Are world bubbles peaking?
Jun 7, 2007
- China is serious about slowing
their stock bubbles. They just increased a stamp tax to .3% on
stock sales, formerly a .1% rate. This is not a miniscule amount
because it is assessed on every trade - they add up. China has
raised interest rates repeatedly, and their senior economic leaders
have stated that their stock bubbles are rising too fast. China
intends to cool their bubbles. More on that, but they may be
the ones to break the entire world financial bubbles - first
- judging on the reaction to their February 9% stock declines
that led to two weeks of serious Asian market crashes - and one
500 point drop in the US DOW - that led to so much volatility
that Dow fell behind in the quotes for several hours that day.
- China's manufacturing purchasing
index declined from 58.6 to 55.7. I posited last week or so that
China manufacturing boom will be telegraphed by dropping base
metal demand in things like copper, and that commodities would
likely telegraph any slowing in China before economic data does.
- ECBs Trichet, and Bernanke,
have just stated - again - that the world financial markets are
not taking into account the risk out there - ie they are in a
semi euphoria. The last time we heard comments such as these
from the ECB - within a month or two, we saw the February stock
crashes in Asia led by the Chinese.
- The BOJ Fukui just stated
that hedge funds add welcome liquidity to markets, but also add
unwelcome volatility in stress presently.
- The Hong Kong monetary authority
recently stated that they are concerned that derivatives are
an increasing danger and that it is of unknown extent. (Fed has
also stated this, as has the ECB and the BOJ.)
- A month or so ago, I wrote
an article that stated that world stock collapses will likely
lead to the next world recession. Reason: stock gains worldwide
have buffered the real estate declines here in the US and also
abroad. When the stocks let go, the last remaining buttress of
US consumer confidence will flag. Certainly, US GDP performance
of about .3% annualized is not behind any consumer confidence
at this time.
- The Chinese stock market has
had repeated days of 7% or more drops for a week. It dropped
7% Tuesday, and rapidly made all that up and gained about 3%
on the day. That market could be telegraphing that it is about
to take a real hit, and, if so, we will likely see another repeat
of the Asian stock crashes, and who knows if it will follow into
the Dow this time? The last episode of that in late February
led to two tense weeks of stock crashes, but were forestalled
by a lack of follow through on the US side. Shanghai might recover
- or might not.
- The US stock market is looking
at inflationary pressures here, and it seems possible the Fed
may either keep rates where they are, or even raise, as the rest
of the world finds itself in a rising interest rate environment
- the EU, China, rising interest rate pressures in Britain, Australia,
Canada, and even possibly Japan. Gold is reacting to expectations
that the US may not lower interest rates. Higher interest rates
are gold suppressive generally.
- IF world interest rates rise
further, all the accumulated leverage - stock margins, derivatives,
the massive Yen carry trade, and record consumer debt could easily
lead to a peak in world financial markets - followed by stock
crashes and economic contraction related to consumer spending.
The world financial/stock bubbles are based on leverage. When
the leverage money peaks, markets will have to unwind.
- We have differing figures
on consumer confidence - the Housing market is in serious decline
here in the US, but wage growth in the US appears to be positive
- and non housing related economic activity appears ok, but of
course the auto industry is severely in recession.
- The EU and China are showing
strong growth, Japan is ok. But China and Japan are vulnerable
to stock sell offs - their markets are highly leveraged. If the
Asia cannot overcome a drop in US demand for their exports, there
is little rationale for their financial markets to stay elevated.
IF their own consumers are supposed to take over a drop in demand
from the US consumer, a big stock drop will prevent that from
happening. China has 100 million brokerage accounts now, rising
at up to 500,000 new accounts a day. A collapse of their stock
mania will severely hurt the middle class.
- There is record brokerage
margin money out. There is record insider selling in the US since
2000. There is record corporate buyout activity and mergers.
Half of all corporate buyouts are for companies that are not
profitable! Did you know that?
- There is huge stock buy back
activity - backed by new corporate debt.
- Debt is at record levels in
most major western economies - The US, Britain, Australia are
prime examples. Consumers are going into bankruptcy in increasing
numbers in these nations.
- Record corporate stock repurchases,
M&A, and buy outs are classic stock bubble phenomena, as
is record insider selling.
- It is stated that much of
the stock increases in the last year or so are due to corporate
buy backs, mergers and buyouts that are taking stock out of circulation
in public markets. When this phase peaks there will be perhaps
little further impetus to world stock bubbles -
- Increasing interest rates
world wide are putting pressure on all the leverage and margin
in world stock markets. Rising interest rates will continue to
be a problem till the markets all start to tank. The logic is
that, if that happens, central banks will lower interest rates-
but if investor sentiment is hit badly, will it be fast enough?
With all the leverage, every one and his dog has out - public,
corporate, government, and the pan leverage of the Yen carry
in all financial markets - I rather doubt the world central banks
would be able to effectively rekindle world financial markets
if there are crashes that spread further, like the late February
crashes in Asia and briefly here in the US - and started with
the way over inflated China stock markets.
Commodities are in a bubble
Commodities are in a bubble,
partly driven by demand from nations like China, but I believe
people underestimate the extent of speculative froth that has
built up in them - copper as a prime example. If there are any
significant drops in demand from China and the US, for example,
not only will inventories start to rise, but all of that speculative
froth in commodities will flee out - leading to rapid and enduring
falls in prices and indexes.
The warning signs are there
I could list another 3 or 4
times the examples - as above - of why I am sure that we are
at the peak of the world financial/stock bubbles. In particular,
any weakening of the US/China industrial / trade economy will
lead to rapid unwinding of stock and commodity markets, because
speculative froth will flee, among other things.
My subscribers have been following
these trends for months. They are major reasons why I have stated
that commodities are going to be at risk of big falls, and that
gold will be associated. Stocks in general will be hit badly
if a crash happens and is not contained. There are always risks
of some major geopolitical event that can spike gold, in particular,
but overall, the macro environment is clearly looking to peak
in commodity and financial markets - probably this year.
It is my belief that the world
is going to see major stock sell offs this year. The latest drops
in February, and China's stock weakness, are only the first stages.
As I said, there are many reasons - not just looks at the stock
Squirrel Newsletter is my macro economic gold newsletter. Subscribers
were alerted right at the beginning of the February stock crashes
of emerging liquidity problems in markets and general sell offs
due to the Yen carry trade, in email alerts about 10:30 am PST
the Tuesday of that late February market crash. They have also
been alerted in advance of many of gold's price drops in the
last few months in email alerts.
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