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China Reopening: Underestimating the Impact on Global Economy, Markets (Szn 5, Ep. 2)

Last updated on February 2, 2023

With Mike Edwards, Weiss Multi-Strategy Advisers

This podcast episode was recorded Jan. 18, 2023, with a short clip of actionable highlights distributed to premium subscribers the following day. The full podcast episode followed a day after that. To become a premium subscriber and take advantage of this and a host of other benefits, visit our Supercast or Substack and sign up!

Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, joins the podcast to discuss China’s post-Covid reopening and why its impact on global markets is not being fully priced in by investors.

Content Highlights

  • China’s abrupt U-turn over ‘Zero Covid’ is unquestionably one of the biggest changes to take effect in the global economy over the last few months (2:23);
  • There have been reservations about this reopening, but it is happening with authoritative force and will have a major positive impact (5:08);
  • What about the US de-coupling from China and the embattled real estate sector? (11:00)
  • Where this will be felt most is in markets that have exposure to the Chinese consumer. It also points to Europe and emerging markets outperforming the US (17:54);
  • Chinese consumers were far more restrained than their US counterparts during Covid and have been slower to return — especially tourists. This is not just a one-off in terms of the resurgence of Chinese travel and services (24:20);
  • What to make of the latest economic developments in the US, especially with the consumer? (27:31);
  • Weiss’s house view is that the US will avoid recession this year (34:02);
  • Background on the guest (37:49);
  • China can re-emerge without the US as a major partner (51:36);
  • After some consolidation, the US economic and market cycle is marked by investors seeking to put money to work — slowly (57:18).

More on Mike Edwards

Not investment advice!

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Transcript

Nathaniel E. Baker 0:35
I’m here with Mike Edwards, deputy CIO of Weiss multi strategy advisors, the third person here from Weiss over the last couple of years that has come on all with quite contrarian views, they have discussed, each one a little different. And you we are here today, first of all, to kick off your view on China, and the China reopening and what this means for the global economy and for markets, which I’m assuming are good things. So take it away. Tell me about that.

Mike Edwards 1:09
I think if we kind of come into 2023. Now, we’re a few weeks into the year. But we come in with I think a consensus view being, you know, basically soft landing or hard landing, but significant slowdown and concern shifting to recession. And that also, I think echoes a little bit with growing, we won’t say complacency, but at least comfort with the inflation picture. One of the biggest, I think, unquestionably if the biggest changes over the last few weeks, let’s say between Thanksgiving or between the end of November, and today, the biggest changes are probably China’s COVID policy and some policies that rhyme with that, but maybe we’ll talk about it. I think I would argue that whether in Europe, and I think with that, we’re starting to see a reluctant acceptance of, okay, some of the inflationary pressures are coming down. And then we’re focused on on a recession question. But I think that, in general, there has been slow, are reservations about both the degree and confidence with which the Chinese economy is reopening. And I mean, that both in the sense of borders, reopening domestic borders, and you know, out of lockdown, as well as international borders, but then also a sort of reopening of economic activity through confidence transmission, and the like, and more predictable policy, we feel like this is a very, very authoritative U turn. And that the at least as relates to what, certainly PMIs in the globally are going to look like two to three months from now it’s going to have a major positive impact. I don’t want to make that sound like this is unreal, therefore, we’re contrarian in the sense of being unreservedly bullish exclusively. Because we do think over time, this will also impact the global inflation picture. So just as we’re seeing deflationary forces elsewhere, we’re starting to see, you know, China as a countervailing force. And so I guess, if I had to articulate what is it that we disagree with, it’s the degree to which China is now effectively asynchronous with the rest of the world. And that can be offsetting at times. And it can be inflaming at other times.

Nathaniel E. Baker 3:19
Right. And so you say a synchronous in terms of they are expanding economically while everybody else is contracting, or in what sense?

Mike Edwards 3:28
Well, I would have said, and I should say, a lot of this commentary is as much from a policy lens as it is sort of parsing the data daily and weekly, but what I mean by that is they from every imaginable policy perspective, monetary, fiscal, regulatory are being accommodative, right, and trying to engineer growth, animal spirits, etc. At a time when most other developed markets, central banks are being intentionally restrictive, tightening, or being pressed in that direction. And you can even say, that’s not just global. I mean, even in region, the sort of battle against the battle with the Bank of Japan, as it were from is, you know, it rhymes with that. Nobody is questioning whether or not, you know, an accommodative cabinet policy from the PBOC. and reopen it, you know, is how long will it last? That’s not a question that, you know, when the there’s no, you know, sort of metaphor to yield curve control being applied to China.

Nathaniel E. Baker 4:28
Okay, so China had their zero COVID policy last year. And then there was some noise, I guess, in the fall that they would move away from it. And now they effectively are completely half right. And so talk us through what exactly that means.

Mike Edwards 4:41
So and the talk in the fall, I think I would characterize it as being, you know, anticipating the NPC the National People’s Congress, which was sort of the record nation or the coronation of Xi Jinping. As, you know, kind of Emperor for life, mostly metaphorically. They didn’t, there was some disappointment on that front where they sort of stay either restrictive with the population or a bunch of reasons for that, which we don’t need to go into. The change was really in November, following harsher lock downs, you also had, and I don’t, what I’m about to say I don’t want to make this sound like it’s purely causal. I think it’s contributory without being causal. But you also had protests over overly severe lockdowns. And to me, that was suggestive, not just that the zero COVID policy in and of itself was a part of that, you know, you know, we all want to get COVID Obviously not I think there’s that, but that the secondary consequences, like to think mostly intentional of restrictions, had just both in duration and in degree had gotten too severe. And that and to see protests of any kind, in mainland China is totally remarkable. And I think, again, I don’t think it was per se causal, but it was a reflection of the degree of frustration that the population had had. And you can see that from an economic data standpoint, and the way that it translates into markets, the degree of excess savings, the complete shutdown and activity, I mean, these are all symptoms of the same malaise. And you know, the irony here is I’m just making a disease metaphor, and then we’re talking about, okay, let’s get the disease and then let’s get over it. Right. And I don’t want to make light of the, you know, on undoubtedly hundreds of 1000s of deaths that are being caused by this, by this reversal, although I would I would posit that, you know, it is actually, it was almost inevitable, like there was not a path through COVID, without a large part of the Chinese population getting COVID. And they just sort of got it over with, as it were. It’s the thing that’s remarkable about this free market. So we’ve been talking about how quickly things changed is just the sharpness of the U turn in policy. mean, it was within the span of a week, you had officials saying I mean, officials, not like man on the street, saying zero COVID, zero COVID, zero Kota masks off, do what you want. And the language which I think is actually really important in terms of market psychology. It went from we, the central provincial municipal government are telling you what is safe and what is not, we are responsible for you to take responsibility for yourself, you decide what’s best for you, right? Now, that’s very easy to interpret and see the implications in a health standpoint, because we’ve all been through, you know, through COVID. And we also all been armchair epidemiologists, and whatever. But if you translate that to the economic sphere, where a lot of the sort of repression of the last year has been in the language, the language and Chinese policy of common prosperity and things like that, it’s you know, if you kind of parse through that it’s, we are going to decide what’s best for the society. And we will make changes accordingly. And other than that, all bets are off, like from a wealth accumulation from a corporate organization, etc, all of those standpoints. And here you’re starting to see broader economic policy mirror that language of individual responsibility, you’re seeing a lot of the hallmarks of that tech crackdown have been reversed. I think the I’ve said before that I think like the we now have kind of bookends to that where we started was. And you know, Alibaba wanted to stop IPO and financial and they got a little ahead of their skis. And they were slapped, right DD IP owed, they did their IPO in the US, and they had some data issues, etc. And they were completely shut down kicked out of the App Store. Well guess what’s happened in the last three weeks. And financial just raised a bunch of cash that is generally considered to be kind of a pre IPO maneuver, and they’re sort of back in good graces, Jack Ma has pretty much relinquished claim to control of Ali Baba, which is good son. And guess what Didi is back in the app stores. Like we’re starting to see that a lot of those and the symbolism here matters more than the specific company occurrence that we might be talking about. A lot of that has really completely reversed at this point. And so I think those are some of the signposts that for us suggests that we are we’ve done a U turn, and we’re going to accelerate from here, rather than thinking about it as cautiously waiting to see if that U turn, you know, turns into a roundabout or we just keep going with a policy unpredictability. mindset. Yeah.

Nathaniel E. Baker 9:30
Now, a couple of questions on this. I mean, first of all, this is not pre pandemic China. And well, more importantly, it’s not pre 2016, China, or 2017. Right. You have a very clear policy objective, it would seem that was not unique to Trump to kind of stop or lessen the trade and the impact and the ties, I guess, economically between the US and China. There’s a whole bunch of geopolitical stuff going on over Taiwan, et cetera. We’re gonna do Get into that. But and then you also have the real estate sector in China that is apparently in a lot of trouble. I mean, it wasn’t that long ago, we’re seeing headlines over Evergrande and all these other ones. And are those not concerns when it comes to China revamping and being able to launch itself again, economically?

Mike Edwards 10:16
Yeah, those there’s I couldn’t agree more in terms of those being long term concerns. You know, I think, quite famously, I don’t remember exactly when it was last year, a couple of Western investment banks, including most prominently, JP Morgan described China as an investable. Right. And I think for real duration, let’s call it multi year investments. I think that statement actually remains true. And there are reasons why following the the National People’s Congress, as we talked about, that, that should be reinforced for folks in terms of the unpredictability of personnel, and in the long term, that the disconnect the sort of from a US perspective, the de China ification of supply chains, and the sort of CapEx boom, we’re seeing globally to accomplish that. Your point on And inevitably, we’re getting into some of the kind of geopolitical aspects of this. But I think a, you know, one of the things that actually accelerated that in the in 2022, was the, you know, probably regrettable, and when I say regrettable, I mean, from their own perspective, Chinese support for, you know, Putin’s adventure in Ukraine. And, you know, some of it was overt, and some of it was support through silence or what have you. But you know, that there was a lot of alienation that happened as a result, I think it’s remains problematic. I also think from a long term standpoint, the US perspective on this, and, you know, sort of asset flows that would be heavily influenced by us preferences to disconnect from China are like that That ship has sailed there, we’re not reversing that force. And so I don’t, my view is not that there. This is, you know, a dawn of a new, you know, we’re going to return to 12% growth, and you have to be there for that. Right. I would say just one more comment on sort of the external environment for that before getting in the property sector, is that I think that environment, so the restrictions and constraints on X, China, investment in China is actually probably getting worse, not better. And in particular, I think, you know, one of the very few things in the US that both parties agree on, is that China’s a problem. Right? So in terms of things that can happen in this, this Congress, or for the next two years, in an environment, where very little let’s be frank is going to happen. Whether it’s from the administration, or congressionally, you know, being hard on China is absolutely one of those things. And one of the tools that hasn’t been deployed yet, is the idea of some people refer to as outbound Cepheus, or review of investment flows into China. And to me, that, that even the consideration of that can have a cooling effect, right, because if you think of it, I mean, obviously, we Weiser, you know, public equity, very liquid firm, but if you just put yourself in the shoes of a, you know, a longer term, em investor a growth, like, even like mezzanine debt to to companies, where you might have a five to 10 year horizon. If somewhere during that period, your portfolio might get reviewed by the Department of Commerce, who’s looking at, you know, follow that through, you’re going to think twice about that allocation, and eat that the eat again, even the sort of like the pre considerations are going to have a chilling effect. I think we’re in that phase. So I don’t think in terms of the dependability of asset flows, as well as repatriation has always been a problem, it’s even more of a problem. And if you think that’s worse, I think that’s a massive concern. And so are being sort of contrarian constructive on the China reopening right now, I consider to be a macro phenomenon that impacts markets sort of in the moment, and absolutely is going to impact global data and economic activity at a very, very important time. When expectations are moving. It’s sort of sort of in an asynchronous way to use my earlier term. The other big problem in China as you point out is the property sector is a disaster. You know, I think it’s not the not the prettiest metaphor, but I think what they’re doing right now, as far as trying to accommodate developers through financing and ease up on some of the prior restrictions, for you know, taking out mortgages and second homes and things like that, the so called the three red lines. I think the what they’re doing right now to repair that. It’s like putting a BandAid on a gunshot wound. That’s right. Yeah. This is like okay, like you You might stop the bleeding for a short period of time, but we’re major surgery is required. Yeah, it’s a huge problem to the dependency of financial flows in general consumer balance sheets, municipal and provincial finance, and the fiscal picture all being dependent on this sort of spinning wheel, I’ll try and try to use a term other than the word Ponzi. Right. But but but all that dependency, is, it’s a huge problem. And so I think there there there’s not a very obvious solution that doesn’t involve a very long horizon and some pain, if I were to be a little bit glass half full on that story. And this isn’t so much predictive as I would get my own kind of subjective view of if I were advising, you know, the, let’s say, the CSRC, and the CBRC and the PBOC. In Beijing, I would suggest that what they have to sort of deepen financial markets and create non property stores of wealth, equities, you know, credit, more securitization functioning, credit functioning, secondary credit markets, places for people to generate wealth, that don’t involve buying a second and third apartment. That’s, that’s just vital. And they pull that off, that’ll be quite interesting. But they’re a long way from even trying let alone, you know, pulling it off.

Nathaniel E. Baker 16:24
Right, right. Right. Okay. Well, well, that aside, let’s let’s walk through this shorter term, China reopening and how this plays out in asset markets. Yeah, I’m assuming this is going to be very good for commodities, because China is the biggest consumer of, you know, these these raw materials. Right. And we’ve already seen oil and copper over the last week or two. Yeah, shoot up. So yeah. Is that sort of an oil? Yeah. So yeah. So talk to me about that. How does that translate into in terms of asset prices?

Mike Edwards 16:50
Yeah. So I think, I mean, I certainly think you’ve started to see those expectations priced in. I do think I don’t want to, I don’t want to get in dive down too many rabbit holes here. But the copper versus versus oil differential to the extent that we can derive the China reopening as being, you know, a motivating force here. I struggle with it a little bit, because you’ve already touched on property. The I don’t think we’re on the dawn of a new wave of property demand, and like the resurgence of, you know, iron ore mines in the Pilbara to put steel and, you know, ever higher towers in Guangzhou, right. I do not think that that is, you know, my own prediction. But also, I don’t think that’s in the consensus mindset, as it were, I think it’s a little bit more of a knee jerk. And the same sort of discussion we had a minute ago about the, you know, the restrictions on some global managers through kind of an ESG lens of like, chasing the China reopening story without actually buying Chinese assets. Like, to your point, what are you going to buy if you want to use the Chinese? Well, let’s buy copper. I don’t know that that’s happening is a little bit of evidence and sort of the some of the positioning data but not enough to be conclusive. That’s, to me is more kind of anecdotal. And is a, it’s a question worth asking that have legs? Sure. Why not? I mean, I think we’re probably, you know, away from we’re definitely not at a turn anymore. And we’re at a sort of, okay, how far can this go? I think where this will show up more clearly. And it has started to but show up more clearly and with more follow through is going to be in global markets, both top down and bottom up, that have exposure to the Chinese consumer versus don’t and I do think this is a consumer story. Okay. The first instance. So it’s actually at lunch earlier and was talking through a similar topic, but think about just as as an easy for people who don’t follow different global securities or whatever. Think about just the way Starbucks might behave versus McDonald’s. McDonald’s, Starbucks has a bigger pound for pound presence in, in, you know, in China, that’s not a recommendation one way or the other. But thinking about how European luxury has a lot more exposure than low end, you know, low end apparel elsewhere, right. Yeah. And that’s sort of a bottom of view, top down view. And we’re also seeing this, it points to Europe and parts of em, outperforming the US. For really, that’s contrarian. Okay, well, I’m okay with that. I’ll embrace that as a contrarian view. Europe has significantly more both, you know, corporate exposure to the Chinese market on a percentage basis than the US does. Both both in the you know, sort of real time, you know, sort of parsing through revenue and also on a capitalized basis. It’s not even it’s not even close. I mean, I just again, I’m thinking about this as much through a policy lens as anything. But I would note that in this same push we’ve been talking about about the US disconnecting from China and the export ban on semiconductors and things like that, you know, who’s pushing back on that. Mark Ruta, the pm of the Netherlands was in the White House yesterday, saying, you know, what, not so fast, right? We have ASML. We have other chip makers that depend heavily on China. And like, you know, to a degree, we’re joining you, but we’re not just cutting off our Chinese revenue. It’s pretty damn. Yeah, you’re starting to hear more and more of that on the continent. And I think it’s indicative of when you were sort of asking the question, Who benefits but I think those policy preferences are indicative of, you know, sort of industrial organization more broadly. And those exposures. So I do think it’s interesting. I think you’re seeing I think what we’ve seen in me, Europe’s outperformed the US in November, December and January. Yeah. I think that, in my estimation, there are two very big reasons for that. One of them is the China discussion we’ve had they’ve done a reversal, Europe has more exposure. And then of course, the other was the other surprise I mentioned, which is warmer, you know, the Ukraine conflict, terrible as it is, it’s sort of reached a, you know, steady, frozen, awful, but frozen state, and the dependency on, you know, on hydrocarbon inputs that could continue to be skyrocketing, and prices waned, because they’ve fixed some of the infrastructure, and it’s been a very warm winter so far. So you know, a lot of mastication in the summer was like, if it’s a cold winter, it’s going to be a disaster, while the flip side, you know, also also holds. So that’s where I think you’re seeing some European outperformance. And I think, without making any predictions about the Ukraine, Russia conflict, looking through the China lens, I think that that view is extensible. I think, you know, the Arab over us is a is a worthwhile preference.

Nathaniel E. Baker 21:58
Interesting. Yeah. I mean, you mentioned some of the companies that are that have a lot of exposure to China. You know, Starbucks is one by the way, the biggest Starbucks in the world, you may know is in or at least was in Shanghai, Disneyland in Shanghai, if I’m not mistaken. And for a while there, Howard Schultz, every quarterly report that you’d read about the read from Starbucks was about China, China, China was like the first and this is like years ago. But anyway, and then of course, the European luxury goods makers to like and cars, right, like these are all things that

Mike Edwards 22:28
on their on their con, their quarterly call, Prada was citing stats on hotel occupancy and high non. Right.

Nathaniel E. Baker 22:36
Right, right. But these are these things because we saw this during the pandemic in the US were like, okay, like in store retail dried up. But people still bought stuff, and they just ordered it online and had it delivered. And did you have the same effect in China? or less? So?

Mike Edwards 22:53
I think somewhat less so. Certainly, from a services standpoint, yeah. The global impact of Chinese tourism is enormous. Absolutely. And I think you can rightly ask the question, okay, well, is this just revenge spending, and people are going to do their one, you know, post COVID trip and then that’s it. What I would point to as a major and probably under covered feature of this change, is that, you know, there was, there was in fact, zero COVID in China for like, two years, the better part of two years, meaning the second half of 2020 through the through April of 22 ish, right. And yet, for I mean, I you know, I’m not making a subjective statement. When I say here for good reason, meaning they justified it, Chinese borders remain closed. Some would say for control purposes, some would say it’s sort of the that’s the she regime of the future and others would say it’s, you know, epidemiologically driven and they didn’t want to import COVID Okay, those can all they’re not mutually exclusive rationales Chinese borders are now open to China Hong Kong border is porous, the, you know, you can but if you’re in China, you can book a flight to anywhere in the world through I mean, mostly through Hong Kong, but all of a sudden, they are issuing passports and visas again, and in fact, ironically, there was some blowback because they don’t need to get into but they halted some visa issuance to foreigners because they required COVID testing of Chinese that were traveling etcetera. Um, but that’s a complete change from over the three years not since the April lockdowns or since the NPC or anything else like that. So, you know, I think the, you know, we can quibble a little bit with Okay, is it is the next let’s imagine that we don’t have another wave and we really emerge in the next couple of weeks and over Lunar New Year and whatever. Is is not going to hold steady for three or four or five. I don’t know, but I do not think that it’s just a one off. i in terms of the resurgence of Chinese travel and services, so I think that is a qualitative difference to the US COVID experience. Yeah.

Nathaniel E. Baker 25:08
And to your point, Europe is closer to China than the US is, and probably maybe a little more accessible from a visa perspective, depending on where you go for Chinese tourists. So there’s a part of that. And then you would think that these regional, you know, air air carriers and other kind of tourism companies in the in Asia could be good. Big time benefit

Mike Edwards 25:28
I think hotels as well.

Nathaniel E. Baker 25:30
Yeah, of course. And Macau.

Mike Edwards 25:33
I mean, the whole trade in Macau when yeah, that’s, you’ve seen that start starting to get priced in? There’s a lot parts. There’s a lot of moving parts there. But yeah, I think there’s all of the above.

Nathaniel E. Baker 25:46
Interesting. Okay, cool. All right. Let’s shift real quick to the to the US here. And we had some kind of good news, bad news this morning, we had producer prices coming quite soft, which means inflation, maybe probably is ebbing. I mean, on the other side of that the bad news is we have a retail report or retail sales that came in below well below, forecasts. Now, I believe that was the month over month, I’m not sure what the year over year. But how do you see that? And, you know, because part of this is, especially if you’re talking about European producers, they need US consumers just as much as any Chinese ones. So for us, retail is kind of starting to slow here. That would be a big concern, one would think so what’s your views on that?

Mike Edwards 26:30
Yeah, so I think and I think it’s starting to — it’s not just the retail data. I mean, we got the Empire, which was pretty remarkably weak. So I think even, you know, kind of producer and small business side, you’re seeing that softness as well. I think it’s too soon to draw a conclusion. But to me from a, you know, at least as far as the debate in, and I’ll come back to the European question in a moment. But I think the debate as far as US valuations, I think it is less about the sort of immediate economic data and more about the Feds response to it. Right? Because I think the biggest unanswered question right now, is not it’s not how high in terms of rates, it’s for how long? So it’s a duration question. And so maybe counter intuitively, you know, I think we’re not sure that we’re sort of past the point of doing a 25 versus 50 debate for the Fed meeting, like, we’re going to do that. But I think it’s, you know, I think consensus is like there’s either 50 or 75 pips more to go, right, I could, I could be wrong a little bit. But it really is sort of for how long and if we start to see softness, then the market may get more comfortable that the fact that the heavy lift is done, and we can take the the Fed can take its foot off, so to speak. So I think that’s what we’re starting to get like, that is why we’re going to have to get multiple data points are not going to draw a conclusion in one day. And I think it’s also why you’re starting to get like the, the thing that’s convincing, you know, bears to reverse themselves or people are reluctantly putting risk back on. I mean, I think there are a number of things, but the biggest is that the environment is getting more predictable. Valis ball is coming down. And so if the sort of in I said before people, just soft landing, hard landing debate, if sort of, you know, Godot is arriving, right, and like, oh my god, we’re getting softness, that’s something to sink our teeth into counter intuitively that can actually push push vol lower, we’re not seeing problems and credit spreads. And you know, the VIX is behaving itself. So that’s all, to me sort of forcing risk taking right now. And that is, I think, really important, not just for the near term risk environment, but also in starting to think longer term where the bigger question to me is going to be, if we pull off a you know, if that is sort of a one off and everybody backs off and things, you know, kind of firm up for an okay, for a non recessionary first quarter, first half, and then the shift goes to okay, but then what, then you have a problem of like, okay, but can the Fed actually lead up and we get to the second order considerations, but that’s at least the way that we’re thinking about software data now, as being sort of be an articulation of how bad can be good. Yeah. I take your point on Europe relying on a on a strong European consumer aren’t strong US consumer, strong global consumer. But right now, I think the European debate is as much around input prices and inflation and I think the moves in nominal growth are so large right now or you know, the nominal pieces are so large, that you can be forgiven, a monthly, you know, monthly fall off and And in, in this case, retail expense, because our expenditure rather, because the it’s also noisy. But I think that on the European side, again, I think when you when we’re still sitting here talking about, you know, CPI and a 10 handle coming down to a nine handle. That’s the big That, to me is the bigger debate in those markets and seeing that change is what’s starting to inspire what has been inspiring risk taking in Europe.

Nathaniel E. Baker 30:27
Yeah, yeah. Yeah. And, of course, the the energy situation and the weather. The but it doesn’t sound like you’re particularly worried about the Fed anymore. I mean, last year, this time, everybody was freaking out, rightfully so as it turned out about the Fed and we had all these rate hikes. 75 basis points four times, was it? Yeah. But you don’t it doesn’t sound like you’re all that concerned about the Fed anymore this year. I mean,

Mike Edwards 30:51
I think we’re well past the point of peak fed fear, there’s not a reason to, I mean, I am not contrarian with respect to the don’t fight the Fed adage at all. And there’s no doubt that the Fed wants to see financial conditions tighter. And by tighter, I mean, tighter than they were and probably tighter than they are. But as far as what the market is telling us about the opportunity. You know, we made lows and equity markets in June, you know, the 10 year is materially lower right now than it was last June. So like we’ve, you know, out the curve, we’ve priced it all in, like, it’s if there were, we’re sort of that’s not to say that there’s not still laughter among the audience at the joke, but at least the joke is getting told, I now, I think it’s a digestion and I do think the right, the questions are around, will there be a recession? And if so, with what depth? And you know, and I think if we’re then splitting hairs, are we talking about, you know, both corporate earnings and labor? Or is there sort of because the labor is so scarce and pricing power? So great. Could this be some sort of an asterisk with corporate earnings falling off materially, but, you know, anyway, we don’t need to go down that particular debate. But But that’s where I think the we’ve shifted to in terms of the relevant question for markets.

Nathaniel E. Baker 32:17
And what’s your view on that and your house view?

Mike Edwards 32:20
Our house view is that we will not we are unlikely to have a recession in at all okay. This year? Yeah. Wow. I mean, between labor shortage and something reasonable resiliency of, again, everything happens in a nominal world here, but of nominal corporate earnings, I would not say that we’re complacent. But we are encouraged by the you know, in addition to this, the inputs that we’ve talked about that have changed over the last month, that the you know, China going from what has basically been at the beginning of this year, and I’m talking three weeks ago, a negative GDP run rate, to, you know, targeting something in the mid single digits like that is going to unlock a lot of consumer activity, a lot of credit, credit and liquidity. And that’s a that’s a pretty powerful counterforce to a lot of what we’ve been talking about.

Nathaniel E. Baker 33:16
Yep. Yep. And you certainly made that point. So far today. All right. Mike Edwards very interesting conversation. Here, I want to take a short break, and then come back and move on to our second segment of the show where I asked you about your personal background, how you came to this, the state of your career. But let’s first take a short break, give our sponsors a quick chance to be heard. And if you’re a premium subscriber, do not touch the dial, you will not get the break. We’ll be right back. In fact, we already are our

Welcome back, everybody, Mike Edwards, Weis multi strategy advisors, the deputy CIO there, Mike, this is the touchstone at the segment of the show where we talk to our guests about his background and how he came to this station of his career. So take us back a little bit, what is your origin story here? And to put it into Marvel terms here with investing? And how do you end up over Weiss?

Mike Edwards 34:04
Yeah, so I, you could probably hear from a lot of us as sort of, I tend to take a policy view and a lot of things. As an undergrad, I was actually a policy major. And what is no longer called the Wilson School. It’s now the Princeton School of Public and International fab probably got that wrong. But when I was there, that’s what it was called. When I was in college, I sort of figured I would be a I’d be in the public sector in some form. And those are what all my internships were. And my I guess, my, my, my disappointment is it’s it’s pretty hard to find people to learn from particularly at the sort of intersection of, you know, finance and policy in the public sector. And there’s a, you know, there’s a tried and true path and people who, you know, do that stuff later, as it were, and I ended up doing that, despite not thinking that I started my career started out actually as a as an m&a banker in the tech sector. Frank which runs team at West Coast, this is right during the you know, sort of 2001 2002 era, the height of and then the end of the of the tech boom. So, particularly in m&a, you can imagine that was pretty busy. Pretty busy time. And I had also which kind of gets to the next segment, I had as an undergrad, I’d spent a lot of time in China, I speak Chinese, Mandarin, and had done some of that, when, as a banker, I went to I went to the buy side to de Shaw, which I assume most many your listeners know who that is, when I joined de SHA, which was in the in the early 2000s. They were almost exclusively a quant. Yeah. And then we’re sort of starting to recruit discretionary people. And we call the team that I worked on, we called it special situations, because you didn’t use an algorithm for was special. So it was kind of great. But I ended up with the Shah spending a fair amount of time in in China as well, that was I guess, you could say was a special situation. But yeah, deepening that and helping a lot of the, the efforts there. And, you know, when I that was actually a very important development and get us a building block to how I came to Weiss in that I had to learn to use data a lot and to quantify just about any view that I had. Not because not just because that’s a good discipline, and it’s important. But as a as a process matter. The way that we actually made deployed investments was by communicating quantified forecasts about securities, as literally signals communicated as you can boil them down to, you know, effectively, mu and sigma, right. And so, so metaphorically speaking Greek, but was was really, that was a very, very important discipline for me in terms of realizing that anything can be quantified, and everything should be measured, which is, especially that latter part is something that we take very seriously. And Weisen are very invested in data science and analytics with baseball cards, you can think of that in a kind of Moneyball sense, but have, you know, a lot of measurement in that regard. I, after, after de Shaw, I ran the US business for a London based firm. And then I came here to Weiss in 2019, to join Jordi, who’s I believe has been on the cheering pod as well. And I know Jewry for quite a while before that, and really had a lot of resonance for his resonance with rather, his view on marriage and culture and technology. Weiss is a well established firm, we’ve been around for 45 years, and we have a lot of folks who I think are, you know, sort of very mature investors. And I mean, that descriptively in terms of their approach, not necessarily their age, but that with a lot of intellectual curiosity, and marrying that interact intellectual curiosity with the technology to measure and help PMS adapt to market environments, and kind of emphasizing that adaptability was something that, you know, I have viewed as being incredibly important, it’s been was a huge effort of jordiz. And starting to build a more scalable business around that is something that we are I joined in 2019 to, to help with, and that’s, that’s a part of my remit. And another part of my remit is obviously helping to, you know, to craft and curate some of our broader booth Mac, for the most part, macro views are, most of our micro deployments are, you know, the remit of individual PMS who are here, but we do have a pretty, both transparent and I’d like to think, you know, cohesive in the sense of joining units to debate views, not necessarily having a house view that every more than not necessarily, we do not have a house view that everybody implement. But we do have a house view on the market dynamics that all of our teams need to be aware of, and to be, you know, thinking about in terms of, on the one hand, the cost of being wrong, on the other hand, the opportunity of, you know, to harness the word projected behind you of being contrarian, and of knowing when you’re providing liquidity and when you’re consuming it, and you want to be liquidity providers. So that’s part of the the mindset that I’ve had, I was certainly very drawn to and I’d like to think I help. Very cool. That’s really interesting. Wow.

Nathaniel E. Baker 39:55
So policy through m&a banker Through de Shaw, which is kind of like one of the original quant hedge funds. But am I mistaken? Yeah. David Shaw through Weiss. That’s quite a China thrown in there as well.

Mike Edwards 40:13
Yeah, I mean, I think I can give you a slightly more I know that seems a bit random to hear you sort of hit it back in now, I will say since I started with the policy discussion, you know, one of the the common threads through that are, you know, I really think the inflection points in markets both at the macro level, and sometimes at the micro level as well, which I’ll come back to you. A lot of times sit at the intersection of policy of policy, regulatory decisions, sometimes geopolitics and the the sort of reflexivity with markets and pricing. And I have a lot of I’ve really gravitated to the parts of markets that are, you know, sort of the tip of the spear there. So on a micro basis, I mentioned as a sort of special situations a de Shah, and things I’ve done since then, a lot of that has been, you could think of it as event driven investing and risk arbitrage and things like that, that are heavily reliant on having, you know, views, legal work, regulatory work, views on policy regimes sometimes overseas. That includes things done in China, including things like cross listings, and some of the bank IPOs, and things like that a long time ago. But all the way to today, where, you know, I think over the last several years, a lot of the inflection points in, in returns and markets from a top down standpoint, have come, you know, frequently following not necessarily dissipating major regime changes. And I would just, I mean, if you want the reasons we were talking about the China reopening look at you know, look at in particular November of 2020, like a monumental month in the history of markets. And, you know, that’s not because November’s are good months for things, right. Because we have the same time we had a sooner than people expected vaccine, and we had a change in administration. Right. Right. You know, and understanding and helping digest the sort of the implications of that, to contextualize. You know, the intersection of policy and markets, I think is a is a really important skill. So that’s why I sort of said, like, that’s where I started, you know, it was much more applied. And I’m sort of now a bit bit more balanced.

Nathaniel E. Baker 42:38
Wow, that’s really interesting, huh? Wow. Okay. Very cool. So what do you think is, is the end game here with this one? I mean, it sounds like on the one hand, you’re saying they can make this transition to a consumer economy, like, which they’ve been talking about forever? I mean, I spent some time in the region to in Hong Kong in the mid 2010s. And that was all the talk then. And that’s kind of been the thing they’ve been, they’ve been beating on for a long time.

Mike Edwards 43:04
Yeah, keep relabeling it. Now, it’s the dual policy, right? What is it called? Dual circulation. It’s the idea that you can sort of spin the domestic economy and the Chinese consumer, and, you know, export the export led global economy and Belton Road initiative and things like that, right. Where, you know, in my estimation, there, it’s a sensible framing. But getting those the two things to spin in the same direction at the same time is, you know, they haven’t succeeded at that yet, and I don’t really think they will.

Nathaniel E. Baker 43:38
Okay, okay. So what did they do they continue being the factory to the world? Or do they just kind of become some one of these more of a hybrid type of thing?

Mike Edwards 43:46
I think it’s I think, I think more hybrid, I think it’s a much more mature economy now than it was I don’t think we’re gonna be back to the, you know, double digit growth phases. And in that maturing, you know, I think, to a lot of fanfare this week, we’ve seen the results published the China’s population shrink for the first time, right? This was totally predictable. It’s, it happened a little bit sooner than people saw. But, you know, we get lost, especially market participants can easily get lost in the day to day flow of this new store and isn’t. And if you zoom out, you know, China has gone from, you know, basically more than doubling its population over the prior 30 years, to a significant population declines over the coming 15 to 30 years. And you’d have a real graying of that population at the same time that it’s a global phenomenon, obviously, increased longevity and life expect both health and life expectancy. And this is you know, it’s good from a quality of life standpoint, it’s a real fiscal problem. For for China. I do think that the you know, the conflict like to send the sort of the binaries, as it were, I think a lot of them for China really are on the, at the sort of bleeding edge of technological innovation. I think we missed this a lot of times, but I mean, right now AI is having a moment, in general, the Chinese are pretty far along in AI, it’s related. But there’s there’s a lot of evidence that, at least in the public sector, which obviously the Chinese public sector is larger than the US public sector, they’re further along in quantum computing. That may not actually be the case, but I think it’s still Chinese advancements in quantum are very, very relevant to an information security view globally, if not just you know, pure processing power, and, and everything else. And I think, you know, the Chinese for the most part are further along, and fintech in general. And I would include, you know, sort of a, you know, kind of closed blockchains in that, that discussion, you know, obviously, crypto per se is banned in China. But all of those bad, right. But I think all of that, in terms of having a, I’ll call it a rich digital future, I think is actually very, very important. China had a problem. I guess it depends on you ask, and I wouldn’t consider myself an expert, but you say like, China’s had a, you know, sort of a mobile, digital as well as a gaming culture that has led the US and led Europe in some ways, and sort of how they, how they harvest that and where that lands, I think those are really important questions for a maturing economy. But China is emerging, emerging as a as a legitimately wealthy country that has, you know, in some ways, the infrastructure of a wealthy country and in other ways, including the property market, the sort of the policy infrastructure of a totally backwards, you know, Banana Republic. So, way they reconcile those things, I think, are the big questions. And I’m, I’m not better than glass half full. If I’m, if I’m, if I’m being honest, I think they’re, you know, I think that the the last and the reason why we were we started with China in the last eight or nine months, I’ve been so terrible, yeah, that the power of the reversal was very, very strong. And the power of semi normalization is very strong. But I wouldn’t extend that positivity out five years or a decade.

Nathaniel E. Baker 47:29
Okay. All right. So you start a little skeptical, but But you think they can pull this off without, without having the US as a major, and we were still a major trading partner, but you know, not the not the huge, you know, thing that they had up until, you know, 2017 or so?

Mike Edwards 47:44
I do think so. Yes, I think the, you know, we’re right now we’re in sort of the capex phase of that, de China. And, you know, listen, the, I mean, the US has made a very clear commitment, so that you’re seeing the beneficiaries in various places in the US are seeing, you know, Mexico is another example of a benefit, for sure. But generally speaking, the Chinese build, I mean, I’m making a sweeping generalization, but the Chinese build things better and faster than the US does. So, to the extent that there’s a mini capex, boom, that is offsetting, you know, there’s not going to be a replacement for for many Chinese corporates of the US consumer. But at the low end, like, just I have no idea where the shirt you’re wearing is from, but like, if the shirt you’re wearing is from China, the same shirt you buy fighters from, it’s still going to be from China, like, yeah, it’s not, there’s not a security risk there. It really is, you know, it’s, you know, maybe you won’t buy the drone that you took, you know, the video, whatever. Maybe that

Nathaniel E. Baker 48:48
won’t, how do you know about that? No, I’m

Mike Edwards 48:49
kidding. I don’t think I don’t think it’s a, you know, if the whatever the I mean, I’m not making this up, this is not data driven. But if the average consumers average American consumer spends $1,000, on Chinese goods, they’re still going to spend so you know, six or 700 of those $1,000.05 and 10 years from now. Yeah, just that we have. We’ve changed the direction of travel because that that wallet, the wallet itself grew and the Chinese share of the wallet had been growing for so long. And now we’ve very much from sort of a high tech standpoint have hit the hit the stop button on that? Yeah,

Nathaniel E. Baker 49:28
yeah, good points. Okay. Last question. Probably the you talked about quants and having to kind of quantify everything. One of the things that and one of the reasons for this podcast is this whole idea that like, the narrative in the market is often wrong and investors are often wrong with the way they price things and it seems to come down to greed versus fear. And I’ve myself played around a lot with this and trying to figure out ways of of gauging how you are on that. Do you have any thoughts about that you guys do any work on that there with behavioral economics perhaps? Or anything like that?

Mike Edwards 50:08
I certainly agree with your instinct that there you do we do sort of go from these. I mean, I think more recently, maybe we could frame the terms a little differently and harness the FOMO phenomenon. Yes, I realized the word fear is in greed as well. But it’s greed by another name, right. Yeah, and sort of that versus uncertainty and unpredictability or sort of a despair. I mean, we absolutely speak linguistically a lot and try to think about broader market, you know, sort of mentalities to think about, in a sense what phase we’re in. I wish I could tell you that there’s, you know, great academic work here. And then And there obviously, is, but nothing that we’ve done, we don’t have, you know, sort of in house economists that look at that our behavior, just just to parse that word, our behavioral approach is much more about the sort of portfolio construction and trading style of our managers to market conditions. Okay. Now, what is interesting about that, though, is that, you know, if you think about it from a, you know, a market neutral portfolio perspective, or hedged, I’m trying not to use the word hedge funds, but market neutral portfolios, right, I tend to do better in re risking environments than in de risking environments. Now, that’s not necessarily directional markets. But I think, changing the language a little bit from greed and fear. But I do think that a, you know, when you get into kind of chasing mentalities or places where you’re the market is seeking confirmatory data points, as opposed to binaries are waiting, varies and gets the other shot. Those are really important behaviorally, in even on in relatively short windows, in thinking about the sort of market phase you’re in, and thus thinking about whether we would expect risk taking behavior. And when I say risk taking behavior, I mean, both dumbing it down a little bit, both long and short, right, you can, you can be you can have investors adding risk and adding to their kind of gross exposures even in down markets shut down beta, right. So we think about that a little bit differently, as opposed to trying to call, you know, call the swings. But the importance of that is that I think I mentioned this phrase before is that we want to be providing liquidity, right. We want to be positioned ahead of that sort of phase in the market and thus providing liquidity, you know, on various different timelines. And I think that’s, that’s a really important mentality for investors in general, but obviously, especially Contrarian investors to take into benefit from so yeah, I do. I do think that trying to parse out the kind of behavioral phase that a market is in is vitally important.

Nathaniel E. Baker 53:11
What phase you think we’re at now with the expansion, if you do the quadrant thing, 1234 or just generally,

Mike Edwards 53:17
my partner Jory? Does I don’t try to borrow his chops here. Okay. But I think generally we are, we’re at this moment in time following almost three weeks of, I’ll just call it chasing, I think we’re in a bit of a consolidation phase. That’s a little it’s a bit of a cop out to your question. But I think we have been, and for choice, we remain in a, I have to put money to work phase right now. So that’s not necessarily to say chasing, but I think we’re in a vol has come down and will stay lower. And I mean, both equity vol and rates fall. And I think you’re starting to see if you just look at credit spreads, and you look at the behavior in credit markets, right now, you’re starting to see people just trying trying to put money to work. And that is not a, you know, that that for the most part is kind of turning, uh, you know, whatever nautical metaphor you like, turning a very large ship. It’s not, we’re not in a tactical wait and see mode. And I think it’s hard to reverse those engines as it were.

Nathaniel E. Baker 54:26
Yeah. Do you think we’ll continue? Yeah. Do you think we’ll continue to see the kind of credit and equities or fixed income and equity strike kind of move the same way the way they happen? I mean, over the past year or so.

Mike Edwards 54:39
Yeah. I mean, the correlations of, you know, you can see from the performance and the mean, I somebody asked me earlier today, you know, is is 4060 and the new 6040. Yeah, I was like, Well, the question kind of answers itself does, to your to your point on on correlations, the i So, I do think that there is more, that kind of, again, Risk taking phase and a willingness to deploy as in an environment, which is the environment I do think we’re in, in which you’re having, you know, vol come down stay higher than we might like it like I don’t see, we’re gonna think we’re gonna see low teens vol anytime soon because as we’ve been discussing, there’s so many unanswered questions. But I do think in that phase there there will continue to be risk put to work. And I think that like, you know, I think I think it’s, it’s expensive to be in cash right now certainly considering, you know, short short term credit carries very, very well. Right. Exactly. Yeah. So I do think that that data is that’s a risk taking mentality. Yep. So I, I think that is, this can be, you know, pretty, pretty decent environments for for a lot for a lot of different investment styles. But I think, you know, I’d be curious your your impression from other guests you’ve had and your own impressions. But I think, to me, you know, you’re in that environment, when people everything sort of feels reluctant. Like it’s not obvious that we shouldn’t be pushing pushing money out. And, but that reluctance generally characterizes environments in which vol continues to come down, and they’re more.

Nathaniel E. Baker 56:14
Yeah, yeah, that’s pretty consistent with what a lot of what we’ve been hearing, I mean, you know, some cautious risk taking. But, you know, at the end of the year, last year, there’s a lot of talk about how the fixed income market wouldn’t turn. But it appears that I mean, who knows? It’s only been a couple of weeks, and, and we’re still over 4% on the two year, I mean, so the yield curve is still inverted. Yep. But so we still have a ways to go, but we’ve certainly come off of that. The highs there and the yields for sure. It would appear. Cool. All right. Mike Edwards of Weiss multi strategy advisor is maybe in closing, you can tell our listeners where they can find out more value if you’re on any of the social media. I hope for your sake, you aren’t but no, I joke because some social I mean, I find Twitter kind of useful. That’s the only one I really use but and where else they might be able to find

Mike Edwards 57:02
you. Yeah, I think easiest is on G weiss.com. We do our own we actually have our own podcasts that we put out weekly on my mom that with some frequency. And we put a lot of even down to our call morning seeds. But some of the high level notes from our daily morning macro meetings we put out ahead of market open every day just for a cool get a sense of what our thinking is and and that’s that’s a pretty good place to find our thinking with some regularity. I am also on as you said, the place I’m I’m on I guess I’m on LinkedIn as any Twitter at M Edwards underscore G voice.

Nathaniel E. Baker 57:43
Am I Edwards underscore G. Weiss? You tell me tell me tell me about the the macro the morning seats thing? What time is you put up that out?

Mike Edwards 57:52
Usually around 915. Okay, daily, we have an eight o’clock morning meeting, okay. We’ll take the kind of four or five, six most salient points from that. And put them out every day. And and it gives you a sense of where what we think is kind of top of mind for for ourselves for our PMS. It’s usually macro. Yeah, sure. But it’s it’s a nice way of giving both our LPs and the folks that we, you know, are sort of in thought leadership circles with, you know, a sense of where we’re at.

Nathaniel E. Baker 58:26
Very cool. Yeah, I do something somewhat sent. I mean, obviously, I don’t have those resources, but I just kind of do a briefing on on the upcoming data releases for the day and how those play out and how markets are moving in five, five minutes or less. That’s what I shoot for. But that’s the daily contrary and one of the benefits of premium subscriptions, but we don’t have to talk about that now. But thank you all for listening. A very interesting conversation here with Mike Edwards. And we look forward to having you on again soon. Mike, you and others from from your firm. Hopefully, it’s a nice little partnership we have going here. That’s great. And with that, we look forward to speaking to you all again. Next week. See you then.

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