Juggling Dynamite

During the Great Recession of 2008, China pumped more stimulus and issued more layers of debt to do so, than any other country in the world. This helped to revive some global demand and contributed to the economic rebound into 2011. After that however, gobs of Central Bank liquidity has been ineffective in reviving global sales, jobs or wage growth. Necessarily mean reverting, the credit cycle now contracting in China is one of the largest shock risks to global growth. This clip offers some interesting discussion comparing China with Japan’s challenges as well as ramifications for China near term.

Dong Tao, chief regional economist at Credit Suisse Group AG, talks about China’s economy and local government debt. Here is a direct video link.

The debts that are coming due and need rolling over here are no small issue: “For 2014 China has about 3.5 trillion of Renminbi of local debts maturing, that’s by far the largest in the history of China.”

First China lent its cash reserves as a form of vendor-take-back financing to fuel unsustainable western consumption of Chinese exports during the 2002-2007 global credit bubble expansion. Then China re-pledged those reserves multiple times over to liquify its banking system and build out infrastructure in its domestic economy as export income fell. Now that exports are still weakening, extreme leverage through all layers of companies and governments have led China full circle back to a credit crunch; this time more severe than in 2008–and with no quick fixes in sight.

David Einhorn, co-founder & president at Greenlight Capital, discusses his dinner conversation with former Federal Reserve Chairman Ben Bernanke on quantitative easing and Fed policy.Here is a direct video link.

This clip offers a good overview on today’s global stock market bubble. The multitrillion dollar question of course, is not if, but when, this bubble will burst once more. Since precise timing is always illusive, each person much bet according to their own rules, risk appetite and conscience. Here is a direct video link.

To hedge his bets and appease the requirements of his company GMO’s now “long always” equity mandate, Jeremy Grantham has said the S&P could rise for perhaps a further 15% before it implodes again. He may be right, but it is a total guess.(Grantham learned the pains of moving away from bubbles early in 1998 when he pulled out of stocks 2 years before the 2000 collapse and was punished with a 50% redemption of assets under management, before attracting billions of inflows again after others lost money and their clients in the 2000-2003  -50% bear market.)

Or possibly this stock bubble burst is already in process as tech, momentum and small cap leaders are in the midst of a significant price correction year to date. Twitter, as an example, is now down more than 50% from its December peak.

Whatever the precise timing turns out to be, the most important question to grasp here is not when will stocks correct by 5 or 10%, but rather when will stocks next fulfill their half-life destiny for the third time since the secular bear began in 2000. Half-life, because fulfilling the secular bear destiny would mean wiping out all of the price gains seen since 1997 and possibly longer. Believe it or not.