China Blowing Even Bigger Credit Bubble Puts World at Greater Risk, Says Global Strategist

Wed, May 4, 2016 - 12:22pm

China is blowing an even bigger industrial-growth bubble, central banks are attempting to prevent a global shock, and, meanwhile, all eyes are on the US dollar for clues as to which way things will go. So says Worth Wray, Global Macro Strategist at STA Wealth Management, in a recent interview with Financial Sense, who also notes that we may just be in the "eye of a hurricane" before things heat up later this year.

Here's some of what he had to say in Wednesday's podcast:

"The last time we spoke back in January the world was I think very close to going off the edge. I think we had a close of a call with a global financial crisis and a global recession as we did in 2012 with the European debt crisis. It was very, very close...but then the dollar proceeded to peak out in late January. [Prior to then] we were in a position where the European Central Bank and the Bank of Japan needed to significantly ramp up their easing programs...and that could've gotten very ugly. Those were the big catalysts for a breakout in the dollar and that would've put a great deal of pressure on China...to float the renminbi and it would've been a global shock...

[However] I think what happened was some kind of a deal. You can call it an accord, you can call it a detente, you can call it a time out for all I care but it looks like there was a truce called in this global currency war on the sidelines of this G-20 meeting that happened in February. And when the central bankers and finance ministers of the four major economies of the world—the US, Europe, Japan, and China—sat down and we know for a fact—it was reported by Bloomberg—that there was a separate meeting of those economies...[to form] a pact to talk to one another before making any policy changes that might affect foreign exchange balances or foreign exchange trading..."

Scroll down to read more of his comments, or click to hear a preview of his interview below. Subscribers can access the full audio by clicking here or via podcast on their mobile device.

"We've seen massive stimulus in China amounting to...one of the largest increases and accelerations in credit growth since 2009. What worries me is that...you're seeing more spending on infrastructure, more spending on construction—the old things that drove China's growth model, which just simply aren't sustainable. So what this does is it helps to stabilize China now, it helps give some sense of stability to global growth now, but it increases the longer-term risks...

Right now there's a big commodity bubble in China that's come off that stimulus, that's come off that weaker dollar...and I think that'll pop and you'll have a problem so basically what we're seeing here is that the dollar only remains in the safe zone as long as major central banks agree to focus on what's right for global stability rather than what's right for them. Over time, that's going to break down.

I don't think that's a long-term deal but I do think that, like David Zervos said, it could be in play until after the US election, until later in the year. At that point, all bets are kind of off and we've got to watch how this thing evolves. But if that stays in place and China can be at least somewhat stable for most of the year, then I think this reflation can continue. It'll be volatile but it can continue for a while. [However], if any of these things break down, if the Saudis flood the oil market and push oil prices lower, that'll stir up risk-aversion and that will push the dollar higher. If central banks decide they are going to go their own way, then I think that could push the dollar higher and disrupt all of this.

If China falters and they have a real problem, again, that's going to stir up risk-aversion; it could push the dollar higher and only increase the chances of the renminbi going so I don't think the risks have gone away—they may have subsided and you have some global stability—but this is a very fragile position and, at this point, we don't know if this is the beginning of a new weakening trend in the dollar...or if this is just the eye of the hurricane..."

To listen to this entire podcast interview with Worth Wray, Global Macro Strategist at STA Wealth Management, log in and click here. Not a subscriber? Click here.

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