What Secy. Raimondo’s China Trip Will Mean for U.S. Relations with Beijing, and Is the IPO Pipeline Opening Back Up? 8/28/23

0:01Right now and fast, all eyes on China. Commerce Secretary Gina Raimondo, the latest White House official to make the trip to Beijing, but will it actually create a thawing of tensions with the U.S.? We'll debate that. Plus, an IPO comeback, Arm Holdings and Instacart making their plans to go public official. Will this trigger a flood of new big offerings or will we just get a trickle? We'll be joined by Goldman Sachs' former top software analyst Heather Bellini for her thoughts on the IPO pipeline and what the future has in store for the fintech space. And later, an industrial revolution. CrowdStrike gets booed and Apple gets caught up in messy mania.

0:35I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Market Site on the desk tonight. Tim Seymour, Dan Nathan, Guy Dami, and Julie Beal. We start off with the latest high-level talks between the world's two largest economies. U.S. Commerce Secretary Gina Raimondo arriving in Beijing for a series of meetings this week with Chinese officials and business leaders. Today, Secretary Raimondo meeting with her counterpart to try tackling China's restrictions on U.S. businesses, which include Intel and Microsoft. The meetings come at the end of a rough month for Chinese stocks. The Crane shares China Internet ETF is off more than 11 percent in August on pace for its worst month since February.

1:11And the large cap FXI down nearly double digits. Both were higher today after China cut its trading tax for the first time in 15 years, an attempt to add confidence to its market. So what is at stake for investors as the two global powers meet? Got to go to the ambassador, Tim. Well, yeah, I mean, first of all, she's the first commerce secretary to go to China in five years. Anthony Blinken was there earlier in the year. And the bottom line here is the diplomatic measures have almost seized up. So the fact that this is being described as communication and just diplomatic dialogue to explain, hey, there's things that we need to do.

1:45We're not trying to keep China down in the world order. We recognize we are competing on a global stage for certain things. I think that's a great idea. I actually think diplomatic procedures and dialogue in bilateral relations we have with a lot of countries in the world have basically seized up. I think it's good news. Back to the market, though, if people are expecting Chinese officials to put to cut a stamp tax in half and expect that to rally the market. I mean, you're crazy. What that does is it rallies trading. So the market rallied five and a half percent. It closed up one percent. You really need debt field consumption led policy.

2:18And Xi Jinping right now has not shown an inclination to do that. So the market's given back all of its gains from the July Politburo. If you look at EM, which looked like it was breaking out right at the same time, it's run into a wall. And there's different reasons for it. I think you can overreact and say, hey, what they did over the weekend was a failure because it wasn't really attempting to be an economic plan. Right, right, right. It wasn't anything sustainable. I mean, it's a quick fix. They need a policy bazooka almost guy in order. And welcome back, by the way. Well, I was just know that, you know, Tim and I are thinking the same thing because what I was going to say, but I will say it.

2:54I'm going to channel my inner John Sebastian, who is at Woodstock. Welcome back. Exactly. Mrs. Carter? Well, no, Melissa Lee. Yes. Because, listen, although Tyler is, what are we talking about, Yellowstone or Mount Rushmore, and then we had CQ on Thursday. Pantheon, whatever. Yes. It's still your rodeo here, and we miss you when you're gone, so welcome back. It's great to be back. Good to see you guys. Talking about China, right, and bazookas? Yes. Well, hopefully that doesn't come to pass, but I'll say this. You know, I think we continue to send people over there because I think our relations with the Chinese are probably the worst they've been since prior to the Nixon administration, number one.

3:28So that doesn't augur particularly well. However, and I think Tim is speaking to this, you can trade these stocks. And, you know, Alibaba, in your absence, roundtrip went from 85 to 114. We went back to 87 and a half or so last week. And here we are in 92 today. And we've been saying, you know, this is probably an opportunity to trade the stock from the long side. Tim mentioned that last week. So although I don't think our relations with China get better anytime soon, I think the trading opportunities, the underlying stocks are there. Yeah. And, you know, the point that you make about, you know, this five and a half percent rally after this trading stamp cut tax, whatever the heck it is.

4:02I mean, there was a time and I think we can all remember the not so distant past where, you know, we were waiting to see how China would open and close and that would dictate the course of our future. Our futures don't even move on anymore. And I guess that's kind of a good thing. But by the same token, like more importantly, I think the point that our commerce secretary is over there, I think it is saying a lot here because there is this tit for tat. We still do have lots of tariffs. We have these, you know, bans, these export bans that are put on and they're going to start ratcheting up. And they also know that the Biden administration, as they get into the election year and there's more pressure there, they probably have more leverage, right?

4:35Because if they think that things that they can do can slow this economy and change the course of our election in a very legitimate sort of way. I mean, this is just how this sort of international relations stuff sorts of work, you know, kind of works. I mean, this is only going to get worse before it gets better. So if they can kind of set some sort of baseline, I think, for at least for the next year and a half or so, that's probably a good thing for everybody involved. The last thing we want to do is see China exporting their deflationary readings across the globe because we could find ourselves, somebody said a debt-fueled consumption, we could find ourselves in a debt-fueled spiral lower as far as economic malaise is concerned.

5:09Well, China can issue, China can engage in a debt-fueled consumption. They have a lot of Chinese balance sheet as a country is very, very strong. I agree with a lot of things you just said. I also think we are not as worried about Chinese economy in terms of its impact on the world as we were before. And in this country, Chinese imports as a percentage of overall imports in this country, I think, are back to where they were in 2003. They're 13.5 % back in July. Mexico is over 15%. So if you think about the importance and what that meant, both in terms of GDP and also pricing power in this country, I'm not all that concerned about it.

5:42I also look at the CSI 300, so China's benchmark index, and how it trades is not necessarily indicative of how I think broader emerging markets and all other markets and the health of the Chinese economy. They're not one and the same thing. And as Guy said, you still can trade these. I mean, if you look at the K-Web, which is the Chinese Internet ETF, which has some of the biggest ETFs, excuse me, some of the biggest Internet companies in China in an ETF. I mean, it's actually up 16 percent over the last three months. It's underperformed the S &P by 11 percent in the last year. But think about what our market has done in the last calendar year.

6:14It's underperformed by 11 percent. That's not a disaster. And I still think China, despite all their policy failings, and I think they need to do a lot more, seems as if they've taken hands off their own companies that were ahead of the government in terms of their independence. And that's, I think, the most important thing to investing there right now. They do have leverage. I mean, the point that Dan was making about the election, that's very interesting in terms of maybe we'll come to some sort of agreement or policy detente until just before the election, Biden administration. Like, how convenient is that?

6:45But also the fact that American companies are probably more dependent on China than they were in 2003 in terms of profits, in terms of presence in China, Julie. And so while we may not rely as much on goods from China, the U.S. corporations relying on China as a consumer of services and products is probably a little bit greater than 2003 or the same, at least. I think that's absolutely right. If you're thinking, you know, if you're heading up Nvidia, if you're, you know, Tim Cook at Apple, it's a little bit like the parents are fighting right now and you're trying to figure out what your own destiny is.

7:18And so for them, I think it's very relevant what's going on in these discussions. You know, Nvidia has to work, bend over backwards in order to, you know, defunction their chips in order to be able to sell them into this massive market. And, you know, on our side, you know, we are very, very thoughtful about how, you know, what can happen with Taiwan Semi because it's just such a critical linchpin in our own supply chains. So I do think there are places where it's really relevant, but I do think you do see some decoupling happening where, you know, their economy can really struggle and we can still be okay.

7:52But I think you have to think about each company's exposure and what it means if we consider it continue to have very frosty relations. Yeah, I'll just say that's a great point by Julie. You know, Apple, their iPhone 15 guy, I know you're already lined up for that one, is coming out next month here. And, you know, this is the first time ever that phones are going to ship from India, from Apple, you know, to the U.S. I think that's kind of interesting. When you think about the, you know, I guess the, you know, de-emphasizing China and the supply chains and everything that, you know, she mentioned Tim Cook and parents fighting.

8:21I mean, that is 100 percent the case. He spent the last 20 years building up that infrastructure, you know, I mean, to make, you know, hundreds of billions of dollars of consumer electronics that go out of China. And so when you think about Vietnam now has like 10 of Apple suppliers there, you know, India is making them. So, you know, that's all happening. And, you know, here's the thing. That's really inflationary. I mean, like when you think, yeah, I mean, like that's the other point. I think Apple has like 85 percent of the gross margin in the smartphone industry. Just think about that. All their competitors, OK, they're just trouncing them.

8:50If they have to reorient their supply chain, it's going to cost more. It's going to cost consumers more because they're going to pass it through. Well, I mean, it happens across the board, not just with Apple, right? For all the chip makers who did business in China before, what we're seeing, we're worried about deflation being exported from China, but maybe we should be worried about the flip side. Companies having to work around China. Exactly. Having a near sure, and that is inflationary. I think so. And I think either way, China has different dynamics working with their brand in China. And we've talked about this.

9:19This is another fallout. I mean, I think the inflationary element of this, though, is not what people were worried about. I think Dan's talking about what people are most worried about, which is the Chinese economy seems to be a drag on the global economy. And we've been waiting for this reopening push that should have been. We actually want a little PPI. If you see China PPI going higher, that's actually really positive. I've been concerned and we should probably have a guest who knows more about this than I do. Like some of you like Morgan Stanley, something to discuss it. But obviously, China, Taiwan, I still think it's going to rear its ugly head.

9:50And the Terry Gao, the founder of Foxconn, is running for president. I think that's the term in Taiwan saying, and I'm paraphrasing, we don't want to be the next Ukraine. There's a lot of things to be concerned about there. And to your point about inflationary pressures, I think the nearshoring, is that a term? That's more inflationary than the deflation they're exporting to us. I think what you're also saying, Mel, is something that would be really unique, I think, for all of us who, like, I'm no economist by any means here. But like, when you think about this, let's just say the Chinese economy is weak.

10:18Let's say the Chinese consumer can no longer be relied upon to buy Teslas or to buy Apple, iPhone 15s, that sort of thing. So you have this weakness there. So U.S. multinationals who are really depending on much of their future growth from China, but then also the reshoring of jobs is inflationary for those goods that are coming back and being sold to U.S. consumers. And that really could be a really interesting dynamic if you think about it, because if China is not that engine of growth, you know, and then it's going to become more expensive, then you think about the idea of building these things here in America.

10:49We just don't, from an immigration policy, the whole host of things, we just don't have the capability to do it. So a lot of those goods would become a lot more expensive for U.S. consumers at a time where U.S. multinationals cannot rely on China. China. All right. Our next guest warns the U.S. and China are going about diplomacy wrong. Yale University fellow Stephen Roach is in the Cold War camp. Professor Roach is the former Morgan Stanley Asia chairman. Stephen, great to have you with us. Always good to get your perspective on this. Are you watching very closely developments out of the secretary's trip to China or you think it's really a, you know, nothing to come out of it?

11:23No. Good to be on with you and the gang, Melissa, I'm sure I'm watching this, and I know with interest she's the fourth senior official to visit since Blinken finally broke the ice in June. All these meetings were pretty much a carbon copy of the other. There was a lot of talk, a lot of ceremony, but very little in the way of concrete developments. I think the one new thing about the Commerce Secretary Raimondo's current visit is the agreement to set up some working groups that meet a couple of times a year. I'm not optimistic on trying to solve thorny problems by just getting together once or twice a year.

12:12We need a much more substantial, permanent arrangement. And I've written about that and talked about it on your program before. Yeah. So step in the right direction, though. Agreed. What's your take on why the Chinese have not launched a huge stimulus program as we've seen in the past? Why drips and drabs like this? No bazooka. Exactly. No bazooka coming out of China as we've seen before. Debt. You know, the debt intensity of the Chinese economy has exploded. It was about 300 percent of GDP at the end of last year, up 100 percentage points of GDP since Xi Jinping took over. And, you know, they're mindful and they've been talking the talk, but not really acting on it since 2016 about Japan style risks.

13:07And, you know, they're right in the sweet spot of going much, much too far on binging out on debt. Hey, Stephen, it's Tim. Thanks for joining us. Your perspective on this is pretty unique considering the amount of time you spent there. So great to get your views. I'm most worried about the currency. When I look at the risks out there, it's not that the CSI trade south of eight times, you know, multiple. It's that the currency is really where we have contagion issues globally. And we've seen it. We've seen the dollar rally five percent in since mid-July. it's coincided with a lot of the China pain.

13:38Can you give your thoughts on the future there? Well, the Chinese are doing their best to prevent their M &B from going down more sharply than they would like. But it's sort of been a losing game for them. I think that's possibly one of the reasons, Tim, why they moved so grudgingly on short-term lending rates last week. They're They're mindful of the currency risk. There has been some capital flight out of China. And, you know, that's also a concern of theirs. Mr. Roach, a week in China, President Biden made comments about this a couple weeks ago. I mean, a lot of people think that will prohibit or keep them from doing something with Taiwan.

14:22I think it actually sort of emboldens them. What are your thoughts? Because stuff going on in the South China Sea right now is not particularly good. Well, I'm sort of with you, Guy. I think, you know, when you have weakness at home, it's the old wag the dog movie. You know, you start a conflict somewhere else to deflect attention away from problems at home. I hope and I certainly don't think China is going to move prematurely in Taiwan. But, you know, we're putting a lot of pressure on them to react to our position, which is very strident, especially in the U.S. House of Representatives with respect to Taiwan.

15:08So you can't rule anything out. But that's certainly not my base case scenario. You mentioned the problems at home. I mean, youth unemployment is so bad that they are stopping. they're not going to report the data anymore. At what point does this become some sort of security threat to Xi Jinping? I mean, you mentioned that Xi Jinping is the security president. He's concerned with security, particularly domestically. And yet these internal problems, these domestic problems could lead to insurrection at some point if they're bad enough. Yeah, I think we overplay the likelihood of, you know, internal uprising in China.

15:49Youth unemployment is an issue, especially since the government has clamped down a lot on the private sector, especially the Internet companies, as you guys noted earlier. And that's a big source of job growth for young people. They've got to address it, even though they've suspended the data on it. They all know there's a serious problem there. You know, consumers are weak in China. They also cancel the data on consumer confidence. It would be great if, you know, we could cancel all of our bad data and pretend we don't have any problems either. But, you know, the Chinese canceling data or not, they know they've got serious issues that need to be addressed.

16:29All right. Professor Roach, thank you for your time. Thank you, Melissa. Stephen Roach. So what do you think looks the most attractive here. You said we can trade this, but all these issues here. And I think I said 114. I think Baba got up to 104. But my point is it had a huge move of the upside. It's retraced the entire thing. And I think that's exactly right. You trade these stocks. But I'm glad Tim brought up the Chinese currency because, again, the last time we saw levels close to this was eight years, literally eight years ago, most of the day when the yuan was devalued and had the reverberations in global markets over the next couple of months.

17:01Markets don't seem to care about it right now. I'm not quite sure why, but I think they will soon enough. I think markets should care a lot about the dollar and we should care about it for this market, but we should definitely care about it for EM. And as I said, the move we've had in the dollar, I don't know if we have a chart, it doesn't matter. This last move in the dollar has been one of the bigger surges in a two-year dollar rally, which looked like it topped out last October. I still think it has. And short dollar was one of the most crowded trades coming into even the second half of the year.

17:27So let's see. But if you trade EMX China, look EWZ for Brazil, look INP for India. Those are two markets and economies that benefit from the things that are giving China problems. Me and Time Mastercard on the move. Shares trading at all-time highs, dating back to the company's IPO in May of 2006. The stocks rally is up nearly 17 percent this year. It comes even as credit card delinquencies rise. The delinquency rate at the end of Q2 is at the highest it has been in more than a decade, according to the New York Fed. Julie, what do you make of this? How do you read this? Well, I mean, I think this is kind of everything we've been talking about here for a while, right, where we continue to be really concerned about the health of the consumer, particularly the lower end consumer.

18:09And I think a lot of it is everyone feels confident pointing back to, well, we still have this excess savings glut, and it really matters who's holding the excess savings. If it's in the top 1%, it's not going to get spent.

18:25Oh, we have a little problem with Julie. Ghosts in the machine. Ghosts. So, I mean, the good news is I'm sure she's back in a second. The problem is not her analysis, by the way. No, not at all. She was smack on with that. No, it's a police album, as we said earlier. So this works for companies that don't take credit risk. MasterCard and Visa, more transaction to process. I'm sure they care on the outskirts of credit risk and stuff, but it doesn't really affect them. One of the reasons they've outperformed American Express almost two to one this year is because of exactly that. All right. Coming up, all eyes on prescription drug prices.

18:55as investors await the first batch of drugs up for negotiation with Medicare. So which names could make the list? And how will pharma stocks react? That trade is next. Plus, industrial size gains, a group leading the market for over the past week. And a few names are even hitting all-time highs. So can they keep boosting your portfolio? We'll debate that when Fast Money returns.

19:23Welcome back to Fast Money. A huge week ahead for big pharma as the Biden administration gets set to announce the first 10 drugs selected for Medicare Part D price negotiations. Analysts are expecting treatments from Pfizer, Eli Lilly, Merck, Abby and Bristol Myers to feature prominently on that list, which could be announced as early as tomorrow. We've talked a lot about the weight loss drug companies having extremely high multiples, but the rest of the group is really traded at depressed multiples in comparison to him. I'm thinking of your Pfizer. My Pfizer is certainly one of them. And it's as if Pfizer did nothing before COVID and COVID vaccines and they're treated as if they didn't.

19:57And how are they going to come up with, you know, and they've spent a lot of money. They spent twenty five billion dollars and put that money to work pretty quickly. And the expectation is it's a pipeline that's worth 30 billion in revenues by 2030. We'll see. I do think that Pfizer is very interesting here. And I do think that these negotiations are political and headlines and, you know, and it makes some sense that they're pushing back. But I'd be amazed if they're able to get some of the victories. I mean, the government. I just I think I think the drug companies, when they get together and we've seen individual fights being picked.

20:29But I think this is very complicated. We certainly heard the commentary on the recent conference calls about this. It's really, you know, the CEO speaking out again. And we've seen lawsuits being filed against the government to stop this because these price changes would go into effect in 2026. Julie, how do you view this? Because, you know, it's interesting. We'll get the list of 10. And in theory, maybe that'll give you some clarity, at least for a short amount of time. But yet the government can still add names to that list in the future. So, I mean, it's like a tiny sliver of clarity maybe for that day.

20:58It's not much clarity, right? It's like asking for the list of all your greatest flaws. It's never going to be comprehensive, or at least it won't be for me. I'm sorry. But I think, you know, I think, look, broadly speaking, the biggest challenges we're going to have are, you know, getting confident that, you know, the list that we have is going to be, okay, that's it. That's all we have to expect. We're not going to need any more of these cuts in terms of pricing. And I think, you know, when you consider the margins of some of these businesses, it's hard for them to argue against Congress, right?

21:32But they also are able to leverage back and say, look, but that's how we do our R &D is, you know, we make money on, you know, the drugs that we have in our pipelines. And so that supports an industry that's very strong. Think of, you know, we were the first to come to the COVID vaccine. So, you know, I think that there is a lot of lobbying that happens. It's one of the strongest lobbying bodies. And so they are able to muscle their way. But Congress has to look like they're doing something. And this is a very easy villain to pick. Pharma companies are the easiest villain to pick. A name like Eli Lilly guy.

22:03So whilst you were gone, I made another new all-time high. Whilst? Whilst. Is that not a word? No, I mean, it's Shakespearean. It's like 1700s. Yeah, it's very powdered wig stuff. Well, I mean, you know, it's funny you say wig because I actually was the last person to vote when the wigs were against the Tories back in the day. But that's probably a different show. All-time high. All-time high. And it's been on fire. But now valuations, I think people will point to, it's very hard, in my opinion, for them to have the move they've enjoyed to continue the upside. There'll be a place to buy this cheaper.