Mark St Cyr puts it out there, in a coherent and plausible argument:
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 …
‘Developed markets’ likely means your economy, by the way. Yes – he’s talking directly to you.
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 …
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?
Now, students of Kahneman will note that, while our brains are susceptible to falling for plausible and coherent arguments, plausibility and coherence are not sound criteria with which to judge the validity of arguments, nor the quality of predictions arising from them. We’d be on much firmer ground with statistical thinking – base rates, conditional probabilities, etc.
But we’re in the world of political economy here, and the people in the Politburo didn’t get to where they were by patiently waiting for their computers to finish calculating a probability space from a Metropolis algorithm in order to set up a Bayesian probability estimate. They got to where they were by being ruthless when ruthlessness was called for, and by doing so on the basis of arguments that sounded plausible and coherent to their Stebbing-Heuer-less minds.
If they’re thinking along the same lines, or even just similar lines, as St Cyr is thinking, then …
… you do the maths, grasshopper.