Bell rung on stock market top? From an article by David Stockman, Director of the Office of Management and Budget under President Ronald Reagan.
The slight uptick in global trade and GDP growth during the last year and one-half is almost entirely attributable to the huge credit impulse that emanated from China as the Red Suzerains of Beijing prepared the economic table for Mr. Xi’s coronation as the second coming of Mao during the 19th party Congress in October.
Our contention has been that credit growth in China has subsequently hit stall speed compared to 40% plus rates of state-driven expansion in during much of 2016-2017. And when China’s $40 trillion credit machine slows, so does world trade, and, with a lag, global growth.
Not surprisingly, South Korea is considered to be the canary in the global coal mine because its efficient, high-tech economy functions as a staging yard for China’s more mundane and end-stage industrial output.
In that context, last night’s report on South Korea’s Q4 GDP and export trade was a bell-ringer. Exports growth plunged by an amount not witnessed since 1985 and quarterly GDP printed negative for only the third time this century.
Money supply growth in the US and EU combined fell below the magic 5% level last October. Market falls and recessions usually begin about 6 months later.
However there are still no immediate signs of an impending market fall or recession in the US — such as faltering margin lending growth. So a fall is presumably not close. Given that world asset markets, and particularly the US stock market, are at historically the highest and most nose-bleed levels ever by many measures, a fall is likely in the second half of this year.
Central banks have no room to lower interest rates — they normally lower 3% or so when a recession hits — so this could be the end game for both the Keynesian nonsense and the conceit that central banks can eliminate the business cycle. No, they cause the business cycle. Before fractional reserve banking and central banking started around 1700, interest rates were stable at around 6% for centuries.