I believe there are three important drivers to markets right now. Two long-term and one short-term. These are:
We’ve written many times over the last few years about why China is THE most important macro variable this cycle. The reason is in the chart below.
China (orange line) has accounted for the majority of credit creation this cycle. They’ve been the global workhorse by leveraging credit driven demand. As a result, China accounts for over 50% of global GDP growth since the financial crisis.
China is now dead set on ending its super-sized leveraging cycle and transitioning to a more sustainable consumer-driven economy. We know this because President Xi Jingping has told us so as he did here in late 2016.
If we don’t structurally transform the economy and instead just stimulate it to generate short-term growth, then we’re taking our future… If we continue to hesitate and wait, we will not only lose this precious window of opportunity, but we will deplete the resources we’ve built up since the start of the reform era.
Xi finished the above statement by saying the country had until the end of 2020 to make this transition.
Xi’s moves to finally tackle the debt are also clearly showing up in the data. We’ve been writing about it all year, here, here, here, here, here, here, and here.
This is a very big deal that is still largely being ignored by the market. Investors appear to be operating off of the old assumption that Xi and team will stimulate at any moment. But this won’t be the case. It’s very unlikely we’ll see a reversal in policy until the end of 2019, at the earliest. This will give them time to juice the Chinese economy going into the centennial anniversary for the Chinese Communist Party.
