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Wee! This is becoming a weird form of time travel.
Twenty-five trading days ago the S&P 500 was just 0.1% below its all-time high of 2131 recorded on May 21. Since then we have traveled backwards about 415 days!
That’s right. Yesterday’s 1893 close was down 11.2% from the all-time high, and marked the chart point first crossed way back on May 22, 2014.
Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the PBOC.
In standard central bank fashion, the latter injected (even) moar credit into the Chinese economy via a 25 bps rate cut, reduction of bank reserve requirements by 50 bps and mainlining about $25 billion directly into the banks via reverse repos. Under the latter procedure, the PBOC takes collateral and gives banks cash for a few weeks and then rinses and repeats—over and over, for as long as it takes.
Of course, in recent weeks China’s officialdom has also been feverishly trying to prop-up its currency in order to forestall a tsunami of capital flight. In the last six quarters more than $800 billion of private capital outflows had Beijing scared silly. They were actually sending the paddy wagons out to arrest people for attempting to sneak their capital out of the land of red capitalist miracles.
In fact, according to Soc Gen today’s PBOC actions will inject about $106 billion of fresh cash into the banking system, including bank reserves freed up by the RRR cut. Apparently, however, during recent weeks China had drawn down its FX reserves in attempting to prop-up the yuan by an even great amount. That means they drained the banking system first, and have now flushed the same liquidity back in.
Push, pull. Tighten, ease.
These are acts of desperate, stupid madness, and here’s why.
Twenty-five years ago, Mr. Deng discovered the printing press in the basement at the PBOC and let it rip——including a 60% devaluation of the RMB in one fell swoop. Soon the world was flooded with cheap Chinese goods.
As its subsequent giant trade surpluses materialized, however, rather than letting the exchange rate rise in a clean float as Nixon and his guru, Milton Friedman, had prescribed when they trashed Bretton Woods back in August 1971, the communist bosses in Beijing ran the dirtiest float ever conceived.
During the last two decades the PBOC and its sovereign wealth management affiliates accumulated dollar, euro and other major currency reserves like there was no tomorrow. But as they stuffed the PBOC’s vaults with $4.2 trillion of US treasury notes, Fannie Mae paper and other so-called FX reserves in the conduct of their currency pegging operation, they perforce expanded their domestic banking and credit system by an equivalent amount of RMB.
At length, the suzerains of Beijing turned China into a credit-fueled house of cards. In the short time of two decades, they morphed a debt-free, quasi-subsistence federation of communes, collectives and state factories into a $28 trillion mountain of IOUs that funded the greatest spree of economically mindless land grabs, construction spending, economic gambling and state corruption in recorded history.
In other words, China is a tottering freak of economic nature. But never mind the deformed foundation upon which the miracle of red capitalism was erected. The Wall Street brokers nearly without exception view it as just one more big economy that can be continuously inflated by deft central bank intervention and other state actions designed to insure stability and growth.
As Nixon might have said, they are all Keynesians now. The job of central banks everywhere and always is to goose trouble-prone economies with printing press money so that households and business will spend more, the GDP will rise more and the stock bourses will be worth more.
Under this regime, there is no reason why economies should ever falter or stock markets should tumble; the state and its central banking branch can purportedly cure any deviations.
Thus, on July 7th Goldman’s China equity strategist gave the all clear signal right after the proceeding 20-day, $3.5 trillion meltdown of the China stock market. Completely ignoring the fact that China’s newly affluent classes have opened 287 million trading accounts, mostly in recent months, and mostly amounting to highly margined table stakes at its red chip casinos, Goldman saw nothing but blue skies ahead:
Goldman Sachs Says There’s No China Stock Bubble, Sees RallyKinger Lau, the bank’s China strategist in Hong Kong, predicts the large-cap CSI 300 Index will rally 27 percent from Tuesday’s close over the next 12 months as government support measures boost investor confidence and monetary easing spurs economic growth. Leveraged positions aren’t big enough to trigger a market collapse, Lau says, and valuations have room to climb.
Goldman Sachs is sticking with its optimistic forecast in the face of record foreign outflows, the biggest-ever selloff by Chinese margin traders and a chorus of bubble warnings from international peers. The call hinges on the success of unprecedented government efforts to revive confidence among individual investors who watched equity values tumble by $3.2 trillion over the past three weeks……“It’s not in a bubble yet,” Lau said in an interview. “China’s government has a lot of tools to support the market.”
Well, not exactly. The Shanghai composite is down 21% since then, and a staggering 43% from the levels attained in late March. That amounts to a $4 trillion “wealth” implosion in less than 100 trading days.
Did Goldman fire this clown yet? No it didn’t.
Why? Because Goldman’s house economic model is essentially statist, and its agents——Dudley at the Fed, Carney at the BOE, Draghi at the ECB—–are strategically placed to execute that model.
So not surprisingly, Goldman’s chief equity strategist is out this morning with a buy-the-dip note, assuring its clients that the storm is over and that the S&P 500 will be back to its old highs in a jiffy:
…….Concern about China economic growth was the immediate catalyst for the correction. (But) we expect the US economy will avoid contagion and continue to expand. S&P 500 will rise by 11% to reach 2100 at year-end. Such a rebound would echo the trading pattern exhibited in 1998 when US equities rallied and largely ignored the Asian financial crisis. ………
Ultimately, the US economy was relatively unaffected by overseas financial market gyrations in 1998 and we believe a similar situation will occur in 2015.Our analysis of the geographic revenue exposure of S&P 500 constituents reveals that the US accounts for 67% of aggregate sales. Approximately 8% of revenues stemmed from the Asia-Pacific region with 1% disclosed as coming specifically from Japan and 2% from China. From an economics perspective, US exports account for roughly 13% of total US GDP, which includes 5% to emerging markets and less than 1% to China.
That is just plain gibberish. Goldman’s statist economic model renders it utterly blind to the booby-traps planted everywhere in the world economy. For goodness sakes, this is not 1998!
Back then China had less than $2 trillion of debt outstanding and a minor presence in the world economy. Since then its credit market debt outstanding has exploded by 14X, its steel industry has expanded by 6X, its auto sales by 25X and its exports have risen by 1300%.
China Exports of Goods and Services data by YCharts
In the interim, in fact, it has paved its landscape with a vast excess of everything——60 million empty high rise apartments that function as piggy-banks for speculators; dozens of ghost cities, empty malls and see through office buildings; scores of steel, machinery and auto plants that will soon be shutdown; mountains of copper and iron ore inventories that are hocked to foreign lenders; and trillions worth of high speed rails that are unsafe, airports that have no traffic and roads and bridges to nowhere.
This did not happen in isolation behind a red curtain. The wild west boom of red capitalism now sucks in $2 trillion more per year of imports of energy, raw materials, intermediate components, capital equipment and luxury goods than it did in 1998 when Alan Greenspan panicked in the face of the LTCM meltdown and slashed interest rates three times.
Indeed, Greenspan’s foolish action triggered a spree of coordinated money printing by the worlds central banks, including the PBOC, that was literally unimaginable by even the most wild eyed Keynesian economist at the time Goldman now identified as pivotal to our current prospects.
To wit, the combined central banks of the world sported a collective balance sheet of less than $2 trillion in September 1998—–reflecting a century’s worth of slow and steady build-up. Today that figure is $22 trillion, meaning that the world economy has been hyper-stimulated by a 11X increase in high powered central bank credit.
It is downright foolish, therefore, to claim that the US economy is decoupled from China and the rest of the world. In fact, it is inextricably bound to the global financial bubble and its leading edge in the form of red capitalism.
It might be wondered how stupid Goldman believes its mullet clients actually are. With respect to its non sequitir that China accounts for only 1% of US exports would it not occur to a reasonably alert observer that Caterpillar did not export its giant mining equipment to China; it went there indirectly by way of Australia’s booming iron ore provinces.
Likewise, the US did not export oil to China, but China’s vast, credit-inflated demand on the world market did artificially lift oil prices above $100 per barrel, thereby touching off the US shale boom that is now crashing in Texas, North Dakota, Oklahoma and three other states. And is it not the fact that every net new job created in the US since 2008 is actually in these same six shale states?
Similarly, US exports to Europe have tripled to nearly $1 trillion annually since 1998, while European exports to China have more than quintupled. Might there possibly be some linkages?
Never mind the obvious, however. All the brokers were out this morning with the decoupling story—–even if it ended-up insufficient to prevent another down day in the market.
But let’s see. According to the Wall Street brokers, housing and employment will carry the US economy steadily upward.
Really? In the face of an unprecedented global collapse of the greatest phony boom known to economic history, here is housing and labor hours employed in the US economy.
Is this a plausible engine of continued expansion for the purportedly “uncoupled” US economy?
US Residential Fixed Investment data by YCharts
Or this?
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