Sell In May And Go Away
The trillion dollar question - are we witnessing the final end to the Artificial Intelligence super bubble?
The balance sheet recession afflicting China right now, is soon to be visited upon the entire rest of the world. What that means is that low interest rates are no longer having any impact on the economy and the housing market. However instead of seeing the similarities between all of these other massively bloated monetary asset bubbles, most Western media pundits assume that it's only a matter of time until Chinese monetary policy begins working.
The global expert on the topic of balance sheet recession doesn't see it that way:
"Once the real estate bubble burst and people realized that they were chasing what I call wrong asset prices, unsustainable asset prices, which was similar in Japan 34 years ago, if people no longer think the price will continue to go up but might actually go down, then you don't want to borrow too much money because your liabilities are high, the asset prices will be going down.
But when that happens on a very large scale, even though individually, people are making the correct decisions, but collectively, the economy could get killed. But once a big nationwide asset price bubble bursts, so many people will be repairing balance sheets by paying down debt, even at zero interest rates, and very few people would be borrowing money...and once you enter that world, the economy could start weakening very, very rapidly"
Richard Koo goes on to say that China's advantage is being aware of this problem and being able to take fiscal action to offset the collapse in consumer demand. Think Tennessee Valley Project circa 1933. Unfortunately, Chinese authorities are following the exact same path as Japanese policy-makers in reacting very slowly and tentatively to this crisis. Why? Because China has been using massive fiscal stimulus for 15 years straight and now they are concerned about the fiscal deficit, the national debt, and the currency. Rightly so.
They are also concerned about adding to the enormous amount of unused infrastructure capacity which is having a hugely deflationary impact on the economy. There are few if any areas of the Chinese economy that actually need MORE investment. So, they are turning to exports, and now the U.S. and Europe are raising tariffs on China. The only thing Trump and Biden agree upon is collapsing China ASAP:
"One day after news broke that President Biden was planning to raise tariffs on Chinese electric vehicles to roughly 100%, Donald Trump moved to one-up his rival for the White House.
“I will put a 200% tax on every car that comes in from those plants”
Getting back to the Keynesian belief that deleveraging must be avoided at all costs, that ideology began in the 1930s and as we see via the first article above, it has grown to become an economist obsession today. Instead of taking the pain of deleveraging and forcing bad companies to shut down, China is repeating the mistakes of Japan by allowing their moribund economy merely to whither slowly and collapse to the zero growth bound where it will remain collapsed indefinitely.
Of course, the entire world is and has made the same mistake, but is merely further behind the curve. Today's media pundits see this latest dead cat bounce in Chinese stocks and assume it's a new bull market and that China is about to "catch up" to the rest of the world. It never once occurs to them that the rest of the world is about to catch down to China. As we see, this 2024 rally is weaker than the 2023 rally that imploded early in the year and then revisited the lows.
Getting back to this massive AI investment mania, what many people don't understand about "AI" is that if it truly is successful, then it will replace a very large amount of jobs. In other words, it won't increase revenue, it will decrease jobs. "And when that happens on a very large scale, even though individually, CEOs are making the correct decisions, collectively, the economy could get killed"
May 24th, 2024:
"Elon Musk, CEO of Tesla, stated that artificial intelligence (AI) will eventually eliminate all jobs, but he believes this is not necessarily a bad development, reported CNN. Speaking at a startup and tech event in Paris on Thursday, Musk said, "Probably none of us will have a job,"
In other words, we either face a Chinese-style deleveraging that is massively deflationary, or best case scenario, these massive AI investments "pay off" and millions of people lose their jobs, which is massively deflationary.
Either way, the bond market has already figured it out.
And perhaps the stock market as well.
