WSJ drinks MB’s kool-aid on China

Wall Street Journal on a theme dear to our hearts – Chinese growth slowing:

The Business Cycle Is Different This Time—Thank China

Diverging Chinese and U.S. growth are behind the confusion in global markets right now

Commodities and stocks have started 2018 with a bang. U.S. oil is trading over $60 a barrel for the first time since 2015, and the Dow has breached 25000. Inflation, though, remains in check despite a U.S. expansion in its ninth year. Investors can be forgiven for being both pleased and befuddled: where exactly are we in the business cycle?

Part of the confusion stems from widely employed language about a “simultaneous” uptick in the U.S., Europe, China and Japan. Global economic powerhouses are all growing, sure, but there are nuances. China experienced a steep slowdown in 2015 followed by a rapid rebound in early 2016, but is now cooling. The U.S. has been slowly healing from the carnage of 2009 and—until recently—hasn’t shown much sign of running up against any big constraints in labor or industrial capacity which could choke off growth.

That divergence ought to be broadly positive for developed world equities—but at best neutral for commodities this year.

More on this here.

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  1. I’m thinking of sellling my ASX Long position today and going short dow jones ETF
    I’m thinking that dow is about to get belted

    Looks too good to be true
    Is everyone on this site bullish US stocks too

    • No, I’m turning bearish. Thinking about liquidating some US stock; in particular, I have had a really good run out of CAT from a mid 2016 buy-in that I would like to lock in. On the fence though, I wouldn’t mind catching a favorable AUD/USD swing. Can’t really say why I’m getting itchy feet, just have a gut feeling things are getting too frothy.

      Commentary on it seems to be reaching a crescendo… though, things usually implode when everyone’s in the throes of euphoria and the minority fringe are labelled doomsayers. But who knows! What a time to be alive!

  2. *Morning at the WSJ*

    Editor in Chief (smoking cigar and swigging from a quart of bourbon): “All right I want you hacks to get the goods on China. Has everyone read MacroBusiness today?”

    Assembled hacks in unison: “Yeah boss, quit ridin my ass”

    Editor in Chief: “Well get back to it and copypasta me a story, we gotta deadline!” (storms back in to office, slams glass door and starts yelling into the phone).

  3. A book I read recently mentioned economic media memes post GFC for the US and China: US on verge of imminent recovery; China on verge of imminent collapse! This story has been de rigueur for years now.

    “China has the potential to maintain an annual economic growth rate of 6 percent until the 2030s, said former senior vice president and chief economist of the World Bank Justin Lin Yifu Tuesday.”

    World Bank has also upgraded China’s 2018 forecast growth rate to 6.8% (with usual caveats).

    I don’t know who drunk the Kool Aid first, Macrobusiness or WSJ, but both might be wrong over the next few years. From an Australia perspective, I hope so.

    • It’s simple, no one has ever escaped smacking into a crisis when debt levels (particularly the growth in private debt) reach the levels seen in China. Does it mean the crisis is going to be like an asteroid smashing into the Middle Kingdom? No, but there will be a crisis. How they solve it is anyone’s guess, but it seems likely to me that there will be decisive move to transfer debt from SoE’s and local government’s onto the central government’s sheet; coupled with a defacto jubilee event for private debt. It is naive to think that China can see current growth trajectories in debt for the next 15 years without a crisis.

      • Similar to suggestions I have made as to likely methodologies of a fix. I think China has legs yet and wouldn’t be betting against it or commodities at this point (with usual caveats).

        2021 is the centenary year of the founding of the CCP and I doubt Xi would want to disappoint. 2049 is another milestone but one too far for my chrystal ball.

    • The imminent total demise of Japan and the yen has been predicted constantly for the past 27 years. According to the pundits China has already been on the verge of total collapse for some years. I suspect China will no more collapse than Japan has done.
      The recovery in the US is based on the idea that the US can continue to do what it is doing and continue to print USD to cover any and all debts…forever.
      Not sure how long that can go on for but Herb Stein certainly summed up the matter.
      P.S. I just note this on ZH

      P.S. Brenton -Agree – I’m in no way claiming that China can continue present growth rates into the future!!

  4. “Then there is the most important question of all: is China even capable of hurting Treasury pricing for an extended period of time: as today’s 10Y Treasury sale showed, there was a surge in demand following the selloff in US paper over the past 48 hours, implying that should China be willing to liquidate its $1.2 trillion in TSYs, someone may be more than happy to buy these at a same, or better yet, lower price. This is the argument made by Bloomberg’s macro commentator Ye Xie earlier today.”

    Hmmm Who is going to buy and what with? This is just TSY’s!!! The only real answer is the Fed one form or another. Wonderful! It’s worked so well so far especially in Europe.

  5. Wow imagine that MB predicting a huge slow down in China unless I’m mistaken MB has been predicting this since 2011 I guess they’ll be right one day, little like Sydney RE circa 2011 it’s gunna crash, crash big I tell you. Turns out MB was possibly mistaken on both counts but I guess if they’re now looking somewhat right on Sydney, so they’ve also gotta be right on China QED.

  6. The reason that China has given the impression of being able to sustain its growth trajectory is that the central planners refuse to take their feet off the money-printing pedal (credit injections) for any more than a few metaphorical minutes … before applying more gas. As usual, Sheeple have been suckered in by ‘it hasn’t happened, so it won’t happen’ logic. (The ‘it’ being a banking and currency crisis).

    There is an unknowable threshold which, once crossed, will be the death knell for the Middle Kingdom’s ‘miracle’ economic expansion. It should be obvious to anyone with an ounce of commonsense that centrally-directed credit injections (on the scale witnessed thus far) will ultimately end in disaster because of the concomitant scale of mal-investment that ensues.

      • I appreciate the link, Daniel. Regrettably the author of the the piece for the CFR appears not to understand how the banking system works. I reached this paragraph:

        “This risk simply is not present in China. China has more external reserves than it has external debt, let alone short-term external debt. China’s lending boom hasn’t been financed by the world—it has been financed out of China’s own savings, intermediated through Chinese financial institutions.”

        …. which revealed a whole heap of (general) myths about the banking system and how it functions. The savings to which the author refers are simply the other side of the loan ledger. Let me put it this way:

        At the turn of this century total Chinese Banking assets were c. $1 trillion …. sixteen years later they had increased to $35 trillion. Allow me to disabuse anyone of the notion that Chinese ‘savings’ managed to increase by this magnitude in that very short period.
        U.S. banking system assets are only around $16 trillion — and that’s in an economy that’s nearly twice the size of China’s.

        A few years back, one Ben Bernanke explained that low domestic interest rates were the result of a ‘savings glut’ — all nonsense, of course. Every $1 of QE created $1 of deposits in the system — that’s your savings glut right there. Created out of thin air. China is no different.

        No need to continue this debate. Time will reveal the truth.