A year ago I recommended investors adopt a defensive posture in regards to the stock market. Stocks were able to move higher, before chopping sideways and then selling off in this current period of volatility. Significant price swings have become commonplace and stocks have so far in 2015 delivered negative returns. My recommendation to underweight stocks was not based on predicting an imminent bear market. Instead, it was a declaration that the risks versus rewards of owning stocks were too negative to justify even a neutral weighting, and the potential for a bear market too high. For a long time, I had been writing about the risks to this current bull market, but that was the first time I recommended the more conservative, defensive posture that I continue to advocate. The reasons for that call are worth revisiting, particularly my worries about China, as they now seem especially pertinent.
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Greek & Chinese Known Unknowns
I.C. Angles Investment Post…
“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” — Donald Rumsfeld, Former U.S. Secretary of Defense
Greece and China have both been in business headlines in June, reminding me of Donald Rumsefeld’s famous quote about known unknowns. It is widely known that Greece may exit the Euro, and as I write this column news has broken that Greek banks will be closed on Monday and capital controls imposed in the country in response to the deepening crisis. It is also known that in response to a slowing economy and recent two week selloff in its stock market, the Chinese government has cut its benchmark lending rate to a record low and is pursuing increasingly accommodative policies. Those are the known knowns.
The Clock is Ticking
I.C. Angles Investment Post…
While market watchers fixated on the debt ceiling in the United States, as the clock for raising the ceiling was again reset by Congress, debt issues in China likely pose a more significant threat to the global economy. It’s a risk not lost on Chinese policymakers, who are adopting new practices in order to wean their economy off dept dependence before the worst happens. But with the current levels of debt, economic imbalances and perhaps most importantly high debt inefficiency that clock is ticking. And unlike the U.S. Congress’ debt clock, this Chinese one is not going to be reset by a simple vote of politicians to borrow more. It is imbalances such as these not so easily addressed that pose the real threat to the stock market.
This Bull is on its Last Legs
ICangles Investment Post…
With the news that China’s central bank is lowering interest rates, the bull market that began in 2009 is likely entering its final stage, which should carry it into at least the next year. Fears that the current global economic recovery is faltering led not just China’s central bank to cut rates, but the European Union to lower rates from 1 to 0.75 percent and the United Kingdom to increase its stimulus efforts. With a weak June jobs report, expectations of further monetary intervention by the United States also grew. But outside of China, monetary intervention is to a large degree pushing on a string. And even if China can give the world a temporary boost, the expansion of its economy will only provide a reprieve from the onset of the next downturn.
China’s Economic Dark Side Part I
ICangles Investment Post…
The story of the Chinese economic miracle is well known. Since opening its economy in the 1980’s, China has followed an export led development model to become the world’s factory, leading exporter and second largest economy. The 2008 Olympic opening ceremonies gave China an opportunity to showcase its success to the world, including with a miraculous display of firework footprints marching across the sky. But in China all is not as it first appears. It turned out the firework footprints seen on televisions weren’t really fireworks, but rather CGI special effects. Similarly, a closer inspection of the Chinese economic miracle reveals some financial special effects at work.
Things Fall Apart
ICangles Investment Post…
It is increasingly clear that the arrangements at the center of the world’s monetary system are fraying. On Monday Standard & Poor’s cut its outlook on the credit rating of the United States to negative indicating there is a very real possibility for a downgrade. By Tuesday gold prices topped $1,500 an ounce. Also last Friday China admitted inflation was picking-up steam, as it announced an official annual uptick of 5.4 percent that almost surely understates the true amount. On the European front Moody’s downgraded Ireland’s credit rating last Friday. That action followed earlier comments from Germany’s finance minister that Greece may default on its debts. All of this came despite the world being in the midst of an economic recovery.
Forecasting the Reckoning
ICangles Investment Post…
There has been a lot of worrying in financial markets over the past few months. In fact quite a long list of looming disasters has been assembled. Will destabilization in the Middle East, especially if unrest reaches Saudi Arabia, send oil prices skyrocketing and the global economy spiraling? Could this wave of unrest spread to China? Will the earthquake in Japan trigger a financial crisis in that country, as more debt is added to an already formidable mountain of debt? Is Bill Gross signaling a debt crisis in the U.S. is eminent, as he pilots the world’s largest bond fund out of U.S. Treasuries? Irrespective of the U.S. Treasury market is a wave of defaults on its way in the municipal bond market? And what about real estate—are we now on our way to a second bottom with prices headed for a 20 percent or greater decline?
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