China Won’t Roll Over Until Liquidity Tightens

This year on October 18th The Communist Party of China will kick off their 19th National Congress and set the leadership for the next five years.

It’s an extremely fragile time for incumbents. During this Congress a group of party representatives will review a report from President Xi on what has been achieved in the past five years as well as what he believes the party should work on going forward.

If they like what they see, Xi and his administration will stay. If not, then it’s onto the next guy…

President Xi has done well for the Chinese people, at least on the surface. (Nevermind the megaton debt bomb that’s bound to explode at some point.)

He’s been able to somehow navigate the country through the Mundell-Fleming Trilemma without setting off a full blown banking crisis. And he has the positive growth numbers to point to as evidence.

GDP growth has been humming along in the 6-7% range with uncanny consistency.

Chinese GDP Growth

President Xi absolutely loves power and the last thing that he wants is an economic meltdown before this important Congress.

So what can a power hungry politician do to guarantee his seat for the next five years?

Well he can turn on the liquidity taps.

If you’ve been reading Macro Ops for awhile you know that the single most important fundamental to markets is liquidity. Nothing else comes close, which is why the investing legends like Soros, Druck and PTJ kept a close watch on how central bankers and government officials used the liquidity spigot.

In China’s case, Xi has made sure that spigot has been running at full bore going into the end of the year. Year over year loan growth to non-financial companies has been cranked up to near 16% — the highest levels seen in nearly 5 years.

China Y-Y Loan Growth to Non-Fin

All of this extra credit creates a huge wall of demand that creates a bunch of economic activity and elevated prices.

This liquidity injection is the reason why China A-shares have caught a nice rally over the last three-months.

We’ve been on for the ride during the entire breakout because we watch liquidity like a hawk. One of our own Chinese liquidity indicators has been signaling looser liquidity conditions since mid-2016. And right now it’s actually hitting new all time highs!

Liquidity AS

Yes, China has a bunch of long-term debt problems that will inevitably lead to a blow up. But with liquidity conditions this strong it’s suicide to play for the implosion. We need to wait until liquidity tightens up before we see any real financial stress.

And our guess is that won’t be happening until President Xi has secured his presidency for the next 5-years.

If you aren’t monitoring liquidity conditions around the world you’re really missing out on an extremely effective market timing tool.

We check liquidity conditions on a monthly basis in every major market.

Click here if you want to see how we monitor U.S. liquidity.

 

 

China Won’t Roll Over Until Liquidity Tightens

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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