October 30 – BloombergView (By Matthew A. Winkler): ‘Ignore China’s Bears: There’s a bull running right past China bears, and it’s leading the world’s second-largest economy in a transition from resource-based manufacturing to domestic-driven services such as health care, insurance and technology. Just when the stock market began its summer-long swoon, investors showed growing confidence in the new economy – and they abandoned their holdings in the old economy. These preferences follow Premier Li Keqiang’s directive earlier in the year at the National People’s Congress to ‘strengthen the service sector and strategic emerging industries.”
Bubbles always feed – and feed off of – good stories. Major Bubbles are replete with great fantasy. Even as China’s Bubble falters, the recent ‘risk on’ global market surge has inspired an optimism reawakening. August has become a distant memory.
In the big picture, the ‘global government finance Bubble – the Granddaddy of all Bubbles’ is underpinned by faith that enlightened global policymakers (i.e. central bankers and Chinese officials) have developed the skills and policy tools to stabilize markets, economies and financial systems. And, indeed, zero rates, open-ended QE and boundless market backstops create a ‘great story’. Astute Chinese officials dictating markets, lending, system Credit expansion and economic ‘transformation’ throughout a now enormous Chinese economy is truly incredible narrative. Reminiscent of U. S. market sentiment in Bubble years 1999 and 2007, ‘What’s not to like?’
Never have a couple of my favorite adages seemed more pertinent: ‘Bubbles go to unimaginable extremes – then double!’ ‘Things always turn wild at the end.’ Well, the ‘moneyness of Credit’ (transforming increasingly risky mortgage Credit into perceived safe and liquid GSE debt, MBS and derivatives) was instrumental the fateful extension of the mortgage finance Bubble cycle. At the same time, Central banks and central governments clearly have much greater capacity (compared to the agencies and ‘Wall Street finance’) to propagate monetary inflation (print ‘money’). Most importantly, this government ‘money’ and the willingness to print unlimited quantities to buttress global securities markets now underpin securities markets on a global basis (‘Moneyness of Risk Assets’). And unprecedented securities market wealth underpins the structurally impaired global economy.
China has been a focal point of my ‘global government finance Bubble’ thesis. Unprecedented 2009 stimulus measures were instrumental in post-crisis global reflation. Importantly, China – and developing economies more generally – had attained strong inflationary biases heading into the 2008/09 crisis. Accordingly, the rapid Credit system and economic responses to stimulus measures had the developing world embracing their newfound role of global recovery ‘locomotive’. I contend that the associated ‘global reflation trade’ was one of history’s great speculative episodes. I have posited that the bursting of this Bubble (commodities and EM currencies) marks a historical inflection point for the global government finance Bubble. I find it remarkable that this analysis remains so extremely detached from conventional thinking.
This post was published at Wall Street Examiner on October 31, 2015.
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