The Fed Put Is Real And China Stimulates

In our December MIR titled Genghis John and Building Snowmobiles during the midst of the market rout I wrote the following noting the key macro variables we didn’t and couldn’t know at the time:

  • We can’t predict with high certainty exactly how the Fed will react to slowing global data ex. US
  • We can’t predict if/when China will attempt to reflate its economy with another massive credit injection
  • Rising geopolitical tensions bring greater risks and unknowns. We don’t know if the trade war will escalate significantly (though recent signs indicate it will) or if other events will conspire (such as a Russian invasion of Ukraine).

Here’s a chart of the Russell small-caps index I included in the report along with our thoughts on where the market was headed.

 

Much has happened since those early volatile December days. The market sold off and bounced off key support as we expected.

 

And we’ve received some answers to two of our three previous ‘unknowns’ (1) The Fed’s response to slowing global growth and (2) if/when China would stimulate.

Let’s start with China and the Red Dragon’s predilection for debt.

The answer to our question of if/when China would stimulate and by how much ended up being “now and by A LOT”.

Chinese credit data for the month of January just hit and the numbers are… how do you say… impressive?

 

January was a gargantuan month for credit creation in China.

Total Social Financing in January was the largest monthly liquidity injection as a % of GDP on record. That one month is equal to nearly a quarter of the total credit creation for ALL of last year and makes for a 51% increase over the year prior.

 

Here’s another look at the data. The orange line shows that credit growth in the shadow banking sector is still contracting (though, the contraction even seems to have stalled somewhat). The red line shows the recent hockey stick turn in total credit creation.

 

I’ve been writing for the last few years about how China is THE most important macro variable in this cycle. The reason why is shown in the chart below.

 

China has undeniably been the global growth workhorse this cycle having helped staved off crushing global deflation with its incredibly large and reliable injections of credit at the nearest hint of slowing growth.

The last time China injected anywhere close to this amount of credit was at the start of 16’. That shot to the arm defibrillated the global economy back to life and sent markets on a 2-year near volatility-free money printing uptrend.

Should we expect the same thing again? Are we about to embark on another emerging market (EM) led bull? Is it time to mortgage the house and dump the proceeds into some EM high-fliers and then just kick back and wait to cash out?

Not so fast Kemosabe…  

We have to look under the hood of this credit data to get a better grasp on what’s really going on. And when we do that, we find that the stimulus is not all it’s cracked up to be.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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