China’s stock market ‘bubble’ was fueled by "speculative mania" which has proven to have had grave implications of the global stock markets. The collapse of this "speculative mania" will have far reaching ramifications on our current global stock markets. This indicates that Central Bank interventions cannot alter market cycles.
Chinese exports have seen their sharpest drop in almost seven years which is adding to concerns of the health of the worlds’ second largest economy. Exports have dropped sharply, by 25.4%, from the previous year, while imports fell 13.8%. This weak data comes on the heels of Beijing registering their ‘ slowest economic growth in 25 years’.
The Chinese stock markets have been the most interesting financial news story occurring in 2015. The worlds’ second largest economy and its’ stock markets were soaring in The Shanghai Stock Exchange Composite Index, (SSEC), which is the equivalent of the U.S. SPX.
These gains were the equivalent of trillions of dollars of wealth for Chinese stock investors. China’s markets are dominated by retail investors. Working class Chinese people account for over 5/6ths of all of the national stock market transactions.
The China’s soaring stock market
Their overwhelming desire and pressure from their peers has led them to aggressively buy stocks. This has gone far beyond normal investing and reached extremes of "herd mentality". The Chinese people who had never before invested in stocks, scrambled to open brokerage accounts. They were in over their heads seeking to establish upward social mobility and financial success.
This was "dumb money" which fueled the popular ‘speculative mania’ in Chinese stocks. The working class people did not have the proper experience nor education of the workings of their financial markets. This HUGE STOCK MARKET crash happening has wiped many peoples finances out. It lured in many ‘novice traders’ who have since quit their jobs, and put all of their lifesavings into the markets in hopes of making themselves rich. However, matters have gone terribly wrong for these investors recently, as they do not understand what they are doing!
They never understood the stock markets and how risky they are. Many of them opened margin accounts so as to borrow money to make it happen!
The margin debt was astounding. They hit a record high of $322B as compared to a record $507B of NYSE margin debt in US stock markets.
Shocked traders, all over the world, believed that Central Banks control market cycles. All of the global Central Banks, with their extreme ‘easing’, has levitated stocks to even higher levels. The fact is, Central Banks can ‘artificially’ inflate stock market prices for only so long.
The major danger signs were pointing towards the rise in margin debt in which we have not seen in recent years. Investors were borrowing tremendous amounts of money in order to fund purchases of stock. We witnessed this during the ‘dotcom bubble’ and just prior to the financial collapse of 2008. It is again happening, right before our eyes. This margin debt has pushed stocks to ridiculous highs, but it also served to drive stock prices down very rapidly when the market turned south. This is now about to occur in the US Markets.
The Chinese government still continues to depreciate its’ currency. The key factor behind its’ Central Banks’ lowering of the yuan is a sharp decline in the growth momentum of exports, along with the yearly rate of growth declining.
Mr. Donald Trump unleashed this tirade on Wolf Blitzer's CNN Situation; “China-these-are-not-our-friends-these-are-our-enemies”.
They’re manipulating their currency. Intellectual property rights and everything else are a joke over there. They're making stuff that you see being sold all the time on Fifth Avenue, copying everything, whether it's Chanel or whatever it may be, the brands, and selling it. I mean the United States is getting ripping off for everything new or high-end ticket product they produce.
The real economic slowdown in China was set in motion a long time ago, when the yearly rate of growth of the money supply fell from 39.3 percent in January 2010 to 1.8 percent by April 2012. The effect of this massive decline in the growth momentum of money places severe pressure on ‘bubble activities’. Anymore continuing of tampering with the currency rate of exchange can only make things much worse as far as the allocation of scarce resources are concerned.
China’s government has no tools to support the market
The U.S. Economy is ‘coupled’ to the Chinese Economy. In fact, it is ‘inextricably’ bound to the ‘global financial bubble’ and its’ leading edge in the form of ‘red capitalism’.
In the face of an ‘unprecedented’ global collapse of the greatest phony boom, known in economic history, courtesy of China. Last Sunday night, March 20th, 2016, the Chinese stock market hit a two-month high by receiving news that the government will offer cheap short-term loans to stock brokerages. The Shanghai Composite Index rose by over 2% upon this news stating that the government will offer cheap short-term loans to stock brokerages. This additional "stimulus" kill their markets in the long run I feel as more debt is not the solution.
I would like to point out, that corporate debt, as a share of GDP, is already far too high at 160%.
Mr. David Stockman discussed on CNBC: “I think your traders are smoking something stronger than what I can legally buy here in Colorado. Investors have been too optimistic about the U.S. economy because they are not factoring in global risk, everywhere trade is drying up, shipping rates are at all-time lows.”
“Quantitate Easing’ has not been the ‘Savior’ of our global financial problems”. It was advocated by John Maynard Keynes and Milton Friedman.
China’s Real Estate Bubble:
The construction boom was financed by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built, not by private creditors and entrepreneurs. They were built by a cozy network of Central Bank officials, politicians, and well connected private corporations.
Nearly seventy million luxury apartments currently remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are now only inhabited by a few thousand. The Chinese economy now has so many ‘ghost cities’ that debt has now grown into an increased unbelievable $25 trillion. What is occurring in the Chinese markets now will be the dissolution of an economy that capital markets have realized is simply not productive enough to enable servicing that amount of debt.
Conclusion to China’s Situation:
Looking at the global markets as a basket using the GWL world stock markets EX-US stocks, the chart paints a clearly picture that stocks around the world in in a full blown bear market. The past two months have been nothing more than a bear market rally, also known as a “Bear Trap” which gets the uneducated investors buying back into the stock market thinking higher prices will continue, through that is not what will happen.
There are some huge opportunities to trade various markets using inverse and leveraged ETFs. This is exactly what I share and will be trading with subscribers of my ETF trade alert newsletter at: www.TheGoldAndOilGuy.com
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