September 18, 2017, 4:30 pm EST Invest Alongside Billionaires For $297/Qtr
As I said on Friday, people continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.
We constantly hear about how the fundamentals don’t support the move in stocks. Yet, we’ve looked at plenty of fundamental reasons to believe that view (the gloom view) just doesn’t match the facts.
Remember, the two primary sources that carry the megahorn to feed the public’s appetite for market information both live in economic depression, relative to the pre-crisis days. That’s 1) traditional media, and 2) Wall Street.
As we know, the traditional media business, has been made more and more obsolete. And both the media, and Wall Street, continue to suffer from what I call “bubble bias.” Not the bubble of excess, but the bubble surrounding them that prevents them from understanding the real world and the real economy.
As I’ve said before, the Wall Street bubble for a very long time was a fat and happy one. But the for the past ten years, they came to the realization that Wall Street cash cow wasn’t going to return to the glory days. And their buddies weren’t getting their jobs back. And they’ve had market and economic crash goggles on ever since. Every data point they look at, every news item they see, every chart they study, seems to be viewed through the lens of “crash goggles.” Their bubble has been and continues to be dark.
Also, when we hear all of the messaging, we have to remember that many of the “veterans” on the trading and the news desks have no career or real-world experience prior to the great recession. Those in the low to mid 30s only know the horrors of the financial crisis and the global central bank sponsored economic world that we continue to live in today. What is viewed as a black swan event for the average person, is viewed as a high probability event for them. And why shouldn’t it? They’ve seen the near collapse of the global economy and all of the calamity that has followed. Everything else looks quite possible!
Still, as I’ve said, if you awoke today from a decade-long slumber, and I told you that unemployment was under 5%, inflation was ultra-low, gas was $2.60, mortgage rates were under 4%, you could finance a new car for 2% and the stock market was at record highs, you would probably say, 1) that makes sense (for stocks), and 2) things must be going really well! Add to that, what we discussed on Friday: household net worth is at record highs, credit growth is at record highs and credit worthiness is at record highs.
We had nearly all of the same conditions a year ago. And I wrote precisely the same thing in one of my August Pro Perspective pieces. Stocks are up 17% since.
And now we can add to this mix: We have fiscal stimulus, which I think (for the reasons we’ve discussed over past weeks) is coming closer to fruition.
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The word China is often thrown around to explain why markets are in turmoil. China doing well was a threat to western civilization. China doing poorly is now a threat to Western civilization.
Which one is true?
First, a bit of background. Over the past twenty years, China’s economy has grown more than fourteen-fold! … to $10 trillion. It’s now the second largest economy in the world.
Source: Billionaire’s Portfolio
During the same period, the U.S. economy has grown 2.5x in size.
So how did China achieve such an ascent and position in the global economy? One word: Currency.
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For a decade, China maintained a fixed exchange rate policy — the yuan was pegged against the dollar. One U.S. dollar bought 8.27 yuan. This allowed China to undercut the rest of the world, churning out cheap commoditized goods, competing on one thing: Price.
But in 2005, China changed its currency policy. It abandoned the peg.
After political tensions rose between China and its key trading partners, namely the U.S., China adopted a “managed float.” Under this policy China agreed to let the yuan trade in a defined daily trading band, while gradually allowing it to appreciate. This was China’s way of pacifying its trading partners while maintaining complete control over its currency.
Over the next three years the Chinese yuan climbed 17 percent against the dollar, enough to ease a politically sensitive issue, but far less than the relative economic growth would warrant. In fact, China’s economy grew by 43 percent while the U.S. economy grew only 10 percent.
That timeline leads us up to the bursting of the global credit bubble. What caused it? The housing bubble can be credited to a key decision made by the government sponsored credit agencies (Fitch, Standard and Poors, Moody’s), all of which stamped AAA ratings on the mortgage bond securities that Wall Street was churning out.
With a AAA rating, massive pension funds couldn’t resist (if they wanted to keep their jobs) loading up on the superior yields these AAA securities were offering. That’s where the money came from. That’s the money that was ultimately creating the demand to give anyone with a pulse a mortgage. That mortgage was then thrown into a mix of other mortgages and the ratings agencies stamped them AAA. They rinsed and they repeated.
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But where did all of the credit come from in the first place, to fuel the U.S. (and global) consumption, the stock market, jobs, investment, government spending … a lot of the drivers of the capital that contributed to the pin the pricked the global credit bubble (i.e. the U.S. housing bust)? It came from China.
China sells us goods. We give them dollars. They take our dollars and buy U.S. Treasuries, which suppresses U.S. interest rates, incentives borrowing, which fuels consumption. And the cycle continues. Here’s how it looked (and still looks):
Source: Billionaire’s Portfolio
The result: China collects and stockpiles dollars and perpetuates a cycle of booms and busts for the world.
That’s the structural imbalance in the world that led to the crisis, and that problem has yet to be solved. And the outlook, longer term, for a solution looks grim because it requires China to move to develop a more robust, and consumer led economy. That structural shift could take decades. And going from double digit growth to low single digit growth in the process is a recipe for social uprising of its billion plus people.
In the near term, the likelihood that China will fight economic weakness with a weaker currency is high. We’ve seen glimpses of it since August. And the hedge fund community is ramping up bets that it’s just starting, not ending.
Source: Billionaire’s Portfolio
Above is a look at the dollar vs the yuan chart (the line going lower represents yuan appreciation, dollar depreciation). Longer term, China’s weak currency policy is a threat to economic stability and geopolitical stability. But short term, it could be a shot in the arm for their economy and for the global economy.
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