Juggling Dynamite

Overnight, China’s National Bureau of Statistics reported that retail sales grew by 2.7% in July-nearly half as much as the consensus forecast of 5%. Industrial production also missed the 4.6% estimate with an increase of 3.8% as the Chinese economy joined the US in shrinking during the second quarter. China’s GDP grew by just 2.5% in the first half of the year, running well below the full-year target of around 5.5% set in March. Analysts will have to reduce their global growth outlook further on this news.

With China’s housing market in distress, consumer confidence remains near the lows ever recorded since 1991 (shown below).

China’s central bank (PBOC) responded with a .10 cut to its one and seven-year lending rates today.  Rather than rejoice in easier credit conditions, commodities are slumping hard on evidence of a worsening global downturn.

Resource-linked currencies like the Canadian and Australian dollars are tumbling along for the ride, off more than 1% this morning, while government bond prices are rising on the disinflationary news.

As risk markets have rebounded over the past month, FOMO has resumed with retail flows moving back to the sketchiest and over-valued securities and shorts being forced to buy back positions. The basket of most-shorted stocks tracked by Goldman Sachs is up almost 39% this quarter. As shown below (from Goldman Sachs Prime), the past month has seen the 3rd biggest hedge fund short-covering event of the last decade.

See Every Wall Street Trend Goes Haywire as Stock Bears Are Crushed:

Retail investors, who watched their post-pandemic profits wiped out this year and dashed out of stocks in June, are rushing back. Share purchases from small-fry traders jumped 62% during the week through Tuesday, industry data compiled by JPMorgan Chase & Co. show.

Like Monty Python’s Black Knight, animal spirits have been injured year to date, but they’re “not dead yet.”

So long as wild abandon and gambling permeate, we can be sure that the cycle bottom is nowhere nigh. As in 2003 and 2009, when cycle lows finally present, very few will have the cash or will to buy.

The first down leg was triggered by concern about central banks hiking interest rates and the reality that higher rates reduce free cash flow and profits. With some $130 trillion of private debt globally, up 250% since 2000, the next down leg will come amid spreading solvency problems. Those capital injuries are always more grave. See more in Volatility Investor Warns of False Dawn for US equities market:

“We are getting close to the end of phase 1, a repricing of growth. Phase 2 is more interesting to me. It is more of a credit cycle. People are upset that they’ve lost money, but there is no fear. The headlines in Q4 and Q1 are going to be of people having trouble refinancing, and nervous investors will start selling. By Q4 or Q1 it will switch to fear.”

As stocks rebound on disinflation data and hope for less central bank tightening, the tech-heavy Nasdaq is +21% from its June low but remains -18% from its November high. Meanwhile, commodity speculators are back to bidding up prices even as excess inventory of many goods mounts and global demand contracts. Bonne chance tout la monde.

While some proclaim a new bull market, realists note that 20% price rebounds have historically been common within ongoing bear markets. We are very early days in this one, and downside for markets, the economy, animal spirits and interest rates, still looms large.

In a late July video interview, cycle expert Jeremy Grantham offered context for what’s happening now as follows:

“There’s nothing as quick and spectacular as a bear market rally. With hindsight, they signify very little, but at the time, they frighten the pants off bears, and they give hope that all is over, all is forgotten, and it’s back to the races.” (Grantham suggested the current rebound in stocks could continue into September.)

“In terms of the entire bear market, it would be unusual for it to bottom out anywhere near this high. I would expect that by the low, the S&P would have declined by 50% from the peak in real terms.”

The Business Insider summarized ten standout quotes from the interview here. The full far-reaching discussion is available below.

Jeremy Grantham is the co-founder and Chief Investment Strategist of Grantham, Mayo and van Otterloo or more commonly known as GMO – a Boston-based asset-management firm. I last spoke with Jeremy almost exactly a year ago on episode 371 and I highly recommend you revisit it to see how prescient his predictions were at the time. In this episode, I wanted to get Jeremy’s thoughts on how the markets have materialized since we last spoke, but I also wanted to dive deeper into his knowledge around climate change. Here is a direct video link.