We often think of liquidation events exclusively in terms of price, but in the real economy there is volume to consider. When financing dries up as financial agents run for cover lest they receive only further margin or collateral calls, it enacts a short run disruption in economic flow. At the margins, some firms are forced to delay activity while others are can only give up altogether. It is difficult to figure how much in any liquidation is temporary and how much ends up as a permanent reduction.
The dramatic events of January and February all across the globe undoubtedly created just this kind of mix. As it ended around February 11, there was going to be some bounce back in economic terms as funding began to flow again, allowing delayed projects and activity to restart. Because of that, it wasn’t surprising to see certain economic accounts and factors seemingly improve especially in March. That did not mean anything other than the end of the liquidation crunch, as the baseline decay remains in place and, as we are finding out again, was only amplified by further reduced capacity during the liquidations – those projects and activity that will never be restarted.
As usual, this global process is most evident in China. Despite a burst of optimism especially in March statistics, the temporary part of the liquidation rebound is increasingly within view. Industrial production had jumped to 6.8% from a multi-year low of 5.4% in the January-February holiday combination and brought with it the usual “it’s all over” commentary. Instead, IP dropped back to just 6.0% in April which, like exports, suggests only what I propose above; a (very) brief respite only because the “dollar” hasn’t been as obviously stifling as it was to start 2016.
The same trend was recorded in Chinese retail sales, as well, which is perhaps a bigger blow to March’s hopeful sentiment. Even economists have started to admit China’s industrial “miracle” may never be resumed so they have turned in near desperation to the idea of a “consumer driven” economy as if there is some plan being carried out to replace the manufacturing/export orientation of the rising euro/dollar period. This wishful thinking gained traction only because retail sales have decelerated at a lag to industrial production.
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