In today’s briefing:
- China Faces the Perfect Storm: Global Tightening, Capital Flight, Overcapacity
- How Far Can This Rally Run?
- Markets Fear Bad Outcomes for Fed Policy, but Inflation Currently Trumps Equity Prices
- Green Shoots = Time to Bottom Fish?
China Faces the Perfect Storm: Global Tightening, Capital Flight, Overcapacity
- Despite cumulative trade surpluses of US$215bn for Jan-Apr’22, foreign reserves declined by US$130bn, suggesting substantial capital flight. China’s ability to ease monetary policy is severely constrained.
- China’s M2 money supply is up 500% since Aug’08 (pre-GFC), while US M2 has only expanded 180% over the period. China’s record monetary growth has funded massive property/industrial over-capacity.
- Real GDP is unlikely to exceed 4.5% growth in 2022. Global monetary tightening will rein-in China’s property market, and constrain FAI growth, likely tipping the financial system towards crisis.
How Far Can This Rally Run?
- Last week’s market action sparked buy signals everywhere. How far can the rally run?
- Despite last week’s show of strength by the bulls, our base-case scenario calls for a bear market rally within a bear trend.
- We offer a few tips on how to spot the bear rally high.
Markets Fear Bad Outcomes for Fed Policy, but Inflation Currently Trumps Equity Prices
- September’s FOMC meeting is being viewed as an inflexion point towards less draconian tightening, but this outcome is dependent on economic data over the course of the summer.
- Reaching the neutral federal funds rate as quickly as possible is the FOMC’s objective, but the policy outlook thereafter will be driven by the stickiness of inflation.
- The lack of concern by the Fed about falling equity prices is viewed as a signal that falling household net worth is viewed as a means to curb inflationary pressures.
Green Shoots = Time to Bottom Fish?
- Our base-case scenario is that this is a bear market rally and the March lows are not the lows of the bear cycle.
- The alternative scenario is the U.S. economy sidesteps a recession next year. If the market doesn’t weaken to a new low by early Q4 2022, the bottom is in.
- . We assign a 60–70% probability to the bear market rally scenario and a 30–40% chance of a soft landing.
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