China's Incredible Credit Whimper by Stephen Duneier
As regular readers know, I do everything I can to avoid reading market commentary. So when some nugget of insight makes it past my defenses, it usually means that everyone out there has seen it 50 times over. In one form or another, this chart of China’s All-System Financing Aggregate has made its way to me from a wide variety of sources in the macro, equity, energy, EM and even family office spaces. The message is clear. The current rally in all things risky is not a mere anomaly or short-term technical rally (as I’ve been suggesting since before it began), but rather a reflection of an epic injection of credit from China that will have far reaching implications.
While anything is possible. I don’t buy it. At least not on the “evidence” provided. I don’t get overly excited by nominal data in general, especially not a single data point. Make no mistake, what is creating all the excitement in the above chart is just ONE data point. (The yellow line reflects the Total Outstanding Social Finance as a % of GDP. Not surprisingly, it has been climbing steadily since the crisis.)
Now, take a look at the same data as shown in the previous chart, but using the YoY growth of 3m, 6m and 12m moving averages. See anything “historic” in the chart? While it’s improving, so far, the answer is a resounding, “Nope.”
It’s worth nothing, when that big spike happened in 2012, it was a great year for risk (as was 2013). However, May ’12 was such a disaster, very few actually participated in the rally that followed. We’ll see if it achieves a similar fever pitch this time around. It’s also worth noting, while it was good for markets, it didn’t do a whole lot to improve global growth prospects. In other words, whether it is as some suggest or not, this capital, like all other capital being injected into the system is unlikely to find its way into the real economy, nor will it ultimately settle in very far along the risk curve.
PS: I searched elsewhere for evidence that perhaps I am wrong. (Below is a chart of new loans in China.) My search continues.
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis in the College of Engineering, as well as Behavioral Investing, at the University of California.
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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