China’s tide changes, and the tide goes out around the world. Who’s next?
When China was still in a quantitative easing mode it was already “exporting deflation” to the world, having to sell its stuff cheaper and cheaper to buoy the bottom, or outer edge, of their economy.
For a near record 21 months in a row, US Import Prices dropped in April compared to last year (down a worse than expected 5.7% YoY, and rising only 0.3%, less than the 0.6% expected rebound from March) with China exporting deflation at the fastest pace since 2009. (US Import Prices Tumble For 21 Months In A Row As China Exports Most Deflation Since 2009 Tyler Durden, 05/12/2016 )
And from the top of their economy they were often the buyers of last resort of the world’s debt, commodities, and facilities. Now that they are mashing the brakes, things should really start imploding there and they will be all the more distressed sellers of cheap goods but will likely buy less commodities and assets. Thus they ramp up exporting deflation to the world.
John Rubino appears to blame this whole malaise on excess debt. Using Macy’s as an example of the dearth of U.S. retail profits, he says,
Macy’s reports horrendous earnings and Italian banks finally reveal their non-performing loans. Share prices plunge accordingly. China, meanwhile, admits that it’s over-leveraged and promises to stop borrowing. In other words, wherever you look, a global slowdown is coming … . (Podcast: Chaos Spreads to US Retailers and Italian Banks)
Insider selling has been rampant and sustained for weeks (months?). Now Tyler Durden, of Zero Hedge, comments,
One month ago, when we updated on the performance of Horseman Global, what until recently was the world’s most bearish hedge fund with a record net short exposure of -98% … at least until Icahn Enterprises emerged with its even more gargantuan -149% net short … (World’s Most Bearish Hedge Fund Manager: “I Think Something Has Changed”)
They have good reason. On the other hand, the the Horseman Global fund lost money in March and April. Durden quotes fund CIO Russell Clark:
To lose 4.29% last month was a bit of a surprise to me, as most of the technical indicators I use indicated that the short squeeze was largely over at the end of March, and yet it continued into April. …
In this case, I think something has changed. The overwhelming theme of the market for the past 18 months or so has been that of a strong dollar. European and Japanese markets had performed well as their currencies weakened versus the dollar, and commodity prices were generally weaker. Furthermore the strong dollar put pressure on the renminbi and encouraged thoughts of a Chinese financial crisis. …
The message that I am getting from the market, the “something” that has changed is that the US dollar is no longer a strong currency.
Rubino agrees in his comments, saying, “a massive currency devaluation will soon be the only politically feasible solution (Podcast: Chaos Spreads to US Retailers and Italian Banks).” Meanwhile, Clark continues:
Typically the US dollar falls when its economic cycle begins to roll over. Many of the indicators that I look at show the US is either in or heading for recession. These indicators include; the US trade deficit ex petroleum products which is back to 2006 levels; US capacity utilisation peaking in late 2014 and declining rapidly ever since; and US high yield have generally been widening since 2014. …
Given that the US dollar could potentially fall significantly from here, it seems to me that we should take what have been hedges to our portfolio (that is long euro and yen, short Japanese and European equities), and make this the core of the portfolio… (World’s Most Bearish Hedge Fund Manager: “I Think Something Has Changed”)
Given the emerging issues with European banks mentioned above, I’m not so sure about going long the euro. But at least they are short the European banks:
We have increased our long euro position to 50% of the fund, and long yen to 30% of the fund. We have closed a number of emerging market financial shorts, and opened European financial shorts. We are now net short European financials. We have closed a number of US listed oil shorts and replaced them with shorted euro denominated oil stocks.
It is possible that the US dollar could be so weak, that the US equity bull markets can continue, but (this) would probably lead to depression and crisis in Europe and Japan. At the beginning of the year, an investor asked me to sum up current central bank policy. I described it as a circular firing squad, where at best perhaps one economy could escape, but most likely everyone dies. The gun that they hold is competitive devaluation. We know now who is most likely to live and who is most likely to die, and are making the appropriate changes. … (World’s Most Bearish Hedge Fund Manager: “I Think Something Has Changed”)
We shall see. Even with the change in policy, Horseman did not cover any of its shorts, so I don’t guess they think that the U.S. stock market will live particularly well.
It is very hard to tell where the water will slosh next. The one thing that seems certain to me is that we are watching the death-throes of the worldwide fiat banking system. The system is going to collapse.
This is why we hear ever increasing talk of various sanctions and/or taxes on cash. It is why we are hearing more about efforts of the banks to roll out a digital cash system based on blockchain technology (what has been called cryptocurrency – but it will doubtless be getting a catchy new name such as e-cash). With the world’s fiat currencies in a race to the bottom, it may be time to stick our collective toes in the crypto-water here.