00:00:00
industrial profits in China have fallen
00:00:02
to maybe their worst on record for 2024
00:00:06
when what was supposed to have been a
00:00:08
turnaround success story especially
00:00:10
where it came to government stimulus
00:00:13
programs but that's not that's just
00:00:14
where it begins China's banking crisis
00:00:17
and real estate crisis has flared up
00:00:18
once again with one of its major
00:00:21
developers threatening to run out of
00:00:23
money against all of that we have
00:00:26
markets across the entire Global complex
00:00:28
that are suggesting these big problems
00:00:31
in China are already spilling over
00:00:33
outside of its borders iron prices way
00:00:36
down the Baltic dry the index for
00:00:39
shipping dry goods and raw materials
00:00:41
around the planet that one has plunged
00:00:44
even though it's normally weak in this
00:00:46
part of the year for winter it is more
00:00:48
weak this year than certainly last year
00:00:50
the Baltic Drive being less than half of
00:00:52
its rate from December of
00:00:55
2023 and against that
00:00:57
backdrop Chinese president xiin says the
00:01:00
country there is in for what he quot
00:01:03
said quote was a very arduous reform
00:01:07
which means that there's more pain ahead
00:01:10
though he did Pat himself and the rest
00:01:12
of the government on the back be by
00:01:14
saying that everything in 2024 went
00:01:18
smoothly at least according to the CCP
00:01:21
so next year is supposed to be really
00:01:23
bad the you shouldn't worry because the
00:01:25
Chinese government is on the case well
00:01:29
that's what Market and results in the
00:01:31
economy are saying well they may be on
00:01:33
the case but it's not working out all
00:01:35
that well so Mr Van Meter Steve China I
00:01:39
where do we want to start here because
00:01:41
the macroeconomy is I mean it's been the
00:01:43
same that it's it's been even weaker but
00:01:45
basically the same shape it's been all
00:01:47
along despite stimulus I mean but here
00:01:49
we have the banking system real estate
00:01:52
problem that was that was supposed to
00:01:53
have been the major focus of the
00:01:55
government not just in September but
00:01:57
also going back to May when they had
00:01:59
that historic housing rescue here we
00:02:01
have one of the biggest Chinese
00:02:02
developer that so far has been able to
00:02:05
avoid default now saying very quietly
00:02:08
very just rumors leaking out that we
00:02:10
need to make sure that we have enough
00:02:11
liquidity that we can survive without
00:02:13
defaulting over the next little while so
00:02:16
where do you pick your poison here do
00:02:17
you want to start with the government
00:02:18
the macroeconomy or the banking system
00:02:21
real estate you know Jeff let's talk
00:02:22
about stimulus because you want to talk
00:02:24
about an absolute failure policy China
00:02:27
is just a perfect example and I think
00:02:29
this is interesting because a lot of
00:02:30
people now think okay well if the US
00:02:32
economy slows down it's no problem
00:02:34
stimulus will come and it will work but
00:02:36
let's look at what China did you know
00:02:38
they said we need to inject the banks
00:02:39
with capital to make them lend and not
00:02:42
because they're going to solvent or
00:02:43
there's liquidity issues because we just
00:02:46
need them to have some more Capital to
00:02:48
lend and well what do we find out that
00:02:50
the banks are largely ill liquid they
00:02:52
went to the real estate developers and
00:02:53
said look we're we're going to give you
00:02:56
bunch of cheap loans for the banks and
00:02:57
that's going to help out well as you
00:02:59
just mentioned mention that didn't
00:03:00
really do anything either and then they
00:03:03
went to the consumer who they really
00:03:04
said was the problem and they gave them
00:03:07
just a little bit said hey you know what
00:03:08
we're going to give you some money to
00:03:09
upgrade your home appliances and your
00:03:11
cars and then what happened that
00:03:13
actually worked but just briefly at the
00:03:16
sacrifice of other demand plunging so
00:03:19
you look at what happened in China and
00:03:21
they had this you know the desperate
00:03:23
need for some sort of stimulus and Jeff
00:03:25
it it didn't do anything in fact maybe
00:03:27
it kicked the can down maybe a couple
00:03:29
months
00:03:31
yeah I think it's even worse than that
00:03:32
Steve because you know when you get into
00:03:34
major government interference it really
00:03:36
is interference it's basically a
00:03:38
distortion as you said they wanted to
00:03:40
stimulate consumer spending get retail
00:03:42
sales up because retail sales have been
00:03:43
the lagger there for the entire decade
00:03:45
of the 2020 so far consumers refuse to
00:03:48
spend and it's pretty obvious why they
00:03:51
won't because most of their wealth is
00:03:52
tied up in the real estate sector and if
00:03:55
you are absolutely no faith in housing
00:03:57
prices stick staying up and you're
00:03:59
worried that hous prices are going to
00:04:00
get worse there might be files fire
00:04:02
sales and liquidations the last thing
00:04:04
you're going to do is go out and just
00:04:05
splurge on everything so the Chinese
00:04:07
government comes along and says let's
00:04:09
give consumers all of these good goodies
00:04:11
and handouts to get them spending and
00:04:14
they did they went like you said Steve
00:04:15
they went and they spent on those things
00:04:17
the government said that we want you to
00:04:18
spend on but they didn't spend more
00:04:21
overall they just redistributed their
00:04:23
spending from one pocket to the other
00:04:25
which means that the Chinese government
00:04:27
essentially transferred the spending
00:04:29
problem from one one place and made it
00:04:30
worse in another place which is I mean
00:04:33
but that's the effect of stimulus and
00:04:35
not just in terms of of of this one cons
00:04:37
this consumer program is that government
00:04:39
stimulus at its best maybe creates a
00:04:42
short run impact but even then it's a
00:04:44
distortion and it's an artificial
00:04:46
imposition that ends up making it making
00:04:49
the situation wor more harm than good
00:04:53
but see this comes right back to
00:04:54
Industrial profits you know we talk
00:04:56
about the Chinese consumer but what's
00:04:57
going on in China is no different than
00:04:59
the European consumer the American
00:05:01
Consumer everybody is spending less but
00:05:04
why is that it's about the labor market
00:05:06
they're going to work and what are they
00:05:07
finding out that the fax machine as we
00:05:10
talk about new orders they're not coming
00:05:11
in as much and they're getting a sign
00:05:13
hey there's some backlogs you can work
00:05:15
on that but when they're doing that
00:05:16
they're noticing the pile of backlogs is
00:05:19
going down not up and the new orders
00:05:21
aren't actually enough to sustain the
00:05:23
workforce so what Chinese consumers are
00:05:26
feeling which is what we're seeing all
00:05:27
around the world is a lack of man and so
00:05:30
it makes perfect sense yes there's an
00:05:32
aspect of course of the real estate
00:05:33
market and concern about that but if
00:05:36
you're going to work and you're worried
00:05:37
that hey maybe my hours are going to get
00:05:39
cut or maybe I'm gonna lose my job and
00:05:41
if I do well my friends have lost their
00:05:43
job they haven't found another one then
00:05:45
natural thing you're going to do is cut
00:05:47
your spending it makes perfect sense and
00:05:49
all of a sudden that's just back feeding
00:05:51
into industrial profits which is just a
00:05:53
response by the fact that retail sales
00:05:55
aren't growing yeah I think that's
00:05:58
really the China is is not just a victim
00:06:00
of its own internal issues right because
00:06:03
that's that's part of it China has its
00:06:05
own real estate problem which is itself
00:06:07
born from the LA that the fact that
00:06:09
there has been no Global demand over the
00:06:11
last 15 years that's where China built
00:06:13
this real estate bubble trying to uh
00:06:16
trying to do something about the fact
00:06:17
that Global external demand just
00:06:19
disappeared after 2008 and never came
00:06:21
back they were all expecting it to come
00:06:23
back and it just never did so now they
00:06:24
have this real estate bubble but none of
00:06:26
the growth That was supposed to have
00:06:28
been there but really that's there's the
00:06:30
internal problem in China that's a big
00:06:33
issue for the Chinese certainly but
00:06:34
there's also this external problem that
00:06:36
has has apparently gotten really a lot
00:06:38
worse because as you mentioned Steve
00:06:41
industrial profits that's almost
00:06:43
entirely a reflection of China's ability
00:06:47
to make stuff and sell it elsewhere with
00:06:49
industrial profits falling as sharply as
00:06:52
they have and I'll go over the the
00:06:53
numbers in just a second here with
00:06:55
industrial profits falling as sharply as
00:06:57
they have what that says is that the
00:06:59
Chinese want they very much want to sell
00:07:02
anything they possibly can to the United
00:07:04
States to Japan and South Korea and
00:07:07
Africa in Europe and everywhere else
00:07:09
around the world but they're
00:07:11
encountering resistance and I don't mean
00:07:13
trade Wars I don't mean tariffs they're
00:07:15
encountering a lack of demand and so now
00:07:18
they have to cut their prices which are
00:07:20
already low to begin with that's the
00:07:22
reason why they're able to dump all
00:07:23
these products in the rest of the world
00:07:24
so they have to cut their low prices by
00:07:26
a lot which eats into profits and so the
00:07:29
more the worse industrial profits in
00:07:31
China become the worse you know it is in
00:07:34
terms of global demand because they have
00:07:36
when they have to cut profits this much
00:07:38
it means they're discounting left and
00:07:40
right they're really running the fax
00:07:41
machine backwards trying to get prices
00:07:44
to go even lower just to trying to spark
00:07:46
some demand yeah Jee and when you see
00:07:48
companies profits decline what happens
00:07:51
next well of course we know they're
00:07:52
going to cut expenses Every Which Way
00:07:54
but there's a point where they can't cut
00:07:56
those anymore so what happens it turns
00:07:59
to labor hey we don't need you as much
00:08:01
we're going to cut some hours here we're
00:08:03
going to cut some jobs and we know those
00:08:05
jobs don't come back and so what we're
00:08:07
seeing in China is just a reflection of
00:08:09
like you said what's going on all around
00:08:10
the world they're trying to dump their
00:08:12
goods on every major economy but nobody
00:08:16
really wants it because when we look at
00:08:17
the manufacturing sector whether it's in
00:08:19
Japan or Europe the us or anywhere in
00:08:21
the world what do we see the same thing
00:08:24
that's happening in China a lack of
00:08:26
demand production is slowing down
00:08:28
profits are clining and yet nobody has
00:08:31
the answer other than what we're seeing
00:08:33
is consumers all around the world are
00:08:35
Tapped Out yeah the the idea of keeping
00:08:38
up production and dumping the goods as
00:08:40
you point that's the whole point of that
00:08:42
is so that China doesn't have to
00:08:44
experience labor market weakness they're
00:08:46
selling the rest of they're selling
00:08:48
their stuff on the rest of the world so
00:08:49
that they can keep factories running
00:08:51
otherwise they're going to have to do
00:08:53
what Steve said which is they're going
00:08:54
to have to cut back on hours if maybe
00:08:56
even cut cut back on workers they've
00:08:58
already stopped hiring ing there have
00:09:00
been rumors of some labor market unrest
00:09:02
in China of course there's always rumors
00:09:04
but um it's certainly in keeping with
00:09:07
where China's economy is going and the
00:09:09
fact that the vast industrial sector is
00:09:11
experiencing this much trouble so let's
00:09:13
let me just briefly go over the numbers
00:09:15
here the industrial profits these are an
00:09:17
accumulated year-over-year basis for the
00:09:19
year-to-date period January through
00:09:21
November 2024 and they were down 4.7%
00:09:24
compared to the same 11 months in 2023
00:09:27
which doesn't sound like a whole lot
00:09:29
but you have to remember industrial
00:09:31
profits were turning around they were
00:09:33
rising in the first half of this year as
00:09:36
it looked like Global demand was picking
00:09:38
up um China's internal situation may
00:09:40
have been um may have stabilized
00:09:43
compared to where it was at the end of
00:09:45
last year because of last year's
00:09:46
stimulus but it didn't last that long
00:09:49
and by the time we got to Summertime
00:09:50
something big changed in terms of
00:09:52
industrial profits and what you saw was
00:09:54
back in August profits fell by 16.7%
00:09:58
just in that month year-over-year in
00:10:00
August alone which was an enormous
00:10:01
decline followed by September's minus
00:10:04
27% which was one of the biggest on
00:10:07
record and then still further decline in
00:10:09
October 10% and then another 7.3%
00:10:12
decline in November so you've got four
00:10:15
straight months of massive declines that
00:10:17
also coincide with the same four
00:10:19
straight months as Steve pointed out
00:10:21
we're seeing weakness around the rest of
00:10:22
the global economy so it all fits
00:10:24
together China's China's massive uh
00:10:27
massive problems are as much about
00:10:29
what's going on inside as well as
00:10:31
outside you know Jeff and that's really
00:10:33
interesting is you look at the data
00:10:35
showing further contraction and profits
00:10:37
because you think about the timing of
00:10:38
this and we wouldn't expect that you
00:10:40
would normally think hey we're heading
00:10:41
the holiday season you know we would see
00:10:43
the factories start to turn up profits
00:10:45
would grow but we didn't see that at all
00:10:48
in fact there's been all this talk of
00:10:49
front running tariffs so once again you
00:10:51
would think all right the factories are
00:10:53
going to ramp up there's going to be a
00:10:54
bunch of production profits are going to
00:10:56
go up and they're going to get
00:10:57
everything out of there and we know of
00:10:58
course the beginning of the year things
00:11:00
are going to change even naturally we
00:11:02
know particularly us consumers go from
00:11:04
spending to paying down debt we know
00:11:06
demand's likely to fall anyways but you
00:11:09
wouldn't expect at this time of the
00:11:11
year yeah it's it's and so it's why and
00:11:14
that's one of the reasons why you know
00:11:15
we there's so much problems in the
00:11:17
banking sector as well because the
00:11:18
banking sector in China depended upon
00:11:21
largely industrial success so lending to
00:11:24
Industry for to generate profits for the
00:11:26
banking system that they would then use
00:11:28
to offset losses and growing losses in
00:11:31
the developer sector and I do want to
00:11:33
mention that too I saw I said that in
00:11:35
the beginning of this video here that
00:11:38
we're seeing some really alarming signs
00:11:40
from the banks as well as the developers
00:11:42
and here's here's the latest uh a major
00:11:45
Hong Kong Builder is asking lenders to
00:11:47
extend loans another industry's peer is
00:11:50
selling an iconic but largely empty Mall
00:11:52
in Beijing so latest signs of stress are
00:11:55
adding to concerns that the worst is far
00:11:57
from over for the housing sector in the
00:11:59
world's number two economy which was
00:12:01
once a powerful growth engine is now a
00:12:03
big drag on demand for items from
00:12:06
furniture to cars and furniture from
00:12:07
Cars not just inside China and they are
00:12:10
particularly worrying because this is in
00:12:11
terms of China vanes their woses are
00:12:14
showing that the liquidity crisis is
00:12:16
hurting one of the few big builders that
00:12:18
have avoided default thus far the
00:12:20
trouble faced by its Hong Kong peers
00:12:22
Bank Hong Kong peers meanwhile means
00:12:25
that the contagion is increasingly being
00:12:28
felt offshore again demonstrating that
00:12:31
this is not just a China problem but as
00:12:34
China's real estate woes flare up and
00:12:36
largely because of the you know this
00:12:38
this intertwined relationship between
00:12:40
the real estate sector the banking
00:12:42
sector and the real economy not you
00:12:44
can't get one of them going to fix the
00:12:46
others because they're all just failing
00:12:48
together you have this contagion that's
00:12:50
not just about China it actually extends
00:12:52
offshore to Hong Kong which is another
00:12:54
reason why the currency is as weak as it
00:12:56
is it's another reason why it's
00:12:57
contributing to risk aversion Behavior
00:12:59
around the rest of the world because
00:13:01
there's a lot of exposure to what's
00:13:03
happening in China not just inside but
00:13:05
also outside too yeah Jeff and I like
00:13:07
the fact you brought up the banks here
00:13:09
because a lot of people understand the
00:13:10
relationship of how they get involved
00:13:12
and you think about it makes perfect
00:13:13
sense so a developer wants to build a
00:13:16
tower you know and sell homes so they go
00:13:18
to the bank and they borrow money start
00:13:20
building it and eventually sell off the
00:13:22
property same with the manufacturing
00:13:23
sector the fact machine wor you get an
00:13:25
order you say great I don't have the
00:13:27
money to fulfill it I'm going to go to
00:13:28
the bank and can borrow it so how is the
00:13:30
bank going to get paid back well simple
00:13:32
when the homes get sold or when the
00:13:34
goods get sold but the problem is coming
00:13:36
out of the pandemic we went from a
00:13:38
supply and demand switch where there was
00:13:40
more demand there was Supply and now
00:13:43
there's far more Supply than demand and
00:13:45
based on what China's doing of trying to
00:13:47
save their economy by hey let's just
00:13:49
overproduce and dump it on everyone's
00:13:51
door is not g to help at all what we're
00:13:54
going to find out is we're going to see
00:13:55
these massive amounts of inventories all
00:13:57
over the world they're going going to
00:13:59
need to be of course brought down that
00:14:01
means there's going to be disinflation
00:14:03
perhaps even deflation in certain parts
00:14:05
of the economy and banks are going to be
00:14:08
holding these loans wondering if they're
00:14:10
going to get paid the question would be
00:14:12
can they sustain long enough and the
00:14:14
answer is no they can't yeah four
00:14:17
straight months of really bad industrial
00:14:19
profits not just not just a risk for the
00:14:21
China's labor market or those industrial
00:14:23
firms like you said I mean that's it's a
00:14:25
banking matter most of all because the
00:14:27
banks are like you got to believe
00:14:28
there's lot of Bankers in in in Shanghai
00:14:31
sitting there Sweating Bullets because
00:14:32
they're thinking oh boy this is not
00:14:34
going so well and you got to believe
00:14:36
that the Chinese industrial firms
00:14:37
they're not willingly cutting prices and
00:14:39
cutting into their profits like this
00:14:41
they have to when you see a 27% monthly
00:14:43
decline in industrial profits one of the
00:14:45
worst on record that is being forced on
00:14:48
these on these businesses because they
00:14:49
don't have any other choice on the one
00:14:51
side they've got the government saying
00:14:53
get going here we want this stuff to
00:14:55
move we want to keep the factories
00:14:56
humming and on the other side you got
00:14:57
the banker saying hey what are you doing
00:15:00
over there we need to get paid back we
00:15:02
can't afford you to to default on the
00:15:03
loan or even just to change the terms of
00:15:05
the loan so it's it's coming from all
00:15:08
sides including outside of China because
00:15:10
this is really about in terms of
00:15:12
industrial profits it's about the
00:15:13
inability to sell this stuff in the way
00:15:15
they thought so Steve let me ask you
00:15:17
this one final question um what do you
00:15:19
think what were the Chinese thinking
00:15:22
because they thought you know middle of
00:15:23
the year the US economy the European
00:15:25
economy is picking up so let's dump all
00:15:26
our products and then they come back and
00:15:29
say holy crap that didn't work we we
00:15:31
tried to dump our product but there was
00:15:33
no demand so what do you think the
00:15:34
Chinese are thinking about all of that
00:15:37
and Jee I think they're in complete
00:15:38
panic mode and you see it with the banks
00:15:40
because what have they come out and
00:15:41
recently said hey we're gonna we're
00:15:43
going to give the banks some more money
00:15:44
but it's it's just because we want them
00:15:46
to lend it's not because anything else
00:15:48
is going wrong here but no the reality
00:15:50
is the bankers like you said they're
00:15:52
Sweating Bullets they're going to the of
00:15:54
course the politicians who have forced
00:15:56
them to lend and they're saying look uh
00:15:58
we're not not sure that you know these
00:16:00
loans are even going to hold because
00:16:02
well nothing's selling government comes
00:16:04
along and says all right well we'll give
00:16:05
you some money but you know obviously
00:16:07
we're going to cover it up as just
00:16:09
you're going to lend more and of course
00:16:11
the bankers we know they don't want to
00:16:12
lend so what is this telling us Jeff we
00:16:15
know everybody's panicking there because
00:16:17
what is the bond market in China telling
00:16:19
us 10year yields collapsing which is
00:16:21
really fascinating because you're now
00:16:23
seeing in the news you know Chinese bond
00:16:25
yields are crashing because of stimulus
00:16:27
well you look to the US and what do you
00:16:29
see the exact opposite long bond is
00:16:31
going up because the fed's cutting rates
00:16:33
it's like uh no what's going to happen
00:16:35
in the US is the same thing was
00:16:37
happening in China the bond market is
00:16:39
telling us exactly the problems there
00:16:41
they're going to get worse right now we
00:16:43
see of course in the US a lot of money
00:16:45
managers want to be short the long Bond
00:16:47
want to dump the long Bond what we know
00:16:49
eventually what's happening with rates
00:16:51
in China it's going to happen here
00:16:53
because the bond market is ultimately
00:16:55
telling us exactly what's happening all
00:16:57
around the world and that is none of
00:16:59
these policies are working yeah the
00:17:01
Chinese bond market and the yields there
00:17:03
are shockingly synchronized with the
00:17:05
rest of the world and the reason is
00:17:07
because China is such an important part
00:17:08
to it and yeah I think I have to agree
00:17:11
with you Steve I think that bazooka in
00:17:13
September was a lot in response to not
00:17:15
just developments in the financial
00:17:16
markets or the real estate sector but
00:17:19
Banks and Banks saying we've called up
00:17:21
all of our industrial contacts and they
00:17:23
can't sell their goods so what do we do
00:17:26
now and I think Beijing like you like
00:17:28
you said St was just like oh crap what
00:17:30
do we what do we do now and so that
00:17:32
leads us into this whole thing where
00:17:33
China's mess is not really about China
00:17:36
and here we are at the end of
00:17:37
2024 and they're in even worse shape
00:17:40
than they were at the end of 2023 which
00:17:42
wasn't supposed to be possible so
00:17:44
everything that's happened in between
00:17:46
it's the same exact thing we see with
00:17:48
the rising dollar falling bond yields it
00:17:50
is the downside of the supply shock and
00:17:52
it is
00:17:54
unfortunately we're still not near the
00:17:56
bottom
00:17:57
yet for
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