China Credit Cycle & US Markets
Updated
Idea on Macro:
- China's Credit Impulse has turned negative.
- Credit impulse is the change in new credit issued as a % of GDP.
- China's Government Bonds 10 YR Yield are correlated with China's Credit Cycle.
- The Credit Cycle taking a downturn signals deflation. Bond prices will rise as borrowers (issuers) will expect to pay back the principal at a loss, and interest rates will fall to incentivize borrowing. During deflation, default risk increases.
- There is news of China "cracking down" on the market...
Warning signs:
bloomberg.com/news/articles/2021-05-23/first-warning-sign-in-the-global-commodity-boom-flashes-in-china
Commodities:
reuters.com/world/china/chinas-industrial-commodities-slide-after-beijing-warns-market-crackdown-2021-05-20/
Cryptocurrencies:
reuters.com/world/china/crypto-miners-halt-china-business-after-beijings-crackdown-bitcoin-dives-2021-05-24/
- However, these are simply headlines. What is occurring is a downturn in the China Credit Cycle, and deflation in their economy.
- The US markets too follow the China Credit Cycle. After the 2008 bailouts, the US markets followed the credit impulse back to recovery.
- Now China's Credit Cycle has begun a downturn. US markets have deviated so far from this traditional relationship - creating a global asset inflationary bubble, that there is only one thing left it can do, according to reflexivity... return to the mean.
- Once the deflationary shock takes place, there are several ways out. WWII followed the Great Depression, with defense spending and inflation.
- A wild thought, but perhaps with the UAP disclosures, the US is toying with an idea for future defense spending...
cnn.com/2021/05/17/politics/ufo-pentagon-explainer/index.html
GLHF
- DPT
- China's Credit Impulse has turned negative.
- Credit impulse is the change in new credit issued as a % of GDP.
- China's Government Bonds 10 YR Yield are correlated with China's Credit Cycle.
- The Credit Cycle taking a downturn signals deflation. Bond prices will rise as borrowers (issuers) will expect to pay back the principal at a loss, and interest rates will fall to incentivize borrowing. During deflation, default risk increases.
- There is news of China "cracking down" on the market...
Warning signs:
bloomberg.com/news/articles/2021-05-23/first-warning-sign-in-the-global-commodity-boom-flashes-in-china
Commodities:
reuters.com/world/china/chinas-industrial-commodities-slide-after-beijing-warns-market-crackdown-2021-05-20/
Cryptocurrencies:
reuters.com/world/china/crypto-miners-halt-china-business-after-beijings-crackdown-bitcoin-dives-2021-05-24/
- However, these are simply headlines. What is occurring is a downturn in the China Credit Cycle, and deflation in their economy.
- The US markets too follow the China Credit Cycle. After the 2008 bailouts, the US markets followed the credit impulse back to recovery.
- Now China's Credit Cycle has begun a downturn. US markets have deviated so far from this traditional relationship - creating a global asset inflationary bubble, that there is only one thing left it can do, according to reflexivity... return to the mean.
- Once the deflationary shock takes place, there are several ways out. WWII followed the Great Depression, with defense spending and inflation.
- A wild thought, but perhaps with the UAP disclosures, the US is toying with an idea for future defense spending...
cnn.com/2021/05/17/politics/ufo-pentagon-explainer/index.html
GLHF
- DPT
Trade active
Despite the media blaring inflation... It appears that there is 40 years of economic deflation:US yields following the China yields, a deflationary shock may occur as investors sell equities for bonds in panic.
The global credit impulse cycle has now turned negative.
Trade active
CN10Y -1.69% and the very next day, US yields turn down and equities see a correction... Interesting correlation.Trade active
China Credit Impulse 12M change again dropsTrade active
Effects being felt now on risk assets: 
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Now it's affecting US Credit: Trade active
Now they let the masses know about credit cycle: reuters.com/breakingviews/chancellor-us-credit-cycle-close-overheating-2021-07-30/Trade active
CCI falls further, YoY fall highest on recordTrade active
Since 08, Drops in Chinese markets have preceded large drops in US indices:Trade active
It's been interesting becoming a 'China watcher' to understand global macro:Aside from the credit impulse, which leads global credit cycles, Chinese money supply over the past 12 years (
28T) is greater than the total money supply in the US and Europe over all of history.- Arthur Budaghyan
China does not have a floating rate on their currency like other developed nations, and instead has a pegged rate to the dollar. They influence the dollar directly through this peg. They buy the dollar and sell the yuan to lower CNYUSD pair.
Something to watch, CNYUSD seems to be at the top of a range, which in turn influences the dollar vs other currencies (EURUSD) and therefore equities:
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