The China Crisis Continues To Metastasize - China's Wholesale Price Collapse Continues To Pick Up Momentum
This week Secretary Geithner thanked the Chinese leadership for stimulating their economy in an effort to recreate global harmony aka globalization. A statement that clearly tells us just how completely unaware Mr. Geithner truly is to the permanent changes that have developed in the global economy. What were some of Mr. Geithner's primary points of concern at this summit? Intellectual property rights? Manipulation of the yuan? Manipulating export subsidies that cost American companies profits and American workers jobs? The largest counterfeiting operations on earth costing American companies hundreds of billions of dollars? Of course not. We embrace free markets. Instead Mr. Geithner is seeking the liberalization of the Chinese financial system and the opening of this particular market to foreign firms. ie, Wall Street. Financial liberalization? Haven't we already lived this nightmare? And now we wish to make this the centerpiece of our policy discussions with China? It's comforting to see Wall Street fraud plays a primary role in shaping our country's trade policy as well. In more ways than anyone could likely imagine.
Well, another reason this is a perfect week is because many of our favorite clowns pumping investment in China over this last cycle have been on the media tour and are beginning to feel their oats again. How could they not be giddy? The Chinese stock market is up 100% since November. Bliss is just around the corner. It's right there. Hiding right behind ignorance.
The focus of this blog has been generally different than most when it comes to economics. That is because experts, analysts, economists and the prevailing wisdom of the status quo are well too focused on country-specific economic analysis. Such an analysis is both faulty and contains substantial forecasting blind spots. How can anyone rely upon a model which doesn't reflect appropriate dynamics? Oh, I'm sorry. I forgot. That's the very reason we are in this mess. Faulty models.
We are in a global economy. No macro perspective has any substantial validity when viewing a country-specific analysis in a vacuum. But, in fact, this is still what we see. As an example, this incessant focus on housing in the U.S. is ridiculous. Housing is one hell of a mess but it is completely irrelevant to the root cause analysis of this crisis or where the global economy is headed.
The Great Depression wasn't a country-specific event either. It was caused by globalization dynamics still not understood to this day. This lack of appreciation for the global nature of today's crisis has given us an opportunity to accurately anticipate far more global outcomes to this crisis than any economist or expert. While the final outcomes have not yet revealed themselves, every macro analysis or perspective we have discussed on this blog continues to develop as we have anticipated. And none of those perspectives have changed over the years. I think this bears witness to the depth and breadth of our analysis. And the understanding of the root causes driving this global crisis. Causes that continue to build in their intensity.
On that note, let's look at a newly announced data point coming out of China. China's June wholesale price index was released a week or so ago. It is showing another very disconcerting decline. The fact that the Shanghai Index was down 8% at its peak on Wednesday is no coincidence. This is not the behavior of a new bull market.
Surely we are all leery of economic statistics coming out of China. Some data seems plausible but we must remember this is a communist country. The only harmony in China is afforded to those who yield completely and willingly to the state. Truth is irrelevant be it economic statistics or personal property rights or free speech. The wholesale price numbers do come directly from the Bank of China's web site. That said, the reality is likely to be substantially worse - either through incompetence of capturing accurate data or outright misrepresentation.
To get some context to the recently released numbers, let's look at China's year-over-year percentage price changes since this global crisis snowballed last September. Do you possibly see a trend here? Do you understand the substantial ramifications for this trend?
We have warned for years that China's banking system is likely the most unstable of any major economy on the planet. It is substantially more unstable than the U.S.'s. Substantially. So, what happens when an enormously overdeveloped economy sees sustained and substantial price declines? Well, we are about to find out. Maybe an inability to meet its financial obligations? Possibly debts turning sour? Liquidity burning out of the economy at a rapid pace? A banking system collapse? That's a good start. I think they call this an economic bust. Now what have we always said is the largest economic calamity on earth? That would be China. Are you sure we have reached the dawn of the Asian century? The China miracle? That China is going to be a large future buyer of gold? That the yuan is going to play a major role in international commerce? China's currency reserves are a sign of economic stability? A flat earth hypothesized by Thomas Friedman and Mohamed El-Erian? We have refuted all of these myths and more. And they are all myths. The decade-long never-ending media blitz backed by Wall Street, corporate interests and the bamboozled themselves have pummelled society with thousands upon thousands of reports, books, economic analyses, prognostications that were myths.
We have seen a strong bear market rally in China but its market is still down 50%. And, just like in the U.S., China's bear market rally is driven by speculators using free government stimulus to play games in financial markets. Statistics aside, which are horrible, liquidity is draining out of the Chinese economy at a rapid clip - loan growth is up thirty-odd percent(likely much higher) yet monetary aggregates are dropping substantially.(likey much lower) And just like in the U.S., the liquidity driving China's equity market will recede again as future shocks hit the economy. The Shanghai Index's 8% dump on Wednesday could be an early warning sign of this fact. Mr. Geithner is completely wrong in his remarks at the China-U.S. summit. This is not a financial crisis. The financial crisis is a symptom of the collapse in globalization and global finance. But, then this isn't anything new to us.
China's crisis has been building for more than a decade. Those concerned about the loan growth over the last handful of months are missing the forest through the trees. It's a symptom of the communist leadership's attempt to stop the deflationary collapse rolling through China's economy. That very fact is the driver of recent loan growth - an all out effort to avert disaster. The statistics are now telling us the China miracle-that-never-was is officially dead. All of our projections on China are starting to materialize on an outwardly measurable level.
The world is still biding time as this global crisis develops into the economic tsunami it shall become. It is simply being delayed by the race to the bottom of the barrel of propping up exports, tax breaks for exporters, quantitative easing, devaluing currencies, budget-busting stimulus packages, capital infusions into financial institutions and other profligate measurements of green shoots.
Let's hope we don't see volatility spill beyond China's border. But, as we have written, that possibility surely exists. The state needs an external enemy to maintain control. To deflect criticism and sustain its power base. And as we have written, that means China's ire could very well find a large target in the form of the United States. (Sounds mildly similar to the American government's position of military Keynesianism.) Yet nothing could be further from the truth. This is China's crisis and China's problem. As the Chinese economy collapses, will it be the communist government that takes responsibility for their crisis or will it conveniently be blamed on the United States?
Any entity with a significant counterparty position to China is a risk itself in one form or another. That includes the other BRIC countries. It also includes more than economic risk. As an example, North Korea relies substantially on China for food, fuel and foreign trade. A crisis in China becomes an immediate crisis in North Korea. A destabilized North Korea is a serious risk to Japan and South Korea. And, of course, as we have repeatedly remarked, China's financial reserves will more than likely disappear as China deals with its financial crisis. For that we can almost be assured a major yuan devalation in imminent at some point - another nail in the coffin of globalization as counterparties adjust accordingly. And for this very adjustment global liquidity will burn even more. Obviously as we have remarked for years, we expect U.S. interest rates to rise due to this dynamic. Not because of inflation but because of risk induced by burning global liquidity. But these dynamics will also be supportive of the dollar. As we have said, don't confuse the U.S. Treasury market with the currency market. There are flawed arguments constantly being forwarded by those who cannot seem to separate the two markets. Then there are the supply chain shocks we have warned of. The foreign investment in a destabilized China represents what risk? The exposure of international banks? And on and on. Of course, all of this is a rehash of our voluminous posts highlighted again for new readers. And as a confirmation that all of our macro positions continue on track.
This all plays into our theme of ever rising global volatility. There is no economic recovery. There may be positive GDP growth later this year due to trillions in debt-driven stimulus but economic recovery has absolutely no foundation in any economic fact.
Now I am become death, the destroyer of worlds. Oppenheimer's remarks are becoming a little too close for comfort. Let us hope those who seek to harness science, not for the betterment of humankind, but instead for its control, do not gain an upper hand in our future world.
The world is going to become much more interesting. Frighteningly so.
All the while, lazy money on Wall Street takes on more and more and more risk. And that in itself is adding more and more and more risk to the American economy. All courtesy of your favorite politician and central bankers. But remember, it's all good.