Here We Go Again: Less Stimulus, China Tightening

The post-2008 bull trap may be springing again.

We've seen this movie several times before. I started blogging heavily in 2014 because the Western financial media was touting Chinese stimulus plans, but Chinese officials repeatedly said they would not repeat the mistakes of 2008. Many commodity producers were banking on endless Chinese demand. Meanwhile, Chinese officials explicity said they wanted to change the development model. Here we are in 2021 with China still in the same development model. Each time they restrict credit in this export-heavy, commodity-dependent infrastrucure and industrial production model, there are big downturns in global markets starting in commodities. They're doing it again. At the same time, excessive stimulus hopes are being squashed in the USA.

ZH: Beware Bursting Bubbles: JPM Now Sees Only $900BN Biden Bill Passing

SIZE – given the push back from the GOP on doing another stimulus bill in this close proximity of the December $900bn package may mean that the pathway forward is via Reconciliation. This would be that a final bill would like be materially smaller than the proposed $1.9T. JPM current estimate is $900bn.

COMPOSITION – one critical aspect of the US economy is the volume of people at/near financial distress.

Consider renters, where ~20% of all renters are behind on payments. The average renters owes $5,600 (CNBC). For reference, US median household income is~$63k and with a 25% withholding means ~$2k per pay period in take home pay. Combined, there is about $57bn in back rent owned by more than 10mm renters.

Consider homeowners, where about 2.7mm homeowners, or ~5.5% of all mortgages, have their mortgage payment in forbearance (WSJ).

The federal eviction moratorium was extended to March 31 by Biden’s Executive Order. An eviction ban does not create jobs nor clear that backlog of debt. If we have millions of people put through an eviction process, it is unlikely that states have the funds to service the increase homelessness.

ZH: China Repo Rates Soar To 15 Month High After PBOC Warns Of Asset Bubbles, Drains Liquidity

It wasn't just the PBOC's liquidity drain however: the rate spike was also catalyzed by a stark warning from PBOC adviser Ma Jun, who spoke at a wealth management forum where according to the 21st Century Business Herald said bubbles have formed in the stock and property markets, and he proposed a shift in monetary policy.

"Whether this situation will intensify in the future depends on whether monetary policy is appropriately changed this year,” he said. He added that if not, such problems would “certainly continue” and lead to “greater economic and financial risks in the medium- and long-term."

ET Realty: China tells big cities to cool overheating property market

China's deputy housing minister has urged authorities in major cities to take steps to curb property market speculation following a recent surge in residential real estate prices, state media Xinhua reported on Tuesday.

During a visit to Shanghai and Shenzhen to inspect property markets, Ni Hong said city governments should uphold the principle that "homes are for living in, not for speculation", and not use the real estate sector as a short-term stimulus for economic growth, Xinhua quoted him as saying.

Cities should act promptly and take targeted measures to guide expectations and curb property market speculations, Ni said, adding they should take the initiative more, and be more creative, in ensuring market stability.

China's bigger cities saw a resurgence in home prices and transactions last year, fuelled by an influx of people and cheap credit.

I don't know how many posts I've done on this, but every single time China loosens credit I say the same thing. China has not shown it can grow credit without real estate. If the planners push credit supply, home prices take off. If they restrict credit supplied to real estate, overall credit growth slows and recession signals start popping up.

Macro factors take awhile to show up in markets. China started openly tightening in October 2017 and I discussed it on this blog. One post was: 19th National Congress: Deleveraging Will Have No Negative Effect on GDP. I only made two brief comments on that article: "Set your watches!' and in response to

We insist on actively and steadily deleveraging, adhere to multi-pronged approach, a variety of measures of deleveraging, and properly handle the relationship between steady growth and deleveraging, to ensure that deleveraging does not adversely affect the economic growth. Currently, deleveraging has achieved initial results, no significant tightening effect on the economy.

, I wrote "There hasn't been much of an effect because China isn't deleveraging..."

That month, I also posted: China Topping

For the past 18 months or so, I've said the rally in commodities is the best sign of an inflationary recovery. If prices keep moving higher, it doesn't matter if its real demand or global currency devaluation, it will signal an exit from the post-2008 low growth environment. However, I still believe this is a massive topping process.

I have been thnking the same thing now. The best sign of inflation is coming from markets. They tend to lead the economy and are a good early signal. That said, markets are also driven by psychology and they have been wrong before. Every commodities rally over the past decade was a bear market rally. This time is slightly different., downtrends were broken. Respecting those charts, the next downturn will be met by extreme reactions by governments and central banks. Extreme compared to March 2020. That's how I can reconcile a breakout with a potentially brutal bear market that causes huge losses in commodities, but doesn't invalidate the charts. Or, it's possible this is all hopium and the worst deflationary depression since the 1920s is still ahead. Yuan devaluation is still a threat if the U.S. dollar bull market hasn't ended. The green former resistance line on the last chart below shows that breaking resistance isn't a guarantee of blue skies ahead.

Lots of great charts in the commodities space with incredible targets if this is a multi-year bull market. On the flip side, things went south quickly, commodities started sliding a few months after China went all in on deleveraging. Below is the Global X Copper ETF (COPX).

The yellow box goes from October 2017 to January 2018. If I didn't know there was a pandemic, that plunge looks like a normal breakdown.

The current rally took out long-term resistance, but the chart is also pausing after having gapped above the July 2014 peak. The U.S. dollar bull market started in June 2014 and it peaked during the pandemic, an inverse of the high-to-low move in COPX. The direction of the dollar is a very important factor for commodities. To circle back to what I said above, if a dollar bear market has started, the 2020 lows in commodities should hold and long-term investors may do well holding through a bear market or using tactical hedging. However, whether a bear market rally or something more, a reversal in the dollar here would take commodities down. Also of note, there was optimsim in 2014, as I stated above, people thought China was growing again. But one of the first big posts I did in that "era" was in April 2014: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave. Today, small businesses are being crushed by lockdown policies around the world. The assumption is opening the economy will be like waving a magic wand, that businesses will simply bounce back. The risk is that government stimulus and bailouts have masked and delayed business closures and defaults.

The time for caution has arrived. I have mostly focused on long gold and commodities since April. For myself, I still see a lot of good charts ready for breakouts if there's more upside ahead, but I have been adding some hedges via volatility derivatives. The spike in stocks of late, the squeezes in stocks like GameStop (GME) make me worry a reversal or at least a volatility blow-up could come sooner rather than later. The U.S. dollar could also reverse in the short-term. If a larger bear move is coming, commodity-related funds such as COPX should top soon or peak by May. The most important signal for a major bear market is the U.S. Dollar Index. It must break above 96 to open up the possibility that this is a bull market correction for the dollar and not the start of a dollar bear market. I remain bearish in general on equities because I expect the technology sector will suffer with inflationary growth, and the major indexes are heavily overweight tech. Putting it together, I've only sold leveraged positions (options) in commodities and shfited some of that to volatility hedges. Unless I decide a major deflationary bear market is likely, I'd rather sit through potentially major declines in small-cap miners, and use the cash generated by put options to buy more in a decline as I did in March and April.

Update: Prerequisite Capital Quarterly Briefing. Lots of charts and graphs making a similar point. Link opens a PDF.