Recession Prediction: The Reason Behind the Scare

Posted On June 26, 2018 1:11 pm

Equity markets around the world are showing the ramifications of the growing possibility of an all-out trade war. As a result, we’re going to look at a recession prediction that explains these global implications.

Emerging economies had already suffered from contraction, and major indexes in China and Germany recently hit a 20% decline, signifying a bear market.

A recent report from Nomura via Zero Hedge explains The Real Reason Behind the Global Growth Scare:

When discussing how the current market has changed in the past year, Morgan Stanley’s cross-asset strategist Andrew Sheets said yesterday that one of the things that stood out to him at recent meetings with clients and conferences is that “China is rarely mentioned as a growth concern (after causing angst for much of this period).”

This could be a significant error in light of the PBOC’s recent confirmation – by way of Sunday’s latest RRR cut – that the Chinese economy has major problems, above and beyond the woeful performance of Chinese stocks in recent weeks, the blow out in Chinese bond yields for riskier companies, the surprising spike in corporate defaults, the record high and growing leverage and overall economic slowdown.

To be sure, much of China’s recent weakness has its genesis in what we noted earlier in the month, namely the sharp slowdown in China’s credit creation, as a result of the ongoing crackdown on shadow credit creation.


In other words, it’s all about China’s credit impulse, once again.

As a reminder, two weeks ago we noted once again that according to most flow-tracking economists (and not their conventionally-trained peers) when one strips away the noise, there are just two things that matter for the global economy and asset prices: central bank liquidity injections, and Chinese credit creationThis is shown in the Citi charts below.

The biggest problem, of course, is that both are set to decelerate.

 Related: These 3 Options Tools Can Double Your Money! 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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