HH 5 Trends That Are Shredding The Global Economy

The next period of risk-off will last a lot longer than a few months.

When stock markets free-fall 10+% in a matter of days, it’s natural to seek some answers to the question why now?

Some are saying it was all the result of high-frequency trading (HFT), while others point to China’s modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.

Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?

We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.

Five Interconnected Trends

At the risk of stating the obvious, let’s list the major trends that are already visible.

The China Story is Over

And I don’t mean the high growth forever fantasy tale, I mean the entire China narrative is over:

That export-dependent China can seamlessly transition to a self-supporting consumer economy.

That China can become a value story now that the growth story is done.

That central planning will ably guide the Chinese economy through every rough patch.

That corruption is being excised from the system.

That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.

That development-dependent local governments will effortlessly find new funding sources when land development slows.

That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.

I could go on, but you get the point: the entire Story is over. (I explained why in a previous essay, Is China’s “Black Box” Economy About to Come Apart? )

This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.