Oil prices have crashed from $52 to $42 in the last month. And China’s the culprit, say Wall Street analysts.
China is an easy mark: Ghost cities, capital flight, shadow banking, rising dissent and the Communist Party.
So naturally, the drumbeat for the Red Dragon’s hard landing began after a couple of negative economic reports.
There is only one problem. There is no hard Chinese economic landing.
In a June 21 research note from TIS Group, Simon Hunt makes a cogent case that fears of a Chinese recession do not jibe with the facts on the ground.
Although the People’s Bank of China is trying to deleverage the system, mortgages accounted for 40% of banks’ new lending last month. Meanwhile, consumer spending remains robust.
Clint Laurent, of Global Demographics Group, forecast spending in China should rise from $3.88 trillion in 2015 to $4.82 trillion in 2020 and to $5.92 trillion in 2025.
Infrastructure expenditures are even more impressive. Recently, government officials predicted they would spend 16% more on domestic infrastructure in 2017 than in 2016. These ventures would include roads, bridges, and energy and telecommunications projects.
And 25% of China’s industrial orders now originate outside the country. Aggressive investment in Pakistan’s power stations will pay big dividends in the near term.
Later down the road, China’s One Belt, One Road global trade initiative should be even more important. The Communists plan to create a New Silk Road to link China with Europe via land and sea.
Anecdotally, Simon notes excavator sales rose 106% during May versus last year, and they have averaged 50% increases over the past nine months. Developers do not invest in earth-moving equipment when they are looking for a slowdown.
Every time there has been consecutive instances of slowness, the Communist Party and the PBOC have mixed in a couple of doses of stimulus.
Slow, slow, quick, quick. It’s like the famous Texas two-step, and it keeps the economy humming.
It’s no surprise that analysts are on the wrong side of China again. They have been getting China wrong every year since 2008. It’s part of a pattern that is beginning to look suspicious.
Famed trader Jesse Livermore warned about analysts, and Wall Street in general. During his storied career, he earned millions of dollars speculating in stocks.
And, he learned that Wall Street is often part of a larger disinformation cycle. It operates like this:
Hedge fund managers are really good at finding big ideas. They will buy and sell sector stocks many times during the course of a cycle.
When they want to sell, they tell Wall Street analysts about the benefits of ownership. When they want to buy, they play up the reasons the stock is overpriced.
Soon, analysts begin parroting these ideas to their institutional and later their retail clients. By the time the idea reaches screaming TV pundits, the advice is usually exactly the wrong thing to do.
Charlie Munger, the vice-chairman of Berkshire Hathaway, calls this Contrast-Caused Distortion.
It’s what allows magicians to steal a man’s watch while you are being distracted by a vivacious female assistant. Or frogs to stay submerged in a pot of water as the heat is slowly turned up. Cognition mimics sensation.
Hedge funds are great cognition manipulators. Wall Street analysts are too often their willing dupes.
A big part of the service I provide to my members is a dose of reality. My research team is constantly questioning the consensus view. We are mixing private research with our own, and pushing loads of data through rigorous statistical analysis.
Crude oil is trouble, to be sure. But it’s not because China is headed for recession.
Best wishes,
Jon Markman
