Albert Edwards of Societe Generale with what readers will recognise if my own thesis for global recession. Ignore the Chinese credit impulse. The rebound is stuck in a liquidity trap, not circulating in the economy.
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Bloomberg’s Wednesday Daily,“5 things to start your day” begins by highlighting the dollar’s surge. But it is the yen and the yuan that will likely break the markets.
Earnie Shavers has just died aged 78. He was widely regarded as the hardest single-punch hitter in the 1970s–the heyday for the heavyweight division. Title contender James Tillis gave a memorably chilling description of what it was like to be on the receiving end of Shavers’ bludgeoning right fist: “He hit me and knocked me face down on the canvas. I was in the land of make-believe. I heard saxophones and trombones sounding in my ear, with one low-pitched note like a bagpiper who fell over dead with no one to stop [it]. I saw little blue rats scamper out to smoke cigars, drink whisky and eat spam sandwiches.”
The great, and almost as hard-hitting, Mike Tyson once said, “everybody hasa plan until they get punched in the face”. The Fed has a plan too, but the Asian currency markets are getting set to unleash an Earnie Shavers knock-out punch onto the chin of an overconfident Fed. The low-pitched bagpipe noise will be the air leaving the US equity market at high speed as it breaks below the March 2020 lows (S&P 2,200) and much to everybody’s surprise, carries on falling.
I wrote back in March as the yen fell through the key chart level of 116 and the decline began to accelerate, “Something huge is happening in FX world and it’s not the dollar: An earthquake has just occurred in the world of foreign exchange. With all eyes fixed on US inflation and the Fed’s increasingly hawkish rhetoric, FX participants have been focused on the dollar’s rise, particularly against the euro. Yet it is in Asia where FX has just gone wild. Aggressive BoJ relative easing has caused the yen to collapse through a multi-decade support level, reigniting fears of a re-run of events that led to the 2015 renminbi devaluation.”That is still 100% true today.
And in the same article, “Despite the yen being undervalued and over-sold, it is entirely plausible that it could fall a long way from here as traders get the bit between their teeth. Is Y150/$ possible? It is, in my opinion, because when the yen breaks, it moves sharply (eg in 2013 from 80 to 100, and again in 2015 from 100 to 120). This beggars the question how will China react? Maybe just like it did in August 2015 when the PBoC devalued? Back then persistent yen weakness had dragged down other competing regional currencies and left the renminbi overvalued. It is all so familiar!” After a brief pause for breath here we are at Y145!
The economic unravelling of China is receiving insufficient attention–maybe because of the focus on the European energy crisis. It is not just the freefall in the domestic property market and sky-high youth unemployment that the authorities have to contend with, but a well-telegrammed economic punch coming in the form of excess inventory accumulation now unwinding in the US.
Investors are complacent partly because they have seen inventories deduct from GDP growth in the last two quarters. But that is only because inventories have been piling up at a less rapid rate. They have certainly not actually fallen like they did in 2021 (chart above). That is coming soon!
Bursting US retail stock rooms are beginning to work their way back up the supply chain to China where the August trade data just disappointed. Zero Hedge report that with China’s economy in deep trouble,“Watch eco, an industry portal for used luxury watches, said the price of second-hand Rolex Submariners has crashed by 46% since March. Luxury bag shops in Shanghai and Hangzhou have slashed the prices of Hermès Birkin bags by 20% over the same period.”The everything bubble is in the process of deflating rapidly, as is the renminbi/US$. Yet the trade-weighted renminbi remains strong–perhaps too strong for China’s comfort!
We warned back in March that China could not tolerate the yen in freefall pulling down other closely competing Asian currencies. Indeed, the spill-over effect of chronic yen weakness was the primary reasons for the shock 2015 Renminbi devaluation. The Korean won is now key.
My colleague Kit Juckes writes that: “The yen can’t really be viewed separately from what is happening to the Korean won, Taiwanese dollar, and most of all, the Chinese yuan. The yen may be the weakest of all the major currencies in the last month, but all four in the Northern Asian block have fallen by over 3%, and by more than either sterling or the euro!” Kit thinks these 4 currencies are more akin to grey swans than black ones–because at least we are talking about them.
The bulls will point to the upturn in the China credit impulse (below left) as the precursor of a Chinese, if not global, economic recovery. But in a sign of the depth of economic stress within China, the FT reports that ‘the number of marriages in China last year plunged to the lowest levelsince 1985–the lowest rate per adult population since records began’. Easy money can’t cure that!
