David Stockman Warns "Don't Forget About The Red Swan"

Tyler Durden's picture

Authored by David Stockman via The Daily Reckoning,

Given the anti-Trump feeding frenzy, we continue to believe that a Swan is on its way bearing Orange. But if that’s not enough to dissuade the dip buyers, perhaps the impending arrival of the Red Swan will at least give them pause.

The chart below comprises a picture worth thousands of words. It puts the lie to the latest Wall Street belief that the global economy is accelerating and that surging corporate profits justify the market’s latest manic rip.

What is actually going on is a short-lived global credit/growth impulse emanating from China. Beijing panicked early last year and opened up the capital expenditure (CapEx) spigots at the state-owned enterprises (SOEs) out of fear that China’s great machine was heading for stall speed at exactly the wrong time.

The 19th national communist party Congress scheduled for late fall of 2017. This every five year event is the single most important happening in the Red Ponzi. This time the event is slated to be the coronation of Xi Jinping as the second coming of Mao.

Beijing was not about to risk an economy fizzling toward a flat line before the Congress. Yet that threat was clearly on the horizon as evident from the dark green line in the chart below which represents total fixed asset investment.

The latter is the spring-wheel of China’s booming economy, but it had dropped from 22% per annum growth rate when Mr. Xi took the helm in 2012 to 10% by early 2016.

There was an eruption as dramatized in the chart. CapEx growth suddenly more than doubled in the one-third of China’s economy that is already saturated in excess capacity.  The state owned enterprises (SOE) in steel, aluminum, autos, shipbuilding, chemicals, building equipment and supplies, railway and highway construction etc boomed.

It was as if a switch had been flicked on by Mr. Xi himself, SOE CapEx soared back toward the 25% year-over-year rate by mid-2016, keeping total CapEx hugging the 10% growth line.

However, you cannot grow an economy indefinitely by building pyramids or any other kind of low-return/no return investment – even if the initial growth spurt lasts for years as China’s had.

Ultimately, the illusion of Keynesian spending gets exposed and the deadweight costs of malinvestments and excess capacity exact a heavy toll.

If the investment boom that was financed with reckless credit expansion is not enough, as was the case in China where debt grew from $1 trillion in 1995 to $35 trillion today, the morning-after toll is especially severe and disruptive.  This used to be called a “depression.”

China Fixed Asset Investment

China’s propagated spurt in global trade and commodities was artificial and short-term. It was done to flatter China’s rulers at the 19th party congress.

Now that a favorable GDP glide path has been assured, China’s planners and bureaucracy are already back at it trying to find some way to reel in its runaway credit growth and bloated economy before it collapses.

Downside Surprises in China Are Virtually Baked In

The sell-by date has expired on this latest China credit impulse, as evident in the chart below. During the first quarter of this year, total social financing (bank credit plus shadow banking loans) reached the incredible rate of $4 trillion per annum. That’s nearly one-third of China’s entire GDP.

The figure scared the daylights out of leadership in Beijing, who have now moved forcefully to reel in China’s debt machine.

What is coming down the pike is the great China Debt Retrenchment.  Expect a global braking motion that will get underway once Mr. Xi dramatically consolidates his power at the 19th party congress.

China Total Social Financing

This has the potential to drastically weaken the global economy – and the impact on corporate profits should not be underestimated.

The Red Swan Has Now Gone Berserk

Half of the world’s GDP growth since the 2008 crisis has been in China, and that, in turn, was purchased by the greatest credit eruption in recorded history.

As China’s nominal GDP was more than doubling from $4.6 trillion in 2008 to $11.2 trillion in 2016, its national leverage ratio soared from 175% of GDP to 300% in less than a decade.

There’s reason to seriously doubt that Beijing can bring the Red Ponzi to a soft landing.  It cannot and will not permit the nation’s debt load to quadruple again during the next eight years, meaning that China’s days as the world’s ultimate stimulus machine are over.

China Red Ponzi Debt to GDP Ratio 2017

The fading of the most recent China growth impulse will soon reveal that most countries, to adapt Warren Buffet’s famous metaphor, have been swimming naked from a fiscal perspective. It has left the world vulnerable to a renewed wave of funding crises as the ECB and other central banks attempt to launch monetary normalization.

In sum, during the last 19 months the Red Ponzi propagated a false upturn in the global economy that is already decisively reversing. This comes at the same time that central banks of the major developed world economies are finally bringing their printing presses to a halt.

The major central bankers have finally recognized that at $22 trillion on central bank balance sheets have become egregiously extended.  China is the epicenter of the world’s two decade plunge into central bank monetary fraud and credit explosion.  They have deformed and destabilized the very warp and woof of the global economy.

So, yes, even as the Orange Swan stumbles toward the Donald’s White House, there is a Red Swan following closely behind.

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shizzledizzle's picture

Oh FFS David... Too much negativity right now for any substatail pullback. The wheels don't come off when people are paying attention. 

francis scott falseflag's picture

One what planet are people are paying attention?  Do they welcome refugees?

Arnold's picture

Which pill is it again?
Morpheus tolt me but I ferget.

francis scott falseflag's picture

Blue helps you sleep

Red stops the crying.

 

With good behavior, your mom should be out before Halloween

OCnStiggs's picture

Didn't David tell us the wheels were flying off our economy due to an insurmountable debt hurdle last March? The week came and passed with the usual debt extension resolution.

I used to listen to Stockman but, lately his dire predictions never pan out.

Giant Meteor's picture

Sooner or later ..

Everyone knows the game is rotten, old black Joe is still pickin cotton ..

Everyone knows ..

Stockman knows, and the only surprise really, how long they keep the balls in the air 

His vision will pan out soon enough, and lot's of folks will wish it hadn't ..

Don't be so impatient for the mother of all collapse. All in good time , patience please  ..

drstrangelove73's picture

Sort of OT,but I am really curious about something I noticed this morning.I got a notice that my default account was above FDIC limits,so I went into the CD market,and for the first time in YEARS you can get 1.25 to 1.3% on 6 month CD's!It has not been possible to get rates like that without going out 2-3 years or longer in a LONG time.What is up with this?

Giant Meteor's picture

Why I haven't the fogggiest ,, however according to Bank Rate . Com 

"The First Internet Bank of Indiana" is offering 1.37% 6 months, on $1000 min ..

Happy days are here again ..

drstrangelove73's picture

I have no idea either.The least it could mean is increasing confidence there will be another rate hike this fall.What it means big picture I have no idea.I agree with you there is a good chance of a fall correction.I need a higher equity allowance than I have,but not at these prices.

Kayman's picture

"What it means big picture I have no idea."

Trending from return ON capital to return OF capital.

francis scott falseflag's picture

I like to be in the same town with my money.  :o)

Arnold's picture

We want your money in our hands when we default.
Thank you very much.

--Your trusted Certificate of Deposit Salesman, in association with the Federal Govenence that by Law says that it is not your money any more. (and the broke ass FDIC says you might get an IOU. See you in Federal court, bitchez.)

fattail's picture

Bank's are having to compete for liquidity, and depositors just aren't very loyal after the 8 year ass ramming the just took.  The marginal cost of keeping alot of your money in a MMDA or DDA has gone up since the FED allowed short term rates to rise.

drstrangelove73's picture

Thanks.Sorry to go to school on you but let me ask you this-is it that people are moving assets out of MMDA and into other higher interest bearing instruments and that's why banks are offering higher short term rates?

Dirtnapper's picture

If this video is right, we are about 30 to 60 days from kickoff of Swanfest 2017 because of food cost shooting up globally: https://youtu.be/rp1NJ0Yf_9M

Everyone ready for a late Sept or early Oct blizzard?

 

 

Giant Meteor's picture

Well I don't know about all that, but my prediction has been this fall all along ..

Legends of the Fall, so to speak, angry bears and such ...

francis scott falseflag's picture

Charlottesville.  Bannon gone.  Nothing has changed.

 

Continue to prepare for the worst and hope for the best

HRH Feant2's picture

So it is a race to see who collapses first, the US or China.

Lost in translation's picture

It's a gripping question.

My guess would be the state that foists greater evil upon the world. Which one is that?

Folks can draw their own conclusions...

francis scott falseflag's picture

That's a no-brainer as China is still enlarging their middle class, while we can't diminish ours fast enough.

Rebelrebel7's picture

Trump has many valid points which American CEOs refuse to acknowledge for their own interests! The CEOs want to have their cake, and eat it too!

Many have willfully,  and most likely criminally, handed national secrets over to the Chinese government in order to continue manufacturing there. It seems that they do not care as long as their IP rights are respected. Everyone knows that China does not respect IP rights. They all complain about it, yet they are all arguing against any solution to the problem which they have created. Only 25 million Chinese people are employed by foreign corporations. 50% of Chinese people work for the government.

 

According to factsanddetails.

Com:

"Foreign companies doing business in China are generally required to form joint ventures with Chinese companies instead of forming wholly owned subsidiaries. Entrance by foreign companies to the Chinese market is often determined by how much technology and know-how the Chinese can get from the foreign company. Many Chinese worry that foreign companies are posed to take over entire sector of the economy."

 

http://factsanddetails.com/china/cat9/sub62/item349.html

Arnold's picture

I Cannot agree more.^^^^^^^
Plus you cannot trust a Chinese number.

If you shake hands on a deal with a Chinaman, you will be lucky to get three fingers back.

--Arnold

DrData02's picture

"It cannot and will not permit the nation’s debt load to quadruple again...."
Why not? They just did it in the last 8 years. Reasons?

TuPhat's picture

I like Stockman but you are right.  The US has done it also.  Will we do it again.  Absolutely we will.  The effect that will have is what is totally unknown.

Chupacabra-322's picture

Not mine: Passing it along.

http://truthfeed.com/breaking-wikileaks-outs-6-republicans-bribed-by-cli...

BREAKING : Wikileaks OUTS 6 Republicans Bribed by Clinton to ‘Destroy Trump’

This is MASSIVE.

Wikileaks has revealed what we’ve all been saying for some time now: the GOP is full of traitors and Clinton cronies, and they’ve been working day and night to ruin President Trump.

Paul Ryan, Carly Fiorina, John Kasich, Lindsey Graham, and John McCain.

TuPhat's picture

Thanks, good to know but who is number 6?

Giant Meteor's picture

Yes, yes, but we knew this ...

And hell, it's a lot more than just six ....

As I've mentioned previously, for Mr. Trump, it's the ides of March, every minute, of every hour, every day, of every month ..

Be shocked about nothing ..

As I've also stated previously, DJT has served in a great role, has done a great service to the nation ..

Let all doubts, doubting, be removed, who run bartertown ..

two hoots's picture

US debt limit, this China thing  here, the current neo-chaos bubble, trade wars, on and on, at some point it will matter to the markets.   We may even talk ourselves into a market correction when none was needed.  The new young billionaires are focused on a bright and wonderous future with 5G, space rides, vacuum travel, AI while the remaining 95% are concerned about surviving today's world.   Why the disparity in this thinking, are these bilionaires past or immune to anything resembling work for pay, savings, 401Ks etc.   Money to them is like air to the rest of us, it's just there when you need it, it is plentiful, forever.   Their counsel is irreleveant to the peoples reality.

francis scott falseflag's picture

Speaking of colored swans, while we are very familiar with the tricks and scams of the FED,

we have no idea what schemes the PBOC are going to pull out of their fortune cookie.

TuPhat's picture

As long as I can still get chinese fireworks to celebrate the 4th of July I'll be OK.

Son of Captain Nemo's picture

Fuck China! And India!!!

They made the deal with "Yankee Jewdle" 40 years ago and are in this "red Swan" pattern David because THEY DID!!!

Russia on the other hand IS THE NEW SWITZERLAND!!!

MK ULTRA Alpha's picture

I think not. Russia is dependent on the price of oil and natural gas. The price of oil has been on a downward ramp. Russia had to reduce military spending.

Putin was expecting a way out from Trump and better relations to power a capex boom in Russia's oil and natural gas industry. The opposite has happened. Putin must now Kowtow(bow) to China.

The reason for trade sanctions had more to do with US natural gas producers demanding European markets, thus the Deep State has a new reason to expand deployment in the Ukraine and Eastern Europe.

Another important point, one of the reasons oil prices are down is because China has finished buying excess oil for their strategic stockpile. This hit OPEC at the wrong time.

The Russian economy is a small economy compared to the EU, US and China. The input of Germany going forward is a key to future US Russian relations. Germany is moving away from the US into the Russian orbit. Germany is a powerful economy with trade and investment in Russia, this would undercut the US in Europe.

The Deep State is working to create a new NATO in Eastern Europe, by passing Germany and France. Poland is now the main opposition to Russia. This Deep State agenda is a royal directive carried out by the Bilderberg Group and it's proxy, the Council on Foreign Relations.

Trump's advisers are leading him by the nose for the NYC based Council on Foreign Relations and the Jewish bankers to the Royals- the Bilderberg Group.

Son of Captain Nemo's picture

MK

You Kikes are losing that battle attempting "yet again" to control the price because you don't own "IT" and the tent dweller whores that have depleted it beyond capacity need there meat hooks elsewhere in order to survive are getting "hammered"...

By the way...

How's that Aramaco public offering (or should I say pan handling) by the Saudi Royals working out these days?!!!

MK ULTRA Alpha's picture

I know it's difficult to understand the geopolitical reality we live. But a television mind can't think outside the box. Perhaps if you read more, then you could understand what I was trying to explain.

Basically you don't know what you're talking about, and what you're doing is using this board to respond to the TV. You're not interested in learning when all you do is watch television. The television is doing all the thinking for you.

How old are you?

Son of Captain Nemo's picture

Which TV show(s) am I watching?...

bunkers's picture

If you like a certain kind of shirt.

If you like a certain food.

If you like anything, I suggest you buy it NOW. There is a good chance it will not be available in 2 years.

MK ULTRA Alpha's picture

Stockman is always acting like a Jewish comedian, making fun of others as if he is superior.

Of course Xi pumped liquidity into the Chinese economy. He must make his five year economic plan successful. The next five year plan is designed to replace the US dollar world reserve currency with the Yuan. The floating of the Yuan will increase the value of the Chinese economy. Thus, the 350% debt to GDP ratio will be reduced.

Printing more Yuan only means more Yuan is available for global trade. Already the deals have been made in the OPEC oil producing region and with Russia. The Swift global clearance system is being replaced. A trading block will use Yuan to trade with China.

The only way to derail this agenda is a trade war between the US and China. If China can't export over $400 billion annually to the US, then US dollars can't be used to buy raw materials and oil. China plans on running a one trillion dollar trade deficit with the US over the next three years. It's important to the US based communist, Trump is destroyed to continue the planned destruction of the US.

Trump is standing in the way of international communism's one world government plan. China and Russia aren't interested in a one world government, one world bank, one world currency and one world religion of worship of the state. But the US based communist and European players like George Soros are and they have shown their hand. The Democratic party is the party of international communism. The sooner people understand this, the better we will be and we can take counter measures.

The counter measures? The US China trade is a one way street for China. This street must be closed. People like McMasters have no business advising the President, most of these men are globalist and were brought in by Pence. The US has embarked on a suicide death march by continuing to follow Deep State players like McMasters, Cohn, and Tillerson. Interesting note, in China, Tillerson planned and built a massive Exxon refinery and it is a major part of Exxon's revenue. Tillerson has a conflict of interest with Exxon and China. Ross at Commerce, he made a deal with China to take more natural gas and beef, but we had to reciprocate with imports of Chicken. And Chinese over capacity is forcing China to dump industrial materials such as iron and steel on the US and world market at dirt cheap prices. When Trump said no to iron and steel imports, China threatens a trade war. The Chinese aren't in a position to demand anything, but because of the communist in our system, we must Kowtow to China.

Interesting note, the North Korea trade sanctions, China doesn't need any and all North Korean coal, iron, steel etc. so it was meaningless. It only helped the Chinese economy because of over capacity, of course China would cut these imports. They really didn't do anything to help the US.

Tillerson is a traitor to America because of money. All of the people surrounding Trump are globalist and the US will lose big.

Do the Jews know people are pointing the finger at them? Do they know more than half of the American people do not support Israel? Do they know a fake poll won't be able to steer public opinion on any Jewish related agenda? Do the Jews know, most of the people no loner trust NYC based main stream media? The Jews are caught in the middle and they've been at the forefront of all Americas problems. They think it is business as usual, but it is not. And Stockman makes it all into a joke, making fun of people and events just like a Jewish comedian. It is not funny, it is serious and the US is at a historic crossroad on the edge of the abyss.

The Jews best get their head out of their ass and knock the China trade off.

Fundies's picture

What about the ginger swan ?

Let it Go's picture

David Stockman is spot on when it comes to this issue. China is no small underdeveloped backwater with an insignificant economy and it is important to remember that "what happens in China does not stay in China." The financial missteps in China have continued and it will only be when their economy falters that we will learn to what extent or hear more stories about how they have masked their problems.

The Chinese economy has "been very reliant" on government stimulus, rapid credit growth and the flow of newly created money from a loose monetary policy. We should remember China is far from transparent and the risk remains out of sight. The simple fact that we have become complacent over our concern and that it has yet to develop into a catastrophe doesn't mean it is no longer a danger or valid. More on this subject in the article below.

http://brucewilds.blogspot.com/2017/07/chinas-financial-missteps-continue.html

DelusionsCrowded's picture

Anyone who has read Taoism knows how completely the Taoists understand human behavior and our connection to the Government/State/Tribe .
Be sure the Chinese Gov in well versed on how the political economic and social structure fits together.
The bottom line is that China makes lots of stuff, people the world over want and they have the brains and the manpower to keep this climb going .

The if we look at one of these charts you see that its companies that carry most of the debt . If a company goes broke , the Government rights off the debt and sells the Company back into the market . Such an action shrinks the money supply , socking up printed cash and lowering inflation . This is just one example of a way out .

Stockman is just another overtrained economist on one track .