Oh how the tables have turned!
I remember not so long ago (last down turn) when the media was full of articles about China's growth collapsing if the United States were to slow down. Countless articles were written about how China's numbers cannot be believed in the context of a U.S. slowdown.
Today the same problem exists, but the shoe is on the other foot.
Rumors have been growing about the economic data coming out of China. No, I am not one of the China disbelievers. If anything I am a China bull and believe that in the medium term China will overtake the United States, as well as in the medium to long term, the Renminbi could replace the U.S. dollar.
Let's take the example of the Purchasing Managers' Index (PMI) in China. We have two agencies that project the latest factory activities in China. One is the private data source of HSBC/Markit, while the other is from the government. For the month of May, the HSBC index projected that China output shrank to 49.2 (50 divides growth from contraction). The data from the government indicated 50.8 — growth not contraction.
The United States is not a newcomer to government massaging the data to aid its story. Here in the United States we are adept at moving the goal posts when it does not suit us. We changed how we measure inflation when it was too high. Then we replaced items that we count toward inflation. When that did not work either, we switched to measuring core inflation only. Now we are tinkering with how the government will measure gross domestic product (GDP) growth rates as we are not seeing enough growth there.
However, I always believe there has to be a fire when we see smoke. There are some serious allegations about how the renminbi deposits are growing astronomically in Hong Kong. It seems like the Chinese are setting up companies in Hong Kong, exporting items to themselves from China and then recording the cash in Hong Kong — all just to inflate renminbi deposit balances in Hong Kong.
There have been stories circulating about the Chinese government building ghost towns (large scale towns with virtually no residents), bullet trains from nowhere to nowhere, etc. All of this stinks of manipulation of economic data and overspending. The only reason I am less alarmed is that of all the countries in the world who can afford to squander money, it is China. Its huge surpluses are somewhat of a cushion for them to splurge before they run into trouble.
But the one thing that is for sure is that China is slowing down and so is India. Both these mega economies and populations are stalling. Jobs are not as abundant as before and inflations are running high.
In times like these, if we see a real and sustained slowdown, what are the chances that such slowdowns will affect U.S. GDP and growth? I would suspect that the probability is very high. The immediate effect will be of these large markets not being able to buy U.S. goods and capital equipment. Then you will see a shrinking of money supply in China, which will mean that cash allocations and buying of U.S. debt will also significantly slow.
If buying of U.S. debt is not as robust from overseas, we can see the interest rates rise rather sharply. To control that all this talk about the tapering by the Fed will vanish and QE4, or QE Infinity, will ramp back up.
In situations like this when there really is no certainty of growth in the world anywhere, hard assets like gold and silver are your best bets. Even though they are manipulated markets, we will see a rise in asset prices due to rapidly growing money supply.
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