Once a month, I adopt a foreboding cadence in the course of warning readers on the Chinese credit impulse, which is moribund on lively days.
Such portents invariably elicit disinterested shrugs from readers because, you know, where are we, China?
But this really is important. Recall that new yuan loans contracted for the second time in four months in July, which is to say Chinese were net repayers of debt last month.
In addition to being a record decline, July’s drop on that metric was only the third decline on record. The growth rate for the outstanding loan stock in China was just 5.1% in July, a new all-time low.
That’s the context — or some context — for the latest dispatch from SocGen’s Albert Edwards, who’s still at it God bless him, after nearly 50 years analyzing and pontificating about global macro.
“A few years ago, every Chinese data release moved global markets. Now investors barely give China’s economic data a second glance,” Edwards wrote, underscoring my point above. That collective shrug, he cautioned, may “prove costly.”
The figure above’s pretty remarkable, particularly if you haven’t seen it before (and depending on your tolerance level for double y-axis charts).
As you can see, the Chinese credit impulse (i.e., the change in Chinese credit growth as a share of GDP) maps pretty well onto S&P 500 12-month returns when led by a year.
What’s up with that? Simple: Chinese credit growth “correlates (and causes) much of what is cyclical,” including and especially revisions breadth, Edwards reminded investors.
There’s that chart, and if there’s anything to it, analyst optimism’s on the brink of rolling over in a big way.
“Clearly, US stock prices correlate with EPS optimism [which] has been extraordinary recently,” Albert said. “The $64,000 question is what happens when this momentum starts to fade?”
True to form, Edwards employed “a little” hyperbole. The first of the two charts from his Tuesday note shown above is “possibly the most important chart” in the macro universe, “certainly relative to the lowly attention it’s getting,” he wrote.
Ignoring it, Albert went on, “could prove to be the biggest investment mistake of the decade.”
China credit leading global cyclicals makes sense but not sure the link to S&P specifically is as strong today when it’s is so concentrated in software / AI
The graphic is quite something, made me chuckle for a bit. And I had not seen the remarkable credit impulse/return chart before so, bonus.
Seems to me Chinese data releases aren’t the only things NOT moving the market much anymore — political scandal and incompetence (too many to list), policy own goals (tariffs, deficits) and geopolitical turbulence (Ukraine, Iran) barely seem to have the effects anyone not born this century would have expected them to have, whether in degree or persistence.
It gives me no pleasure to note that we are less than 2 weeks out from the 25th anniversary (if that’s the right word) of the 9/11 attacks. I’m only being half-cynical in stating that if something similar happened again, I’m not sure the market would sell of much, if at all. Instead, we seem to holding our noses and hoping stock market riches provide some sort of insulation from everything falling apart everywhere all at once. I guess active market trading is the new prepper economy.