But Shanghai Composite Index Is Only At 2006 Levels
China is seemingly a series of paradoxes. Like Escher’s Relativity drawing.
Wall St. Journal – BEIJING—China’s economic expansion slowed to its weakest pace since the financial crisis, as top financial regulators launched an extraordinary coordinated effort to calm jittery investors.
The rate of growth in the third quarter dropped to 6.5%, falling short of market expectations, official statistics released Friday showed. Growth in industrial output and consumption weakened in the quarter, while exports held up despite the country’s bruising trade fight with the U.S.
Yes, in 2017, China had 3 times the GDP growth of the USA (if you believe China’s accounting!). And China has been growing at over 6.9% since 1990 EVERY YEAR.
Yet the Shanghai composite index remains at late 2006 levels.
By necessity, today’s topic will venture into the world of politics, so I warn you now – you might be offended. Actually, I have decided to cut jabs at all politicians, so if you feel like your team has been maligned, just read on, I will probably be even worse to the other side.
I want to speak about the recent “trade wars” that the Trump administration has set in motion. There can be no denying that America has ventured down a road of adversarial trade renegotiations not seen in decades. I am not making any judgments about this policy – it is what it is. But to think it doesn’t have profound implications for your portfolio would be naive.
What I used to think
Previously, I believed America’s trade stance was just Trump doing his “Art of the Deal” negotiations. You know – insult your opponent, be belligerent and take extreme stances right until the very end, at which point you just cut the best deal available.
Somehow, the scale of May 29 keeps getting bigger. I should clarify, meaning that the very few data series that can pick up on what happened that day have had trouble picking up on exactly what happened that day. It was, to put it simply, a global collateral call of some undetermined magnitude. We know it was substantial by the earthquake across markets in the real world.
One of my favorite things to do is discover and utilize somewhat obscure, new, misunderstood, or underutilized datasets. Or indeed, to look at an existing and well-understood set of data in a different way. In today’s post we look at a little bit of all of the above. What we’ve got here is a global composite consumer sentiment indicator I’ve calculated from the Thomson Reuters IPSOS consumer sentiment surveys (using IMF GDP data for the weightings).
I’ve shown this indicator against the key global equity benchmark (the MSCI All Countries World Index or ACWI for short), and the global manufacturing PMI (basically business confidence). The interesting thing about this chart is that up until the turn of the year, these 3 inter-related indicators were all headed in the same direction (i.e. up)… so what’s changed?
I’ve read many comments to the effect that the next financial crisis will be like 2007-2008, only worse. However, the sole reason that many people are talking about a coming 2008-like crisis is because the happenings of 2008 are still fresh in the memory. Market participants often expect the next crisis to look like the last one, but it never does. Consequently, the general prediction about the next financial crisis with the highest probability of success is that it won’t be anything like 2008. It could, for example, revolve around an inflation scare rather than a deflation scare. In fact, the current monetary system’s ultimate financial crisis, meaning the crisis that leads to a new monetary system, will have to be inflationary.
The ultimate financial crisis will have to be inflationary, because deflation scares provide ‘justification’ for central bank money-pumping and thus enable the long-term credit expansion to continue with only minor interruptions. To put it another way, a crisis won’t be system-threatening as long as it can be ameliorated by central banks doing what they do best, which is promote inflation.
A related point is that a crisis won’t be system-threatening as long as it involves an increase in demand for the official money. The 2007-2008 crisis was such an animal. Like every other crisis in the US since 1940 it did not involve genuine deflation, almost regardless of how the word deflation is defined. The money supply continued to grow, the total supply of credit did no worse than flatten out, and, as illustrated by the following long-term chart, there was nothing more than a downward blip in the Consumer Price Index. However, with the stock market losing more than half its value and commodity prices collapsing, for 6-12 months it sure felt like deflation was happening.
There’s little satisfaction writing the CBB after a big down week in the markets. Motivation seems easier to come by after up weeks, perhaps my defiant streak kicking in. I find myself especially melancholy at the end of this week. There’s a Rude Awakening Coming – perhaps it’s finally starting to unfold.
Many will compare this week’s market downdraft to the bout of market tumult back in early-February. At the time, I likened the blowup of some short volatility products to the June 2017 failure of two Bear Stearns structured Credit funds – an episode marking the beginning of the end for subprime and the greater mortgage finance Bubble. First cracks in vulnerable Bubbles. Back in 2007, it took 15 months for the initial fissure to develop into the “worst financial crisis since the Great Depression.”
I posited some months back that tumult in the emerging markets marked the second phase of unfolding Crisis Dynamics. I have argued that the global government finance Bubble, history’s greatest Bubble, has been pierced at the “periphery.” More recently, the analytical focus has been on “Periphery to Core Crisis Dynamics.” I’ve chronicled de-risking/deleveraging dynamics making headway toward the “Core.” This week the “Core” became fully enveloped, as the unfolding global crisis entered a critical third phase.
Don’t you love it how, now – after the biggest sell-off in fixed income in decades – suddenly everyone is bearish?
Long-time readers will know how I am a Kodiak Brown when it comes to fixed-income, but even I can’t bring myself to sell into this hole. I mean, c’mon – do you really think that waiting for your guru to announce on CNBC that two closes above 3.25% for the 30-year bond constitutes a trading strategy?
The always insightful Trevor Noren from 13D Global Research recently tweeted a chart from the WSJ’s Daily Shot that demonstrated the true extent of the bond market’s oversold nature:
The latest round of OECD leading indicator data showed ongoing softness in the breadth across countries – which is an interesting and innovative indicator we track as part of a suite of indicators on global equities. The punchline of course is that this is the kind of thing we usually see during a major correction or bear market. Like all indicators it is not without its short-comings, but it shows the wobbles currently being experienced by the global economy, and in particular the global equity ex-US index reflects the weakness which has been more pronounced outside of America.