Are We Just In A Dead Cat Bounce? Or Are We Headed For New Highs?

The market has been so volatile, we’re now in a “bad news is good news” phase.

The global economy was heading for a recession well before Trump stepped in with his trade wars (mainly with China).

China is at the heart of where the economy and markets go from here.

Or, rather, Chinese credit (aka debt). The growth of which has been slowing.

As we all know, China has used a mountain of debt to build its economy. It quadrupled its debt to $28 trillion from 2007-2014 alone – according to McKinsey. Who knows how much more they’ve borrowed since.

All this debt has been used to pay for railways, highways and cities. Debt to pay for factories. Debt to pay for homes.

It was a rush to build, build build. Export, export, export. And create millions of jobs.

But the steam ran out a while ago. The big projects are done. To shove money into the system requires more effort.

Turned around, the demand to build factories leads to a demand for money. As growth slows and money (credit) demand slows, money creation slows.

The biggest source of money is Central Banks and their lending – aka M1 money supply.

 

China’s M1 supply growth peaked in early 2016 (the chart has lagged the M1 supply growth by 13 months).

The above chart shows the correlation between Chinese money (credit) growth and their economic activity as measured by trade. At current levels of M1 supply growth, trade will continue to contract throughout 2019. That’s recessionary.

Is that a problem? Well it is for their trading partners.

Germany’s #1 export destination is China (no longer the U.S.). Notice the relationship between German factory orders and China’s industrial production measurement (the Caixin PMI).

 

 

When the PMI falls below 50, that’s recessionary. And notice that Germany’s factory orders have been contracting.

China has been trying to navigate a soft landing. But Trump pushed them into a hard landing.

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