| | | | China’s Economy is Failing and Why That’s Good For Stocks
China’s economy might be about to implode. Let’s look at how we got here, and why this means U.S. stocks will keep hitting all-time highs.
First off, China’s property market has been annihilated over the past two years. Starting with the collapse of Evergrande, the Chinese real estate index has tumbled by 82%.
Not only that, but China has had a deflationary economy for five straight quarters. This is longer than the deflationary period during the ‘08 crisis. And deflation can be way worse than inflation; as prices fall, people know they’re going to fall more, so they stop spending in order to capture lower prices later. This process can cause an economy to grind to a halt.
Unemployment is also soaring, as construction jobs disappear due to the housing crisis, and the consumer gets tapped out. So, what has China done to alleviate things?
1. Cut banking reserve requirements
2. Cut reverse repo rate
3. Lowered mortgage rates
4. Launched $412 billion into the banking system
We’ll see what happens next. But as that money is injected into the system, Chinese institutions and investors are not going to put it in the Chinese market. It’s coming right over here to American shores. And all of that state-sponsored liquidity will cause stocks to soar as long as the music keeps playing. | | | | |
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