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China and Greece Signal a New Round of Deflation

Stocks rallied today because the Fed meets today and tomorrow and traders are conditioned to play for a rally into Fed meetings. Also, stocks had fallen for four days straight prior to this and so we were oversold in the near-term.

The larger picture concerns the bursting of China’s stock bubble as well as the ongoing 3rd Greek bailout drama.

Regarding China, anyone who actually bothered performing real analysis could have seen that the economic data coming out of that country was totally bogus. Indeed, back in 2007, current First Vice Premiere of China, Li Keqiang, admitted to the US ambassador to China that ALL Chinese data, outside of electricity consumption, railroad cargo, and bank lending is for “reference only.”

With that in mind, China’s rail volumes had been collapsing at a pace not seen since the Asia Financial Crisis!

 

Despite this, 99% of analysts believed China’s GDP was growing at 7%+. Those people piled into Chinese stocks and commodities… and they’ve since been eviscerated as the Chinese stock bubble burst and commodity prices plunged to 13-year lows.

 

China has been the largest driver of global economic growth since 2009. With that country flirting with outright deflation, it's only a matter of time before global GDP tanks.

As for Greece… the negotiations regarding a third bailout have officially begun. However, things have grown more complicated as former Greek Finance Minister Yanis Varoufakis revealed that Greece had a “Plan B” in place that would allow it to switch from the Euro to the Drachma “at the flip of a switch.”

Germany was already fed up with Greece’s debt problems before this. Now that it’s clear Greece is ready to pull the nuclear option and leave the Euro, Germany’s economic council has backed a plan to kick out “uncooperative” Eurozone members.

When both sides in a negotiation begin to believe that not agreeing is the best solution, it’s only a matter of time before things break down in a serious fashion. This is why for many investment banks, a Grexit remains the “base case” scenario for this situation.

At the end of the day, both China and Greece are signaling that a new round of deflation has begun in the markets. Stocks are bouncing today, but a tectonic shift has begun.

It is now clear that Central Banks have lost control of some markets… and this loss of control will be spreading in the coming months, culminating in a market Crash that will make 2008 look like a picnic.

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