The global economy has had its artificial boom and CapEx frenzy already and years of deflationary liquidation and correction lie ahead. Money printing has failed. Any effort by the central banks to double down on another $20 trillion of bond purchases would blow the world’s financial casinos sky high. Contemporary central bankers function like a team of monetary wranglers, herding the retail cattle toward the asset gathers.At the end of the day, the asset gathers will profoundly regret what they are clamoring for.
"China is to the current cycle what the US housing market was for the Global Financial Crisis in 2008. It will take years to correct the excesses that were built up in China... the consequences of a weaker yuan would be disastrous...If China devalues, all the other countries in the region will follow suit which will lead to a global deflationary shock. There is a real chance of a bigger correction than many investors realize..."
Is the economy “nowhere near recession?” Maybe. Maybe not. But the charts above look extremely similar to where we were at this point in late 2007 and early 2008. Could this time be “different?” Sure. But historically speaking, it never has been.
Maybe this is it. Maybe the global financial system has truly reached its limit. Maybe the world has realized that the path to prosperity is not in conjuring money out of thin air, raising taxes, or going deeper into debt. Maybe people have finally figured out that an insolvent government and insolvent central bank cannot possibly continue to underpin the entire financial system. Or maybe not. But the incredible thing is how much panic there has been, particularly in banking and financial markets, just at the mere HINT of problems in the system.
The robo-machines are now having a grand old time hazing the August lows at 1870 on the S&P, and may succeed in ginning up another dead-cat bounce or two. But this market is going down for the count owing to a perfect storm.
One place where not even the IMF can in good conscience predict a hockeystick-like rebound in growth, is China, where the IMF now expects GDP to grow only 6.3% in 2016, dropping to an even lower 6.0% in 2017.
Last night's Chinese data deluge can only be classified with one word: bad. So if bad news was again bad news as many claim, both commodities (read oil), and US equity futures should be tumbling right now... but just the opposite is happening and in fact both Brent and WTI have already jumped over $30 this morning. This happens even as the IEA said this morning that global oil markets could “drown in oversupply,” And yet this morning both commodities, global stocks and futures soaring? Simple: the following Bloomberg headline summarizes it: "Brent Rallies More Than $1 as China GDP Spurs Stimulus Bets," and where Brent goes, so goes risk, and the S&P.
"... there is presently an enormous chasm between the point where self-reinforcing selling pressure by speculators is likely to emerge, and the much lower point where balancing buying pressure by value-conscious investors is likely to support the market. Because every seller necessarily requires a buyer, the enormous gap between the two represents substantial crash risk."
All we can do is point out the risks, so that people can at least prepare on an individual level. A major lesson everybody should take to heart from the Cyprus experience is this: when the next crisis strikes, do not believe any of the promises uttered by government or central bank officials. You will be lied to in the critical moments, and you could stand to lose a lot if you believe the lies.