Juggling Dynamite

Unverified online posts about the potential reopening of China continue to inspire periodic rebounds in commodity and stock prices. After nearly two years of disappointment and $6 trillion of losses, last week, Chinese stocks soared on frenzied speculation that a bottom has finally arrived.

Then, on the weekend, bullish dreams were dampened once more as Chinese Health officials stated an “unswerving” adherence to current COVID controls as the country faces increasingly serious outbreaks. See Bloomberg: China to “unswervingly” keep to COVID-zero policy, dashing hopes.

China Beige Book analyst Leland Miller recently explained the paradigm shift unfolding in China and why many incorrectly extrapolate past growth and demand patterns forward.

Markets plunged on Monday after Xi Jinping clearly signalled to the world a new era within China. Leland Miller walks through the paradigm shift in China’s growth model going forward and how this spills-over into politics, economics, business and everything in between. Expecting a “slower, healthier” level of growth going forward, Leland helps investors walk through the new landscape he has been identifying for many years to come, but to hear that, you’ll have to tune in!

Also, see: China’s exports shrink in October, badly missing expectations for growth.

Danielle was a guest with Rubina Ahmed-Haq and host John Northcott on the CBC Weekend Business Panel today. You can watch a video clip of the segment here.

Yesterday, Fed chair Jerome Powell reiterated his commitment to combating inflation (lagging indicator) at the expense of economic growth, employment and asset prices (leading indicator). Stocks didn’t like the message. In an abrupt reversal, every market sector tumbled into the close, with 474 of S&P 500 members ending in the red. There’s a point of financial pain at which the Fed will pause; evidently, we aren’t there yet.

The persistent hawkishness of central banks is a new paradigm for a world of market participants who’ve been trained to presume unending monetary bailouts. Most are incredulous that gambling isn’t winning and lack the discipline to do otherwise.

Meanwhile, the most abrupt tightening cycle on record is moving through the economy faster than average. With interest rates the highest since 2007, home sales are already down 49% year over year in Toronto and 45% in Vancouver. US mortgage applications (a leading indicator) were -40.8% year over year for the week of October 28. Used car prices in October were -10.4%, the weakest since the 2008 recession.

Ex-oil and gas, S&P 500 earnings per share were -5.1% year over year in the third quarter, following a 4% contraction in Q2, registering the first successive quarterly decline since the 2020 recession.

Public company profits benefited from pandemic-era fiscal and monetary support while they were able to pass on higher input costs to consumers. But that is all in the rearview mirror. Now, consumers are tapped out and focused on how to cut spending just as excess inventories, higher borrowing costs and worsening productivity prompt companies to cut overhead/workers.

On the upside, collapsing demand and a profit recession will force liquidation selling and finally help bring inflation back to target. The policy-enabled inflation of 2021 is mean reverting through deflation in 2023.