Transcription
China just made a jaw-dropping move before Trump's inauguration. What happens next could change everything. I'm your host, Steve Van Meter, and thanks for joining me today.
In our show today, China just made a move that could bring the US economy and stock markets to their knees. What I want to know from you is: is this latest move out of China an act of desperation, or is it an attempt to undermine Trump's second term? I'm going to show you why their latest move is more dangerous than it seems.
Now, let's head over to Bloomberg, where we picked up today’s headline: "China's central bank pumps near historic levels of cash into the financial system." What we're seeing here is that China's financial system is running out of liquidity. We've been warning that the banks are insolvent, and we continue to see signs of this.
But why would they inject cash right ahead of the inauguration? Is this a move to undermine Trump's second term? Well, you're going to be completely surprised, as you're about to find out. It could be that the operation is aimed at offsetting the impact of the expiration of medium-term lending, peak tax season, and cash before the Lunar New Year holidays, and to keep the banking system's liquidity ample.
Now, keep in mind we've seen from the PBOC lately that they've been injecting cash into the banking system. In fact, that's been one of their goals: to put cash into the banking system to get the banks to lend. But there's a problem here: cash keeps disappearing from the Chinese banking system. Where is it going, and why?
Is this again an all-out attempt to undermine Trump's second term? Check this out: the sizable liquidity support will come as a relief for Chinese lenders after a cash crunch earlier this week pushed 7-day interbank funding rates to the highest level in more than a year.
It wasn't long ago that we heard from the banks that they were flush with cash; they had plenty of money. I said, "No, it's all a mirage." The Chinese banking system is running out of liquidity, and when you see the interbank lending rate spike, that's exactly what it means.
When banks hold on to money, when they hold on to cash, it means their ability or desire to lend to other banks comes at a huge premium. That's why you see these interbank lending rates spike. Everything's pointing to the Chinese economy heading into recession. Their banking system is running out of liquidity, and Beijing is getting increasingly desperate.
But are they looking to take the US down with them? Well, they are. The central bank has been using liquidity measures to expand its support for the yuan, which has come under pressure from a strengthening dollar. It sold a record 60 billion yuan of six-month bills in Hong Kong on Wednesday, a move that will drain liquidity offshore to support demand for its currency.
On top of all the other issues China is facing—an economy headed into recession, a liquidity crisis in their banks, and a currency in freefall—they've tried to stop the fall of the yuan. I said every attempt will fail. Sure enough, it is.
Now, their latest move is to borrow a bunch of money in the Hong Kong markets to try to pull yuan off the market to provide some support underneath it. The question is: will it work? The answer is absolutely not, but it will in the short term because liquidity conditions remain tight for non-financial institutions, with signs of demand exceeding supply.
Now, the question is: what demand? Demand for money or currency, that is. That's what happens when you go into a liquidity crisis. Suddenly, everybody looks for the safety and security of either currency or government bonds. They don't want to lend, and this is all a sign of what happens right before a financial system goes into an all-out crisis.
The PBOC is carefully managing the pace of liquidity provisions, but it wouldn't appear that that's happening at all now that currency stability has become a priority. The problem is they've got too many holes to plug. They've got a banking system running out of liquidity, so they need to inject cash. They've got a currency that's falling, so they need to suck up cash out of the global system.
You can see that China is panicking. This is an absolute desperate move. The problem is: are they going to try to bring down the US economy with it and undermine Trump's second term? I think they are. I'm going to make the case; you decide.
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Because money's pouring out, and that means an opportunity for you to make money. Now, let's look at China's real issue: China's record capital account outflows pile pressure on the yuan. You can see the issues Beijing's facing here. They've got a liquidity crisis in their banking system; there's just not enough money.
At the same time, people are trying to get their money out of China, and for good reason. The economy is slowing down. They've got property developers that are on the brink of bankruptcy, an insolvent banking system, and no answers to the potential tariffs that are coming.
So China's only move then is to try to put some support underneath the currency, but they can't stop it. That's the issue here. So if you know you're going down, do you go down on your own, or do you take somebody with you? Well, they're going to try to take the US down and undermine Trump's second term.
As China's capital account, which tracks flows of capital in and out of the country, saw a record outflow last year, investors looked for better returns abroad. Here you see a difference in interest rates. In the US, you have a rising dollar, higher interest rates, and the safety and security of US Treasuries.
All that compared to what you have in China: an economy slowing down, a currency weakening, and rates expected to fall. It's not making anything better for China that the Fed is not cutting rates. In fact, it's making things even worse.
The challenge for the People's Bank of China is that weak growth is making it hard to attract growth-sensitive portfolio inflows, and risk around foreign business viability in China is making multinational corporations reluctant to add to or, in some cases, leave or sell investments there. You really can't blame it; money finds its highest possible yield.
So if you're looking for an equity market return right now, where is money going to flow? Into US stocks. Why? Because nobody thinks they're going to go down, particularly under Trump's second term. What about fixed income? If you want a higher return, you go to US Treasuries.
What about if you want to hold cash? You're going to go to the dollar. Money's going to leave China, and it's not going to stop. The combination of these factors has led to higher demand for dollars, larger outflows, and greater yuan volatility.
All attempts here by Beijing to put a floor on the yuan are not going to work; it's going to continue to go down. They're going to be forced to borrow more money until they face the ultimate decision, and that's going to be to devalue their currency.
But in the meantime, is this move—injecting cash into the banking system—all an attempt to undermine Trump's term? I'm going to make the case of why it is. I'd love to know what you think.
As exporters have preferred to hold on to their dollar earnings due to the yield premium of US assets over Chinese ones, isn't this interesting? Because when you start to see what's going on here, Beijing is effectively saying they're not going to do anything to turn their economy around.
One thing we know they could do is direct fiscal stimulus to try to revive domestic consumption, but they're not doing that. They're doing it in small ways, but not big enough to actually turn their economy. Instead, they're going to inject cash into their banking system.
What's that going to do? Cause greater capital outflow, lead to an even stronger dollar. It's going to go into Treasuries, and the problem here is a stronger dollar is not something the Trump administration wants—not even close.
As we look to potentially our next Treasury Secretary, he said the dollar's global status is critical to the US economy, and he's absolutely right. The US way of life, our economic strength, the benefits we get from the dollar's reserve currency are absolutely critical to maintaining our dominance around the world.
He doesn't want to see it leave, but he's got a lot of challenges here. Critically, he said we must ensure that the US dollar remains the world's reserve currency, and without a doubt, that is an absolute fact. It must stay that way, or at least for as long as possible.
Now, we know that no currency remains a reserve forever, but in terms of the US consumer way of life, we need that to stay. Because what we do is import cheap goods and export inflation—that's their exporting the dollar. Our entire financial system relies on us remaining the reserve currency.
But he has been a proponent of realigning US currency policy. He'll stop short of supporting an overt strategy of depreciating the dollar. Now, why wouldn't he try to depreciate the dollar? Well, because he can't. He already knows this.
What's great about him is he knows how the financial system works. He knows that the Treasury has no control over the dollar. He knows the president doesn't, and he knows the Fed doesn't. So he can't cause the dollar to depreciate.
So you start to think about China's move here: let's inject capital into the banks. We're going to let the world know they're illiquid. What's going to happen? More money's going to leave China. Where's it going to go? Into the dollar. It makes sense. Where else would it go?
If you want the safest currency, if you want the highest yields, your money's going to the US. They can't depreciate the dollar; that's the big problem he faces here.
Now, during Trump's first term, then-President Trump called out dollar appreciation for being harmful to US manufacturers and even considered government intervention to manage the greenback's value. The problem is President-elect Trump doesn't realize he has no control over the dollar. There's nothing the government can do about it.
So there's no way to intervene here. But you start to think about China's move: is this an absolute power play? You know your economy is going down anyway, so what do you do? You try to bring the US down with you.
Well, it makes sense because the manufacturing sector in the US is absolutely critical. Look what happens when the dollar starts to go higher: exports start to go down.
Let's take a look at this chart of the nominal broad US dollar index in red against exports of goods and services going out of the United States in blue on a year-over-year rate of change. What you can see here is that right around late 2008 into 2009, the dollar tears higher. What happens? Exports fall.
But even outside of a financial crisis, you can see in 2014 the dollar starts to rally into about 2017. What happens? At least going into 2016, you see exports contract and go negative as that blue line falls below the horizontal black line.
How about around 2018? The dollar starts to pick up speed, export growth starts to slow, and eventually contracts just as we're heading into the pandemic. Look what now. You can see why the Trump administration is going to be worried about the strong dollar because it's headed up again.
What that means is exports are likely to head down, and that's a huge problem. Because when we talk about the labor market, this is going to have a massive impact on jobs. When you look at the relationship to exports and jobs, when you see continued claims here, what it tells you is as demand for US goods falls, so too does the demand for US workers.
We can look back here now into the late 1980s. We see a slowdown in exports. We don't get a contraction; we just see a slowdown. What happens? It puts workers on the unemployment line.
We move forward now to around 2000. What do we see? Export growth rolls over; it comes plunging down into the dot-com bubble, and next thing you know, workers are on the unemployment line with no hope of finding a job.
Here we see that again going into the global financial crisis. Right around 2009, you see a peak in exports that comes plunging down. Of course, the US workforce is on the unemployment line, with no hopes of getting a job until things turn around.
Look what's happening now. You can see the bottom, and continued claims match right alongside a big drop in exports. You can tell he is absolutely worried about this. He knows what is coming. The strong dollar is a big issue here; it's not just going to impact exports; it's going to impact jobs.
You take jobs out of the US economy, and it means we're falling into a recession right along with China. So you start to get some perspective here. China could turn around their economy, or they could just take us down with them.
He also emphasized the importance of extending Trump's 2017 tax cuts, some of which expire next year. That's right, at the end of 2025—a cornerstone of the economic agenda the president promised on the campaign trail.
You start to get some perspective on why a lot of people are now afraid. If the tax cuts expire, it means at the end of the year, going into next year, US consumers are not going to have the spending power they do now. We already know that's weak.
Of course, that means less demand for Chinese goods. But what does China care if they bring the US economy down with them? If Congress fails to act, Americans will face the largest tax increase in history: a crushing $4 trillion tax hike.
We must make permanent the 2017 Tax Cuts and Jobs Act and implement new pro-growth policies to reduce the tax burden on American manufacturing, service workers, and seniors.
Now, I want to know what you think: should the tax cuts be made permanent, or should they be allowed to expire? Weigh in the comments below because you can see how high the risks are.
We see Americans facing a big tax increase going into next year. It will all but be certain that the US economy could be in an all-out depression sometime next year. You can see the effects of this as Chinese stocks enter a bear market.
As geopolitical risk mounts, this is something we told our subscribers. We saw some flags on our reports to invest in China. Nope, do not do this; it's not a good time. Sure enough, now you see their stock market is entering a bear market, and that is a dangerous sign.
Because the US market—nobody thinks it can happen. Everyone thinks the stocks are only going to go up under Trump's second term. But wait till you see this chart I've got for you because what's going on in China reflects numerous uncertainties: the weakening macro numbers, Trump's inauguration, currency pressure due to US dollar strength, and a lull in stimulus until the two sessions.
I think fast money might stay away in the first quarter. Well, undoubtedly, they're going to wait for things to be clear, especially Trump's tariffs. So Trump comes out and puts tariffs on China on top of the fact that they're heading into recession, their currency is crashing, money's leaving their country, and the banking system is facing a liquidity crisis.
You can all but guess that their stock market is going to outright crash. But again, this is all about a move potentially by President Xi Jinping to bring down the US economy with him.
Because he knows if you drive the dollar higher, exports are going to go down, demand for workers in the US is going to go down, and what happens? That means the stock market's going to fall with it.
Here you can see the NASDAQ 100 in blue overlaid against continued unemployment claims in red. You can see as continued claims rise, people aren't buying stocks. In fact, they turn into net sellers to pay their bills.
With people loaded up in debt right now, this is a dangerous situation. You see going back to 2000, the market comes crumbling down. It happens again going into the global financial crisis. This time, we started to see stocks come down as continued claims rise.
Then people said, "Nope, this isn't going to happen." The stock market took off. The risk now is if continued claims head higher and China gets their way, it could plunge the US economy into an outright recession, perhaps even another financial crisis.
When we talk about the uncertainty of what's going on in the US banking system, particularly in the small to midsize banks, I'd love to know what you think. Again, is this a move by China an act of desperation, or is it a move to undermine Trump's second term and plunge us into a recession?
I'd love to know; weigh in the comments below. With that, I'm Steve Van Meter. Thanks for watching, and thanks for being fans. Bye now.