Here we go again

April13-19, 2024

Big news. A “bubble in the US stock market” has finally formed:

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In scale, it apparently repeated the scale of 1929. It should be noted here that the scale of structural distortions may not at all coincide with the scale of the stock market “bubble”. The former may be significantly larger than the latter. Thus, today structural imbalances (the excess of household expenses over the “normal” level of their income) amount to 25% of GDP, both in the United States and in China. And in 1930 they were only 15%. Therefore, the current crisis will be significantly stronger than the then one, which led to the “Great” Depression

As a matter of fact, our estimates suggest that a recession similar to that which occurred from the spring of 1930 to the end of 1932 has already begun in the fall of 2021. But it is not following a deflationary scenario, as it was then, but rather an inflationary one. Therefore, there has not yet been a collapse of financial markets, although a bubble is successfully forming in them. And, of course, sooner or later it will collapse.

Our estimate (which we described in our August-September 2021 reviews) was that the actual US economic contraction was running at about 6% per year. 90 years ago the decline was about 1% of GDP per month, that is, about 10% per year. We suspect that without government support the same rate of decline would have occurred now, but government participation is slowing down this process. Although he cannot stop him.

Until recently, speculation about a real decline was heavily criticized, largely because official data did not show it. And assessments can always be challenged. But after the article by Summers & Co, which we wrote about in several recent reviews, it became clear that many people agreed with our position. In the closed telegram channel of Mikhail Khazin https://t.me/hazinOpen. (which will become available to review subscribers starting next week) provides a Russian translation of Summers&Co’s article, and if we accept his assessments, then the decline in the US economy since the fall of 2021 has to be recognized.

In conclusion of this section, we can only note that after the crisis (several years later), it will become clear in retrospect that the official data were greatly embellished and did not correspond to reality. But it is very difficult to assess real economic indicators, moreover, sometimes even impossible.

Macroeconomics. As always, the Chinese data is mixed.
GDP accelerated to +1.6% quarterly:

China GDP Growth Rate
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And +5.3% per year:

China GDP Annual Growth Rate
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And investments in fixed capital – up to +4.5% per year:

China Fixed Asset Investment
Pic. 4

At the same time, industrial production clearly slowed down, to +4.5% per year (7-month bottom):

China Industrial Production
Pic. 5

And capacity utilization fell to an 8-year low (73.6%), excluding Covid:

China Industrial Capacity Utilization
Pic. 6

Annual retail sales growth (+3.1%) is the weakest in 7 months:

China Retail Sales YoY
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Finally, prices of new buildings have hit the bottom of 2023 and are falling at the worst pace in 9 years (-2.2% per year):

China Newly Built House Prices YoY Change
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However, the Central Bank of China will extract another 70 billion yuan from banks through the medium-term loan system.

China One-Year Medium-Term Lending Facility Rate
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Conclusion. The situation in the Chinese economy is deteriorating and the authorities have begun to actively “draw” beautiful numbers. However, they are not the only ones.

Israeli GDP -5.6% per quarter. Not counting the Covid dip, this is a record decline over 44 years of observation:

Israel GDP Growth Rate
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However, there is a war going on there.

Net engineering orders in Japan -8.5% per year, 15th minus in a row:

Japan Machine Tool Orders YoY
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PMI (expert industry performance index; its value below 50 means stagnation and decline) of the New Zealand service sector 47.5. Not counting Covid, this is the minimum since 2009:

New Zealand Services PMI
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The number of new buildings in the USA is -14.7% per month, the strongest drop in 9 years (excluding Covid):

United States Housing Starts MoM
Pic. 13

Up to 7 month minimum:

United States Housing Starts
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Permits for construction at the bottom within 8 months:

United States Building Permits
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The mortgage rate, the highest for more than 4 months, is to blame:

United States MBA 30-Yr Mortgage Rate
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The Philadelphia Fed Index is up overall, but its employment component is the worst in 8 years (not counting Covid):

United States Philly Fed Employment
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The number of employees in Britain fell at a record pace over the month (excluding Covid):

United Kingdom HMRC Payrolls Change
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Why the number of unemployed increased to a 2-year high:

United Kingdom Unemployed Persons
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Main conclusions. The situation in the global economy has been depressingly similar for several months now. There is a structural crisis all over the planet. But various political circumstances (last week – the Iran-Israeli conflict) are beginning to have an increasing impact on the situation, especially on speculative markets.

The key moment here will come in early June, when the Fed will have to make a decision, economic or political. Politically, the rate needs to be lowered, economically, it needs to be raised. Of course, it will be possible to depict a decrease in inflation in May, but how favorable circumstances will be for this is a big question. But in any case, it’s time to think about the future, both yours and your business.

And here it is very important that the stock “bubble” is inflated mainly by shares of companies related to artificial intelligence. It is more or less clear that this “bubble” is artificial, but it has one problem: it is not very clear to which end user this AI should be sold? Who needs it for private use? No, it is suitable for reducing the number of employees, but in this case the expelled employees stop receiving salaries and drop out of the number of consumers, that is, aggregate demand falls. And what to do in this situation?

Apparently, faith in AI is becoming less and less.

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Nvidia, apparently, has gone down, and a correction is expected in the stock market. In a “bubble”, this is a very dangerous situation. Of course, you can lower the rate, then the market will rush up. But, given the extreme insignificance of growing companies, not for long. And then a collapse will become inevitable.

Apparently, the beginning of a sharp collapse in financial markets is approaching… But forewarned is forearmed, and we wish our readers a pleasant spring weekend and a prosperous working week!

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