๐Ÿ”” Bull Markets & Easy Money

Bull markets, easy money and China: It probably seems strange to talk about these together considering China's Covid lockdown and the yuge economic impact.

And perhaps even stranger when we've just reiterated our view of China's future on the global stage ๐Ÿ‘‡

But, these things take time to play out. And I'm wondering if conditions are converging for a perfect storm first...

It's low conviction idea for now, but the short version is essentially...

"What if social unrest in China leads to easy money and poor-quality lending?"

(Even more) poor quality lending.

There's this whole narrative surrounding China's 20th party congress, which is expected to take place in November this year and confirm Xi Jinping's third term as China's leader.

But all is not well & the natives are getting restless...

 ๐Ÿ”ป evening of May 26: students at Tianjin University rallied on campus to protest the lockdown and zero COVID measures.

They are shouting โ€œๆ‰“ๅ€’ๅฎ˜ๅƒšไธป็พฉโ€ (Down with bureaucracy) and โ€œๆ‰“ๅ€’ๅฝขๅผไธป็พฉโ€ (Down with formalism)โ€ฆ

1/n pic.twitter.com/vQ045HcgBKโ€” Byron Wan (@Byron_Wan) May 27, 2022 

Now, this alone isn't anything to get excited about. It's just the latest in many examples of growing unhappiness and dissent. It's not especially unexpected either.

Dissent happens, CCP censors it, and then people move on.

But people move on more easily when things are pretty stable in the economy, and policy-makers are roughly singing the same tunes and swimming in the same direction.

Which isn't the case right now...

Bloomberg ran with these comments from un-named officials, that, to me at least, speak volumes. (emphasis added) ๐Ÿ‘‡

Yet many government officials charged with implementing policy at the ground level arenโ€™t quite sure who to listen to: Xi continues to emphasize the need for officials to push for zero Covid-19 cases, even as Li continuously urges them to bolster the economy and hit preordained growth targets.

That dilemma is leading to paralysis within a nation normally hailed for speedy implementation of diktats from above, according to eight senior local government officials and financial bureaucrats who requested not to be named because they arenโ€™t authorized to speak publicly.

While investors and analysts saw Liโ€™s impromptu meeting as an attempt to strengthen consensus on the urgency to revive the economy, four senior officials said it did little to change their view that controlling the Covid outbreak still took priority. One said that from a personal career perspective, a cadreโ€™s hard work means nothing if they fail to contain an outbreak, while the upside for kicking off economic projects was limited.

Ah, that old chestnut!

"It is difficult to get a man to understand something when his salary depends on his not understanding it"

Basically, Li's really worried about the economy and understands that if momentum slips too far, it could be very hard to recover. In contrast, bureaucrats are tempted to look after their careers by prioritising the zero-Covid rules...

Bloomberg also summarised Li's unpublished remarks on employment ๐Ÿ‘‡

Li said the spike in the jobless rate -- it hit 6.1% in April, close to a record -- would bring about grave consequences. While jumps are tolerable in the short term, he warned dangers would emerge should the problem last longer than a quarter.

That concern, he said, means that economic growth must be positive in the second quarter, and the unemployment rate must drop.

BBG

'Grave consequences' lead to social unrest, which leads to emergencies.

What do emergencies lead to?

Emergency spending

Remember, this isn't because of Zero-Covid. That's just the spark to the dry tinder of decades of malinvestment, ghost cities and roads to nowhere.

BBG 24th May 2022

The PBOC also vowed to guide banks to โ€œgo all outโ€ to increase loans, according to a separate statement published Tuesday about a meeting discussing credit that was held Monday. The central bank also said it would support lenders to lower financing costs, as well as step up help for small businesses in order to stabilize the economy and jobs.

Soooo, maybe the 'solution' will be to kick the can again, forget the long term consequences... Set big lending targets for the banks and keep cutting rates to ensure credit gets into the economy. After all, it's pretty hard to have 'common prosperity' without the prosperity...

Even The Economist has noticed they're in deep s**t... ๐Ÿ‘‡

When Japan set lending targets and cut rates in the 80's, it led to a massive bubble in their housing and stock markets.

China's already let some air out of their housing bubble. Will the leadership hold their resolve?

Or could we be in for another debt-fuelled mini-bubble in China's markets?

"Surely not?!" cry the naysayers. "It's been less than a year"

To them, I say... Read the latest note from Howard Marks: Bull Market Rhymes

It'll make you infinitely smarter and contains nuggets like this ๐Ÿ‘‡

I donโ€™t think investors are actually forgetful. Rather, knowledge of history and the appropriateness of prudence sit on one side of the balance, and the dream of getting rich sits on the other.

The latter always wins.

Memory, prudence, realism, and risk aversion would only get in the way of that dream. For this reason, reasonable concerns are regularly dismissed when bull markets get going.  

What appears in their place is often intellectual justifications for valuations that exceed historical norms.

Politicians and policymakers are human, just like investors. Their dreams might be a little different (legacy, staying in power, rather than just getting rich), but the comparison holds.

Short-term excitement/panic and the need to act will almost always overcome concerns about the longer-term consequences.

If it can happen in the UK, it can happen anywhere... ๐Ÿ‘‡

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