The Worst Bear Market on Earth

Who has it worse?... The world's worst bear market... The Chinese government cries uncle... A big interest-rate cut... Recessions in the U.K. and Japan... Central bankers are all the same eventually... Greg Diamond on Nvidia and more...

Since they stopped reporting the numbers...

I (Corey McLaughlin) am going to presume that China's youth-unemployment rate is still above 20%, which is what it was last June. That's when the country's communist government stopped reporting the ugly numbers, a clear sign of an economy in distress...

Since then, the world's second-largest economy has continued to go through its share of struggles following its extended pandemic lockdowns.

Foreign investment from Western financial institutions has decreased... Once-mighty real estate developers still can't fill "ghost towns"... And as we wrote in December, the Chinese economy has been seeing widespread deflation for years as measured by its consumer price index ("CPI")...

Since the start of 2020, China has seen 4.7% deflation, based on CPI data. It's the only country in the world where deflation is occurring, and the trend is ongoing.

A few months later, it's the same story. China's CPI in January rose 0.3% versus December, but it was down 0.8% versus a year ago. That might sound good for people with a budget, but for a system reliant on fiat currency and central bankers, deflation is the most feared of the 'flations.

Take China's producer price index ("PPI"), for example. This index reflects costs taken on by businesses, and indirectly is a sign of profit potential. It has been showing annualized deflation for 16 straight months dating to September 2022.

This is all recessionary and possibly depressionary...

As I wrote in December, in an understatement...

Deflation is typically "bad news" for stocks in general as lower prices begin and then persist in an economy. It's what happened for seven consecutive years leading up to what became known as The Great Depression.

And it happened in a handful of other more narrow periods in the 1940s and '50s, and then in the Great Recession 15 years ago.

As Stansberry Research senior analyst Brett Eversole wrote in the latest issue of the True Wealth newsletter, stocks sure have been behaving like investors are depressed...

The overall Chinese stock market is down nearly 60% over the past three years. And the technology sector is down around 75%. Take a look...

Going back even a little further, since 2019, Chinese stocks have returned just 10%. For comparison, U.S. stocks have returned 88% in the same period.

And since Chinese PPI deflation began 16 months ago, the Shanghai Composite Index is essentially flat and has been trending down... toward the key multiyear low from March 2020 when the pandemic took off.

Despite all this, China's economy allegedly grew by 5% in 2023... if you take the Chinese data with no grains of salt. But the government admitted that real estate activity and investment were down by around 10% late into the year.

And we hadn't seen an emphatic "rescue" policy response out of the Chinese government to stem what Brett describes as the worst bear market on the planet. We so often see government interventions here in the U.S. and other nations... And they can boost stock prices.

Finally, the government in Beijing looks like it's crying uncle...

On Tuesday morning in China, the People's Bank of China announced it was cutting its key five-year interest rate – the peg for most mortgages – by 25 basis points to 3.95%. That may not sound like a lot, but consensus expectations were for a 5- or 10-basis-point cut.

It's the first time China's central bank has cut the benchmark five-year rate since June. (It left alone the one-year rate – which most Chinese household and corporate loans are tied to – at 3.45%, however.) And this could be just the start of "easier" monetary policy...

Yesterday, the Chinese premier called for "pragmatic and forceful" action to boost the nation's confidence in the economy. To that report, our Asia-based analyst Brian Tycangco wrote on X (formerly Twitter)...

Yes, that's exactly what China needs at this point. Do more things conducive to boosting confidence and expectations. Admitting the problem is the first step to finding a solution. I'm interested in knowing what Beijing's growth targets are for 2024. Could give us a picture of what measures can be expected.

We won't hold our breath on seeing that picture, but it would be nice to know those numbers (and youth unemployment, too).

Maybe you think this is all half a world away and it doesn't matter to your portfolio... But what happens in China is linked to and perhaps can reflect trends in much of the rest of the global economy, certainly the leading economies.

As history tells us, there's also a good argument to be made that a struggling economy can fuel internal unrest and perhaps fan the flames of war from those in power. (Here's looking at Chinese officials, looking at Taiwan.)

But get your poles out for 'bottom fishing'...

If you are at all interested in Chinese investments – and I know from hearing from many of you over the years that you might not be for various reasons... that's fine – right now is a time to pay attention...

China's government is signaling that more stimulus measures might come. It's also making notable leadership moves in the financial sector. As Brett explained in True Wealth last week...

One of the biggest steps happened last week, when China replaced the head of the China Securities Regulatory Commission ("CSRC"). The organization is effectively China's version of the U.S. Securities and Exchange Commission ("SEC").

The last CSRC chairman took over in 2019, just before the regulatory crackdown began. His successor – Wu Qing – has a history of aggressive regulation as well. But it's telling that the former chairman was removed during a market plunge. Most view the switch as Beijing acknowledging that it has been too aggressive and is shifting toward a less antagonistic stance.

The second move from Beijing happened last summer. More than two years after the death of Ant Group's IPO, the government ended its campaign against the company by fining it 7.1 billion yuan. Industry experts see this as Beijing bringing its crackdown on tech to a close.

Regulators announced that "most of the prominent problems in the financial business of technology giants have been rectified."

This is a critical turning point, according to Brett. He said things simply can't get much worse from here in China, which makes for an opportunity to act. As he shared in True Wealth...

Chinese stocks have been crashing. Tensions with the U.S. have been rising. Practically everyone hates the idea of putting money to work in this part of the world. But as far as I'm concerned...

We're watching a "blood in the streets" moment for Chinese stocks right now.

You've almost certainly heard the famous quote, "The time to buy is when there's blood in the streets." It means that just when things seem like they can't get worse, they stop getting worse... And that's when you want to put money to work.

In the latest issue of True Wealth, Brett details much more about recent developments in the Chinese economy and stocks. And he recommends a "one click" investment opportunity that limits downside and offers a seemingly unbelievable 46% dividend.

That's not a typo. Existing True Wealth subscribers and Stansberry Alliance members can find the full issue here with the tailwinds Brett sees in China... the risks involved... and also where else he suggests being invested now.

Recession watch and reality...

Last week, the U.K. and Japanese governments reported GDP data confirming ongoing recessions, with two straight quarters of declining growth...

Curiously, the global and U.S. financial media was quick to report on the idea that these nations were in a recession based on the conventional definition. But when the U.S. experienced six months of declining growth at the start of 2022, the definition somehow didn't apply.

Anyway, much like in China, monetary policymakers in the U.K. are already signaling that they're ready to step in for a rescue, even if it means allowing higher inflation.

Just today, Bank of England head Andrew Bailey in talking to the U.K. parliament put a positive spin on the U.K. economy, which grew by a measly 0.5% in 2023. But he also signaled that interest-rate cuts could be ahead even if inflation doesn't get to a 2% target. Bailey said...

We don't need inflation to come back to target before we cut interest rates, I must be very clear on that, that's not necessary.

Japan is, for now, considering going the other way, as it continues to weigh higher inflation risks, its current negative-interest-rate policy, a currency that's depreciating against the dollar, and now recession.

So far, the Fed here in the U.S. has been publicly more resolute about fighting inflation. But if signs of recession emerge in the U.S., I'm willing to bet Federal Reserve Chair Jerome Powell will act materially similar to Andrew Bailey and the People's Bank of China.

After all, deflation scares central bankers more than inflation...

As I wrote in December, in the U.S., the rare deflationary times got scary enough for central bankers that they tended to make moves to reverse the trend. Whether it's through cutting interest rates or employing whatever newfangled money-printing or stimulus plan they could come up with, they'll do something.

This appears to be what central bankers around the world are on track to do today.

Alternatively, the pace of inflation could just keep running higher, like it has the past few months in the U.S. In that case, interest rates could stay higher for longer... which comes with its own set of challenges.

As I wrote earlier this month, when talking about Powell and the Fed's messaging that rate cuts are coming, it's just a matter of the timing...

If everything is going so great with the [U.S.] economy, you might be wondering why the Fed doesn't just keep rates where they are instead of cutting them.

This might be part of your answer... Consider the nearly $9 trillion in government debt (of $34 trillion total) that will mature over the next year. Corporate debt, topping $13 trillion, and consumer debt levels are part of the calculus, too, as are unrealized losses in bonds (prices trade inversely to yields) that banks are sitting on since rates went from near zero to above 5%.

Add it all up and Powell is interested in lowering debt costs at some point this year.

Either way, the value of the U.S. dollar is likely to continue to be among the biggest losers in the long run.

For much more detail on this part of the story, I suggest you check out a new, thought-provoking presentation that Dan Ferris recently sat down to record on camera.

To start things off, Dan makes a bold prediction about November's presidential election... then he delves into financial history as only he can... turns his analysis on the current state of the economy... and explains why we could see another banking crisis soon.

Be sure to check it out here for free... Stansberry Alliance members and Dan's subscribers have access to these ideas already, but it still might be worth your time to hear his fresh thoughts on camera.

New 52-week highs (as of 2/16/24): ABB (ABBNY), AbbVie (ABBV), Applied Materials (AMAT), American Express (AXP), Berkshire Hathaway (BRK-B), Diamondback Energy (FANG), GEO Group (GEO), Intercontinental Exchange (ICE), Linde (LIN), Eli Lilly (LLY), Novo Nordisk (NVO), Repligen (RGEN), Sprouts Farmers Market (SFM), Sprott (SII), Spotify Technology (SPOT), TFI International (TFII), Viper Energy (VNOM), Waste Management (WM), Walmart (WMT), and Health Care Select Sector SPDR Fund (XLV).

We hope you enjoyed the long weekend. In today's mailbag, feedback on Dan Ferris' Friday Digest, which focused on "mega-bubble valuations" in the market today... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan: Your Friday column warning of overvaluation and Chauncey Gardiner investing resonates with me. Every week I see the lengthening 52-week high list at the bottom of the report and it scares the hell out of me." – Subscriber Larry B.

"Dan, Great analogy. Thank you. I fear that too many analysts tend to quickly brush off the risk and reward of market peaks and valleys. Thank you, Greg, Doc, and Porter for not doing so. Courageous...

"Like many followers, I indeed believe in well diversified high-quality portfolios. I believe the secret to wealth is 'don't lose money... (repeat) don't lose money'. And the secret to this rule is all about market 'extremes' and diversified investing. This even includes taking some profits from high flyers and buying back in on a 'correction', but certainly includes income and inflation (in commodities) strategies.

"Thanks again. Great article. Great advice." – Stansberry Alliance member Bill B.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 20, 2024