Markets at a Crossroads: Inflation, Employment Data, and Geopolitical Risks

There are a number of things I would like to address this week. 

In my last write-up I noted that the Chinese stock market would rally sharply on the back of the recent policy moves, and the markets responded with their continuation of a 25% surge. The Chinese market had already exploded off the recent lows when I wrote this, but the move continued. (***See the chart of the Shanghai stock market below.) 

Going forward, I have some doubts about whether the policy moves by the Chinese authorities will really solve the massive problems in their economy.  Sure, the interest rate cuts and the de facto put on the stock market will support their equity market, but the deleveraging in the Chinese real estate market has cost investors more than $10 trillion. 

Monetary policy alone won’t solve this problem.  The Chinese must take extraordinary steps fiscally to address this type of crushing balance sheet recession, and so far, they have been quite vague about the precise fiscal policies they will implement.  We have learned from the Japanese experience that monetary stimulus has limited power when it comes to fixing deflationary pressures. Even the extreme fiscal measures of the Japanese authorities to supplement their unprecedentedly loose monetary policy have had limited effect on the economy after more than thirty years.