<p>The news of the week is NOT the Fed cutting 50 bps - yes sure, that’s important but there is something much more relevant going on.</p><p><strong>The Chinese economy keeps imploding from within.</strong><br />And we should pay attention.</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F00a8b1d5-187c-451b-9c0a-066c06f890d9_717x523.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="523" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F00a8b1d5-187c-451b-9c0a-066c06f890d9_717x523.png" width="717" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p><strong>The Property Price Index for Chinese tier-1 cities keeps making new lows</strong>, and it’s now approaching levels last seen 8 years ago!</p><p>At this point you might ask yourself: well, is it so bad if house prices drop a bit?</p><p>In standard circumstances I’d tell you this is not a disaster.<br />But for Chinese people, things are different:</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F75573556-0687-459c-b5a5-274944890153_633x529.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="529" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F75573556-0687-459c-b5a5-274944890153_633x529.png" width="633" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p><strong>Chinese households hold 60%+ of their wealth in Chinese properties.</strong><br />This is way higher than in the US, where households only hold 23% of their wealth in properties while the majority sits in the stock market or retirement plans.</p><p>Now imagine if your stock portfolio dropped back to 2016 levels.<br />How would you feel about it?<br />That’s how Chinese households are feeling!</p><p><strong>But why is China imploding this fast?</strong><br />It’s because Xi Jinping wants to engineer a new ‘‘common prosperity’’ economic model which relies less on leverage, tech bubbles, bridges in the middle of nowhere and frothy house prices and more on internal consumption.</p><p><strong>The problem is that when you deleverage a 50 trillion (!) worth real estate market</strong> inflated with absurd levels of leverage…well, that’s not an easy task to achieve.</p><p>China is cutting interest rates aggressively to try and limit the slowdown: <strong>Chinese 10-year interest rates just dropped below 2% for the first time..ever?</strong></p><p>Yet cutting interest rates while the real estate market is deleveraging won’t help much.<br />Ask Japanese people in the 1990s for reference:</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe9fca773-2a9e-428a-9b94-4375a6f9a28c_1053x663.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="663" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe9fca773-2a9e-428a-9b94-4375a6f9a28c_1053x663.png" width="1053" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>China keeps imploding from within and this matters for the rest of the world.<br />For example, <strong>China is the number 1 trade partner for many countries</strong> and for specific jurisdictions it represents a very large importer for the commodities they produce.</p><p>See Brazil for instance:</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe70641f3-6fe4-4340-975c-c629dbc4e4eb_879x630.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="630" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe70641f3-6fe4-4340-975c-c629dbc4e4eb_879x630.png" width="879" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Everybody is talking about the Fed.<br /><strong>But the real macro mover to watch here is China.</strong></p><p>Keep it on your radar!</p><p>And of course - who am I not to spend a few words on the Fed as well.</p><p><strong>This week's 50 bps cut was initially celebrated by markets</strong>: after all, if the Fed proceeds with such a sizable cut what's not to celebrate?</p><p>The problem with such a simple narrative is that the Fed's monetary policy needs to be measured against the underlying growth conditions.<br />Fed Funds at 4.75% can be:<br /><br />- Still loose: if the US economy is running ultra-hot<br />- Still tight: if the US economy is rapidly weakening<br /><br />In other words: <strong>the monetary policy looseness/tightness needs to be measured taking into consideration the ongoing economic conditions.</strong></p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe2140912-5c46-4bca-a3ba-ffd991cbe789_1200x714.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="714" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe2140912-5c46-4bca-a3ba-ffd991cbe789_1200x714.png" width="1200" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>The chart above does just that, and it compares Fed Funds (orange) with the underlying trend of US nominal growth (blue).<br />The US nominal growth proxy is built using core PCE - the Fed's official target for inflation - and the NBER gauge for US real economic growth.</p><p>Why the NBER gauge and not real GDP?<br />Because the NBER is the body that ultimately determines whether the US is in a recession, and they do so using a broad basket of 7 indicators tracking every sector of the US economy (from consumers to industrial production to the labor market).<br /><br />The outcome of this analysis is straightforward.</p><p><strong>There is nothing to celebrate.<br />The Fed's policy is still dangerously tight.</strong></p><p>As you can see, it only rarely happens that Fed Funds (orange) sit close or even above US nominal growth (blue) for a prolonged period of time.<br />And when that happens, it's never good news for the economy.<br /><br /><strong>The Fed needs to do more.<br />Or it risks falling further behind the curve.</strong></p><h4>And now, some big news - adding even more value for you…<br />FOR FREE!</h4><p>If you enjoyed this piece, you should know <strong>I launched a YouTube channel</strong> for my weekly show <strong>The Macro Trading Floor with Brent Donnelly.</strong><br />Every week we discuss a ton of macro with supporting charts, trade ideas, and trading/risk management education.</p><p><strong>Click below</strong> to watch our first video which just went online: </p><p class="button-wrapper"><a class="button primary" href="https://www.youtube.com/watch?v=o1iDoADS0c4"><span>WATCH THE VIDEO</span></a></p><p>I appreciate you!<br />Please share this post with a friend/colleague if you want to support my work</p><p class="button-wrapper"><a class="button primary" href="https://themacrocompass.substack.com/p/china-is-imploding?utm_source=substack&utm_medium=email&utm_content=share&action=share"><span>Share</span></a></p><p>Enjoy the weekend, and don’t drink cappuccino after 11am.</p>