The year is 2007 and the Chinese economy is on fire. Growing at an annual pace of 14.2% it appears the Chinese are moving to take over the world, at least the economic portion of the world. The force of the Chinese momentum is spreading throughout the world, rippling here and there to generate growth elsewhere.
Today, the Chinese GDP growth came in at a mere 7.5%, a massive drop from the peak year of 2007, but only fractional drop from May when it came in at 7.7%. This “news” is at the top of today’s financial reporting, as the conclusion is that this “falling” GDP is a negative rippling throughout the global economy, or so the breathless media tells us.
Yet, within the internal confines of the Chinese economy, it appears another story is unfolding, one that speaks to an economy less dependent on exports and one more dependent on Chinese consumer spending.
- Consumer spending was a bright spot, as retail sales accelerated to 13.3% in June, compared with 12.9% growth in May.
Interestingly, the headline news drives the market and the actual data inside seems to slip by the reader. This works for the breathless media because the “bad” news out of China fits right into the “bad” news about retails sales in the US.
- Retail sales rose less than expected in June, the latest sign of a slowdown in economic growth.
Now, like the Chinese GDP, overall retail sales in the US dropped just a bit month over month, from .5% in May to .4% in June. Forecasts had retail sales coming in at .8%. Economists, who are often incorrect in their predictions, missed again, so the flavor of the headline reporting is negative, which causes a stampede effect in the market, at least until the news beyond the headlines is swallowed.
- But growth is not slowing abruptly, with other data on Monday showing factory activity in New York state accelerating in July as new orders and employment improved. The survey’s measure of new orders rebounded into positive territory, while gauges of employment improved.
The reality to be aware of is that the market most always initially reacts to the headline news, so this presents an opportunity to enter or exit trades. As it digests the information coming out, it often has a more balanced and realistic view.
- Retail sales increased 0.4 percent last month, lifted by demand for automobiles and higher gasoline prices. However, sales of building materials fell by the most in a year, a potentially worrying sign for the housing market.
“Potentially worrying sign” is appropriate, but not for reason suggested above. Recalling last month’s barrage of news about an overheating real estate market, one should keep in mind that some reporting suggests major builders are holding back for a bit to take advantage of the rising prices. Maybe true, maybe not, but sales of building materials dropping can only be temporary in a market that is running out of inventory. The fact is that whatever is holding up the sales of building materials is momentary because the reality is there is money to be made in the building and selling of homes.
All is not bad in the kingdom, that is true, but things could be better. That is true as well. Getting better is a process, especially when the injury was so massive, as it was in 2008. Applying the fixes is a long and difficult process as well, especially when vested interests fight to protect their minor kingdoms. These folks will resort to all manner of sleight of hand to make you think (or not think) the remedies actually will not do anything to fix the problems.
- The real issue is that reinstating Glass-Steagall would give the illusion of safety where none exists. Trading desks don’t need to collect deposits to create derivatives. Financial institutions don’t rely on trading desks to make their money.
For over 60 years, Glass-Steagall, contained within the Banking act of 1933, protected us all from the greed that caused the 2008 financial collapse. When the law removed that piece in 2000 (the wall between banks and commercial investment houses), the onslaught of greedy derivatives trading overwhelmed the whole financial system. So, here we have voices from their side telling us reinstating Glass-Steagall won’t help? Wow!
Trade in the day; Invest in your life …
