Enzio's Clock

Background

1. Why Friday matters

In short, because what was said this week heralds an exit strategy from loose monetary policy, which, in turn, heralds a  change for the worse in China's Economic Time®.

Here is what happened, according to the South China Morning Post of Saturday, 17th October, p. B3: 

• This Thursday,  the People's Bank of China's  (PBOC) Governor, Zhou Xiaochan, announced that while he was "relaxed" about monetary policy,"The central bank's measures in responding to crisis are different from the guidance on inflationary expectations in normal times. There must be a handle on duration." My interpretation: he is relaxed about monetary policy as it pertains to inflation, which is not an imminent threat. But, he is not relaxed about banks' rampant lending and the sure-to-be banking crises that must follow reckless lending, and
• This Friday, the China Banking Regulatory Commission's (CBRC) Vice Chairman, Jiang Dingzhi, publicly announced something which he had already had relayed on Wednesday, namely that "...banks must make sure their lending does not run out of control and their capital adequacy ratios do not deteriorate."  My interpretation: Mr. Jiang was emphasizing the importance of banking stability, and this stability, in turn, is what the PBOC's Mr. Zhou was referring to when using the euphemism "duration".

The significance of these two moves is that China's Central Bank as well as banking regulator are revealing that the end is nigh: soon, they will exit the strategy of loose monetary policy, the one introduced later last year.

Within the framework of our Economic Clock®, this means that the government soon will change the monetary dial on the Clock - from  a current excess supply of money to an excess demand for money.  The PBOC will tighten monetarily.

Thus, the Economic Time® just might morph into an excess demand for money and an excess supply of goods. This would be hell for markets, and I do not expect this to become apparent for some time. But the market perception that the Central Bank is planning an exit strategy already jolted Chinese markets on Friday.

And moving beyond China, the second significance of Friday's "double header" announcement is that China very well could trigger the next global market downturn, the one that we have forecast for October - or, at least, for the current fourth quarter - for some time. 

How can China's cough cause a global cold? Simple logic.  If the market perception is that China is this stunningly large saviour of the global economy, then the opposite must also hold true, should this pygmy giant stumble: a crash in her markets could pull the trigger on crashes in other markets.

Indeed, glimpsing at Wall Street's gyrations on Friday lend credence to our thesis of increasing market jitters: the profits of GE and of Bank of America disappointed and the consumer's mood soured... Soon, the market's subconscious will have to accept that the Economic Time® in America has to remain bad, i.e. that unemployment has to rise and thus, consumption has to keep falling, implying an ever more pronounced  "excess supply of goods".

Tough to make profits if you are not making sales, is it not?  So why hold stocks?

2. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Short the Chinese stock market. We own one such ETF, FXP:US
3. Short the U.S. stock market. We one own such ETF, SDS:US