Breaking Bad?

(1) China’s stock market turns volatile as P/Es surge. (2) The “insanity” trade in China. (3) PBOC warns about too much debt as it cuts interest rates. (4) China suffering from too much capacity, too much debt, too much deflation, too much pollution, and too many seniors. (5) Professor Copper is bullish on China and bearish on bonds. (6) Is housing turning up or down? (7) Payrolls say “up,” while lumber futures say “down.” (8) Brexit and Grexit? China’s Economy: Breaking Down? The “insanity trade” had a good day yesterday in China after the PBOC cut interest rates for the third time in six months on Sunday. Stock prices soared in China on the news. The Shanghai Composite Index jumped 3.0% on Monday, and is up 79.3% since November 7. Last week, the index had a nasty selloff of 7.4% through Thursday on bad news about China’s exports to add Chinese Stock Indexes to and imports, as discussed below (Fig. 1 and Fig. 2). (Click MyPage.) The latest rate cut was triggered by more bad news about China’s economy over the weekend. It is suffering from too much capacity, too much debt, too much deflation, and too much pollution. In addition, the population is aging rapidly. Perversely, lowering interest rates might actually exacerbate some of these problems, especially excess capacity and deflation since easier credit conditions will allow lots of China’s “zombie” companies to stay in business. Insanity is sometimes defined as doing the same thing over and over again and expecting a different outcome. (There’s no evidence that Einstein said so.) The PBOC’s action on Sunday came right after the central bank said in its monetary policy report released on Friday that the “rising debt size is forcing China to use a lot of resources in repaying and rolling over debt” while limiting the room for further fiscal expansion. Yet the PBOC eased credit conditions, which will lead to more debt! That’s insanity. I’ve recently had some push-back from a few of our accounts who believe that soaring stock prices are a significant sign of a coming economic rebound in China. After all, stock price indexes have long been regarded as leading economic indicators. Besides, Chinese stocks are not insanely expensive. They’re actually quite cheap, with the forward P/E of the China MSCI at 12.3 at the end of April (Fig. 3). Forward revenues and earnings have been flat this year, though near last year’s record highs, and both could recover along with the economy. The forward profit margin has been on an uptrend since late to add China MSCI to MyPage.)