From the latest weekend notes from Eric Peters, CIO of One River Asset Management
"Some people blindly invested offshore and were in a rush to do so,” explained China’s central bank chief, justifying his recent capital controls.
“Some of this outbound investment was not in line with our own policies and had no real gain for China.” No doubt he’s right. The tycoons fleeing Chinese capital markets have done so selfishly. “So to regulate capital flows, I think it is normal,” concluded the central banker.
Chinese credit relative to GDP has doubled in the past decade to 300%. Which remains less than the US at 350%, but the rate of Chinese credit growth is as unsustainable as it is difficult to reverse -- without tanking the economy. The tycoons are running from this dynamic. Because such loops almost always end badly.
Anyhow, after so many years of secular stagnation fears, global investors have grown conditioned to run. They’ve been running away from fear for so long, they’ve forgotten how to run toward greed. Which has left them blindly holding over $10trln of bonds, which yield negative interest.
Now, this might make sense in a deflationary depression. But the global economy has not seen such strong synchronized cyclical growth in years. Inflation is likewise firming everywhere.
But China lowered its growth target again. As the World Bank warned that today’s strong global upswing in confidence and financial markets are not enough to pull the world out of a “low-growth trap.” If they’re right, we’re surely headed for depression. Because all this new debt requires robust economic strength to shoulder the weight.
But European debt markets are still largely priced for depression. And with JP Morgan’s CEO Jamie Dimon announcing the return of animal spirits in America’s economy, it seems more likely that this cycle ends like every other. With a blind run toward greed.