The sound of one hand clapping

Written by Bruce J. Clark

April 17, 2019

We walked in this morning to ebullient headlines out of China, proclaiming that better than expected economic data from the mainland was evidence that their massive stimulus effort is finally working. First quarter 2019 GDP expanded at a 6.4% rate, unchanged from the fourth quarter of 2018 and scraping along the bottom at the weakest pace since 1990 (see chart below). If you’re wondering why that’s good news, it had been expected to fall further. Yay! I guess. This is what my friend and legendary investor, the late Mark Turner, would describe as the sound of one hand clapping.

China has been in the news a lot lately as authorities try to boost their slowing economy. The growing influence that China will have on the outcome for all regions and all markets can’t be overstated.

As I mentioned here yesterday, the Chinese have expanded credit at a blistering pace this year. https://atradersperspective.org/2019/04/16/whats-wrong-with-this-picture/ Maybe it will ultimately be successful, but for all the heavy lifting so far, they’ve only managed to slow the bleeding. https://reut.rs/2UpcFNd

Despite the hype, the financial markets today were also largely unimpressed with the numbers. A lot of high expectations have already been discounted over the last 3 1/2 months, from stabilization of the Chinese economy to a positive result from the US-Chinese trade talks. Today’s muted response served as a gut check. I have been saying to watch the Australian and Canadian dollars, and gold for confirmation of an upswing in global growth trends. None moved today and all remain vulnerable.

Subsequently, equity and commodity markets are at risk that frothy expectations have run far ahead of reality . The S&P today traced out a bearish reversal pattern (see below). The risk/reward profile of the broad market has shifted decidedly to the downside.