The Two Big Risks Coming Out of China and the Coming “Hurricane” in Commercial Real Estate 5/23/23

0:01Right now on Fast, fresh fear factors from China. In addition to the red-hot rhetoric of the U.S. and Beijing decoupling, there are now new worries about a rising wave of COVID that could infect more than 65 million in China every week. A deep dive on the challenges China faces straight ahead. Plus, the real estate storm, why one industry exec says we are in the middle of an office space hurricane and investors better prepare for things to keep getting worse. Then later, raising a glass of Netflix as the stock turns 21. The spending fade for all those do-it-yourselfers at home and the trouble in the charge for two retail giants.

0:36I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite on the desk tonight. Karen Feinerman, Dan Nathan, Guy Adami and Rebecca Patterson, the former chief investment strategist at Bridgewater Associates. And we start off with two big risks coming out of China. First, rising trade tensions between the U.S. and Beijing. Apple, the latest company to act, inking a multibillion-dollar deal with Broadcom to develop 5G chips in the United States. This after China slapped rival chipmaker Micron with a ban, citing it as a security risk. Today's news helps send Broadcom shares to all-time highs, a stock rising over a percent.

1:08And then there's the renewed threat of COVID in China. One health expert estimating a new wave could result in 65 million cases a week by the end of June. NBC hasn't been able to independently verify that report. Still, the news sent shares of vaccine makers like Moderna soaring today. Those shares seeing their best day of the year, up more than 8 percent. So let's begin with that scary headline of a new COVID wave in China. Bring in Dr. Kavita Patel, NBC News medical contributor, former White House health policy director during the Obama administration. Dr. Patel, great to have you with us. Can you put this wave in context, you know, the XBB variants and whether or not, you know, you would think that people, I don't know if the people in China have had COVID in terms of penetration that we've seen here in the United States.

1:52So is there some sort of immunity or less immunity there? Yeah, Melissa, a couple of things to put things into context. First of all, anytime you hear these kinds of numbers coming out of China, you do have to take it seriously. And we don't know if we've kind of seen the peak of what their cases are. I know those are predictions about cases at the end of June, but it's difficult to say. But suffice it to say, XBB is the circulating variant around the globe. And we know it's a more easy variant to give and to get. It's more infectious, if you will. And to kind of think about where China is right now, remember, because of the severe lockdowns, we have kind of an uneven immunity pattern.

2:27So we do see some of these reinfections, which is what we saw in the United States. People have had one, two, three, even four or five infections, but not as many of the kind of broader based vaccine induced immunity. If you'll recall, they haven't had really mRNA vaccines in China. They've been using kind of older technology. and because of their lockdown policies, they had had a very different distribution of the types of people that were infected. So I think the critical things to look at, one, it would not be shocking, Melissa, to see an uptick in cases globally, as well as in the United States that could trail weeks to months.

3:00But the question is, are we seeing more hospitalizations? Are we seeing severe cases? And if we are, what kind of people? Is it older people, people who have never had infections, people who are not vaccinated? And then I think ultimately the reason you're seeing not just Moderna, Pfizer, other stocks trading up is that it's renewing calls for an updated vaccine. Even the vaccine that we have in the United States isn't the most current variant protective vaccine. So this is renewing the calls we've had in the country for some time now to have a much more updated vaccine faster and in a rapid dissemination fashion.

3:34How would you gauge and I know it's very difficult to do what the public health response might be in China. I mean, they've had they had COVID zero. Then they completely flip flopped on that. And at this point, we're hearing reports of sudden shutdowns of events, concerts, conferences, movie theaters, etc. Will that sort of containment work with this variant? Or do you think that they're just going to say, let it let it go? Let's see. In which case for us and for investors, the concern would be a shutdown of ports, a shutdown of manufacturing facilities, etc. The supply chain demands that we've been talking about for so long that we know that China is kind of sitting at the center and even the drug supply chain that's still causing problems around the globe.

4:17So I think, number one, we have to take a step and look at shutting down concerts and shutting down events certainly did not do enough in the United States. It was really kind of a three pronged strategy. We really needed to put in better surveillance. We've seen that with wastewater. Something that's troubled me is that the China CDC, if you will, has also drawn back on its surveillance mechanisms, much like what we're doing, Melissa, in the United States. Right. We're not doing as much of the monitoring, although we have some systems in place for wastewater detection, which can help see what we're you know, what we're what variants are more current, what we're seeing in the United States.

4:50We don't have that necessarily in China. And so we have a kind of a blind spot. Shutting down a concert won't really do you much good if you have the virus in other pockets, which can spread easily. And we know XBB can. I think the second part of this is vaccination. We know that vaccination doesn't prevent transmission, but it can provide that really good layer, especially for the vulnerable. And then the third prong is treatments. And I think that's where if the United States had to do something today to heed this warning, it would be to kind of make sure all three of those arms of the public health response are ready to be activated.

5:23I would like to think they are, Melissa, but I have to tell you, you walk around, you know, the United States today, it feels like people have thought this is over. And I think the news coming out of China reminds us this is not over. All right. Dr. Patel, thank you so much for putting it all into perspective for us. Dr. Kavita Patel, let's trade this. Rebecca, how do you sort of digest this? Well, I think there's two downside risks to worry about. One is within China. If they do do lockdowns, you're going to see a very quick pullback in services. We're seeing that priced into some stocks, but not broadly yet at a vulnerable time.

5:55Youth unemployment at 20 percent in China, consumer confidence low, property sector already weak, government saying they don't want to stimulate a lot more. So this would come in a bad time domestically. but then to the point you made during the interview, if they say, let it fly, right? Natural immunity, what will be, will be. But how do the rest of the world respond? Do we start preventing Chinese from coming in other countries again? Is it going to spread? How bad is that spread going to be? What kind of wave could we see? I mean, I doubt any of us have had a booster in several months at least.

6:28So there is some vulnerability globally that this could spread and we could see another mini wave. And to her point, are we ready? So I do think this is a risk that we need to be thinking about pretty strongly over the next quarter, at least. I mean, whether or not China actually decides to say we're going to shut certain cities down or certain sectors of cities down or to say natural immunity, let's let this go. It seems like there is upside risk at this point to a disruption in the supply chain, which is extraordinarily inflationary. That got us into the problem in the first place. That's something you've been talking about.

6:58But, yeah, it's a problem. And the FXI, if you want to, again, we understand the health concerns, and we're all sympathetic to that. That's not our mandate here. But in terms of the trade, the FXI is at a pretty precarious level if you look at it. This sort of 27.5, 28 level has been support for quite some time. There's the chart right there. You can see it. You know, close below 27, things get dicey. And so many of these stocks that have been basically carried up on the wave, a lot of the casino stocks we talked about, starting to take it out to the woodshed a little bit here. One has to wonder, though, it's the inflationary aspect of this that's made a Fed's job difficult.

7:32Again, if this comes to fruition, that much more. Well, I would just add, not just inflationary, stagflationary, which makes the Fed's job doubly worse. But I think it's also deflationary in some ways, right? If China slows down. Right. Demand is lower. Demand is lower. Right. We see commodities lower. And that's, you know, that's good for the inflation fighting story. But to sort of translate, if you look at some of the stocks like luxury, which I own, that had just a terrible day today, you know, on the fears of that China was really growing again. And that that's where luxury is really making a lot of money.

8:07Wynn Resorts, you know, a number of Macau related things. But when you ask the question about would they just let it run, does that mean that you continue to operate ports, even if some of your workers are sick, you stay open or you come to work sick? I don't know. Is that? But as opposed to a real shutdown. I guess they could, in theory, come to work sick if they are well enough to work, to work even if they're infected. Well, and before they did the contained bubbles, right? So they had workers stay within certain zones, allowed to leave. But that still created a lot of supply chain problems because you had transportation of a good to another place for assembly to the port.

8:42So you still had a huge, huge amount of damage to the supply chain, even with the bubbles. I'm sure I'm using the wrong word, but you know what I mean. Right. Closed systems or whatever. Yes, thank you. Yeah. Yeah. No, I think your point about luxury. I mean, I don't know if you saw Tesla and I look at it like probably every take every day. It had almost a four percent reversal from its highs today. It was breaking out. It was kind of above this kind of downtrend it's been over the last few months or so. And I think once those sorts of fears started kind of working their way through the market, you think to yourself, OK, what were some of the issues that they had about missing deliveries or slow demand in a place like China?

9:14It's these sorts of things. And I think that, you know, there was all this optimism about China doing this about face on the zero covid. You know, when we think about that Q1 GDP print that we saw in China, it's like four and a half percent or something. I mean, they were doing six, eight, six, nine in the in the few years in the lead up to 2020 right into the pandemic. So the fact that we've really never had this great contribution from the China reopening trade. And, you know, I was looking at it today. Have you guys seen Freeport? Have you seen Alcoa? Have you seen, you know, BTU? I mean, these stocks look like we are about to be in a global recession right now.

9:48They're not trading particularly well. Crude oil can't get out of its own way in and around this kind of low 70s or so. So there's lots of things in the stock market that are not the shiniest things in the Nasdaq that are actually flashing some warning signs that don't seem to be evident in the major indices here in the U.S. Yeah, it seems like investors would not be prepared mentally, whether it be thinking about the disruptions or pricing and devaluations for a supply chain disruption again at this point. It feels like everybody thought those or inventory issues coming back again for the retailers.

10:22They had just gone through. But what if we got the inventory covered? Right. Exactly. No, I understand your point. They were just this was sort of a nice bounce for a lot of them where they did have inventory. Right. Right. But then the schools around the corner and then you have this again. I mean, these are things that just have not been on our radar in so long because people the same way people we talk about it here. People are tired of being bearish in the stock market. Right. There's fatigue around this entire issue, which you can totally understand. It doesn't mean it's going to go away.

10:52And to sort of continue the conversation, the major retailers, Target and Walmart, Target's at a five-and-a-half, six-month low, and Walmart heads this major double top around 158, and it hasn't traded particularly well since earnings released. So you have to start looking at these things, connecting the dots, and say, wait a second, maybe there's something more here. We will have a little bit more on those charts later on in the show. Yeah. Meantime, let's focus now on what a full U.S.-China decoupling could mean for the trade and policy relationship between the two countries. The former National Economic Council's deputy director, Cleet Williams, joins us now with that.

11:25Cleet, great to have you with us. Thank you. Good to be here. It seems like damned if you do, damned if you don't in terms of raising China's national security concern and trying to isolate it. You know, you can be seen as weak and allowing the security concern to be an issue. But this will be at the expense of the economy if you do say we are going to treat this as a real issue and say, you know what, we're not going to we're going to sever those ties with China. You're absolutely right. And the U.S. right now is struggling to get that balance. You know, when I was in the Trump administration, our view is that we hadn't done enough as a government to deal with some of the unfair practices in China, to deal with some of the threats that they were posing to U.S.

12:11national security. But I think in some ways we're at risk of overcorrecting here. And this whole notion of we need to decouple our economy from China is something that you hear folks talking about more and more on the Hill. And quite frankly, you know, that's something that could be catastrophic. And just to give you a sense of this, you know, our trade last year with China was$690 billion. They were our number three trading partner. They're the number one export destination for U.S. agricultural products. 20 percent of our ag products that are exported go to China. And so I think we need to be careful.

12:47And we do need to protect U.S. national security interests. We do need to be tough on unfair trade practices. But we need to be strategic about it. And we need to look at de-risking and strategic decoupling rather than trying to completely sever our economic ties. It sounds like the de-risking was the word of the day at the latest G7 meeting in Japan. So they're trying to move away from decoupling and say, let's be more strategic, let's be more fine tuned about this. But there's a difference between that and actually the United States striking new trade deals with with friends. And I know that you've been of the view that we're not doing enough of that.

13:24And the sense I got from the U.S. Trade Representative, Catherine Tai, is that politics is policy. And if politics right now on both sides of the aisle is that globalization is not something voters want and trade deals are going to be hard pressed to get through Congress. Can you have new trade deals, even if it's in the U.S.'s interest for national security reasons? You know, critical mineral countries, for example. Can we get new trade deals? Do you think it's politically possible? I do, absolutely. And I look back at this agreement that we used to know that was called NAFTA that was really unpopular in the United States.

14:00And we figured out a way to renegotiate it. And we came up with the USMCA. And the point there is we can do trade agreements. They just need to be good trade agreements. And I have been quite frustrated with the administration. They talk about friendshoring and working with allies and partners and how that's a key part of their de-risking strategy. But they aren't creating any economic incentives to really do that. And that's where these trade agreements come into play. And this is critical for all sorts of different supply chains. If we want to move supply chains out of China, we need to be working with partners and allies through trade agreements.

14:36Cleet, the wild card is China-Taiwan, I would imagine, because that will be bipartisan. and what game that out and what are the chances of something happening there? I think it's a real threat. And I was talking this afternoon with a colleague of mine in Beijing and she asked me, how come no one in the United States is taking this seriously? Basically, what I see happening in China is that they are really preparing. They're on a war footing. They're thinking about what that kind of invasion would look like. And why isn't the U.S. taking this seriously? And I think that's a great question. You know, I think that this is a realistic aim of Xi Jinping, something that he could look to do in the next four to five years.

15:18And we need to be acting now to be both thinking about how we can deter them militarily. I think another part of that is trade agreements and thinking about how we can help Taiwan diversify its supply chains away from China. Right now, they're 40 percent dependent on China for trade. And that gives China a tool of economic coercion. And so we need to figure out how can we help them diversify? How can we do trade agreements with them so that China can't coerce them as a precursor to an invasion? So I think this is something we need to take more serious than we are. We need to not just have a military deterrent strategy, but also an economic deterrent strategy.

15:55And I hope that's something you see coming out of this administration and this Congress. It seems to me, Cleet, though, that one of the biggest risks is being cut off from Taiwan as a supplier of chips. They supply 90 percent of the advanced semiconductor chips globally. And Taiwan is two to three generations ahead of the U.S. in terms of chips 10 nanometers and below. This all according to Barclays in a note overnight. Right. And so, I mean, losing that access would just be basically, you know, cutting off at the at the ankles, the global manufacturing of advanced infrastructure, devices, et cetera.

16:34I agree with you. And this is the long term risk that we need to be thinking about. And, you know, the U.S. has tried to address this through the chips bill and things like that. And I think that will help to a limited degree. But we absolutely need to be doing more. We need to be doing more than just subsidizing. I think we also need to look at what are the conditions to make sure we remain an innovative place to do business. I'd like to see more talk about having a competitive tax and regulatory environment. I mean, I think that's the best way that you deal with this issue. If you want to bring more manufacturing on shore, make it more cost effective to do so.

17:13And at the same time, look at all those measures that I was talking about before, about how we help Taiwan deter China and stand up to either military or economic coercion. Cleet, thank you. Appreciate it. Cleet Williams. So those are the dangers. Imagine you get cut off from minerals out of China, rare earths. You get cut off from advanced semiconductors. And then what happens? Catastrophic. I'm not trying to be hyperbolic here, but it's really bad. And if you follow Kyle Bass, which you should, he's on the Squawk Box every once in a while. I mean, he's been talking about this for the last couple of years.

17:50And he does extraordinary work. And then when Cleet says that we're not paying enough attention to it, you have to listen to these people. Yeah. Dan, what do you think? Yeah, it is interesting to see that folks like him, they say it's like years out, like some sort of invasion or some sort of thing, right? It doesn't seem like it's on the doorstep here. And so, again, I think a lot of our multinationals are really moving their feet right now. And you see, I know we're going to talk a little bit about the Apple Broadcom thing. I mean, everything incrementally, I think, makes sense. But at the end of the day, what's one of the stickiest parts of inflation that we have here in the U.S.?

18:20It is wages, right? So I don't know how you reshore a lot of these jobs unless it's just literally some entree until we get to some sort of automation where we really do have machines making machines here. Because in the near term, it's the thing that probably keeps rates higher because inflation is going to be sticky. I was just driving through Phoenix recently. And if you go down the main highway there, you see the new chip plants starting to be built. These things are blocks and blocks and blocks. They're enormous. It's going to take years to get them up and running. But to your point on inflation, the workers in America cost a heck of a lot more than the workers in Taiwan.

18:56Taiwan gives much more government subsidies to those companies than we're going to give here, even though we're given a lot. So it is going to be more expensive. Canadian Prime Minister Trudeau just the other day, they're starting an electric vehicle battery plant in Ontario. VW agreement, huge subsidies said our workers cost more. Environmental protection in Canada is different than China. It's inflationary. So all of this portends for a longer term, slightly higher level inflation than what we've enjoyed for the last or dealt with for the last 20 years. Two percent seems like a dream at this point, right?

19:32For some, at least. All right. Coming up, we are watching Toll Brothers after our shares on the move after posting results. The details from the quarter next. And speaking of the whole building space, Lowe's jumping on the top and bottom line beat this morning. But it wasn't all glossy paint and power tools for the retailer. But the company is forecasting when Fast Money returns.

20:00Welcome back to Fast Money. Earnings alert on Toll Brothers. Shares of the home builder popping after reporting a beat in the top and the bottom lines with earnings per share coming in nearly a dollar higher than estimates. Kate Rogers got the details. Kate. Melissa, as you said, better than expected quarter for Toll Brothers. Home sales revenues up 14 percent year-on-year. Gross margins were 26.4 percent, up more than 2 percent from Q2 of 2022. The company's CEO, Douglas Yearley Jr., said, quote, as mortgage rates have stabilized and buyer confidence has improved, the increase in demand that began in January has continued through our second fiscal quarter and into the start of our third quarter.

20:35He said in light of this, they're raising full year guidance by nearly every metric. Yearley added that supply-demand imbalance is set to continue well into the future, adding to the long-term tailwinds that have supported the housing industry in recent years. He said these include favorable demographics, migration trends, and more flexible work arrangements. As you said, the stock is up by more than 3 percent on the report, up by more than 27 percent year to date. Melissa, back over to you. Kate, thank you. Kate Rogers. Karen, what do you think? There was a lot to like, actually, in that, right?

21:07I mean, it showed a lot of strength. I think orders up, closings up, backlog was OK, average selling price in line. I mean, there was a lot to like. You'd think that if you listen to all the other stuff happening, we'll get to Lowe's and Home Depot and interest rates and mortgage rates being back up. I mean, we could talk about it again and again. The supply demand dynamic is still so far out of whack. And these not just told, but others have done a really good job of managing through this and not getting over their skis, not over building, but building profitably. And the margins were good. There was a lot to like.

21:40Yeah, I mean, average selling prices staying up with mortgage rates higher. That's that's really a tremendous win here. I would, on a forward looking basis, wonder how long they can keep the guidance where it is, given that you are seeing housing. It has picked up recently with mortgage rates coming down, but now we're back above 7 percent for a 30 year mortgage. So it's climbed back up. And as the consumer slows down later this year, as the Fed hikes feed through, I wonder if the demand is going to hold up the way it did in recent months. But wouldn't you thought you've seen that already, given how much mortgage rates have moved, which is enormous?

22:13We have. I mean, if you look at the housing data we got this morning, the housing data we've gotten in the last week was good. But it's been incredibly volatile over the last few months. And if you go year on year, we're already down a lot, to your point. So the housing market has already softened. The companies are adjusting as appropriate. We saw that in their report today. But I think the trend over the next 12 months is going to be for a continued slowing in the housing market, just bumpy. And so the question is, can companies like Toll Brothers continue to navigate that well? The supply, to your point, I totally agree, helps them.

22:46Karen mentioned Lowe's, so let's piece that one in. Lowe's topping the tape, posting a top and a bottom line beat before the bell today. The stock almost 2 percent higher as investors seemingly shrugged off. A cut to the retailer's full year outlook like Home Depot. Lowe's is getting hit by lumber deflation, softer demand leading to weaker same-store sales in this quarter, Guy. Yeah, but if you look, and we talked about Home Depot, the quarter wasn't great. But we said the stock should have traded a lot worse than it did. And if you remember, I think it got down to, I want to say, 281 or so. It was only down$4 on the day.