Wall Street And The Year Of The Rooster
Our world is all connected. In the Year of the Monkey, February 2016, Chinese Supreme Leader Xi Jinping could not have imagined that his next decision would cause Goldman Sachs to become the world’s most pre-eminent global bank by February 2017, the year of the Rooster! But that is exactly what happened.
A Backdrop of Global Deflation
After the crash of 2008 the world was mired in a long period of stagnant growth and deflation. The Chinese economy was not exempt. In 2009 the Chinese faced a long period of civil unrest unless they could get their economy working and employment growing again. That is when they crafted a bold new infrastructure plan. It was a very risky plan of mass migration. The plan was to convince millions of rural Chinese in the western part of the country to move to brand new cities built just for them in the mid-west part of the country. The building of these cities would create millions of local jobs, and would create a huge global demand for all commodities including steel, coal, concrete, copper and oil. These cities would be portrayed globally as a huge display of strength and creativity. They were supposedly so grandiose, that you could see them from outer space. One of their cities, Tianjin, was even a replica of Manhattan with a knock-off of the Rockefeller Center and its own Hudson River. It was billed as the world’s largest financial center when its ten year construction program was conceived over five years ago. Today it is missing only the people. All the tall buildings appeared, but the construction has halted and the builders have left town. Now this 50 billion dollar project is heavily in debt.
The Great Ghost Cities of China
The problem was that the migrating citizens passed up these mid-west cities and moved directly to the existing southeast coastal cities, like Guangzhou, Shenzhen and Shanghai. Many of the ‘brand new’ cities in the interior of China lay empty. They have been dubbed “The Great Ghost Cities of China”. They were a huge infrastructure miscalculation. As a result of the mass migration plan slowing down, the overall economy began to slow down. In 2015 the Chinese growth rate began to slow from its historic twelve percent pace to a more sedate seven percent pace. That is when the Chinese panicked.
The Year of the Monkey
January 2016 was a very bad time for the global economy. Commodity prices were dropping, global stock markets were crashing and the U.S. economy started to drift backwards. Donald Trump was taking advantage of the situation by addressing the dis-enfranchised Americans with his slogan “Make America Great Again.” It was also a bad time for China. The Chinese massive infrastructure project had not panned out and Xi Jinping had to make a decision. It looked like growth could slow below 6.5 percent in 2016 for the first time in over a decade. China could experience mass civil unrest. That is when Xi Jinping sprang into action. He decided to launch his last big tool, the equivalent of an economic bazooka. He printed the equivalent of one trillion U.S. dollars in local currency (Yuan) and flooded the markets.
The result was immediate and spectacular, but not as planned. This new money was originally intended to target the ageing Chinese industrial infrastructure. However, most of it leaked into other areas, especially residential and commercial real estate. The astute and wealthy also knew that the printing of new money would cause each existing Yuan to be de-valued, so there was also a race to get money out of China. The result was the 2016 global boom in real estate. In the first half of 2016 housing prices in the Chinese coastal cities like Shenzhen, went up as much as sixty percent as citizens tried desperately to lock in the current value of their Yuan. In addition the Chinese boom, property prices went up all over the world, especially in the global gateway cities. Prices in Sydney, San Francisco, and especially Vancouver shot up as well, some by more than twenty percent in six months.
This global real estate boom created a massive stimulus around the world as all the commodities gained new traction and global economic activity increased. An outside observer could almost watch the money flow through the system like a snake eating a rabbit. First housing prices and construction went up. Then steel and copper went up as residential construction went up. Then oil prices went up as activity increased. Then durable goods went up as people started to furnish their new places. Then services and restaurants went up as people began to feel more confident. Along with this mini boom, the United States began to see stable employment increases and the population began to feel more confident. At the voting booths, Donald Trump took advantage this burst of inspiration on his way to the presidency of the United States, saying that he had made America great again. The U.S. Stock market, especially the banking sector, celebrated his victory and firms like Goldman Sachs were elevated to international prominence.
The Year of the Rooster
We are all connected. In 2016 China printed “The Silent Trillion”, as discussed above.It was one trillion dollars printed in China, but immediately went global. It had a huge silent impact on global economics and global politics. But it had the same global impact as if it were printed in Washington.
However, by January 2017 the trillion dollars appeared to have worked its way through most of the economic system and things appear to be slowing again in China. Housing prices and commodity prices appear to be falling. But Xi Jinping now has an even bigger problem. His debt levels are now at historic proportions and his Yuan is falling drastically. After a seven percent depreciation over the past year, the Yuan is looking to fall again in 2017. This could cause import costs to go up, precisely as his economy is slowing down causing the unrest he has been trying to avoid. His next move could be the most important of his career. He has already begun to back pedal and has made statements to the effect that growth below 6.5 percent would be acceptable. Perhaps that would be acceptable to China, but the rest of the world has become hooked on the silent stimulus. I doubt that the impact of Chinese growth below 6.5 percent isfully captured in global economic forecasts. How will all of this affect global markets and especially Wall Street in 2017? No one really knows. Only one thing is for sure……
In 2017 we must listen for the cry of the Rooster. It could be a wake-up call for all of us!
SoCal has become a center of Chinese real estate speculation as well. The dislocations because of this fever are great, and the ultimate results will be complicated by anti city, anti tech Trump. Trump wants the US to focus on making trinkets.
Excellent article!