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Daily Missive

Seven Grey Swans a Swimmin’ in 2025: #4 The China Wild Card

Loading ...Addison Wiggin

December 26, 2024 • 4 minute, 53 second read


BRICSChinaU.S.

Seven Grey Swans a Swimmin’ in 2025: #4 The China Wild Card

“The Chinese use two brush strokes to write the word “crisis.” One brush stroke stands for danger; the other for opportunity.”

–Attributed to both JFK and Richard Nixon


 

December 26, 2024— Pundits have long predicted some kind of crisis between China and the United States.

It’s often pitted as one country’s ascension that results in some kind of test against the existing power. Much like how the United States was on the rise as the British Empire was seeing the sunset after all. Or how Britain rose against the French before that.

It’s certainly true that China could become the leading global economy at some point in the next few decades. It sprinted to the #2 position from a nearly non-existent economy when President Nixon first visited China in 1972.

However, history is also littered with those who came at the king—and missed. Examples include the rise of Germany in the late 19th century, the USSR in the 20th, and perhaps China in the 21st.

But even if China doesn’t become the world’s new superpower, it could still look to flex its power by destabilizing the existing one.

Grey Swan #4: The China Wild Card

There are plenty of reasons why China could trigger a Grey Swan event in financial markets in 2025.

For starters, 2025 will mark two years since they ended their draconian Covid-era lockdowns. While economic analysts predicted a surge of growth, the opposite has occurred.

China’s economy still grows, at least on paper. But that’s what happens when you include government spending on GDP. China’s stimulus announcements made in late 2024 suggest a weakening economy.

Since 2020, China has moved to shore up its real estate market. That includes addressing the failures of developers such as Evergrande. All told, real estate investment peaked at 13.9% of GDP in 2020, and fell to 9.6% at the end of 2023.

As our portfolio director Andrew Packer noted back in August:

Perhaps not surprisingly to the student of history, China’s attempt to grow its own middle class has fizzled out.

In 2023, China was supposed to see massive growth as they ended draconian Covid-era lockdown policies.

They did grow by 5.2% – it’s amazing how much GDP growth you can have thanks to the fact that government spending is added to GDP, not subtracted. But it was far less than expectations for 6-8% growth.

More importantly, China’s neo-mercantilist policies have soured with the investment community.

Companies have spent billions to expand manufacturing outside of China, whether still far away, or with near-shoring in Mexico, or even re-shoring for America’s semiconductor manufacturing renaissance.

Perhaps it’s because, despite China’s massive economic growth over the past few decades, there’s very little individual freedom. Or, perhaps, it’s simply because there’s no good translation of The Wealth of Nations.

Clearly, China may try to distract its population from a worsening condition with some kind of adventure abroad.

That could mean anything from trying to destabilize Western nations, possibly in conjunction with the BRICS members … to an outright invasion of Taiwan.

Plus, how China reacts to new tariffs from the incoming Trump administration could also lead to significant shortages in key materials, such as rare earth elements (REEs) that could hobble America’s technological advances.

However, for most Americans, the real “China threat” is America’s addiction and dependence to cheap labor and cheap goods.

America’s reliance on cheap Chinese imports and labor has left us vulnerable to China’s economic instability.

If China’s economy continues to falter, the days of cheap imports could be over, leading to higher prices for American consumers across a wide range of goods.

Everything from electronics to clothing could become significantly more expensive, putting pressure on household budgets.

Supply chain disruptions could become more frequent and severe, affecting everything from electronics to pharmaceuticals. This could lead to shortages of critical goods and materials, impacting both consumers and businesses.

American companies heavily invested in China could face significant losses, potentially leading to job cuts and economic instability at home.

Many U.S. corporations have bet big on the Chinese market, and a downturn there could hit their bottom lines hard.

The global economic ripple effects could trigger a worldwide recession, with America caught in the crossfire. Given China’s role as the world’s second-largest economy, its problems could quickly become everyone’s problems.

The China problem is real, urgent, and not going away. How we respond in the coming years will determine not just the future of U.S.-China relations but the future of the global order itself. The stakes couldn’t be higher.

If our relations with China continue to sour, there’s a very real chance we’ll see “sticky” inflation. That could tank today’s ebullient financial markets and cause a selloff that would affect all assets, even safe-haven plays like gold.

For now, this is a situation to monitor closely. China’s weakening market may also pose an opportunity to rethink fairer trade deals, end the theft of intellectual property, and move forward in a more constructive manner.

Regards,


Addison Wiggin,
Grey Swan

P.S.  China’s 2024 stimulus measures came in just under $1.1 trillion (so far). That’s about 6% of the country’s GDP. Meanwhile, their reported GDP growth for 2024 was about 5%.

In other words, China is already buying economic growth at a high price, paying more than what it’s likely to get as a benefit. Worsening economic conditions in China could tip over to the rest of the world in 2025, and we wouldn’t be surprised to see other countries look to undertake stimulus measures either.

As Grey Swan Investment Fraternity contributor John Robb notes, a failing centralized economy may cause the party leadership to lash out at Taiwan and deliberately draw the U.S. into a hot war.

Your thoughts on the top Grey Swan events of 2025 are welcome here: addison@greyswanfraternity.com.


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Looking at your gold stock holdings with an eye to how much share dilution they’ve done is critical to your investment success.

Share dilution is real across any industry. But how shares are being diluted, and what they’re being diluted for matter.

In the resource space, that means paying close attention to the value of any announced acquisitions, the total shares outstanding, and how that company is performing relative to its underlying resource.

That can make the difference between a good investment, a middling investment, and a killer investment.

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In 2023 and 2024, gold prices trended higher. That trend has continued this year, with gold prices rallying over 20%.

In prior years, gold mining companies have been conspicuously absent from that rally. But in 2025, they’re starting to move up – and at a faster pace than gold:

Gold mining stocks should perform better than gold during a rally. Why? Imagine a gold company has total cash costs of $1,500 per ounce.

At $2,500 gold, they make a profit of $1,000 per ounce. If gold rallies to $3,500, a 40% rally, the miner’s profit goes from $1,000 to $2,000 per ounce – a 100% jump in profits.

That’s the power of investing in gold mining companies. Aside from the first half of 2016, this is the best setup for gold mining stocks since the early 2000s. It’s not too late to buy gold stocks if you haven’t done so yet.

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Truth matters.

Free and fair money, whether measured in gold ounces or satoshis – a one-hundred-millionth of a bitcoin – can compel a governmental and political system to stay honest. Or at least within some rails.

Fiat currencies, which are determined by those same governments, provide unchecked power, including the ability to keep some in power despite clear abuses of it.

History shows time and again that it’s the power to destroy.

Public confidence has been hit with a one-two punch of hefty inflation the past few years, and a sense of a two-tiered justice system that projects those in power who were harming children.

In a time of rapidly-declining trust in traditional institutions, it’s more important than ever to make sure you hold gold and bitcoin.

I know I sound like a broken record – but every day, there’s about 3 billion more reasons to hold those assets. And that’s just the daily increase in America’s federal debt.

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Since the US confiscation of Russian assets in 2022, pretty much every pull back to 50-day moving average (red line) has been bought, and they continue to be bought. The average is now flattening out, as you would expect with this summer consolidation, rather as it did late last year. Some sideways consolidation is good. Ideally, you want to see the short-, medium- and long-term moving averages all flatten and converge. There often follows a big move higher.

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