China M2 Drops Below Stall Speed in April

China's M2 growth rate slowed to 8 percent in spring 2018 and briefly (barely) had a 7-handle at one point leading into 2020.

2024 Bear Market in One Chart

A bear market has this chart completing the symmetry.

Bear Rally Over? Yield Curve and VIX Turn Higher

It has been a long and winding road in this bear market. Yes, I still believe a bear markert is underway until new highs are made. I haven't been tactically bearish on the market over the preceding months, onyl taking some small swings when setups looked good. Until those old highs are taken out, my bear market call from November 2021 remains intact.

First, the classic bubble chart pattern hasn't been violated:

A double-top is a valid expression of the "return to normal" phase. Bullish sentiment and speculative behavior return to near peak levels, propelling the major indexes or stocks into double-tops. Anecdotal, but cryptocurrency speculators believe a new bull market is underway. Bitcoin BTC has a pattern that is consistent with the classic top though:

Tesla, Google, Amazon and Meta all sport the classic pattern with no hint of an imminent double-top. The paradox stocks are Apple and Microsoft. Both have achieved new all-time highs. Their massive weight in the S&P 500 technology sector (nearing 50 percent at times) propelled that sector to a new all-time high in July. If I'm correct in my assessment, this will turn into an overthrow of a double-top pattern and not an extension of the bull market.

Industrials also achieved new all-time highs this year. Energy and materials made new highs in the second-quarter of 2022 and remain within striking distance of new highs.

I'll digress here and give the bullish argument over the longer-term. Assume for a moment the U.S. was primed for a recession around the time the coronavirus hit. The government then wrecked the economy and then flooded it with far too much stimulus. Even though there's no official recession in 2023, the U.S. government is running deficits on par with the fallout from 2008:

There's nothing bullish about that chart long-term. Growing deficits will increase inflationary pressure. Falling deficits could trigger deflationary pressure. Since stocks are priced for perfection, deviation out of the Goldilocks Zone will trigger price declines in all sectors at least for a time, barring an explosive move higher in energy as we saw in early 2022.

I don't want to belabor the valuation topic, but here is the price-to-earnings ratio divided by the growth rate (PEG) and the spread between investment grade corporate bonds and the Federal funds rate.

Going back the to the bull thesis: what if the government front-loaded stimulus and the bear market/recession doesn't materialize? In that case, either an extension of the bull unfolds or the transition occurs without the bear move. Both EFA and EEM, the developed and emerging market ETFs, bottomed in October 2022, with EEM having a little overthrow this year:

To wrap up the bull case: the government flooded the economy with stimulus, triggering a temporary inflation surge. Inflation settles back into the Goldilocks Zone, as does GDP growth, sub-2 percent for both. In the short-term bull scenario, stocks enjoy an extension with tech and other speculative assets resuming leadership. In the longer-term scenario, the transition to new leadership such as industrials, energy, commodities and foreign markets takes place without a major bear.

Back to the bear scenario, one of the strongest signals for a recession has been the inverted yield curve. It doesn't indicate an imminent recession, rather it signals the pre-recesesionary stage. The actual recession comes when the yield curve steepens. Going back the past four decades, this has always occurred when the Federal Reserve slashed rates. Right now, the yield curve is steepening because long-term bond yields are rising faster than short-term yields. It is a small move at the moment, but the spread has made a higher low, indicating the final low might be in.

The 10-year treasury yield has a bullish formation that may or may not complete. If it completes, then higher long-term rates will sink financial asset valuation and could indicate a stagflationary recession. The 30-year mortgage would be on its way towards 10 percent, a level that would almost assuredly kill home prices too. On the flip side, a traditional steepening via Fed rate cuts would be another bear market and recession like we've seen in 2000 and 2008.

The decline in the VIX has been a hallmark of this bull market. The VIX has fallen below the level reached at the November 2021 peak, indicating fear is gone. Here's the VIX overlaid with the 2s10s spread:

VIX isn't a great indicator in that it tends to be coincident with the 2s10s, but a rising VIX indicates rising fear, likely because there's bearish action in parts of the market ahead of the full-blown bear. Here's a look at when the VIX bottomed ahed of prior bearish periods:

There will be bearish trades emerging very soon if the yield curve has finished inverting and moved into steepening. Ditto if the VIX follows it higher. With September and October coming up, the calendar supports a market top scenario here. New highs on the major indexes will invalidate the bear scenario, as will a falling VIX. If the 2s10s inverts further or moves sideways, it will indicate no imminent economic pressure. If the 10-year yield fails a breakout for instance, the yield curve might invert further while the broader stock market interprets the falling yield as disinflationary and therefore bullish.

Troubles in China: Developers Going Down, Province Needs a Bailout

Here we are again, at the starting line for a crisis: Chinese Developers Going Down Like Dominoes

China Prints at Devaluation Speed

China Printing At Devaluation Speed

The annualized three-month growth rate of M2 money supply growth hit 24.1 percent in March. The last time it hit 24.1 percent? July 2015. The “surprise” yuan depreciation was in August 2015 under similar economic circumstances.

Everything is not the same, but the key component in this mix is the U.S. dollar...

Reclosing

Evidence continues to confirm my suspicion that China's lockdowns were hiding a recession. Industrial profits tumble

Ground Shifting Beneath the Bulls' Feet

With Twitter and Substack fighting, links cannot go between the sites. I miss the Internet of the 1990s.

Anyway, this rally is all but done here if the bears want to take it lower or the bulls gets skitting: Ground Shifting Beneath the Rally

Game Over

Repo is inverse with XLF, not on XLE.

Chinese Real Estate Digs for Hope

Qiushi 求是 is the Chinese communist party's internal and external magazine.

Its goal is to "to publicize the governing philosophy of the CPC" with content that reports on political, economic, cultural and social issues, while providing analysis of world politics and China’s foreign relations". About 60% of its articles are written by political leaders.

In late February, Qiushi published part of a speech written by Xi Jinping in which he discussed the need for stable real estate growth along with repeating the line that "houses are for living in, not speculation on." As a result, hopes for a floodgate of easy money and regulatory policy evaporated. Since then however, the industry found a new hope: China's 5 percent GDP target for 2023. In a nutshell,

On the other hand, the main expected goal of this year's development is to increase the GDP by about 5%. Li Yujia said that this means that real estate at least cannot form a drag. To boost economic growth, real estate needs to perform well in investment, construction, and consumption this year.

iFeng: 房地产重磅！中央最新定调，关键信号来了

Auto Lending Trouble

A Twitter thread. tl;dr Car prices have plunged so much that consumer would owe on loans when trading in a car. The lenders will give them new loans anyway and ignore that part, assuming they'll default on the older loan. Yay auto sales!

If California Didn't Exist, Austrians Would Have to Invent It

Clownifornia delivers another lesson in central planning and interventionism gone wrong. Retail sales spiked in October when California issued a stimulus check. Retail sales fell in November.

If America chose a pet rock for president, it would be a successful term because the pet rock would not intervene. Unfortunately, there are bad policies that do constant intervention that must be unwound, but a pet rock would come up with no stupid ideas, which it seems is the only thing the Baizuo ruling class can come up with.

Unemployment and Stocks

Very simple formula for 2023 in my opinion. If unemployment rises, stocks are going to new lows.

The first chart below shows claims and stocks positively correlated because myopic, QE-addicted bulls think higher unemployment is good for them, because the Fed will ease off hikes.

If unemployment starts rising sharply, then we'll know what form the Black Rabbit will take.

Hello Economy, Anybody Home?

If diesel is really in a shortage situation, that makes this chart all the worse.

Most Recessions Start a Year After Steepening

Most recessions start at least a year after the yield curve starts reversing higher. There already was recession in Q1 and Q2. Maybe there isn't now, or maybe inflation is being undercounted. Either way, not a good outlook.

I posted some trades over on the Substack.

Inventory Crunch to Liquidation

The Sounding Line: Inventory Crunch Over

The NFIB survey of ‘small’ and independent businesses is now showing that an equal number are reporting inventories too low compared to those reporting excess inventories.

There's a chart at the link if you want a graphical representation.

He is the ratio of inventory to sales:

Roaring Economy

I grabbed this too early. Atlanta Fed hiked the forecast to 4.0 percent today. Will the Fed worry about hiking too much in this environment?

Chinese Imports Sink Again

Zero-covid looks like one component of trade surplus maximization policy. MSN: China imports and exports shrink in October as demand from U.S. plummets

A key economic report card released Monday by China's national customs authority showed the country's overall exports fell by 0.3% in October compared to a year ago, but analysts had been expecting an increase well above 4%.

In a more troubling sign, exports to the United States, Beijing's largest trading partner, fell by 12.6% over the same month -- which was the third dip since August.

October's decline in exports represented an even deeper nosedive from a 5.7% annual increase that was seen in September and was the first market retraction in more than two years, according to financial data analyst Refinitiv Eikon.

China's imports also ran into trouble in October, falling 0.7% and missing expectations for 0.1% growth following a 0.3% increase the previous month.

Will Germany Break Free from the United States?

Berlin goes to Beijing: the real deal

According to these sources, the Scholz caravan went to Beijing to essentially lay down the preparatory steps for working out a peace deal with Russia, with China as privileged messenger.

This is – literally – as explosive, geopolitically and geoeconomically, as it gets. As I pointed out in one of my previous columns, Berlin and Moscow were keeping a secret communication back channel – via business interlocutors – right to the minute the usual suspects, in desperation, decided to blow up the Nord Streams.

Cue to the now notorious SMS from Liz Truss’s iPhone to Little Tony Blinken, one minute after the explosions: “It’s done.”

There’s more: the Scholz caravan may be trying to start a long and convoluted process of eventually replacing the US with China as a key ally. One should never forget that the top BRI trade/connectivity terminal in the EU is Germany (the Ruhr valley).

According to one of the sources, “if this effort is successful, then Germany, China and Russia can ally themselves together and drive the US out of Europe.”

Another source provided the cherry on the cake: “Olaf Scholz is being accompanied on this trip by German industrialists who actually control Germany and are not going to sit back watching themselves being destroyed.”

Moscow knows very well what the imperial aim is when it comes to the EU reduced to the role of totally dominated – and deindustrialized – vassal, exercising zero sovereignty. The back channels after all are not lying in tatters on the bottom of the Baltic Sea. Additionally, China has not provided any hint that its massive trade with Germany and the EU is about to vanish.

In the present, the U.S. ruling class seeks empire. Even Trump, who advocated for more nationalism, sought to use American power. He pushed Germany to wean itself from Russian energy instead of telling Germany that NATO is past its due date and American tariffs are coming for German exports. The immediate threat of war comes from the imperiliast attitudes of the American ruling class versus the Russia-China alliance. There is no nationalist political movement that can displace the imperialists yet, although there are growing movements such as the pockets of MAGA and Christian nationalism.

Zooming out in time, the U.S. was never supposed to be an imperial power. It was supposed to be the Shining City on the Hill, a Christian commerical nation that acted as a model to the world. It should rededicate itself to anti-socialism, abandon both empire and free trade, leave NATO, the United Nations, climate groups and all the other globalist NGOs. Reimplement nationlist economic policies and turn it into the fastest growing economy in the world again that play by its own rules.

Germany also has never really been an ally of the United States. It was a conquered territory and allied with the U.S. by force and because the alternative was communist oppression. As the EU commission said when Musk took over Twitter, "the bird flies by our rules." Europe and the United States were pushed into a marriage of convenience against communism, but they have different ideas of governance. The communist threat is gone. Europe and the United States share historic and cultural bonds, but the U.S. influence in Europe is keeping its nationalists from rising. The imperialist tyrants in DC oppress American nationalists along with European nationalists. It's time for the Americans to take power back in their nation and give power back to all the so-called allies that have been living under the thumb of an anti-American imperialist government for the past thirty years.

Commodities Signal Something Wicked

Preface: I'm all set whichever way the market goes and I'll change positioning as necessary. Even if you're bearish, it makes sense to have real assets, some physical precious metals and you should have a small watchlist of lotto-ticket junior mining stocks in case things change in a hurry.

Commodities exploded higher on Friday. Market participants and more so financial media, always create an explanation for what happened. The story for Friday's move was China re-opening. 

Another explanation is that the money printers take power away from the Federal Reserve. There is a growing rumor that the Treasury Department led by former Fed chair Janet Yellen will seize monetary power. She has floated the idea of doing a "twist" where the treasury issues new debt and buys back older debts. This would squeeze shorts and shock the market in the short-term, though maybe not. First, if this is done, it is the financial equivalent of draining the SPR for votes. How many votes will the Biden administration get for the SPR policy? It looks like a negative number to me. I bet this move is a larger negative number. It wants to "drain" the treasury market of very favorable debt (from the view of the U.S. government) and replace it with more volatile short-term debt that will reset at higher interest rates. As with the SPR drain, they refuse the simple solution: issue less debt. Instead of sending $30 billion to Ukraine, issue $30 billion less in treasuries. What a concept! As with the SPR drain, if the policy fails and the future is worse, then they've screwed the country. Interest on the debt will bring forward the date when massive cuts in welfare and warfare spending will be made.

It's possible the gambit will fail immediately too. In addition to worsening the government's fiscal position, they are crossing a red line by interfering in monetary policy. As someone who opposes central banks for economic and political reasons, it nonetheless is a superior economic arrangement to a U.S. treasury run by literal money printing MMTers. It is possible the market reaction to this treasury move will be a collapse in treasuries, the U.S. dollar and an outbreak of inflation so bad that there are inflation riots in the streets. For this potential risk alone, it is insane for a Democrat administration to effectively take 100 percent responsibility for the nation's fiscal woes built up over generations, but that is what will be the "narrative" if they do it.

The above scenario is a valid explanation for a sustained explosion in commodities of which Friday was merely the start. Another is that for all the whining by degenerate speculators and gamblers, the Federal Reserve still has interest rates at negative 2 percent measured by core CPI. What if I and others who expect lower inflation are wrong? If neutral policy includes rates of positive 2 percent, that argues for an 8 percent Fed funds rate right now. That would mean mortgages above 10 percent. What if the move on Friday was the market calling bullshit on the Fed and inflation is about to rip higher? Say hello to 10 percent on the 10-year and 15 percent yield on mortgages. 

Intuitively it makes sense. There is no hope of a soft landing given the amount of debt-financed stimulus and lockdowns that preceded it. At the very least, the 30 to 50 percent rise in home prices, more than 100 percent in many places, should reverse nearly 100 percent if the inflation comes out. Factor in lockdowns and the economy should be at a lower level than it was in February 2020. There was a great deal of economic destruction carried out by politicians and then hidden by massive stimulus. The electoral guillotine that will drop on Tuesday November 8 is the public reaction to the tip of an iceberg of destruction that the ruling class sent our way in 2020.

Alright, there's your commodities bull case. How about the bear case? First, the Fed gets serious about inflation if the runaway inflation scenario is real. They do whatever it takes to get inflation down, including the hardest landing for stocks since 1929. You will hear screeching like never before if the Fed does an emergency rate hike, but it is the appropriate move if commodities are taking off. Copper is begging for a 100 basis point emerging hike if it has one more day like Friday.

More likely, the big move is the end of a speculative wave. Whenever I'm writing one of these posts, something big usually follows. Markets get to the starting line of a major phase change many times before they go through with the change. If this isn't the phase change yet, then history says Friday was a great shorting opportunity.

Prior spikes in copper, outside of the Ukraine war pop, came at the end of rallies:

Huge spikes in and of themselves can be bearish outside of V-bottom type moves preceding them. If China doesn't unleash massive stimulus and/or the U.S. treasury isn't dumb enough to trash the currency and treasury market, then that spike is unwarranted.

Friday's move still leaves assets such as gold and copper with their crash analogs intact. Gold did pop up, but that candle could still end up looking like April 2013 before the month is out.

Silver had a similar spike with similar volume in the futures market at the start of October.

That also came within the context of a stock rally. Using the the stock market for context and relative weakness in stocks last week, the pop in commodities looks like it could be an outlier move.

As for the broader market, it can be distilled down to one stock: Apple. The stock has a bearish topping pattern that has yet to break. The measured move off the topping pattern gives a target of below $80 per share. There is a gap at $95 per share. If it fell as much as the rest of BigTech, it would trade down around $110 at minimum. Long-term support is around $124 per share. Apple is the largest stock in the S&P 500 Index at more than 7 percent of the index. It is nearly 25 percent of the technology sector. It is 14 percent of the Nasdaq 100. Finally, it broke the AAPL/SPY uptrend ratio. While not a necessarily a trade signal, it does indicate Apple is officially losing its status as the largest company in the stock market. I doubt this will be a painless transition. It is possible Apple collapses alone, but unlikely. 

We'll find out soon enough what the market has in store. One thing I'm relatively certain of: if commodities go up, then stocks like Apple are going to crumble. If commodities reverse lower, it'll probably be for a bad reason that is also bad news for Apple. It's possible both stocks and commodities rally for a time, but I don't see them rising together for long. 

China Going Supply Side

Yicai: China’s Local Governments Should Put State Assets to Better Use, Ministry Says

Chinese local governments should make better use of state-owned assets, such as houses, land and cars, in order to help plug the gap between fiscal revenue and expenditure, the Ministry of Finance said.

Local governments should conduct a thorough inventory of the assets that they occupy and use to make sure that they are being used efficiently, such as through the sharing, swapping, leasing or selling of these resources, and that none are lying idle, the ministry said in a document released yesterday.

Liu He had a widely-discussed editorial calling for supply side reforms: 刘鹤人民日报撰文：把实施扩大内需战略同深化供给侧结构性改革有机结合起来Hong Kong shares jumped 5 percent and A-shares more than 2 percent with more rumors of reopening. These two hotpot chains sport higher lows.

The emerging market ETF will open up near the gray line this morning.

Since everything is tied together, it still all boils down to the U.S. dollar. Copper is up 5 percent today, crude oil 4 percent for the same reason as the above. Will the Federal Reserve ease policy if the CPI reverses and goes vertical on a China reopening? Or are we headed for 10 percent interest on 30-year mortgages

FWIW, I'm looking for a reversal in the stock market today because none of these moves are good for U.S. equities. Short-term anything can happen though.