quantified way to look at Alibaba’s upside:

These are our projections for Alibaba in the next 5 years. Although initially our base case, the country's economic realities (and recovery) have forced us to switch to the best-case scenario now.

Look, inflation has been positive every month this year, and China's Composite PMI index has been expanding since December 2023.

This means that the consumer confidence is soon to take off, especially with all of the economic stimulus the government is throwing at the country.

So, without accounting for the recovering values in Alibaba's equity investments (which will boost earnings per share) nor adjusting for the $25 billion buyback program the company has approved, here's how much we think it's worth:

Roughly $212 a share, or almost 150% higher 🔥 than where it trades today. Keep in mind, though, that this assumes we’ll be able to sell Alibaba stock at a 14.5x price-to-earnings (P/E) ratio.

The reality is that, when times are good, this stock trades at around 28.0x P/E, just like any other blue-chip would and should.

Adjusting for this 28.0x valuation exit, the stock is now worth closer to $400 a share! That’s a 370% upside 🎯 for a life-changing investment.

Will it get to 28.0x P/E again? Letting all of China invest in the stock market and adding pressure on wealth managers around the globe to do the same might get us there.

NOW GO AND MAKE IT HAPPEN
Fun Research

When I first became interested in China, I decided to look into who was thinking along the same lines. Turns out, Jim Rogers has been a massive China bull in the past decade, and as he worked with George Soros, so has his former boss.

Today’s recommendation 🎥 is a documentary walking you through where China’s economy has gotten to lately and why all the upside in the world still lies ahead.

To your success,

G. 🥃