China Credit Cycle & US MarketsIdea 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:
www.bloomberg.com
Commodities:
www.reuters.com
Cryptocurrencies:
www.reuters.com
- 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...
www.cnn.com
GLHF
- DPT
