The headline above was the Wall Street Journal’s summary of last week’s market action. But was it really “crazy”?
Perhaps it just felt “crazy” to those who had wanted to believe central banks’ stimulus policies could somehow restore growth to previous SuperCycle levels?
Maybe instead, last week was just the early stages of the Great Unwinding of these failed policies? Certainly more and more people now seem to be concerned that China’s policy reversal is an earthquake that risks opening up the “fault-lines in the debt-fuelled ‘ring of fire’” created by the central banks.
And contrary to the hopes of most analysts, China has repeated once again that there is no going back to the old ways. As the chief economist of China’s central bank explained at the weekend:
“Part of China’s “New Normal” is that “big stimulus” won’t be called for every time growth decelerates. And secondly, the New Normal will involve a lot of rebalancing in terms of changing the economic structure.”
- China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan
- Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices
- The US dollar is strengthening and liquidity is tightening across the world
- Equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits
- Interest rates are becoming volatile as some investors seek a ‘safe haven’, whilst others worry that stimulus policy debt may never be repaid
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As Merryn Somerset Webb wrote in the Financial Times on Saturday:
TOO MANY UNANSWERED QUESTIONS OVER CHINESE GROWTH
“A paper from chemicals consultancy International eChem gives a good overview of how it (China’s collateral trade) works and there are various mind-boggling schemes in use. But the key point is that the trades involve commodities of all types (metals in the past and more recently chemicals) being shipped to China and used as collateral via the shadow banking system to finance other investments offering higher returns – in particular, property. They have been one of the key drivers of credit creation.
“Investors in commodities might have believed that everything imported into China was used for something productive. But Paul Hodges of International eChem says many of the imports have just been stockpiled for financial engineering. Some estimates suggest that 100m tonnes of iron ore is tied up in finance deals. That’s all been fine while China has been growing fast – who cares about the complications when everyone’s making money? But with the property bubble deflating, it matters now. Not only can deals fail as property prices and liquidity fall off but the government has announced it has found some $10bn of fraud in trade finance and ordered a tightening of systems.
“This, says Mr Hodges, suggests the “moment of truth” for commodities may be near. Falling capital expenditure means that China doesn’t need natural resources like it used to, and the “vast stockpiles” it was only ever going to use as financing instruments “may soon be released back on to the open market” too. The unwinding won’t be pretty….
“The clear message from all of this is that we should continue to steer clear of assets that rely on Chinese economic growth, and in particular investment growth, for their success. This doesn’t necessarily include all Chinese equities. However, it does include most commodities. It also includes pretty much anything in Australia – which is very reliant on mining – and, among other things, the multiple booms in high-end property markets worldwide.”