When one reviews the headlines on China’s fourth quarter 2011 GDP growth estimate (8.9% y/y) and the full-year 2011 estimate (9.2%), it is hard to know whether China’s economy has slowed or accelerated or if it is good news or bad news. In the end, it does not seem to matter since investors are in a mood to see, hear and speak no bad news. Either the economy did not slow, or if it slowed, it did not slow so much as the consensus expected or if it slowed, the government would ease monetary policy. So, the market was determined only to see good news in the report. It forces investors to take risks and construct arguments to justify those risks. China growth numbers were an excuse for commodity currencies to do well. South African rand reached a six-month high. That currency was a rank underperformer in 2011. On its part, the Australian dollar, after attempting to break down for a few days, soared high. AUDUSD is near 1.04 at the time of this note being written.
The European sovereign downgrades do not matter. The German GDP contraction does not matter but the German economists’ opinion that the economy is doing not so poorly as thought matters. The downgrade of the European Financial Stability Fund does not matter. That the financial sector is on life support system from the central banks does not matter. That the European Central Bank, under Mr. Draghi, is all set to match or beat America in money printing with dire consequences for global inflation and social stability does not matter. That Greece is virtually technically in default does not matter.
As my friend Jim Walker points out,
the numbers just totally defy logic, as do the expectations of the markets for what China will do next in policy terms. More. The numbers defy the ongoing collapse in transactions in the property sector. They defy the drop in fourth quarter PMI readings below the 50 boom-bust line. They defy the anecdotal evidence of severe SME pain that has been accumulating for months. They defy a slowdown in exports and a fall in the trade balance. They defy a deceleration in money supply and official credit growth. They defy the fact that local governments and the Railways Ministry have been forced to slow or abandon many projects. And most importantly they defy the downgrades and reports of slowing profitability in the corporate sector
No one wants to find out if the emperor has clothes or not. They are not interested. The emperor would, of course, never admit that he is naked, in any case. Yesterday’s numbers were proof of that.
Such is the power of liquidity and zero interest rates to fool most of the people most of the time. This can only end in one way – in tears.