{"id":13783,"date":"2015-09-03T08:23:13","date_gmt":"2015-09-03T08:23:13","guid":{"rendered":"http:\/\/researchandinvestment.com\/?p=1033"},"modified":"2024-04-18T05:08:29","modified_gmt":"2024-04-18T05:08:29","slug":"the-illusion-of-unstoppable-chinese-growth","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2015\/09\/03\/the-illusion-of-unstoppable-chinese-growth\/","title":{"rendered":"The illusion of unstoppable Chinese growth"},"content":{"rendered":"

Throughout history, from Dutch tulips to South Sea investments, investors experiencing a bubble have refused to believe that it will end. Forecasters with the temerity to suggest otherwise were attacked and ridiculed. Denial is a powerful emotion.<\/p>\n

The last three decades have been no different, as we moved through a succession of bubbles: from Japan in 1989\/90, to the 1997\/98 Asian crisis, to the Dotcom crash in 2000\/01, and the GFC in 2007\/08. All had the same primary cause: state interference with two major pricing mechanisms that allow markets to clear. Central bank suppression of interest rates fueled rapid debt growth and forced investors to assume greater risk in order to achieve a viable return, building huge imbalances within the economy. Suppression of exchange rates through accumulation of vast foreign reserves, primarily foreign debt, has also been used by emerging economies such as China to boost exports and maintain a current account surplus. But this ignores the inevitable feedback loop that results.<\/p>\n

China’s and other emerging markets current account surpluses caused the US to suffer a persistent current account deficit.<\/p>\n

\"US<\/p>\n

The effect on the US is twofold. First, a persistent current account deficit hurts economic growth. Second, foreign purchases of US debt suppress long-term interest rates. Like most central banks, the Fed preferred to address the symptoms (falling growth and rising unemployment) rather than address the underlying cause (if your only tool is a hammer then every problem starts to resemble a nail). Fed suppression of interest rates created a wash of easy money looking for a return. A large chunk of this flowed into China and other emerging markets — primarily as credit to domestic borrowers — taking advantage of low interest rates in the US and higher yields in these rapidly growing economies, while enjoying the protection of a currency pegged to the Dollar.<\/p>\n

Now that the Fed is making noises about raising interest rates, margins are likely to be squeezed and the currency peg appears vulnerable. Recent capital outflows forced China to devalue the Yuan. But devaluation is likely to fuel further outflows. Supporting the currency — purchasing Yuan using China’s more than $4 trillion of foreign reserves — may appear a simple solution but that contracts the amount of money in circulation, threatening deflation.<\/p>\n

Attempts to stem the outgoing tide are likely to sap confidence and exacerbate the problem. China and other emerging markets can expect a hard landing. US and European markets survived the crises of 1989\/90 and 1997\/98 but global economies are now far more intertwined. I prefer to err on the side of caution.<\/p>\n

North America<\/h2>\n

The S&P 500 respected the new resistance level at 2000, suggesting that the rally has failed. Wednesday’s blue harami candle<\/a> offers feint hope of a reversal, but the overriding trend is downward. Rising short sales<\/a> warn of increased selling pressure. Recovery above 2000 is unlikely but would offer hope of a relieving rally. Breach of short-term support at 1900 would suggest another decline, while failure of 1870 would confirm.<\/p>\n

\"S&P<\/p>\n

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800<\/p>\n

The CBOE Volatility Index (VIX) continues to indicate elevated market risk.<\/p>\n

\"S&P<\/p>\n

Dow Jones Industrial Average is in a similar position to the S&P 500. Breach of support at 16000 would confirm a primary down-trend. Recovery above 17000 is less likely, but would signal buying pressure.<\/p>\n

\"Dow<\/p>\n

Canada’s TSX 60 rallied above resistance at 800 but has since reversed. Follow-through below say 790 would confirm the primary down-trend. Declining 13-week Twiggs Momentum below zero continues to warn of a down-trend. Recovery above 820 is less likely but would indicate buying pressure.<\/p>\n

\"TSX<\/p>\n

* Target calculation: 800 – ( 900 – 800 ) = 700<\/p>\n

Europe<\/h2>\n

Germany’s DAX recovered above support at 10000. Follow-through above last week’s candle at 10500 would indicate a rally to test the descending trendline. Respect of the zero line by 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 10000 is less likely, but would warn of a primary down-trend.<\/p>\n

\"DAX\"<\/p>\n

The Footsie is testing primary support at 6100. Reversal below that level would confirm a primary down-trend, while recovery above 6250 would indicate a rally to test 6500. Respect of the zero line by 13-week Twiggs Money Flow again indicates medium-term support.<\/p>\n

\"FTSE<\/p>\n

Asia<\/h2>\n

Chinese markets are closed Thursday and Friday for the World War II 70th Anniversary. The Shanghai Composite index is testing support at 3000. Intervention to support the market is unlikely to succeed. Reversal of 13-week Twiggs Money Flow below zero would confirm a primary down-trend.<\/p>\n

\"Dow<\/p>\n

Hong Kong’s Hang Seng Index gives a clearer picture of investor sentiment without government intervention. Breach of support at 22500 and declining 13-week Twiggs Money Flow (below zero) both signal a primary down-trend. Failure of the next level of support at 21000 further strengthens the signal.<\/p>\n

\"Dow<\/p>\n

* Target calculation: 440 – ( 550 – 440 ) = 330<\/p>\n

Japan’s Nikkei 225 retreated below support at 19000 and is likely to test primary support at 17000. The gradual decline of 13-week Twiggs Money Flow indicates medium-term selling pressure — more a secondary correction than a primary reversal.<\/p>\n

\"Nikkei<\/p>\n

* Target calculation: 19000 – ( 21000 – 19000 ) = 17000<\/p>\n

India’s Sensex retreated below 26000, confirming a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero would further strengthen the signal.<\/p>\n

\"SENSEX\"<\/p>\n

* Target calculation: 27000 – ( 30000 – 27000 ) = 24000<\/p>\n

Australia<\/h2>\n

The ASX 200 is testing key support at 5000. Respect of the zero line (from below) on 21-day Twiggs Money Flow indicates selling pressure. Breach of 5000 is likely and would confirm a primary down-trend. Respect is unlikely, but would indicate another test of medium-term resistance at 5300.<\/p>\n

\"ASX<\/p>\n

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600<\/p>\n

\n
\nMore….
\n<\/a>
\n<\/h2>\n

\n\t\t\t\tNYSE short selling rises<\/a>
\n\t\t\t\t\t\t<\/h4>\n

\n\t\t\t\tIf we don’t understand both sides of China’s balance sheet, we understand neither | Michael Pettis<\/a>
\n\t\t\t\t\t\t<\/h4>\n

\n\t\t\t\tVolatile crude<\/a>
\n\t\t\t\t\t\t<\/h4>\n

\n\t\t\t\tChina: It just got worse<\/a>
\n\t\t\t\t\t\t<\/h4>\n

\n\t\t\t\tS&P 500: Dead cat bounce?<\/a>
\n\t\t\t\t\t\t<\/h4>\n

\n\t\t\t\tChina’s conundrum: Capital flight or deflation<\/a>
\n\t\t\t\t\t\t<\/h4>\n
\n

\nThere is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.
\n
\nThere is another theory which states that this has already happened.\n<\/p>\n

~ Douglas Adams: Hitchhiker’s Guide to the Galaxy<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Throughout history, from Dutch tulips to South Sea investments, investors experiencing a bubble have refused to believe that it will end. Forecasters with the temerity to suggest otherwise were attacked and ridiculed. Denial is a powerful emotion. The last three decades have been no different, as we moved through a succession of bubbles: from Japan … <\/p>\n

Continue reading “The illusion of unstoppable Chinese growth”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[18,57],"tags":[64,251,507,919,927,947,1113,1441,1481,2478,2535,3010,3100,3503],"class_list":["post-13783","post","type-post","status-publish","format-standard","hentry","category-market-insights","category-stock-markets","tag-vix","tag-asx-200","tag-bse-sensex","tag-currency-manipulation","tag-current-account","tag-dax","tag-dow-jones-industrial-average","tag-foreign-reserves","tag-ftse-100","tag-nikkei-225","tag-nyse-short-sales","tag-sp-500","tag-shanghai-composite-index","tag-tsx-60"],"yoast_head":"\nThe illusion of unstoppable Chinese growth - the patient investor<\/title>\n<meta name=\"description\" content=\"Throughout history, from Dutch tulips to South Sea investments, investors experiencing a bubble have refused to believe that it will end. 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Investing each year in the countries with\u2026","rel":"","context":"In "Economy"","block_context":{"text":"Economy","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":12682,"url":"https:\/\/thepatientinvestor.com\/index.php\/2015\/12\/06\/the-great-asx-sclerosis-gerard-minack\/","url_meta":{"origin":13783,"position":1},"title":"The great ASX sclerosis | Gerard Minack","author":"ColinTwiggs","date":"December 6, 2015","format":false,"excerpt":"Excellent summary by Gerard Minack of headwinds facing the ASX: Excluding miners, the listed sector enjoyed 15%-plus annual sales growth last cycle; now nominal sales growth is less than one-third that pace.... Structurally lower domestic sales, combined with the stress in the resource sector \u2013 which, in my view, is\u2026","rel":"","context":"In "Stock Markets"","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":60528,"url":"https:\/\/thepatientinvestor.com\/index.php\/2025\/01\/22\/good-as-gold\/","url_meta":{"origin":13783,"position":2},"title":"Good as gold","author":"Colin Twiggs","date":"January 22, 2025","format":false,"excerpt":"Stocks continue their rally, with a surge of liquidity lifting the S&P 500 and its equal-weighted index. Treasury yields softened, and the Dollar weakened, but gold broke resistance to signal another test of its recent high at $2,800 per ounce. Stocks The S&P 500 overcame hesitancy at 6000, signaling a\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-01-21-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-01-21-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-01-21-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":16662,"url":"https:\/\/thepatientinvestor.com\/index.php\/2018\/07\/14\/cpi-rises-but-us-stocks-rally\/","url_meta":{"origin":13783,"position":3},"title":"CPI rises but US stocks rally","author":"Colin Twiggs","date":"July 14, 2018","format":false,"excerpt":"June consumer price index (CPI) jumped to 2.8% but forward estimates of inflation, represented by the 5-Year breakeven rate (5-year Treasury yield minus TIPS) remain subdued at 2.06%. Core CPI (excluding food and energy) is at 2.2% while average hourly earnings (total private: production and non-supervisory employees) annual growth, representing\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":15099,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/04\/05\/rba-monetary-policy-what-could-go-wrong\/","url_meta":{"origin":13783,"position":4},"title":"RBA Monetary Policy: What could go wrong?","author":"ColinTwiggs","date":"April 5, 2017","format":false,"excerpt":"Statement by Philip Lowe, Governor Monetary Policy Decision 4 April 2017 At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have\u2026","rel":"","context":"In "Stock Markets"","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18847,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/09\/10\/no-recession-but-growth-sluggish-bob-doll\/","url_meta":{"origin":13783,"position":5},"title":"Time to be defensive","author":"Colin Twiggs","date":"September 10, 2019","format":false,"excerpt":"Bob Doll at Nuveen says he does not expect a recession (for the next few quarters) but remains neutral towards stocks: \"Although stock prices have advanced over the last couple of weeks, investors remain focused on downside economic and policy risks and are increasingly concerned about a possible recession. 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