Back Up Those Money Trucks
Wee! This is becoming a weird form of time travel.
Twenty-five trading days ago the S&P 500 was just 0.1% below its all-time high of 2131 recorded on May 21. Since then we have traveled backwards about 415 days!
That’s right. Yesterday’s 1893 close was down 11.2% from the all-time high, and marked the chart point first crossed way back on May 22, 2014.
Do not fret, however. Beijing has called in the Red Cavalry—otherwise known as the PBOC.
Why? Because Goldman’s house economic model is essentially statist, and its agents——Dudley at the Fed, Carney at the BOE, Draghi at the ECB—–are strategically placed to execute that model.
So not surprisingly, Goldman’s chief equity strategist is out this morning with a buy-the-dip note, assuring its clients that the storm is over and that the S&P 500 will be back to its old highs in a jiffy:
…….Concern about China economic growth was the immediate catalyst for the correction. (But) we expect the US economy will avoid contagion and continue to expand. S&P 500 will rise by 11% to reach 2100 at year-end. Such a rebound would echo the trading pattern exhibited in 1998 when US equities rallied and largely ignored the Asian financial crisis. ………
Ultimately, the US economy was relatively unaffected by overseas financial market gyrations in 1998 and we believe a similar situation will occur in 2015.Our analysis of the geographic revenue exposure of S&P 500 constituents reveals that the US accounts for 67% of aggregate sales. Approximately 8% of revenues stemmed from the Asia-Pacific region with 1% disclosed as coming specifically from Japan and 2% from China. From an economics perspective, US exports account for roughly 13% of total US GDP, which includes 5% to emerging markets and less than 1% to China.
That is just plain gibberish. Goldman’s statist economic model renders it utterly blind to the booby-traps planted everywhere in the world economy. For goodness sakes, this is not 1998!
Back then China had less than $2 trillion of debt outstanding and a minor presence in the world economy. Since then its credit market debt outstanding has exploded by 14X, its steel industry has expanded by 6X, its auto sales by 25X and its exports have risen by 1300%.
China Exports of Goods and Services data by YCharts
In the interim, in fact, it has paved its landscape with a vast excess of everything——60 million empty high rise apartments that function as piggy-banks for speculators; dozens of ghost cities, empty malls and see through office buildings; scores of steel, machinery and auto plants that will soon be shutdown; mountains of copper and iron ore inventories that are hocked to foreign lenders; and trillions worth of high speed rails that are unsafe, airports that have no traffic and roads and bridges to nowhere.
This did not happen in isolation behind a red curtain. The wild west boom of red capitalism now sucks in $2 trillion more per year of imports of energy, raw materials, intermediate components, capital equipment and luxury goods than it did in 1998 when Alan Greenspan panicked in the face of the LTCM meltdown and slashed interest rates three times.
Indeed, Greenspan’s foolish action triggered a spree of coordinated money printing by the worlds central banks, including the PBOC, that was literally unimaginable by even the most wild eyed Keynesian economist at the time Goldman now identified as pivotal to our current prospects.
To wit, the combined central banks of the world sported a collective balance sheet of less than $2 trillion in September 1998—–reflecting a century’s worth of slow and steady build-up. Today that figure is $22 trillion, meaning that the world economy has been hyper-stimulated by a 11X increase in high powered central bank credit.
It is downright foolish, therefore, to claim that the US economy is decoupled from China and the rest of the world. In fact, it is inextricably bound to the global financial bubble and its leading edge in the form of red capitalism.
It might be wondered how stupid Goldman believes its mullet clients actually are. With respect to its non sequitir that China accounts for only 1% of US exports would it not occur to a reasonably alert observer that Caterpillar did not export its giant mining equipment to China; it went there indirectly by way of Australia’s booming iron ore provinces.
Likewise, the US did not export oil to China, but China’s vast, credit-inflated demand on the world market did artificially lift oil prices above $100 per barrel, thereby touching off the US shale boom that is now crashing in Texas, North Dakota, Oklahoma and three other states. And is it not the fact that every net new job created in the US since 2008 is actually in these same six shale states?
Similarly, US exports to Europe have tripled to nearly $1 trillion annually since 1998, while European exports to China have more than quintupled. Might there possibly be some linkages?
Never mind the obvious, however. All the brokers were out this morning with the decoupling story—–even if it ended-up insufficient to prevent another down day in the market.
But let’s see. According to the Wall Street brokers, housing and employment will carry the US economy steadily upward.
Really? In the face of an unprecedented global collapse of the greatest phony boom known to economic history, here is housing and labor hours employed in the US economy.
Is this a plausible engine of continued expansion for the purportedly “uncoupled” US economy?
US Residential Fixed Investment data by YCharts
Or this?
Reprinted with permission from David Stockman’s Contra Corner.
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