The Truth About the Latest “Inflation Spiral”

Freedom Financial Archive | Originally posted May 02, 2023
  • Inflation around the world is still pinned at highs.
  • How the movement of money (or lack thereof) affects investing, hiring and global growth.
  • The debt bubble in China is popping.

Dear Reader,

One of the biggest overhangs in the market remains inflation that will keep central banks active in the market. Inflation around the world is still pinned at highs – especially when you look at core inflation.

This isn’t adjusting anytime soon as commodity prices are elevated around the world. The amount of liquidity that has been in the market since 2008 only intensified as it expanded in 2020.

Driven by liquidity fears, it’s near impossible for Central Banks to remove money at the same rate it’s injected. This is a pivotal fact that was missed by many of the “experts” that discussed ZIRP (zero interest rate policy) and perpetual QE (quantitative easing). We are seeing it play out around the world by triggering an inflation spiral.

How the Movement of Money (Or Lack Thereof) Affects Investing, Hiring & Global Growth

The hawkish stance of Central Banks is going to keep global liquidity depressed and drive down credit impulses.

As credit impulses stay low, the movement of money (i.e. the velocity of money) through the system will stay hindered in a big way.

This will impact CAPEX, investment, hiring, and all other corporate activities depressing global growth.

When we look at the largest countries in the world, many of them are still in a rate-rising cycle with little to slow their rise in the near term. Inflation will be the biggest factor that will keep rates pushing higher.

The below chart puts into perspective the rate rising cycle, but we disagree with the “dovish” stance of the PBoC. If the data is even half right (which is probably the case), there is no reason for the PBoC to stimulate or cut rates further.

Their goal has been to reduce liquidity and pull a ton of excess from the market that has been flooding their markets for the last 20 years.

Our stance on the PBoC could change over the next few months as more credit risk expands in China, and manufacturing/construction/ infrastructure spending struggles.

Right now- the expansion in the country is being driven internally as external factors show more pressure forming. We don’t believe the GDP figures – let alone the beat – but based on our data, the country did expand in Q1.

The Debt Bubble in China is Popping

We have been highlighting since last year (February 16th to be exact) that the debt bubble in China was popping, and here is the latest balloon to pop.

“Dalian Wanda Group Co. has become the latest source of angst in China’s credit market, with dollar bonds of billionaire Wang Jianlin’s conglomerate sinking to distressed levels just months after they were issued.

This week’s plunge occurred as investors brace for a potential surge in cash outlays by the group. Wanda and its units could face the equivalent of $1.9 billion in principal and interest payments on loans and public bonds, including put options, the rest of this year, according to data compiled by Bloomberg.”

This is just another issue impacting the credit problems that stem from everything within China – ranging from international exposure through the Belt and Road Initiative (BRI) to local real estate.

I think this sums up the questions surrounding the Chinese data release:

China’s stats bureau released the Q1 GDP results on Tuesday of last week.

The headlines:

  • The economy expanded 4.5% y/y in Q1, compared with 2.9% y/y in Q4 2022 and 3.0% in 2022 as a whole.
  • GDP in Q1 was up 2.2% on a seasonally adjusted basis versus the previous three months.

Break out the champagne: The print smashed expectations for 4.0% y/y growth.

But…we’re not sure such celebrations are merited.

  • In fact, the GDP data and corresponding econ numbers leave us unsure about a whole host of things.

Riddle me this: If the economy is recovering, why is corporate spending growth still so weak?

  • FAI (fixed asset investment) increased 5.1% y/y in the first quarter of 2023 – the same rate of growth for 2022 as a whole.

At first glance, it seems that strong household spending explains the discrepancy:

  • Retail sales rose 5.7% y/y in Q1, versus a 0.3% y/y decline in 2022.
  • In March, sales jumped 10.6% y/y.

But other data suggest households are still under considerable financial pressure:

  • Urban household income increased by only 2.7% y/y in real terms in Q1, versus 1.9% in 2022 and 5.0% y/y in 2019.
  • The urban unemployment rate remains stubbornly high. It was 5.3% in March, compared with 5.5% at the end of last year.

There was also a disconnect between government stimulus and weak industrial production:

  • Infrastructure investment continued to grow at a decent clip, increasing 10.8% y/y in Q1 and 9.9% y/y in March.
  • But value-added industrial output growth was up only 3.0% y/y in Q1 versus 3.6% in 2022.

Get smart: The absence of an across-the-broad recovery as China reopens raises questions about its sustainability.

Bottom line: This is not a slam dunk economic recovery.

Thanks for reading,

Freedom Financial News