Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China Is Leading a Once-in-a-Generation Shift to Inflation

Economics / Inflation Mar 08, 2018 - 02:37 PM GMT

By: John_Mauldin

Economics

By Patrick Watson : At the Strategic Investment Conference 2018, Louis Gave, co-founder and CEO of Gavekal Research, talked about “game-changing policy shifts” and massive social changes that are underway in China.

One of the most notable changes is Xi Jinping’s effort to pull the Chinese economy away from pollution-heavy industries. Cement, steel, and textile industries are under pressure—they are forced to cut back production and reduce supply.


Source: Mauldin Economics

The president of the People’s Republic of China initiated the new policies a couple of years ago, said Gave. Now the reform is intensifying.

The China-style “supply-side reform” is exposing an inherent contradiction in our thinking. We believe central banks can always inject liquidity and companies can always get more efficient.

If these are true, Gave raised the question, why is there excess capacity in the system? Because China has been building it due to the low inflation and deflation of the last two decades.

Meanwhile, the rest of the economy responded with its own “overcapacity optimizers” like Uber and Airbnb. These will be less necessary as China soaks up the overcapacity.

This will be a big change, and few see it coming.

China’s Reform Amid US Struggles

Meanwhile, the US deficit has been deteriorating for the last two years, yet we did not have a recession. The problem is that it’s hard to cut spending. Gave likened this situation to Europe 20 years ago.

Tax cuts coupled with increased spending will mean record budget deficits for years to come. The US fiscal policy is not stable and, Gave said, the markets are starting to realize it.

If that’s the case, he asked, who will fund the ever-expanding US deficit?

There are only a few possibilities: the Federal Reserve, US banks loading up on Treasury paper, domestic investors, or foreign investors. None look inclined to do it.

Further, the US dollar shows no promise and acts like an emerging-market currency. It has failed to rally even as interest rates rise, markets fall, or other central banks sound dovish.

Considering the US debt situation and lack of other obvious financing sources, it seems likely that the debt will be paid with a weak dollar. Hence Xi’s decision to ramp up China’s imperial ambitions.

A Structural Shift to Inflation Is Underway

Gave said the People’s Bank of China is the only central bank in the world that is truly hawkish on inflation.

Chinese Marxists blame inflation for the 1989 Tiananmen Square incident and don’t want it to happen again. Gave sees a shift coming as China leads the world out of the disinflationary boom and bust cycles. Gold prices and bonds are also signaling a shift to inflation.

Conclusion: We could be seeing a structural, once-in-a-generation shift to inflation. This will require radically different thinking for most investors. US Treasury bonds will no longer be good diversifiers. Gold, and possibly RMB bonds, will replace them.

Gave is also interested in Eastern Europe—one of the regions he’s looking at. Countries there will benefit from China’s infrastructure rollout, which reduces its dependence on Germany and Russia.

Get Live Updates from the Strategic Investment Conference 2018

Learn from 25 top financial experts, best-selling authors, and investment professionals as they discuss their best investment ideas and predictions for the economy, financial markets, and geopolitical relations. Tune in to the SIC 2018 live blog now!

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in