We are watching the endgame for Globalization, but investors are fat and happy...
This past week, an article in the Wall Street Journal aptly described the collapse of the Chinese economy after 40 years of breakneck growth. The Boom Is Over.
China is once again exporting deflation globally. Their strategy of using infrastructure investment to power the economy is ending in a mountain of insolvent debt and excess capacity. Ghost cities. Bridges to nowhere. Multitudes of empty airports. They believed that being an industrial powerhouse was the secret to economic success. And yet, the article also points out that despite all of these extreme efforts, China never achieved a true middle class. Average incomes still linger far below developed world standards. What went wrong? Globalization went wrong. Instead of creating a middle class in the Third World, it bankrupted the middle class in the developed world. All solely for record corporate profit and rampant environmental degradation. If China goes down, the whole world goes down. Therefore it's only fitting that the Walmart junkies don't see it coming.
Here we see the U.S. bank index with 2008 on the left and 2023 on the right. Clearly, banks are descending in a three wave nested waterfall. In the lower pane we see the eight week moving average of retail investor bearish sentiment, still at the lower end of the range.
A lot of people don't know that Lehman Brothers was actually a second rate Wall Street bank. That's why the Fed let it fail. Having organized bailouts for all of the initial dominoes, the Fed finally just let the chips fall where they may with Lehman. But the system went into meltdown, because the system requires ALL wealthy investors get bailed out, not just a lucky few. So now, we are comparing the failure of a minor investment bank to the failure of the country that pulled the entire world out of recession after 2008. And yet investors view this as the minor event.
You have to be brain dead to believe that, hence it's consensus.
Let's recap events to date:
Global markets bottomed in October 2022 on the basis that the Fed and other central banks were mostly done raising interest rates. Markets sky-rocketed into early February and then tanked because inflation had rebounded and the Fed became hawkish again. The same week that Powell raised rate hike expectations, regional banks spontaneously exploded. However, the bank run caused investors to once again believe that rate hikes were over, despite the fact that Powell himself said there was no connection between the rate hikes and the bank run.
Nevertheless, gamblers rotated from cyclicals back to the beloved Tech sector on the basis that artificial intelligence was the next gold rush. The Tech melt-up went vertical in late May when Nvidia released earnings and raised guidance for the year. Now, fittingly Nvidia earnings are on tap again in this seminal week. One Wall Street bank after another has been upgrading their price target on Nvidia this past week heading into earnings on Wednesday.
Meanwhile, Powell, who saw no connection between rate hikes and U.S. bank implosion is widely expected to be hawkish again this week at the Jackson Hole Symposium, on Friday. Below we see that he was hawkish last year at Jackson Hole and he catalyzed a collapse in stocks to their October low. This time the stakes have been raised to global meltdown proportions.
The dotted lines show what would happen if markets follow the same trajectory as last year - they will oscillate ahead of the meeting and then explode lower. Which means next week.
Note GDP Now in the lower pane vs. last year, for those still praying for a dovish speech.
Here we see the S&P Tech sector backtesting the 50 day moving average similar to one year ago. Many bullish pundits claim the market is "oversold", however oversold in a bull market is not the same as oversold in a bear market. Which this chart clearly shows.
In summary, this is Powell's defining moment. Similar to most U.S. gamblers he has zero perspective on the collapse of China and its implications for global markets and the economy.
Here we see what happened last year when Powell monkey hammered the Yuan lower. This year it's at the precipice. The Chinese government is trying to support the currency and lower interest rates at the same time. Which never works.
Something has to give.
