Xi Whizz

This week the Chinese People's Congress, or 政协 for you Mandarin fans, will vote to solidify Xi Jinping's control over the future of China. It means good things for the world economy and bad things for democratic rights. But democracy doesn't seem to be working so well these days anyway. From Catalonia, to Brexit, to Trump, widespread examples of political polarization has created impasses that are stultifying economic growth. Conversely, the ability of China to set policy and execute strategies to support them, sets them apart from all other major economies. The proposed 30 year, $5Trn, One Belt,One Road project is only possible in a command and control economy like China.

The Chinese are feeling pretty good about themselves after the latest PMI data and a recent GDP growth rate above 7%. This feel-good environment was totally predictable as there is usually a suspiciously positive slant to the pre-conference government supplied data releases. Mr Xi doesn't want any messy headlines to deal with as he works behind the scenes to consolidate his power. Commodity markets have firmed recently, confirming the positive expectations for a pro-growth outcome.

Notwithstanding that positive vibe , some darker forces lurk beneath the surface of the world's #2 economy. State Owned Enterprises are horribly over-leveraged and are in need of refinancing. Next week, when the CPC is over, Xi will be faced with an opportunity to 'kitchen sink' the sector and force a major restructuring. After consolidating his grip on power a move to clean house should be expected.

Unfortunately for the markets, any disruption in the Chinese economy would have significant disruptive effects on the global growth outlook. It remains a potential threat at this stage, but the bullet-proof bull market may continue to shrug it off as commodity prices are signalling a playable growth spurt. Longer term structural deflationary pressures will continue to threaten global growth but are currently subordinate to the short term bullish sentiment.

For now, Dr Copper rules. The multi-year trend break by copper relative to gold is a huge tailwind to the cyclical leadership trend.

Risk Model: 5/5 Risk On

The market seems un-correctable as a broadening out of the participation and an increased correlation of the upside move has destroyed the bear case. Financials, Materials, Energy are all rallying alongside a resurgent FANG. The model is as strongly bullish as it can get, with Copper/Gold leading the parade. AAII bull/bear ratio swung hard to the positive last week and the VIX seems to be suffering from a 'do not resuscitate" order.

Skew Protection Trades - Skew is the new VIX.

A record long period without a greater than 3% correction has increased the demand for crash protection. As the 'long vol' trade continues to fail to produce, investors are now more interested in tail risk protection. The ratio of implied volatility on deep out of the money puts is at record highs (see chart below) to their corresponding call premia. This shows how expensive crash protection really is. Lets hope they aren't right just yet. Remember, Black Swans are, by definition, are unforeseen events.