Will china’s slowdown wreak havoc on markets macro ops zyklon b gas effects


Last July, we laid out the case for why China is the most important macro factor this cycle. We talked about why it’s a debt riddled neutrino bomb waiting to go boom… But … we also noted how the Chinese Communist Party (CCP) had been injecting liquidity into its economy in order to steady the boat during its all-important National Congress last year.

Well, now that the big gathering of Marx lovers is over and Xi Jinping has been anointed the Grand Emperor for life. The CCP has the all-clear to move forward with managing the country’s deleveraging and transitioning from an export economy to a consumption based one

A real estate analyst was addressing the partners and he said: ‘Currently there’s 5.6 billion square meters of high rises in China under construction. Half residential, half office space.’ And I thought for a second and I said: ‘No, you’ve gotten the American, rest of the world metrics wrong. You must mean 5.6 billion square feet. Because 5.6 billion square meters is roughly 60 billion square feet.’

And my analyst looked at me sort of terrified. He was a young analyst at the time. He said: ‘I know. I double checked. It’s 5.6 billion square meters.’ And I thought for a second and I said: ‘Well if half of that’s office space, that’s roughly 30 billion square feet of office space. And that’s a five foot by five foot office cubicle for every man, woman and child in China!’

And with the government’s explicit backing to do whatever it takes to keep China growing faster than the rest of the world’s major economies. Right now markets believe in two things: central banks have the market’s back and China has the global economy’s back.

Xi Jinping, as the leader of the CCP, cares solely about keeping his grip on power. All leaders, especially authoritarian ones, sit under a heavy sword of damocles. Xi is no different. Maintaining power and control are necessary to his survival.

The same goes for the broader party and its members. The CCP fears social unrest more than anything else; lest the people take to the streets and begin to demand a voice in government. Both know that the best way to keep the peace is by keeping the engine of economic progress turning and never letting things regress, too much.

Anyways, so Xi and fam know that they must maintain stability, both economically and politically to ensure their survival. And since their government is filled with very bright technocrats, they know that they have to deal with their debt problem. They can’t afford to keep kicking that can down the road, anymore.

In addition, communism is all about outward appearance. Dog and pony shows are extremely important in reminding the people that the communist system is really the best. Which is why the CCP’s coming centenary anniversary in 2021 is such a big deal. They need to celebrate 100 years of economic progress.

It’s very important that the Chinese economy is strong like dragon for the centenary in just three years time. The technocrats know this. And they know that if they want a strong economy in 2021 then they need to slow it down, now. This was the theory first put forth by macro hedge fund manager Felix Zulauf, which I wrote about here .

2021 is the 100th anniversary of the Communist Party… So I assume that the current president, who is now president for a lifetime, wants to have a good economy in 2021. If he wants to have a good economy then, he’s no dummy, and his experts aren’t either because I think, actually, the Chinese government has the best experts of all the governments in the world. So they have to slow down the pace of the economy in ’18-’19, and reduce some of the risks they have built up . And I think you are seeing that already.

And I think the Chinese think that the fiscal stimulus in the US could take up some of the slack. And I think it is timed that way that when the US pushes their economy a little bit further through the fiscal stimulus, that they could retreat some and it would be balanced. Of course, it will not be balanced because China’s effect and impact on the world economy today is much bigger than the US economy.

So I think the Chinese will most likely overdeliver in their restructuring efforts over the next two years, compared to what the world expects. If that is true, then we will have a stronger dollar for longer, and will have weaker commodities for longer. But once the world then gets disappointed in ’19 or whenever they figure that out– the Chinese are beginning to kick start their economy from 2020 onwards. So I think there are many cycles within these long cycle that we are in. And the mini cycle, I think, is topping.

I mean, we know the Chinese government is worried about its excessive leverage. And we know that political anniversaries and pageantry are important in their culture. And … it would be wise — and China’s technocrats are wise, if not sometimes hamstrung — for China to move aggressively in deleveraging while the US (its counterpart engine for global growth) is firing on all cylinders, with unemployment sittings at 17-year lows and capital expenditures trending towards generational highs…

It’s the YoY change of railway freight. Remember, in our recent article , we talked about why it’s best to view data at the second derivative level. Because the rate-of-change reveals important trend changes in velocity. Well, we can see that in the chart below.

Looking at this chart alone would have tipped you off to something being amiss. You could have triangulated this with price action in commodity and emerging markets to either help you to side-step or go outright short into what became a nasty bear market.

China’s M1 money supply (narrow money) growth turned negative following its large upswing in 16’-17’. Here it is, charted along with the year-over-year change in industrial metal spot price index. Notice any correlations? Perhaps any leading correlations?

I’m no curmudgeon or China doomsdayer. I think China will manage things just fine. But growth there is clearly decelerating. And the CCP’s actions give weight to our “slowdown into 2021” theory. So, as long as the data continues to confirm our theory, that’s the one we’ll base our assumptions off of.

I’m guessing the CCP learned its lessons from the painful economic slowdown in 14’-16’ and will proceed with more caution this time around. Taking one step back for every two forward in their move to deleverage — or crossing the debt river by feeling the stones, as Deng Xiaoping would say.

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