The Doom Loop Is Coming
When I started in this biz over 20 years ago, it was called a negative feedback cycle. A negative feedback cycle starts with some event or scenario that makes people pull back on spending.
Maybe a staple like gasoline spikes in price and people have to spend less in other areas. Or maybe people own too much of an asset that suddenly drops in price...
Companies tend to react pretty quickly when demand (spending) drops. They will lay people off in order to maintain quarterly profit goals. Laid off people spend less, so demand falls a bit more. More people get laid off, spending and demand fall more, and there you have it: the negative feedback loop.
Like so many other solid, time-tested phrases, "negative feedback loop" just isn't good enough anymore. Maybe it comes across as too academic, too sterile to really capture the human suffering side of the business cycle. Maybe it just doesn't instill the right degree of hysteria and panic to trigger the Facebook and Google algorithms that send an article viral...
That's probably why Bloomberg just coined the phrase "doom loop" (trademarked, patent pending, do not use without express written permission).
Yet another sparkling example of the Twitter-fication of how we communicate.
Ah, the days of the boom/bust cycle are gone. We'll never again tighten our belts as a country and ride out an economic downturn. One foul-up, and we all go straight to hell for an eternity of torment.
I am a firm believer that language is a significant determiner of experience. That is, the way we talk about events, the words we use to describe the world around us, pretty much determines how we experience the world.
(That's why no on likes hanging out with complainers. Most of us are fairly optimistic. We enjoy the world we live in. But when you're with someone who complains about everything, it'll wear you down. It's like you're living in different worlds.)
Now that 5 billion humans have a soapbox (Facebook, Twitter), it's probably inevitable that we use more and more inflammatory language just so we can be heard. You may or may not click on an article about a "negative feedback loop." But DOOM LOOP???? Holy shit, you better click on that or you might be dead by lunchtime...
Take a Deep Breath
So. This doom loop that Bloomberg speaks of. Apparently there are five, if Bloomberg is to be believed. The Five Doom Loops of the Apocalypse. There's the Hedging Doom Loop, where everyone has either bought or sold so many put options that we all go bust and end up in hell for an eternity of torment.
Then there's the Collateral Doom Loop, where asset values fall so far they trigger margin calls, which trigger more selling, which triggers more margin calls and eventually formal invitations to us all to report to hell for an eternity of torment (written on very fine stationary, because the Prince of Darkness has a keen sense of irony).
To round out the five, there are doom loops for Sovereign Debt, for Intermediary, and for the Real Economy.
Now, none of these are new. They've all existed to some degree for centuries. But why only five? I see a really good doom loop that Bloomberg basically ignores...
The China Meltdown Doom Loop
Ever since stocks started selling off in October, we've been looking for the reason. Trade war? Interest rates? Yield curve? Inflation? Debt?
Here's a table I came across that I think is damn interesting:
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This table tracks China's consumption tax revenue for 2018. China's central bank was cutting interest rates in summer, and you can see how tax revenue was trending higher. Rate cuts ended in August. And tax revenue fell off a cliff in October (China tightened some loan reserve requirements, leading to less lending).
The U.S. stock market reacted immediately. As it should. Because like it or not, China is our engine for growth. Ask Ford where it gets growth from. China. Same for Starbucks and Apple. And on down the line...
If the Chinese consumer is spending, U.S. companies and the economy benefit. If they aren't, well, check a chart of the S&P 500 starting in October.
If you wanna flip out, then definitely call this the China Doom Loop. If you wanna look at it objectively, here are a couple tips.
One, it takes six months to a year for interest rate adjustments to really kick in. China stopped cutting rates in August. It will be six months in February.
Two, China has already relaxed some loan reserve requirements, which means more lending and more spending.
Three, an income tax cut for China's middle class went into effect yesterday.
Four, trade war negotiations start on January 7 (and the wingnuts Navarro and Lighthizer are reportedly not part of the U.S. delegation).
Clearly, #4 has the biggest impact on sentiment. And China has actually taken a number of pretty big steps over the last couple months. They've ditched some tariffs on cars and have introduced rules to end the intellectual property sharing requirements for U.S. companies that do business in China.
The one to watch for is rules that allow foreign banks to invest in Chinese banks. I don't know if that's actually on the table right now. But I hear it's been discussed, and it would be a huge step forward for the global economy.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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