The economic data out of China has been downright awful. Just consider the following litany of depressing news:
==> The amount of bad loans clogging the Chinese banking system jumped 72.5 billion yuan to 766.9 billion yuan in the third quarter. That was the biggest quarterly rise in five years.
==> Home sales are dropping at double-digit, year-over-year rates, while house prices fell in all but three of China’s top 70 cities in October.
==> Investment in large fixed assets is rising only 15.9 percent, the least since 2001, while retail sales growth is running at the lowest rate since 2006.
==> All told, Chinese GDP is now on track to grow at the slowest pace in 24 years!
So the smart move would be to short the heck out of the Chinese stock market, right? Wrong! As Bloomberg reported on Wednesday:
“Chinese stock turnover climbed to a record as the benchmark index rose to a three-year high, led by commodity producers and consumer companies.”
|The Chinese government now targets a growth rate of 7.5 percent, well down from the double-digit rates we’ve seen before the crisis.|
The story goes on to note that trading volume was double the one-month average, and that China’s benchmark Shanghai Composite Index surged 14 percent in the last month. That made China’s index the strongest performer of the 92 worldwide indexes that Bloomberg tracks!
Note also that the story said commodity producers led the advance, even though commodities have performed hideously in the past few months. Gold prices just plunged to a four-plus-year low of around $1,130 an ounce, while crude oil has shed around $44 a barrel just since June.
So what accounts for this startling state of affairs? Well, let’s go back to the Bloomberg story:
“Central bank efforts to bolster China’s economic growth, including lowering borrowing costs, are reviving optimism in the $4.5 trillion stock market.”
And there you have it! Nothing about an actual change in circumstances. Nothing about the fact that round after round of easing in China (or Japan and Europe, for that matter) has done nothing to revive the economy, as the data I shared at the outset proved. Nothing whatsoever about corporate fundamentals or earnings.
Just the central bank, which cut interest rates a few days ago for the first time since 2012. Officials are also talking about flooding the economy with more liquidity, a move that would follow the recent injection of tens of billions of yuan into the country’s major banks.
I think there’s a very important lesson for U.S. investors in all this. The primary force driving interest rates and stock prices (as well as currencies) right now is central bank policy.
Which bank is easing the most?
Which is easing the least?
When will the next bank act, and in what fashion (QE, targeted asset purchases, a change in its reserve investment strategy)?
That has driven U.S. stocks higher vis-à-vis foreign stocks … and boosted the dollar at the expense of foreign currencies. That, in turn, has even attracted inflows to U.S. bonds, keeping U.S. interest rates far lower than they “should” be based purely on the strength of our domestic economic data.
I’ve been willing to ride the lion’s share of those trends, making nice profits from recommendations to short the euro currency and buy stocks that have a domestic focus to their operations. But it’s worth noting that these trends are getting more and more extended.
That means it wouldn’t take much to lead to significant corrections — lower for the dollar, higher for things like gold and oil, and a shift in stock market leadership to commodity and resource stocks versus retailers, banks, airlines, and the like. Those are the stocks that are already leading in China, as I noted earlier. So you may want to start allocating some capital their way, in slow and steady steps.
In sum: Never lose sight of what policymakers are doing — overseas or here in our backyard. They are driving the bus right now, regardless of underlying economic news!
Until next time,