Poor economic numbers coming out of China and the Eurozone is not good news for anyone, reports Landon Whaley.

As the slew of dumpster fire economic data rolled forth last week, there was a single phrase circling the inner sanctum of my mind, “behind the curve.”

One of our more profitable macro themes has been “Slowing Dragon,” which was active from Feb. 20, 2018, through Feb. 4, 2019. This past week, we received the latest iteration of the “Big 3” Chinese data, and it’s clear we retired the Slowing Dragon too soon!

Retail sales growth has been in a downtrend for years now, but the retail bear market accelerated in July slowing an additional -2.2%, to a 7.6% annual growth rate. Industrial production growth has been in its own downtrend since peaking in late 2017, and July’s 4.8% reading is officially the slowest pace of growth in 17 years. And rounding out the Big 3, fixed-asset investment growth slowed for the third time in the last four months. More importantly, infrastructure fixed-asset investment growth (which serves as a proxy for the People’s Bank of China (PBOC) policy support) slowed -30 basis points month-over-month. 

Investors hoping for prompt PBOC reaction to the deteriorating data should take a look at China’s July credit data. For starters, those boys drained more than 500 billion CNY from the banking system, the largest single-month withdrawal in nearly two years. Second, the PBOC’s medium-term lending facility contracted at a 31.1% annual pace, the sharpest contraction ever. Third, the pace of new loan growth slowed yet again and is now sitting at the slowest rate of growth in 29 months. Finally, M2 money supply growth hit the lowest level since February 2018.

The bottom line is that the PBOC is not just behind the curve; they are running full speed in the opposite direction of an economy that is slowly careening of a cliff.

I Know a Little German

Similar to our Slowing Dragon macro theme, we profitably traded “Draghi’s Dilemma” during 2018, and it’s clear now that we closed that macro theme too early.

I’m not going to regale you with a laundry list of growth data points so ugly their own mother doesn’t love them. No, I only need two data sets to summarize the German economic story and the Fundamental Gravity engulfing the aggregated Eurozone.

First up, the German ZEW Economic Sentiment index is constructed by surveying 300 experts from banks, insurance companies and financial departments of selected corporations about their six-months expectations concerning topics like the economy, inflation rates, interest rates, stock markets and exchange rates. The August reading of the ZEW took the elevator shaft from July’s -24.5 reading down to -44.1, which is the lowest reading since 2010. You may be thinking, “2010 sounds familiar to me; why does that year stick out?” The answer is that 2010-2011 marked the height of the last Eurozone debt crisis. 

Second, Germany’s GDP quarterly growth rate just contracted for the second time in the last four quarters. The annual pace of German GDP growth slowed for the fifth quarter in the previous six and hit an uninspiring rate of just 0.4% in Q2 2019.

To say the ECB is behind the curve is like saying Trump likes the sound of his own tweets. It’s only been within the last six weeks that Draghi has copped to the economic reality we’ve been harping on for 17 months (we initiated Draghi’s Dilemma on March 19, 2018). Not only is the Eurozone close to climbing aboard the long black recessionary train, but you can cue the start of the next Eurozone banking crisis in 3…2…1.

Bottom Line

The Eurozone and Chinese economies need Life Alert because they’ve not only fallen and can’t get up, they continue to fall even harder.

But make no mistake, this isn’t just a China and Eurozone problem. I’ve been in this game two decades, and there have been very few times when economic data was puking this badly, and across a wide swath of global economies.

The three-headed hydra of stock markets correcting, bond yields imploding, and safe-haven assets (U.S. dollar and yen) ripping is accurately reflecting the Global Winter Fundamental Gravity and ensures that the final 20 weeks of 2019 will prove to be an environment of elevated volatility…and opportunities. Trade accordingly.

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