Global Economy

Plenty amongst you will be talking about economic cycles, and opportunities, and debate how to ‘play’ the crash, but all this is useless if and when a market doesn’t function. And just about all markets in the richer part of the world stopped functioning when central banks started buying assets. That’s when you stopped being investors. And when market strategies stopped making sense. Central banks will come up with more, much more, ‘stimulus’, but what China teaches us today is that we’re woefully close to the moment when central banks will lose the faith and trust of everyone. After injecting tens of billions of dollars in markets, which thereby ceased to function, the global economy is in a bigger mess then it was prior to QE. The whole thing is one big bubble now, and we know what invariably happens to those.

We warned on Friday, after last week's China rout, that the market is getting ahead of itself with its expectation of a RRR-cut by China as large as 100 bps. "The risk is that there isn't one." We were spot on, because not only was there no RRR cut, but Chinese stocks plunged, with the composite tumbling as much a 9% at one point, the most since 1996 when it dropped 9.4% in a single session. The session, as profile overnight was brutal, with about 2000 stocks trading by the -10% limit down, and other markets not doing any better: CSI 300 -8.8%, ChiNext -8.1%, Shenzhen Composite -7.7%. This was the biggest Chinese rout since 2007.

Three weeks ago, "something just snapped." Now, it is getting worse by the day.

Anyone who listens to a mainstream media pundit, talking head, or spokes bimbo deserves the reaming they are going to receive.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

Over the weeks, months, and years ahead we’ll begin to understand more about the fallout from the death of the petrodollar and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that's fueling speculation about the viability of the dollar peg. As Bloomberg reports, the current situation mirrors a "very scary moment" in Saudi Arabia’s history.

Déjà-vu time!

The $64,000,000,000,000 question: what does the Fed now do? One attempt at an explanation taking into account last week's market plunge comes from Nomura, which provides a "2015 Scenario Analysis" in which it "breaks down various monetary policy (rate hike options) and rates market implications ahead."

Courtesy of the following chart by BofA, we have the answer: while for the most part of 2015, the move in the price of oil was a combination of both supply and demand, the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy.

In the past, readers have been alerted to numerous “impossible” trends in our markets and economies, all manufactured by the Western banking crime syndicate. Here are just a few of those highlights (low-lights?)

• No End in Sight for Oil Glut (WSJ)
• Dozens of Clinton emails were classified from the start, U.S. rules suggest (Reuters)
• China August Manufacturing Activity Hits Lowest Level Since 2009 (WSJ)
• German Manufacturing Strengthens as Economy Shifts Up a Gear (BBG)
• Israel responds to rocket attack with protest and air strikes (FT)
• ASX carnage: 2015 fast becoming a year to forget  (Canberra Times)
• Hong Kong Stocks Enter Bear Market After Falling From April Peak (BBG)

The musings of the many wonderful minds who preach to goldbugs, contrarians, real anarchists, real patriots, conservatives and republicans, moralists, real believers in genuine free markets, solution seekers and a combination of them all, have had a significant impact on my worldview.

Perhaps the biggest surprise about the overnight Chinese stock rout is which followed the lowest manufacturing PMI since March 2009, is that it happened despite repeat sellside pleas for a PBOC RRR cut as soon as this weekend: usually that alone would have been sufficient to push the market back into the green, and it almost worked when in the afternoon session stocks rebounded after dropping as much as 4.7% below the "hard" floor of 3500, but then a second bout of selling just before the close took Chinese stocks right back to the lows with the Shanghai Composite closing at 3,507, down 4.3% on the day, having wiped out the entire 18% rebound from July 8 when the PBOC first threatened both sellers and shorters with arrest.

It’s getting downright hazardous out there, and not just because the robo-machines were slamming the “sell” key today. The real danger comes from the loose assemblage of official institutions which claim to be running the world.

So why are so many prominent voices now warning that a global financial crisis is imminent? The answer is actually very simple: A global financial crisis is imminent.

The rise of populism is not just a U.S. issue. Globalization and deregulation, especially with regard to the open adoption of new technology and work structures, is increasingly being called into question. As we have discussed previously, there is increasing potential that major political and economic changes will emerge from this vote. The emergence of Donald Trump and Bernie Sanders is a reflection that the populists want a change in the direction of American policy. We will be watching closely to see whether any serious changes result.