Stock Market Relapse Because Of China?

by Mike Holman

spring roll

Intelligent Speculator is a blog about investing, news and comments about the markets and the relevant news. It also supplies users with free stock picks that will hopefully help you get ahead. You can visit the blog at IntelligentSpeculator.net and subscribe to the RSS feed here.

It was mid-November, the market had reached new lows with the S&P 500 closing under 800 points and the economic news was not looking good. Then, something very odd happened as the markets started to rebound. Sure, there had been some positive news such as the end of uncertainty of a new US government and more information about the massive stimulus plan of the US government.  But economic numbers related to demand, consumer confidence and especially employment looked depressed.

However, the markets seemed to shrug off (ignore?) those negative factors very easily as they shot up 25% in a few weeks.  The market rebound hardly seemed justified .  Then the stock markets started dropping because of more bad economic news, the now famous Madoff fraud and more dire economic   news. So markets went back on their road towards new bottoms, with even the new year not being able to stop much of that momentum.

And just last week, with the S&P500 now on a losing streak and standing at 850, some very bleak predictions were released from French Bank SocGen. They have been gathering information from one country that has not received that much coverage given its importance; China. Say what you want about the communist state, it has been gaining importance in the global picture over the past few decades. In fact, as it has rapidly gained its spot in the biggest world economies, China generated much of the world growth over the past decade with growth over 10% year after year.

China is now encountering some severe structural problems that are slowing its economy in a way that will impact the world economy, especially with China’s importance in world trade. In fact, the OECD (Organisation for Economic Co-Operation and Development) has released some economic indicators that look very depressing and could signal an important slowdown. The Chinese authorities could devalue their currency. “It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan” wrote Albert Edwards of Societe Generale

What would be the consequence of such a change? In fact, Societe Generale spoke of the increasing risk of a global recession and in their opinion, this could mean another 40% drop in the major stock market levels.  Perhaps it seems like a very negative perspective but I am fearful of buying until the market lows of November are tested or until economic data starts to improve, there is just not much positive and no reason really for the stock market to improve at this moment. There is always a risk of missing a positive move but for now, I’m ready to remain on the sidelines or do as I have in recent weeks, do some long-short trading which should not be as affected by a market downward move….

What do you think – is China going to drag the stock markets down further or has it’s problems already been factored in?

Photo credit – taiyofj’s photostream.


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{ 5 comments… read them below or add one }

1 Brian

FP,

Did you spawn off a new blog (IntelligentSpeculator.net)? or is that an affiliate?

Nice theme btw, its very clean.

2 Four Pillars

Brian – the Intelligent Speculator was created by TheFinancialBlogger.com. He did this guest post to try to publicize it a bit and maybe get some more readers.

I have no connection to it.

3 Four Pillars

Thanks Thomas – I don’t know anything about Drupal but if it is hard to use then consider switching to WP.

4 Jordan

I’ve just started reading the book “The Elephant and the Dragon” which is about India & China. So far it has a lot of interesting details on the history of their economies, what their early problems were and how they have dramatically taken off, and what it means for our future. It is helping me to understand more about the countries before jumping to conclusions based on headlines in the news.

5 Gate VP

… is China going to drag the stock markets down further or has its problems already been factored in?

I think that we’re at the start of lots of stock market issues. I really don’t get the feeling that Chinese problems have been fully priced in, but from what I can see the markets are only now pricing in inflation caused by Obama’s new “new deal”. (a truth that was pretty obvious in December and even early January)

So yeah, the markets are in for more hurt as the Chinese behemoth undergoes a big “paradigm shift” en route to achieving the next “factor” of growth. If you look at 10%/year over 10 years, you’re looking at more than a 2.5x growth. Established companies don’t grow like that without serious problems. Imagining that China is going to pull it off without some serious stumbling and waste seems pretty naive.

But from the bigger picture, I think this is really just a small part of the problem the markets are going to face. The problem the markets will face is that they’re valued and tracked in nominal terms. The world has “lost” a lot of paper money, now the government is printing a lot of paper money.

The average person doesn’t really grasp this. I think that the market is still grasping this.

And this causes a big problem when you talk about “down further”. I mean, adjusted for inflation, the markets are in an 8-year bear market. Heck if the market had not crashed in 2008 and merely gone sideways, the market would still be in a 8-year bear market.

So what’s up and down?

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