After a terrible December stock markets have soared with renewed vigor tearing the faces off bears that thought their time had come. A great deal of the market advance has been based on optimism a new trade deal will occur between America and China paving the way for future growth even while data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor based on optimism and hope could fall into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm. 

Since reaching a trade agreement with China is not guaranteed or a silver bullet to our economic woes, it is likely that many of those bullish on stocks and predicting markets are about to move into new record high territory have allowed their projections to be influenced by the fact China unleashed a huge amount of new credit into the market. In January, Beijing injected a staggering $685 billion in new credit into its financial system and this money continues to leak out of China causing assets to rise across the globe. Simply put, bulls surmise that since this form of QE has worked in the past it will continue to work in the future. Whether they want to admit it or not this again puts China front and center in their future growth scenario.

Over the year many people have come to see China's economy as invincible, however, that myth may soon be tested. Today China continues to prop up what many China watchers, economists, and investors see as the unpropable, and yes, while no such word exists, when it comes to China's economy it should, for "unpropable" describes the financial collapse that can only be postponed but not stopped. For years, battle-lines have been forming as to whether China's economic growth is sustainable and its future role as a global player. The previous article on this website titled; "China Continues To Prop Up Its "Unpropable" Economy" argued it is not. 

(Click on image to enlarge)

China's Economy Is Dependent On Stimulus

As the efficiency of credit has continued to wane across the globe, new money and stimulus pumped into the system has resulted in ever diminishing returns. In short, each new wave of money has resulted in shorter bouts of prosperity. During this long bull market we have witnessed huge numbers of investors adopt the mantra of "buy the dip" and the "fear of missing out" has replaced prudence. While most people work hard for their money and even harder to save a bit of it they are often lulled into complacency when it comes to protecting it and that appears to be where we are today. The big question is how long it will take for this current bout of glee to play out and for us to return our focus to a rise in late cycle indicators, moderating growth, tightening credit, declining earnings, and sliding consumer confidence as inflation continues to rise.  

Currently, it is only massive and unsustainable deficit spending that continues driving our economy forward. 

 Deficit spending has never proved to be a silver bullet without consequences and with each step forward we get closer to the end of the road. This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. History has proven that while government spending can supplement the economy, such action combined with central banks pouring new credit into markets are poor substitutes for the free market in allocating capital to where it is most effective. Activities driven by deficit spending often do not reflect true economic growth but simply a method of borrowing from the future.

Much of what we see today as investors enthusiastically dive into the market is rooted in the so-called "everything bubble" caused by massively expanding credit and debt, we have allowed loans to be stacked upon other loans which has until now floated all boats. It would seem prudent to ask whether we have started a major reset of asset valuations, and if not when we finally will as well as how such an event might unfold. Following a dismal Philly Fed and a disappointing durable goods number, the PMI recently missed expectations hitting its lowest reading in 17 months. This indicates the recent rebound in manufacturing won't last. So far, while the market at times seems concerned we are seeing nothing resembling panic but as it becomes evident that we are approaching the end of an era, watch out below. 

When optimism and hope finally collide with reality a few of the .01% will take a hit but even after losing a great deal of wealth most will remain wealthy and basically unscathed while the average man or woman is decimated. If you view the economy as an economic battlefield the rich and powerful are carrying M16s while the rest of us are armed with only sticks. A total lack of investment options will leave the majority of us extremely vulnerable when an economic crisis does occur. Because we have continually underestimated both the breadth and size of the global intervention from central banks and governments those of us who have repeatedly predicted the collapse of this so-called recovery have remained wrong. Timing such an event is difficult but as sure as the moon follows the day it will occur.