by Tyler Durden
Once again – ahead of the G-20 meetings – China’s currency mysteriously abated its incessant plunge suggesting ‘stability’. As Bloomberg notes, history shows that the Chinese currency usually strengthens ahead of major political or economic events, such as President Xi Jinping’s state visits to the U.S. and the Boao Forum.
The People’s Bank of China raised its daily reference rate for the yuan in each of the last three days, spurring speculation it is acting to limit losses in the currency.
Howeber, as Mark St.Cyr notes, lately there have been quite a few warning signs pertaining to China. Yet, concern seems anathema to not only the “markets,” but the media in general. However, I’m of the opinion that is all about to change. And that “change” is not years away, but rather, sooner (and much sooner at that) than later.
To use an analogy, I don’t think there’s a better one than the old “Bull in a china shop.” Sure there’s no broken dishes currently, but that’s because the bull has yet chosen an aisle to venture down. That is – if he chooses to use an aisle at all. And the “markets” are behaving as if the bull can somehow read or cares about the “you break it – you own it!” sign. This pretty much sums up the absurdity of complacency now taking place in the “markets.”
Last week China’s GDP figure was reported to be 6.7, beating consensus by just a tick. However, there was some concern that the print might come in (heaven forbid) below consensus. Why the need for any concern one might ask? After all, when your GDP figure is basically announced well in advance (e.g., 6.5 – 7.0) then hit with statistical precision, report, after report, after report as announced by the politburo of a communist controlled economy. Again, why sweat it? The so-called “smart crowd” weren’t.
Easy: Today, in a market so utterly adulterated and carry trade sensitive via central bank meddling, just a tick lower of the expected 6.6, as opposed to their tick higher beat, has ominous implications. For any movement lower is now suspect or viewed by the outside world as “just how bad is it if they reported lower?” An inline, or even just a tick higher beat is seen as “they must still have some control of their economy.” e.g., Phew…Buy, buy, buy!
Hence lies where the real concern is by those that understand the true, current economic conditions within China. For where that concern truly emanates from is all summed up in those 6 words. i.e, The assumption of “they must still have some control,” emphasis on “still” and “some.”
To understand the underlying concern of what is inferred by using “they must still have some control.” Let’s use another analogy, one of a speeding car with a driver either asleep, or impaired at the wheel. The driver represents chinese consumers. The car represents all those state funded enterprises of all sorts, fueled with artificially produced rocket fuel (i.e., loans.)
The politburo currently has no more control over that vehicle than that of guard rails. What’s also at issue are that these “guard rails” are not fully constructed. They’re being feverishly assembled, haphazardly and slightly ahead of the oncoming car which is careening from side to side as it goes along. So far they’ve managed to just stay ahead. But to say they have the situation under “control” is disingenuous at best.
To sum up the way this is being played across the main stream financial media, you’ll hear arguments to the likes of: “Currently the vehicle (e.g., chinese economy) is still traveling down the road. It appears things are going in the right direction with the politburo exerting control policies when needed which are showing to be quite effective.”
It is my stance the above example is a microcosm of just how most of the specious, egregious, or intentional lack of details is allowed to go unquestioned by the financial media at large. Precisely how one uses or views the word “control” (i.e., meeting or beating measurements) is where the rubber hits the road. e.g., Think Bill Clinton in his now immortal argument of what the definition of “is,” is.
So what are we to read into with this latest “beat” in GDP out of China? Are we to believe as is being dissected and disseminated by the so-called “smart crowd” that this “beat” is good news, showing that things in China are being managed efficiently and effectively, where the concerns of an impending crisis is “overblown?”
Or how about: “China is quite successfully demonstrating its ability of turning its economy from a manufacturing based economy, to a service economy. And this latest GDP print proves it.” Which by-the-way is near verbatim of what I’ve heard or read recently.
I am often amused at how this “switch” is reported on, as if it were remotely true. Need an example? Fair enough: Then why is China’s continuing (and sometimes panicked) credit expansion still directed into ever the more construction (and all its aggregates) when “consumption” can’t even begin to consume what’s already built? And no, that’s not a play on words.
Let me express it this way using just a little common sense and thought-through, as opposed to the “in-depth” analysis delivered by most of the main stream outlets that I’ve come across. Ready?
It took decades for the U.S. to show measurable signs that its service sector was in any way replacing its manufacturing based economy. And in many ways that “replacement” has not been for the better (see Detroit, Allentown, etc., etc.) So what we’re now supposed to believe is – in less than a decade – both during and after one of the greatest financial crisis and economic malaise of history – China has just “flipped a switch” and boom they’re now “Service Sector R Us?”
I’ll just add one more point: The same people who do hold that view, also hold the view that China doesn’t have a dept problem. Don’t take my word for it. Just listen to any current Institute president or “senior fellow” of some think tank.
I bring this all up for ne reason: Few believe there is a reason for concern that China “might” do something which may upset the current economy as it now stands. I am not one of those. I’m of the opinion it’s “will” and soon.
I’m also of the viewpoint (and right now I know its controversial, and I may be well alone, but so-be-it) that the 6.7 GDP print was only to allow a little more wiggle room in the timing as for China to venture down a road of monetary policy that will rattle all other economies to their very core. I also believe some (“some” meaning developed market economies) will be shaken so severely they might monetarily implode all together.
Again, I’m not talking about emerging markets – I’m talking about the developed. Precisely which ones are up for grabs. But none will walk away unscathed. Here’s some of my reasoning for concern…
One of the things you won’t see in the main stream outlets is the all out flooding for credit expansion happening within China. Now some might say “Well that’s typical, nothing to see there, they’ve been doing that since the beginning.” Well, that’s yes, and no. Sure, they goosed the system in unison with every other developed economy during the go-go years. What they haven’t done is something of this size (which by all measures is gargantuan) when just previously in May they all but shut the spigots off.
To try and give that some context think of it this way: Imagine the Fed. coming out after the May FOMC with a 1.5% rate hike, then in July, announcing it was implementing a negative rate. (forget the global impact for comparison, just think about it from a domestic view) Would a move such as that give businesses or anyone else for that matter confidence in the controlling leaders? Yet, that’s just about what China did. And most are unaware of it even transpiring.
Think about it: In just one month (yes, that’s 30 days) new credit exceeded the total 2015 GDP of Chile, Ireland, or Vietnam. And all they felt comfortable reporting was 1 lousy tick above the “hit never miss” figure? (insert lousy T-shirt joke here) Again, reread that point. That was in a month!
Oh, and by the way, if you thought May was showing restraint and control – then maybe I shouldn’t mention April. Yep, nothing to see here folks – please move along.
It is my belief that China has already lost control and is desperately waiting for the right circumstance (much like the American version of “never let a crisis go to waste”) as to implement some form of game changing monetary upheaval that helps set the stage for a more China-centric platform, as opposed to them needing to react to both Fed. policy movements or ECB for that matter. And to my thinking, in many ways, those circumstances are piling up on a silver platter.
And to be clear: I believe China grabs that platter – and soon. And by “soon” I mean just that: very. Possibly before year-end
I’m also of the opinion China is already on that brink or dilemma for that point-of-no-return, first mover decision, as to initiate those controls and policies they believe must be implemented. For if not they’ll be left to deal (if they can at all) with the whims and consequences of all the other central banks. I believe that is an absolute non-starter for China, particularly in this current economic, and political environment.
No matter what one thinks about current Fed. policy, just the very fact that the Fed. “could” raise rates is causing huge capital outflow headaches for China. It’s as if China is being told and expected to wait patiently under the sword of Damocles while the Fed. ponders what policy move it should embark upon next.
And if indeed the Fed. were to actually raise? (I know don’t laugh but you have to access the possibility no matter) The politburo in China may be left helpless to stop the outflows unless they come down with a complete and unforgiving hammer.
However, too this point, China can’t make that kind of political and monetary move in anything resembling “normal” times. (i.e., “normal” being a relative term.) It would be seen as too heavy-handed (or communistic) now that they’ve supposedly become more sympathetic to playing by western rules. (e.g., inclusion into the SDR etc.) But the necessary fruit needed to upset that apple-cart (i.e., to their first mover advantage) is just sitting there on that silver platter adorned, hand delivered, again, and again by those very economies that believe “they need us, as much as we need them.”
To which I’ll say – au contraire.
China has been aligning, as well as solidifying its economy and its ideology (e.g., communist, dictatorial, or anti $ hegemony) with other like-minded players. Russia is just one example. Now with the advent of Brexit, who knows who else. In the advent of a sudden economic collapse one thing is certain: China can, and will, control any and all civil unrest. So too will Russia. The West? It’s an open question. And there lies the rub. Let me explain…
Why would China or any other communist/dictatorially led nation just sit there knowing full well that civil unrest, money outflows, and a whole lot more are inevitable because of economic dictates emanating from the West? (e.g. central bankers) Again, and I can’t make this point enough: All while they, in-turn, do everything they are telling China not to do themselves? i.e., Implement excessive central bank intervention buying up stocks, bonds, and more. All while funding those purchases by devaluing their own currencies ipso facto by hitting the “print” button over, and over, and over again, as they simultaneously warn China of devaluing their Yuan will be seen as “manipulation” calling for some kind of expressed condemnation, if not out right sanctions.
Think through just this one hypothetical: Do you think for a moment China is going to nonchalantly wait till the Fed. decides that it will or won’t raise, then deal with its aftermath? Hint: Not a chance on Earth. And in-particularly – not in this current political environment. And those that will write this type of argument off as some “tin foiled hat” type of assumption, in my view, either haven’t a clue, or aren’t paying attention. Period.
What China needs (and desperately wants) is to devalue the Yuan ever more. Yet, they can’t do that if there is any chance (as remote as it may be) that the Fed. may raise interest rates. The outflows would be exponential compared to today. However, as I’ve alluded to – that platter sits there just waiting to be tossed. And that “bull” is still within the store. If China devalues, and forcefully at that, the resulting mayhem ties the Fed’s hands from ever raising indefinitely. And there’s more…
Currently this supposed “bull” market in the U.S. has now been pushed to heights never before seen in human history. China’s? Not so much.
We also know China is sitting on massive stockpiles of goods from commodities to further finished. Add to this both the current political ramifications such as the recent decision in the Hague with a denouncement of China claims in the South China Sea. Along with a current U.S. election cycle rhetoric where one of the main topics is curtailing China both in trade, as well as militarily. How do you think this is all being viewed by not only the politburo in China, but by the populace at large? Hint: Not well.
As of this writing anti-U.S. protesters are smashing iPhones® in front of a KFC™ and calling for boycotts in China. This is in direct retaliation of the South China Sea decision. It is also exactly the type of “fruit” that makes that “platter” ever the more tempting. i.e., Why invent a scapegoat when your people are giving you one?
China has also been sending signals both overtly, as well as implicitly when it comes to how they will approach whether or not items will be sold regardless of how a manufacture believes in respect to whether it has a recognized brand, copyright protection, or not.
As I stated in an earlier article concerning China, here are a few points that should be raising alarm bells. To wit:
“China just announced some form of reprisal against Apple™ stating a copyright infringement on its phones therefore halting future sales. The reports have been mixed. Some say it isn’t true, some say it is. As of this writing I’m not quite sure myself. But what made this allegation stand out to me was the most recent public statements from none other than Alibaba™ founder Jack Ma when he stated “fakes are better than originals.”
That wasn’t all. He went on to make other assertions such as this. To wit:
“The problem is the fake products today are of better quality and better price than the real names,” he said during a speech on Tuesday at Alibaba’s headquarters in Hangzhou. “They are exactly the [same] factories, exactly the same raw materials but they do not use the names.”
“Why such a statement unless…you’re moving closer and closer to what China wants (or is demanding) you to accept. i.e., we make the stuff, start taking the credit and now openly state you’re going to take the money associated with it. Trade agreement or no trade agreement. Besides, agreements? We don’t need no stinkin agreements – we make the stuff! See my point?”
Millions of factory workers have been displaced in China over the last few years. Every developed economy via their central bank has been implementing some form of devaluation in one way or another. And you now have non other than the former chairman of the Fed. Ben Bernanke in the midst of all this flying over to Japan (China’s #1 trading nemesis) openly flaunting how maybe “helicopter money” styled policies might be the next best thing for Japan. How do you think that is being viewed in China?
The U.S. is currently playing a game a chicken in the contested waters of the South China Sea. N.A.T.O. is rattling sabres throughout Europe. The U.S. markets are at record heights. The ECB is buying up bonds levitating the values and solvency of its own manufacturers in Europe. Japan could at any moment embark on a “helicopter money” styled monetary policy making the ¥en ever the weaker helping their manufacturing.(Sure they’ve now openly stated this is not an option. Need I remind you of what they said about implementing N.I.R.P.?) South Korea is possibly embarking on their own further easing.
And what to all of this? China is to just sit there? With a stockpile of commodities, finished goods, stagnant factories, possible civil unrest directed at their own politburo? Are you starting to see the powder keg here? All while the West wags its finger and says “You better keep that Yuan in check!”
Thinking all this through just using my own prism of business experience there’s only one conclusion I would make: Use your first mover advantage – and dump everything. Your first loss – is your best loss. That rationale comes from my early career (the meat industry) where that’s still used because it’s true.
Yes, such a move may harm China, but it may hurt everyone else far more. And communist run countries can, and will, deal with their populace in ways and with calculations unfathomable to those in the West. i.e., Lenin’s famous quote when told of the millions that were dying under Mao’s regime and change, “To make an omelet, you must be willing to break some eggs.”
When one brings up the term “war” people immediately think “WW3” via some form of armed nuclear exchange. I believe that (although the warning signs are there) is where the mistake lies. People are assuming there’s only one way to fight a war today of global proportions. I’m not in that camp. I believe it will come via monetarily – not military. At least at first. For once it takes place all bets are off as to what happens next.
The obvious first mover advantage for China (and all its current allies) would be to use the rhetoric coming out of the current U.S. political arena, along with current, as well as proposed monetary policies via the Fed, ECB, and Japan. Add to that the proposition for the possibility of the Fed. tightening in this economic climate making it a magnet for outflows, all against the backdrop of a former Fed. chairman tries to convince their #1 trade nemesis to devalue and deploy monetary interventions of historic measures.
I would take all the above (and would find even more examples) and spin it all for populace consumption as “What else are we to do? Sit back while the world holds our trade, our currency, our waters, and our economy, even our workers hostage to their demands?!” Then I’d dump every and all possible goods flooding the markets, devalue the Yuan in one epic move. And let the chips fall where they may.
From a business perspective: it would be of the utmost stupidity to just sit back and wait to see how you competitors were going to position themselves when nearly every move they make helps solidify their advantages and leaves you only some form of reaction mode.
And to think in this current environment China is going to stay, or be held to, some form of “reaction mode only” is absolutely ludicrous. I know I wouldn’t. And I made my mark in business as a “turn around” expert. And I’m here to tell you, if my people came into the board room and laid out just some of the things I iterated earlier? I can say unequivocally what my first response would be: Do it – and now!
That “bull” I alluded to earlier in the china shop is this current “bull####” market. It is currently standing at the peak of absurdity with no volume, earnings, or any other fundamental reason. And its fragility is just the same as that of any fine piece of crystal or china. And all it will take to send everything crashing down in a frenzy of broken shards is when he gets spooked. But by then – it will be too late. It will be a first mover world advantage world only – reactionary will be as useless as the broken glass that befalls it. Central banks (let alone many government officials) are in no way prepared for what could take place if China decides “it’s time.”
And I believe they are weighing the precise time to move – not if.
As I conclude these following two phrases kept coming into my head. I end with them because together I believe they frame just how precarious the markets, and for that matter, the global economy sits at the doorstep of what China decides to do next. Especially as I stated previously: in this current political, as well as economic and monetary environment.
First to quote Hugh Hendry: “If China devalues by 20% the world is over!”
The other comes from the movie “Margin Call” when Jon Tuld (played by Jeremy Irons) states: “It’s not panicking if you’re first.”
Mix in “your first loss – is your best loss” and you have a situation that has the near certainty of changing the global macro world in ways never dreamed imaginable. Not in the future, but right now.
And no one seems to even notice – let alone care.
* * *
Of course, the ‘stealth’ devaluation has been ongoing for months, it’s just not always directed against the US dollar…