China Completes Another Head-Fake

The concept of a head-fake in stock investing is pretty well-established and well-known but it may have to be extended to economics. Every small increase in positive numbers for major statistics is extrapolated into grandiose projections for the final recovery that “everyone” knows has to be coming. Yet, each and every time those expectations are delivered, and swallowed without question in the media, they amount to nothing but a head-fake – over and over.

This has been particularly acute since the 2012 slowdown, which suggests again that economists have yet to appreciate (or even recognize) its significance. I have conjectured for years that it amounted to a new form or exhibition of the “business cycle”, an elongated segment of inflection. Increasingly, that looks likely as, despite all the head-fakes, the US and the related global economy continues heading in the “wrong” direction in more rapid resolve.

It was only nine days ago that Chinese GDP and the rest of the monthly major accounts were cause for almost euphoria about the global direction. Even though the statistics were not all that much better, and thus really didn’t suggest anything so momentous, the fact that they weren’t getting worse was all that mattered despite the obvious context.

This is nothing new, of course, as every uptrend is extrapolated into the recovery while at the same time every bit of weakness is qualified “temporary” or “anomalous.” The result over time is the regular saw-toothed monthly variation steadily sinking on that “unexpected” but somehow persisting downtrend. If you don’t observe the overall context beyond those shortest variations you might actually expect a domestic or global recovery intact.

The June data was simply inferred as evidence of both internal stabilizing (PBOC and all that) as well as the awaited global rebirth, a robust export environment with which to add durability to this assumed upward inflection.

A survey showed Chinese manufacturing contracted by the most in 15 months in July as orders shrank. Worries over demand increased in the world’s biggest metals consumer as stockpiles mounted.

 

The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) showed activity contracted for a fifth straight month, and faster than economists polled by Reuters had estimated.

So much for the export rebound.

“Recent improvements in economic momentum may have been derailed this month by weaker foreign demand,” Julian Evans-Pritchard, a China economist at Capital Economics, said in a note Friday, adding that the export orders component of the data posted the largest decline. “Today’s PMI reading suggests that the improvement in momentum seen at the end of the second quarter may not have extended into the start of the third quarter and that downside risks to growth remain.”

This is what typically occurs in the aftermath, as economists flood the media with how what was certainly the recovery became “derailed” by some “unexpected” factor. The sheer number and persistent occurrence of these derailments should at some point awaken at least common sense that there has been, and will be, no such thing; instead, this is the same, consistent ebbs and flows along a decidedly entrenched downward trend. The global economy is sinking, but it has never and will never do so in a straight line. China, as the US, did not experience “recent improvements in economic momentum” so much as a pause in that overall declining trajectory that will, if it hasn’t already, simply resume until it gets where it is going.

That last part is the trickiest, as it is judged completely and totally impossible in the mainstream – there is claimed no chance whatsoever that the global economy, and the US, could fall into recession but yet it is July and the arrows across the globe are still curiously synchronized in that direction and nearly, already, to that degree.

China Electricity Council released “A Brief on 2015 Jan.-Jun. Electricity Industry” on July 21, reporting a declined acceleration rate on power consumption of 1.3%- the lowest acceleration rate in 30 years.

This is what the “dollar” has been predicting for more than a year, as funding retrenchment (the global “dollar” short becoming more and more “expensive” and uncertain) is fundamentally linked to leading economic factors. Crude oil, commodity prices and currency disorder more generally are all manifest interactions between economy and finance under these conditions. All the world’s central banks, including the PBOC, spent a few years and trillions in “currency” and all they could produce was some uneven, artificial and short-lived momentum. That fact, more than anything, should begin any analysis about where the ultimate downside trajectory might finally land; how dark before actually seeing some realistic and determined light rather than one head-fake after another.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access