Why China's Leading Indicators Are A Big Flashing Warning Light To Albert Edwards; A Triple Dip Headfake In The US?

Tyler Durden's picture

As usual, Soc Gen's  Albert Edwards does not pull any punches: "Once again, investors see China plays as the only investment game in town. Dylan and I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s." Already we have seen traces of Edwards proving correct after the Chinese market has swooned dangerously in the past week. Should the world realize that, as Edwards claims, even near-unlimited liquidity is insufficient to keep the system going, then the China-initiated avalanche will be severe. Not only that, but in the recent fake economic renaissance (sorry, unwind QE1, QE Lite and QE2 and then we'll talk how real this recovery is) Edwards sees nothing less than the shades of the dreaded 1990s economic Triple Dip...

Here is conventional wisdowm, as transcribed by Edwards:

The investment case for emerging markets (EM) and commodities is appealing: weak growth in the West and in Japan, burdened under the weight of excess private sector and now public sector debt. Most now accept that easy monetary stances in the West are being transmitted almost 1-1 to the EM economies ? indeed the IMF has conclusively shown this to be the case, link. Loose money and strong EM growth with its high commodity intensity is the underpinning for the bull market in commodities, mining stocks and the like.

And here is the canary in the coalmine:

Once again, China?'s leading indicator is pointing towards a very significant slowdown in economic growth ahead. The last time the Chinese OECD leading indicator was this weak, commodity prices had just reached their euphoric mid-2008 peak, having spent the first half of the year resolutely ignoring the clear signals that the economy was about to slow sharply. Commodity and EM bulls ignore the weak Chinese leading indicator at their peril.

And another version of the China leading indicator:

It?s not just the OECD leading indicator that is very weak. The Chinese National Bureau of Statistics publishes its own leading indicator. And it absolutely confirms the OECD?s version of the future (see chart below and link).

And here is why we would love to get a suddenly irrationaly optimistic (but always agenda-toting) Jan Hatzius and Albert Edwards in the Octagon - the 1990's Triple Dip, which the Dutchman apparently was too young to remember.

Indeed it is not just EM/commodities that are running on fumes. The rally in the US equity market seems to be underpinned by some stronger than expected economic data. Yet we once again urge caution and remind our readers of the early 1990s experience. Then we went through a few years of private sector de-leveraging in the wake of the Savings and Loans crisis (see chart below). It wasn?t until the second half of 1993, well after the recession finished, that the private sector?s appetite for debt recovered and ?normal service? was resumed.

During the early 1990s deleveraging process, the economy remained extremely fragile. There was not just one slump in the economic data in the aftermath of the initial recovery out of recession, but three relapses, as the economic data went on a rollercoaster ride (see chart: we use consumer confidence to show the volatility in growth, but the ISM is just as good). During that period each growth scare drove bond yields to lower lows.

Similarly this year after its initial recovery, investors were caught out by the slide in the economic data. This now seems to be perking up. If the early 1990s deleveraging experience is anything to go by, investors should expect more relapses ahead and the markets to respond accordingly as we grind ever closer to outright deflation.



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Spitzer's picture

If the US treasury bubble can last this long then China has a long way to go. Maybe 10 years.

Spalding_Smailes's picture




Inflation = Unrest.

They have an asset bubble that will make an arthur anderson accountant blush ...

Spitzer's picture

And all that China has to do is depeg and buy less dollars to solve their inflation problem. That will instantly re-export that inflation back to the US.

Considering the debt levels is the US, when China does that, the dollar will do the same thing the Thai Baht did in 1997.

Thats what happens when creditors run.


Spalding_Smailes's picture

They cant de peg the banks would get crushed. 

This is how they keep the advantage in trade. The manufacturing complex would get monkeyhammered.

The jobs lost/social unrest would be unwelcome.

They are walking on a tightrope.

Spitzer's picture

No, its quite simple actually.

As the RMB appreciates, the cost of food and oil goes down for  the Chines . Since China is the creditor with the peg, the rise in the RMB is an incremental fall of the dollar.

If a Chinese family pays less for food and gas, they have more discretinary income leftover to buy their own production.

ThreeTrees's picture

I hope you're right.  My economy of residence is one of the resource extracting China derivatives.

One question of your thesis:  How much slack will a Chinese person be able to pick up with their newly deflated RMB?  Demand for Chinese goods is going to implode if they depeg and I've yet to see anything to convince me that the Chinese consumer can make up a significant portion of that loss.

Spalding_Smailes's picture


China ~ 700 million farmers.

GDP - per capita (PPP): $6,600 (2009 est.)
$6,100 (2008 est.)
$5,600 (2007 est.)
note: data are in 2009 US dollars

ThreeTrees's picture

China ~ 700 million farmers.

That's exactly what I'm talking about.  Vast majority of them are subsistence farmers at that.  They've almost been totally left out of the massive globalist expansion of the past couple decades.

Spalding_Smailes's picture

The people will gain wealth as the RMB goes up but are the farmers ready to spend this cash on cars or coach bags. And when the RMB goes up 20% the unemployment from the lost jobs at the factories would wipe out any gain in RMB wealth created. And the exports would get monkeyhammered.

ZackLo's picture

who said american corporations were going to run those factories after they get their purchasing power back...

this could be interesting too



Spalding_Smailes's picture

China will be strong in the future. But first we will have an asset bubble explode.

How that plays out for the ruling class is the real big question.

RoloTomassi's picture

honestly the smartest post i've read on ZH in two years..

Spitzer's picture

And when the RMB goes up 20% the unemployment from the lost jobs at the factorie. And the exports would get monkeyhammered.

They will have an ability to consume more of their own production. Hint...hint.. They can already afford to consume some of it.

Fred G Sanford's picture

I think you nailed it.  Chinese unemployment should be expected to rise significantly if the RMB were to appreciate significantly.  That would lead to an increase in social unrest in a place that already has a lot of unrest.

Spitzer's picture

That is a dumb american myth.

Go there and see for yourself.

Spalding_Smailes's picture

That is a dumb american myth.


But its in the news spitzer.... (33 seconds in) 700 million poor farmers . From 2008


Now spitzer that looks like a hoe in that farmers hand not an iphone. He has a donkey and a mud hut/straw and hes going to .... "pick up the slack".....



trav7777's picture

see what?  the vast polluted rivers and lakes?  Or did you mean down the street through the smog?

When you go there, you see the potemkin villages of Shanghai and Beijing.  Good luck getting to see reality behind the facade.

Spitzer's picture

I hope you're right.

This is not a matter of right and wrong, this is how economics works.

One question of your thesis:  How much slack will a Chinese person be able to pick up with their newly deflated RMB?


I can tell you first hand from traveling to China and Thailand. It costs fuck all nothing to live in these countries now, just imagine a 25% maybe 50% rise in the purchasing power of their currency !

I would say 95% of these people already have cell phones. I have travelled around the small towns and villages, you even see some iPhones kicking around. There is already laptops around too.

There is huge potencial to pick up slack.




Spalding_Smailes's picture

The job loss from the 50% rise would make tiananmen square look like a food fight. The export oligarchy would never allow it, game over for exports/jobs/communist party, party.

Oh regional Indian's picture

Maybe the point being missed in this whole discussion is that we are looking at the death of Supply side economics in the "want" sector and a calamitous situation in multiple sectors on the "need" side of the equation.

phones and laptops mean jack-shit when you cannot keep a roof over your head or eat.

I am speaking from daily observations of the Indian Dysfunction which closely mirrors the Chinese dysfunction.



Spalding_Smailes's picture

Great point as always.

The inflation is no joke if 40-50% of your income goes toward your food .

Spitzer's picture

Simple solution, export it back.

Spitzer's picture

It costs NOTHING to live in these countries. An apartment with a bathroom in the middle of Bangkok, $80 a month.

Its the Americans that will be looking for a roof over their heads.

XPolemic's picture


It costs you nothing to live in these countries, it costs the local population the same as everywhere else on the planet: 100% of their income.

If their income remains unaffected, then the value of the currency has little effect, but if they lose their income, life is expensive (no matter how cheap you percieve it to be.)

In the short term Asians would be worse off, but in the long term, they would be much better off. But how do you convince people to go through short term pain for long term gain? Western people refuse to accept that proposition, but in Asia you just start shooting people and they eventually go along.

eatandtravel's picture

Spitzer my man.  Don't be so sure of yourself.  China  is growing but it's not a wealthy country by any stretch.  In can't feed its population without America.  It has 25% of the world's population but has access to 6% of world's drinkable water. 

How will China grow with the lack of commodities?  Who has coal, natural gas and huge oil reserves?  America.

China's economy is geared for a highly levered global economy.  They have excess capacity.  Domestic demand isn't going to pick up the slack.

China is in trouble...



revenue_anticipation_believer's picture

The New China is a Govt/business partnership (fascist socialism) that works, and brute force has/will be used in Tibet, and outlying provinces...and in the center, more gently but with assured confidence...

THIS China, is, after all, a PLANNED Economy...there are aspects of "Free-Market-like/Capitalistic resource/manpower/money allocation...BUT don't compare what happens, don't assume ANYTHING regards their 'bubbles too high' and 'sure to burst'

If needed, the 'empty cities WILL REMAIN empty, like money in the bank..they will eventually be used, allocated..and yet 'privately owned'

The drops in the Chinese stock market are induced by the Bank of China, planned that way...just simply because of an excess of economic optimism, 'animal spirits'...

stop using the Western Business-Model paradigm/attitude..oversight and remember that Chinese work-ethic/culture means working 14hours/day everyday, the whole family,  if needed... Millennia of high population density, of living at the economic margin - nearly no excess production..

Just a reminder, WHO built the Western Railroad from San Francisco to the half-way point...WHO...not the Irish, but imported 'little people' who produced like no other ethnic groupAsking about 'slack', living under deprivation/hardship and suceeding not matter how much work/time it takes to survive... 

is it that some economic/stock market writers  actually INTEND to mislead, to benefit their own book??


Kayman's picture

The Chinese worked on many railroads because there was no paying work at home. And despite the dangerous conditions, working and living at home in China was no better.

Now China exports worthless junk that most economies could live without. 

Either way, exporting goods or exporting people is China's only short/medium term option.

China is in a frenzy akin to a gold rush. The transition ought to be interesting to see.

May the Chicoms live in interesting times.

Double down's picture

Which they will not do because discretionary income in Asia = savings = PM or real estate.

No safety net, no discretionary spending.

Spitzer's picture

No safety net

Which results is efficient free market solutions rather then massive unaffordable bureaucracies that usurp money out of people's paychecks every day.


Kayman's picture


I had to read that twice:

Implication (China) does NOT have a "massive unaffordable bureaucracy".

Read your history; China invented useless bureaucracy.

trav7777's picture

and the fact that much of the national GDP is operating on negative or marginal profitability is of no matter when the RMB appreciates?

their margins cannot be compressed any further; they have entire cities that are empty, factories that are idle.  They are a mercantilist ponzi.

There isn't the demand domestically absent a massive *increase* in debt in the nation.  There's already a massive overhang of that for capacity.

Dollar Bill Hiccup's picture

Debt, yes! Enter Bill Gross and PIMPCO. Create a massive, deep and liquid government RMB debt market. Sure, we'd be happy to help you out. Become a new reserve currency. Borrow like nobody's business ... become the world's biggest consumer .... wait, where did I see that before?

Rogerwilco's picture

Tightrope indeed. They have to maintain over 7% growth just to employ the kids coming out of the countryside, 7% just to stand still. Their version of TARP in '08 was almost three times the size of ours as a percentage of GDP, and now PBoC has to find an exit strategy that keeps growth above 7% without causing inflation -- and you thought Bernanke had troubles! What they're trying to do is the economic equivalent of walking a tightrope in a hurricane while juggling three running chainsaws.

JLee2027's picture

So much for the China myth about taking over the planet. How can they ever become the #1 economy when they still import food and depend on stealing then copying others inventions for their exports? Answer, they can't.

XPolemic's picture

That's how the United States became a super power, why wouldn't it work for China?

snowball777's picture

Take advantage of...

...their cartel tactics in commodity production and mining.

...their lead on green power production (dependent on said commodities).

...the fact that the US no longer has production capacity.

...their treasuries by selling into the Fed's "monetization ATM" (note: not an automated teller) until Ben has ~30% more than they do, then punking him, and spiking yields.

eatthebanksters's picture

You're a smart one Spitzter.  If China depegs they kill their export based economy and their GDP goes in the tank over night.  The bubble goes nuclear when it explodes.  Think about what you say before you say it.

JLee2027's picture

China is headed for a crash...this isn't news to those following them.

Spitzer's picture

Is that you Paul Krugman ?

What would you do if your currency bounced up 50% ?

snowball777's picture

Highly dependent on whether one actually has currency, Spitski.

There is a culture of mass consumption in the US that made Chi-Merica work and those ironic commies can't duplicate it!

60% of the melamine-laced crap moving through Fontana, CA warehouses isn't marketable in China. All that capacity isn't for shit without exports because ChiCom domestic demand doesn't include fucking Bratz dolls, m'kay? 


eatandtravel's picture

Why would inflation appear in the United States if the Chinese depeg their currency?  No velocity means no inflation.

XPolemic's picture

Two reasons:

1. Chinese stuff would become more expensive and

2. The US dollar would drop like a money packet from a helicopter if China (and Japan, and Saudi Arabia and ....) stopped buying US Treasuries, because the Benanke would pick up the slack, inflating the money supply to the moon and monetizing the debt, which would result in commodity prices going parabolic, and commodities are like your breakfast and stuff.

eatandtravel's picture

I agree the prices at Wal Mart will increase temporary.  If prices continue to incresse, production will move to Mexico.

Regarding the world dumping the dollar, hell no.  You can't replace something with nothing.  China will experience a hard fall.  Japan is in trouble.  We know about Europe.

Commodity prices are going higher thanks to the Chinese and hot money.  What happens when the Chinese stop buying?  All that hot money will run for the door and soft and hard commodity prices will drop very fast.

If you are smart, buy American...





XPolemic's picture

I sense that you may be an idiot, but am ready to change my mind.

Regarding the world dumping the dollar, hell no.  You can't replace something with nothing.  China will experience a hard fall.  Japan is in trouble.  We know about Europe.

I am not sure if you are just babbling, or trying to condense your thoughts to save you typing. The world was ready to dump the dollar long ago. If it wasn't for military intervention, it would have already been dumped. Are you implying that the US will continue to invade countries at an ever increasing rate to protect the dollar? How will it pay for it? Will the Chinese lend a hand?

Commodity prices are going higher thanks to the Chinese and hot money.  What happens when the Chinese stop buying?  All that hot money will run for the door and soft and hard commodity prices will drop very fast.

Ummm .... huh? Do you even know how markets work? You know that oil is a commodity, yes? You know that commodities are priced in USD, yes? Are you saying that the world is about to stop buying oil, corn, wheat, steel and cotton? I find your ideas intriguing and would like to subscribe to your newsletter.

If you are smart, buy American...

As the USD drops I increasingly do, but I am not sure what point you are trying to make. Maybe you work for the Fox news channel and are unable to string together a coherent idea.

Kayman's picture


If China depegs, the direction of the RMB is a toss up. It could just as easily fall over the medium term, since Corporate America (the partners of Chinese Fascism) would need to find alternative slave factories.

And of all the debt-laden, deficit growing, blind countries in the world, the U.S. continues to be the least ugly sister at this economic dance.

To paraphrase Churchill, the U.S. dollar is the worst currency in the world; except for all the others.

Saudi Arabia is not going to price oil in RMB.

RoloTomassi's picture

the dollar is not just the reserve currency, its the reserve language...as much as we all appreciate the dilution and all that crap, remember without a seismic and fundamental shift in the wealth transmission mechanism that is the british/american empire mercantilism/globalisation model we are still prone/destined to witness an abject deflationary impulse..china in its current state is not capable of leading the reform..in any ways..buying the dollar is the only trade because we are not ready to build a system outsid of this "free-market"/globalistion framework we live in

strannick's picture



If they depeg and let their currency appreciate, yeah, they'll export inflation to the US, and thats all they will export. Their crappy little trinket-stand economy will go tits up faster than you can say 'ancient Chinese secret, huh?'

Non Passaran's picture

What do you mean by "buy less dollars"? Their exports are paid for in dollars (which then get exchanged in return for T bills), so I wouldn't say they buy dollars, but if they did they couldn't buy less dollars without lowering their exports or making their currency even cheaper. As for exporting inflation, I doubt that demand for products made in China (no food or other essentials) is inelastic - Chinese exports would drop.

malek's picture

Not so sure about 10 years, but generally yes, it has a way to go.

Also from an american point of view:
I can invest quite some part of my money in China, because
-if China flourishes but US slumps, I can live off my investments
-if China busts then US should benefit, and I will have an income from a paid job.

Looks like a well spread risk to me.