Perspective on the Stock Market and China

by Victor Sperandeo, edited by the Curmudgeon


Due to the sell-off last week, I feel I should comment and provide my views:


1.  The S&P 500 has declined -7.40%... if this is the benchmark to most professionals, it is not yet a correction (decline of at least 10% from closing high).


2.  The Fed is going to announce it is leaving short term interest rates unchanged, i.e. zero.    The Fed has no bullets left, and the world is slowing and is headed into recession.  Fed will talk the market up... but after 6.6 years of “recovery” talk is very cheap. The attempt to eliminate the business cycle is blind to history -see Japan for a classic example.


3.  China is toast. However, it is NOT the “China economy” that was the cause of the US stock market decline.  It is China's Stock Market!


Many have attributed China's economy as the trigger for this week's US stock market decline.  That is so off base!  China's economy has been declining and getting worse for over 2 years!  In spite of that, China’s Shanghai Composite index rallied 180% in just 2.25 years, while the S&P 500 has rallied 220% in 6.33 years. 


As described in the article I wrote titled Bear in a China Shop, the main reason China's stock market rallied was that “investors” were expecting China's Yuan to get a 10-13% "Reserve Currency" status by the IMF.  That would have caused an estimated one Trillion in dollar buying of China stocks through various index funds. 


However, on August 19th, the WSJ reported that the IMF was going to delay the Yuan Reserve Currency decision for at least a year.  That was the nail in the coffin which killed any hopes of China stock buying tied to Yuan Reserve Currency status.  It reaffirmed an August 4th WSJ article titled “IMF Details Hurdles to Yuan Reserve-Currency Bid: Market restrictions pose difficulties that could push decision into next year.”


Therefore, the Shanghai Comp, now ~3500, is heading back to 1900!  That will likely cause a recession in China and in many emerging markets.  Maybe even in the US?


This is my best and strongest opinion and I'll stand by it.


The Curmudgeon


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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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