By MoneyMorning.com.au
“China’s surging economy moderated to its slowest pace in more than two years in the third quarter, as it remains on track for a government-engineered ‘soft landing’ that has unsettled global investors.” – Financial Times
When we see the words “government-engineered”, it sends a shiver down our spine… hairs stand up on the back of our neck… and if it happens to be a full moon, we howl at it.
But that’s nothing compared to our reaction to the term “soft landing”. It’s one of the most dangerous words in the economic language.
Because shortly we’ll show how the U.S. Federal Reserve’s attempt at a “soft landing” in 2000 gives a clue to where the Chinese economy is heading next. And considering how crucial China is to the Aussie economy, understanding what’s happening in China is important to every Australian…
But before we go on, don’t forget to check out Slipstream Trader, Murray’s Dawes’ latest free weekly update on YouTube.
In the video released yesterday, Murray revealed the next few weeks could be “one of the best selling opportunities of the year.” That’s great news for short-sellers. And it’s also good news for investors who want to get out of stocks before the market tanks… again.
This morning the Aussie market is down more than 1% in early trading – thanks to lower commodity prices and…
As it turns out, Europe’s banks may be in better shape than many thought (remember everything is relative, the banks are still stuffed, just not quite as stuffed).
That means the bailout and stimulus programs may not be as big as investors had hoped… which means less money printing and a smaller boost to asset prices.
In other words, good news is bad news!
But the banks aren’t on our radar today. Because right now, the banking story is just noise hiding the real story. Which brings us to Mark Twain…
He supposedly wrote:
“It is not worth while to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible.”
What Mr. Twain was getting at is that history provides a good indication of what could happen in the future. And that it’s wishful thinking to believe people will learn from mistakes.
We’re sure you’ve heard how U.S. Federal Reserve chairman, Dr. Ben S. Bernanke is determined not to make the same mistakes as the Fed did during the Great Depression. Yet everything we’ve seen from the Fed tells us Dr. Bernanke is helping repeat history, rather than avoiding it.
The problem is those who gain positions of authority believe too much in their own abilities. They believe they’re the only ones who can solve the problem… because only they’ve learnt from history.
Only, humans are fallible. And no single person can possibly know enough information to predict all possible outcomes – if it was possible you wouldn’t get unintended consequences.
Yet as we’ve written many times, despite the evidence, most believe those in authority will succeed. They believe chaps like Dr. Bernanke knows what he’s doing. And those same people also believe China knows what it’s doing too… that China can engineer the fabled economic soft landing.
So, let’s briefly describe just what a “soft landing” is…
In simple terms it’s the idea a central bank can gradually raise interest rates to slow down an economy. That rather than crashing to a halt, the economy will slow gradually to a more sustainable rate of economic growth.
Of course, as you can guess, the People’s Bank of China isn’t the first central bank to give it a go. For example, take this from the Philippine Daily Inquirer on 6 July 2000:
“The US economy is on track in the second half of this year to achieve the ‘soft landing’ desired by Federal Reserve policymakers, slowing just enough to hold inflation in check, according to economists surveyed by Bloomberg News.
“Growth will probably average a 3.7-percent annual rate in the final six months of the year… That’s down from a 5.5-percent first quarter growth pace and close to the consensus forecast of a 3.5-percent rate for the second quarter that ended Friday.”
The article continues with a comment from Paul Christopher, economist at financial services firm, AG Edwards & Sons:
“Whether the Fed closed their eyes and pushed the button or they have a remarkably good crystal ball, it seems like they are going to get the kind of slowdown they wanted.”
Turns out either the Fed did close its eyes… or the crystal ball was a dud. Because two years later the U.S. market had dropped 50%. And the economy was in recession:
If that was the “kind of slowdown they wanted”, we don’t recall the Fed mentioning it in advance.
Let’s be honest, the idea that a central bank can engineer a soft landing is about as likely as you finding a pot of gold at the end of a rainbow.
Soft landings – if they happen at all – happen by luck, not design.
And right now, China is right out of luck. Because based on what we can see, the signs are that China is heading for a very, very hard landing… and for the most part, the market is blind to it.
Even so, the clues are obvious. Of course, there’s always a chance they’re too obvious and we’re wrong. But we don’t think so.
Our bet is the Chinese economic collapse will happen soon – perhaps very soon. And make no mistake, when it happens it will cause more damage to the world economy than anything the collapse of a few dodgy European banks could ever do.
So, what are the clues?
For that you’ll have to wait until tomorrow. We’ll fill you in on the details then…
Cheers.
Kris.