Friday, February 26, 2016

China Puts on a Brave (Fake?) Face as Economy, Markets Slump

China Puts on a Brave (Fake?) Face as Economy, Markets Slump

Mike Larson | Thursday, February 25, 2016 at 4:20 pm

Market Roundup
16,697.29 (+212.30)
1,951.70 (+21.90)
4,582.21 (+39.60)
10-YR Yield
1.70% (-0.05)
$1,234.00 (-$4.70)
$32.99 (+$0.84)

China is a mess. Its benchmark stock market plunged more than 6% overnight, while its money-market rates surged higher.
Its currency remains under pressure thanks to massive credit concerns and hundreds of billions of dollars in capital outflows.
Its economy is slowing dramatically amid widespread weakness in sectors like heavy manufacturing, mining, and real estate.
But to listen to the Chinese tell it, as reported in today’s New York Times, everything is just peachy. And when the news isn’t peachy, the Chinese have a solution for that too. Hide the truth.
022516_1834_ChinaPutson1.jpg Has China really solved all of its economic problems?
In the first of two stories, headlined “China Gives Glimpse of Its Solutions to Economic Problems,” Chinese central bankers say they won’t devalue the yuan to spur the economy. Chinese finance officials say they will increase deficit spending this year to boost growth. And still other officials say the economy will seamlessly transition from a manufacturing/export-based growth model to one based on services and consumer spending.
But in the second of two stories, headlined “As China’s Economic Picture Turns Uglier, Beijing Applies Airbrush,” we learn how China is clamping down on bad news and the free-flow of data and information.
Looking for unbiased reporting from Chinese media? You won’t get it because President Xi Jinping just visited the top three state news outlets and laid out what was expected of them. Specifically, he said that, “All news media run by the party must work to speak for the party’s will and its propositions, and protect the party’s authority and unity.” Okay then.
The Times added that two private research firms, Market Economics of the U.K. and Caixin Media of China, had to stop reporting some factory survey data back in September after pressure from China’s statistics bureau. And detailed data on foreign-exchange activity by private banks mysteriously disappeared from a central bank-produced report in January.
My simple question: If things are so great, why would the Chinese go to those kinds of lengths? I think you know the answer.
So what does this all mean to investors like you? Well, you have finance ministers, central bankers, and other key global policymakers flying into Shanghai right now for the latest G-20 meeting. Chinese officials are clearly trying to put on a brave face for the world.
In addition to the comments in The New York Times from earlier, policymakers are saying things in the Financial Times like, “For the foreseeable future, our demand will remain fairly strong.” Chinese central bankers are also urging more deficit-financed spending, and leaking the news to the Wall Street Journal.
Meanwhile, the International Monetary Fund, the Organization for Economic Co-Operation and Development and the U.S. Treasury Secretary, among others, are practically begging for massive injections of government spending. Treasury’s Jacob Lew told the Journal “We have to commit to using all policy levers,” while the IMF urged “coordinated demand support, using available fiscal space to boost public investment and complement structural reform.” Yesterday’s intraday market bounce was at least partially inspired by hope those calls would be heeded.
“If the markets are hoping for true, concrete action … they’ll be disappointed.”
But if the markets are hoping for true, concrete action … rather than more happy talk and doctored data … I believe they’ll be disappointed. Past G-20 communiqu├ęs and pledges have proven to be nothing more than empty promises. Political willpower is lacking both here and abroad for a huge new global stimulus push. And even government officials are admitting that the latest monetary policy measures are failing to achieve anything.
So I’m heading into this weekend with a cautious outlook and a defensive stance. I’m taking every bit of talk and data out of China with a huge shaker full of salt. And most importantly, I’m going a step further to help you sort through the market’s confusing action.
Specifically, I’m participating in a critical, well-timed webinar on Monday, Feb. 29 at 2 p.m. Eastern, when I’ll share my take on the latest market developments. It’s called “Finding Profits as Markets Falter and Gold Soars,” and it’s entirely free to attend. All you have to do is register here.
You won’t just hear from me, either. I’ll be joined by noted gold and market experts Brien Lundin, Brent Cook, and Peter Schiff. So I expect the webinar to be a lively, interactive affair. I hope to “see” you there.
And as always, feel free to weigh in on my take on China, the G-20, and government stimulus efforts in the comment section below.
Our Readers Speak
Stock market turmoil. Crazy interest-rate policy. Ridiculous lending. Politics. You were talking about a little of everything at the website in the last 24 hours.
Reader Howard referenced the last major credit crisis, and how we’re still dealing with its aftereffects now: “Many will remember the period in 2008/09 when the markets fell apart but weren’t allowed to settle. Intervention came from such luminaries as Warren Buffett, who called for the intervention of government at the time. So now mom and pop taxpayers are on the hook for the damage, which is still being kicked down the road.
“Until markets can find their true bottom and the chips fall where they may, true confidence will not return. We need to address this mess as a first step in restoring what we value in our freedoms and the country our forefathers built. There are many other things to do and a bit of guts and grit will help.”
Reader Badger10 referenced yesterday’s intraday rally, but said it doesn’t change the bear case in the longer term: “When we start paying down our debt, I’ll start buying stocks. Short-covering rallies are not the way as these are hope rallies. Enjoy the recession as we are there — and it’s not discounted in the market.”
When it comes to lending activity, Reader Ted F. said: “It seems the same silly stuff keeps happening over and over: Subprime loans here, subprime loans there, then the subprime loans go bad, just like before. So do they make subprime loans for consumer electrics and fancy phones next?
“Why does it look like a bunch of chickens running around when the wolf gets in the hen house? When are they going to start paying people to borrow money or buy something other than the usual rebates?”
Meanwhile, Reader Chuck B. brought up the subject of negative interest rates, saying: “Mike has a good point about what ZIRP and NIRP do to bank earnings. In Japan, the safe business is booming, as people pull their money out of the banks to keep it at home. It may lose value due to inflation, but fees and negative interest won’t be a factor, at least. In this country, you’d better buy a Bushmaster with your safe, and never sleep.”
Finally, on the subject of politics, Reader Al said: “In regard to Trump’s momentum, if it continues, we will certainly have Hillary in the White House. At this point, unless Rubio and Cruz flip a coin to decide who is out to eliminate the vote-splitting between them, Trump will be triumphant. As fed up as we are regarding Washington insiders, the biggest losers will be us if Hillary (the ultimate insider) is elected.”
But Reader J.S. said: “I am not sure I buy into the fact that Hillary beats Trump if he is the GOP candidate. There are many people who do not like Hillary for her ethics and political beliefs. I also believe there are many people who are not sold on Rubio. I am not sure he possesses core beliefs, and it is obvious that he is the preferred choice of the GOP elite/establishment wing of the party.
“If the party elders pull out all the tricks to derail Trump, many people will stay home for the election or go third party. They will perceive, and rightly so, that it will be business as usual in Washington, with just lip service being paid to crucial issues like immigration and trade pacts.”
Thank you for sharing your views. Frankly, I’m aghast at some of the monetary policy decisions being made around the world — and I believe they’re making things worse, rather than better, in the markets.
My credit-based indicators also suggest we have more pain to come, and that the down-cycle is far from over. So I continue to advocate a strategy of safe, defensive investing. For more details, make sure you sign up for the webinar I’m participating in on Monday that I mentioned earlier. Here’s the link again.
Other Developments of the Day
BulletApple (AAPL) is continuing its full-court press over iPhone privacy. The tech company is pleading its case to allies in Congress, while also planning to tell a federal judge that it shouldn’t have to give the FBI a “back door” way to defeat the security measures on its smartphones.
BulletDid you know the Federal Reserve has tightened interest rates by more than 300 basis points, rather than just 25 points? Okay, not officially. But “unofficially” if you use the so-called Wu-Xia “shadow funds rate” cited in this Bloomberg story. The obscure measure attempts to factor in non-rate factors like forward guidance and QE, and come up with an effective funds rate that includes them.
BulletSpeaking of interest rates, they keep falling in overseas markets where negative policy rates are causing turmoil and herding behavior. The yield on Japan’s 40-year government bonds just sank below 1%, while yields on bonds all the way out to the 10-year maturity point are trading in negative territory. Where will this crazy train end up? Stay tuned to find out.
BulletA vigorous storm system moving through the South and Mid-Atlantic caused several deaths and widespread property damage in the last two days. Tornadoes, heavy rain, and strong storms struck Louisiana, Florida, Alabama, and Virginia, among other states.
So what do you think of the idea that the Fed has really tightened by more than 300 basis points? Or the fact rates in countries like Japan keep sinking and sinking? As for Apple, is it right to continue its privacy fight against the FBI? Let me know what you’re thinking in the comment section below.
Until next time,
Mike Larson
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Mike Larson Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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