While we wait for China's economic data dump due Monday, when industrial production and retail sales are expected to crater to deep negative territory as a result of the ongoing covid lockdowns, this morning we got a harsh reminder just how hard the world's 2nd biggest economy has been hit when Beijing reported that April total social financing and RMB loans came in much below market expectations, even as M2 growth accelerated and was above market expectations on the back of the RRR cut and more expansionary fiscal policy stance.
Here are the details:
- New CNY loans: RMB 645.4 bn in April, badly missing consensus of RMB 1520bn. Outstanding CNY loan growth: 10.9% yoy in April vs March 11.4% yoy; Overall CNY loans growth decelerated materially and grew 6.6% mom annualized sa from 18.1% in March.
- Total social financing RMB 910bn in April, badly missing consensus growth of RMB 2200bn; Total social financing (TSF) was well below expectations after a strong acceleration in March. The sequential growth of TSF stock decelerated to 3.9% mom annualized in April, the slowest sequential growth in the past decade.
- TSF stock growth was 10.2% yoy in April, slower than the 10.6% in March. The implied month-on-month growth of TSF stock decelerated to 3.9% from 14.4% in March.
- M2: 10.5% yoy in April vs. above consensus of 9.9% yoy. March: 9.7% yoy; M2 year-on-year growth accelerated on the other hand to 10.5% yoy in April, vs 9.7% in March, and expanded by 13.8% in month-over-month annualized terms, vs 24.4% in March.
Among major TSF components, shadow banking credit continued to contract in April at a much faster pace compared with March. Trust, entrusted loans and undiscounted bankers’ acceptance bills fell RMB275bn in April, vs the RMB113bn contraction in March. Based on loans to different sectors, weakness in loan growth was broad-based, with the only exception being bill financing. Corporate mid-to-long term loan growth was 6% vs 22.5% mom annualized in March. Corporate bill financing rose strongly by 102.4% mom annualized from 97.3% in March. On loans to households, total household loans declined by 1.7% month-over-month annualized, vs an expansion of 6.6% in March. PBOC changed their categorization of household loans and now focuses on usage of loans (housing related vs consumption related, for example), rather than by maturity. April data are thus not strictly comparable with March data. However, on a net basis, new mortgages were -61bn RMB in April, in comparison with household new medium to long term loans (which are mostly mortgages) of 492bn RMB in April 2021, or +374bn RMB in March 2022 (NSA basis). Government and corporate bond issuance also slowed in April.
According to Goldman, "the composition of RMB loans suggests corporate loan growth decelerated and household loans stock declined in April", which is painfully obvious of course. The question is why, and according to the PBOC, credit demand tumbled due to the Covid resurgence which was cited as one main reason behind the weak RMB loans and TSF data. Medium to long term loan growth was still much slower than short term loans (such as bill financing) growth, and loans to the real economy was also much lower than overall RMB new loans (which include lending between financial institutions). "These all implied very weak credit demand despite monetary policy easing", according to Goldman.
What does China's collapsing credit data means? Well, as Bloomberg's Simon White writes, liquidity and lending data in China looks to be forming a trough, which points to a bottom in growth and stocks. However, there are two important caveats:
- growth is likely to be lower than its previous trend as internal imbalances rise again; and
- any growth is vulnerable to a wage-price spiral if CPI takes off.
Echoing what we wrote above, White writes that on the surface, April lending data for China released today looked dismal, showing a Covid-driven slump for aggregate financing and new CNY loans, "but monthly numbers are noisy and impacted by seasonal effects. Looking at the 1-year aggregate sum’s change over the last year gives a more stable picture, and on this basis new CNY loans look to be bottoming."
Meanwhile, today’s announcement that China will build more Covid hospitals and increased testing suggests they are making the first steps towards “endemicity”, or living with Covid according to White. Moreover, the PBoC has recently introduced new relending programs and further loosened restrictions to aid beleaguered property developers. Lending going forward should thus begin to pick up steam, which points to growth soon turning up.
Still, the total figures mask the sharp decline in lending to the household sector, in a sign imbalances are worsening again. As the Bloomberg strategist explains, a key feature of China’s economy has been to repress the household sector to the benefit of the export-orientated corporate sector. The household sector is a net importer so inhibiting its demand widens the trade surplus. Further household repression has resulted in even larger trade surpluses through the pandemic, which China must foist upon the rest of the world.
Of course, the flipside of trade surpluses is capital outflow, and capital outflow from China has been depressing domestic credit (it will also soon prove a major tailwind to bitcoin once Chinese households with $35 trillion in deposits realize more devaluation is coming and scramble to park their capital offshore using the only possible mechanism available). Rising trade surpluses and falling FX reserves (some of which is due to the rising dollar and rising US yields) betray increasing capital leakage. In an economy with a managed exchange rate and capital controls, capital outflow leads to a destruction of domestic credit.
This is why the yuan has been allowed to weaken, as it lessens the fall in domestic credit from capital outflow. However, as White warns, it also adds to imbalances, and globally it requires a greater trade deficit in the US. These are bad for China’s and the US’s growth in the medium term.
Bottom line: growth in China should soon bottom, but rise at a slower pace than before. Nevertheless, all bets are off if food prices drive an acceleration in China’s CPI - the way they did in 2011 - risking a wage-price spiral, a significantly weaker yuan, and a rise in global trade protectionism.
Mish’s Daily: Step Back to the Monthly Chart on Transportation
Last Friday, I spoke on Women of Wall Street Twitter Spaces and Fox Business’s Making Money with Charles Payne to talk about a key monthly moving average.What…
Last Friday, I spoke on Women of Wall Street Twitter Spaces and Fox Business's Making Money with Charles Payne to talk about a key monthly moving average.
What makes this moving average so important right now is that three of the Economic Modern Family members are testing it. The three members, Granddad Russell 2000 (IWM), Grandma Retail (XRT) and Transportation (IYT), well deserve their status as what Stanley Druckenmiller calls the "inside" of the U.S. economy. In fact, the components of the modern family were put together before we heard Druckenmiller's viewpoint. We have observed how predictive they all are in helping us see in advance the next big market direction. Hence, these "inside" indicators -- right now -- are all sitting just above a 6–7-year business cycle low.
For the purposes of this daily and because we have featured this sector a lot lately, the chart of IYT is a perfect example of this moving average and what to watch for. Except for the brief blip in 2011 when the government shut down, and then again during the pandemic, IYT has sat above the dark blue line for 11 years. Currently, that line sits at the 195 area. The same is true with IWM and XRT, both marginally holding their monthly MAs.
So, watch IYT to either hold, and begin a rally possibly back closer to 220, or for IYT to fail 195, in which case we see the whole market selling off further.
To note, the other family members, such as Sister Semiconductors (SMH) and Prodigal Son Regional Banks (KRE) are still sitting well above the monthly MA. Big Brother Biotechnology (IBB), however, is now trading below it. And not in the family, but still notable, is the REIT sector (IYR), also sitting below it. SPY has the same MA, only that one sits at 310 (a long way off).
Incidentally, junk bonds broke down under this moving average in November 2021. The market has been slow to take junk bond's hint.
For more information on how to invest profitably in sectors like biotech, please reach out to Rob Quinn, our Chief Strategy Consultant, by clicking here.
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Mish in the Media
A business cycle is about 6-7 years - where are the indices now and what should you watch for? Mish discusses this question in this appearance on Fox's Making Money with Charles Payne.
- S&P 500 (SPY): Testing the previous low; 362 support, 370 resistance.
- Russell 2000 (IWM): Broke the June low of 165.18; 162 support, 170 resistance.
- Dow (DIA): Broke June low -289 support, 298 resistance.
- Nasdaq (QQQ): Testing the June low;269 support, 280 resistance.
- KRE (Regional Banks): Relative outperformer; 57 support, 61 resistance.
- SMH (Semiconductors): 187 support, 194 resistance.
- IYT (Transportation): 196 support, 200 resistance.
- IBB (Biotechnology): 112 support, 118 resistance.
- XRT (Retail): 55 support, 60 resistance.
Director of Trading Research and Educationbonds pandemic nasdaq reit etf russell 2000 testing
Playing the infinite game: patient investing
In his 2019 book The Infinite Game, author Simon Sinek describes how taking a long-term view — what he calls adopting an infinite mindset — is critical…
In his 2019 book The Infinite Game, author Simon Sinek describes how taking a long-term view — what he calls adopting an infinite mindset — is critical for success. Although discussed in the context of leadership, the same principle applies to investing, which has historically favored those who take a long-term view rather than react impulsively to the inevitable ups and downs that occur on the path to creating wealth. Of course, while countless investors have demonstrated that the market rewards those who stay the course, the reality is that doing so isn’t always easy. On the contrary, it takes discipline, self-restraint, and patience.
Investors can quickly lose sight of this reality, particularly in the current environment. Faced with record inflation, rising interest rates, and geopolitical unrest, it’s only natural for investors to want to take action. Shifting strategies or pulling out of the market are among the ways that some investors try to insulate themselves from volatility. Yet the reality is that taking these or other similar steps rarely yields the desired outcome over the long term. Patience isn’t just a virtue. We believe it’s an essential ingredient in any successful financial strategy.
Why we believe patience pays off
As a society, we’re constantly bombarded with information that can either scare us or make us feel like we’re missing out. As a result, it’s easy to feel compelled to take steps we believe will safeguard our assets or to try to time the market or cash in on the latest trend. That’s one reason so many investors have shifted from a buy-and-hold mentality in recent years to one that favors trading securities much more frequently. While the desire to buy low and sell high is understandable, it’s virtually impossible to do so regularly without a crystal ball.
In our view, making a conscious decision to be patient is critical, even though it’s challenging. People are often hardwired to seek instant gratification. We want results, and we want them now. As such, we have a strong bias toward taking action to reach a resolution sooner rather than later, even when waiting can be the more prudent thing to do.
Practically speaking, that means that many investors are willing to sell their assets in a down market in the hopes of avoiding deeper losses. Our experience suggests that, in many cases, had they just remained invested, their outcome could have been markedly different. On the opposite end of the spectrum, those same investors are also prone to selling assets that have increased in value far too soon. While there’s nothing wrong with locking in gains, doing so can come at a high cost if it means missing out on a substantial upside.
With investing, taking action for action’s sake can lead to poor outcomes. Exhibit 1 shows the impact of missing the one, five, and ten days in the market with the highest total return for the Russell 1000 Growth and the Russell 2000 Growth over the past 20 years.1 Notably, some of these “best days” can occur during highly uncertain times, such as the challenging market downdraft at the end of 2008, and the tumultuous early phase of the COVID-19 pandemic in 2020. To us, this underscores the difficulty of attempting to time the market and the wisdom of staying invested for the long term.
Exhibit 1: Impact of Missing the Best Days in the Stock Market, August 31, 2002 to August 31, 2022
Source: Bloomberg, as of August 31, 2022
Patience takes determination, resilience, and the confidence to stand by investments backed by careful, fundamental research. To be clear, being patient isn’t the same as being passive. It’s not about taking your eye off the ball and letting come what may. Nor is it about being too stubborn or inflexible to adjust one’s strategy when merited. Instead, the goal is to see past any noise in the market today and to hold steady in pursuit of greater rewards.
For the patient investor, those rewards are possible thanks to the power of long-term compounding. Our research indicates that successful companies plow profits back into their business to promote further growth, which can lead to greater value and higher stock prices over time. Investors who trade in and out of the market, whether driven by fear or to chase returns from the latest meme stock, frequently miss out on that compounding effect and sacrifice substantial long-term growth.
Taking the patient approach
At Polen, we believe that patient investing starts with adopting an owner’s mindset rather than that of a trader. For us, that means taking the time to identify and invest in what we see as the highest-quality companies and having the discipline to maintain those positions over the long term. We carefully study each company we invest in, engaging with their management teams and examining multiple aspects of their business before allocating capital. We take a bottom-up approach focused on understanding the business, its potential for profitability and growth, and any risk factors that could stand in the way.
Notably, the companies we invest in aren’t new, untested, or at the forefront of the latest fad or trend. They are proven, established businesses with robust balance sheets and the financial flexibility to keep investing in and growing their business in any environment, including periods of high volatility and recession. Once we’ve invested in a company, we continuously monitor its progress and note any factors that could prompt a change in our outlook (Exhibit 2). We believe that this measured, unemotional approach is critical not only for capital preservation but also to position ourselves to reap the full benefits of long-term compounding.
Exhibit 2: Select Factors That May Prompt a Polen Capital Decision to Sell an Equity Security
Source: Polen Capital
While no business is immune to macroeconomic conditions like the ones currently affecting the market, we believe short-term fluctuations shouldn’t be cause for concern. We believe that investors with a diversified portfolio of companies with outstanding fundamentals should reflect that while the path to wealth creation may be bumpy, the patience to play the infinite game can improve one’s chances of succeeding.
1 The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values. The index is maintained by the FTSE Russell, a subsidiary of the London Stock Exchange Group. The Russell 2000® Growth Index is a market capitalization weighted index that measures the performance of the small-cap growth segment of the U.S. equity universe. It includes Russell 2000® Index companies with higher price/book ratios and higher forecasted growth values. The index is maintained by the FTSE Russell, a subsidiary of the London Stock Exchange Group. The volatility and other material characteristics of the indices referenced may be materially different from the performance achieved. In addition, the composite’s holdings may be materially different from those within the index. Indices are unmanaged and one cannot invest directly in an index.
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of September 2022 and may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. Past performance does not guarantee future results and profitable results cannot be guaranteed.recession pandemic covid-19 ftse small-cap russell 2000 interest rates
Druckenmiller: “We Are In Deep Trouble… I Don’t Rule Out Something Really Bad”
Druckenmiller: "We Are In Deep Trouble… I Don’t Rule Out Something Really Bad"
For once, billionaire investor Stanley Druckenmiller did…
For once, billionaire investor Stanley Druckenmiller did not say anything even remotely controversial when he echoed what we (and Morgan Stanley) have been warning for a long time, and said the Fed's attempt to quickly unwind the excesses it itself built up over the past 13 years with its ultra easy monetary policy will end in tears for the U.S. economy.
“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I would be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”
And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said effectively repeating what we said in April that "Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" "
"Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" https://t.co/tfCHZMEkob— zerohedge (@zerohedge) April 16, 2022
He pointed to massive global quantitative easing that reached $30 trillion as what’s driving the looming recession: “Our central case is a hard landing by the end of next year", he said, adding that we have also had a bunch of myopic policies such as the Treasury running down the savings account, and Biden's irresponsible oil SPR drain.
Repeating something else even the rather slow "transitory bros" and "team MMT" know by now, Druckenmiller said he believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.
“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”
The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.
Druckenmiller said the Fed made a policy error - as did we... repeatedly... last summer - when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.
“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”
“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.
Commenting on recent events, Druck was more upbeat, saying “I like everything I’m hearing out of the Fed and I hope they finish the job,” he said. Now, the tightening has to go all the way. “You have to slay the dragon.” The problem is that, as the BOE demonstrated with its QT to QE pivot today, it's impossible to slay the dragon and sooner or later every central banks fails.
What happens then? According to Druck, once people lose trust in central banks - which at this rate could happen in a few weeks or tomorrow - he expects a cryptocurrency renaissance, something which may already be starting...
... and not just there, but in the original crypto - gold - as well...
Excerpts from his interview below:
Futures Jump, Yields And Dollar Slide After Gundlach Says He’s A “Buyer” Of Treasuries
F1’s Daniel Ricciardo cruises into crypto at Token2049
Four Video Game Stocks to Buy Amid High Inflation, War and Recession
Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE
New home sales are up 28% — but don’t believe the hype
Is now a good time to buy the Australian dollar? Retail sales remain strong
New Home Sales Increase to 685,000 Annual Rate in August
29% Of Americans Now Drawing From Their Savings “More Than Usual”, New Survey Shows
Research into 1930s commuting in London shows how public transport boosts the labour market
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