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Chart Of The Day: Is China Sending A Warning?

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

In yesterday's discussion on the technical underpinnings of the market, I pondered the question of whether Greece was really the primary issue of concern for investors.

"Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning:

 

'I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble.'"

I think that Art may be onto something. While Greece is indeed an issue, and did confirm that they would default on their debt payment to the IMF, this is something that has been long in the making. China, on the other hand, is very a different story.

Today's chart(s) of the day is a look at the history of "bubbles and busts" of the Chinese Shanghai index.

China-Index-063015

Emerging markets have a long history of speculative investment bubbles and bursts. Whether it has been South American debt or emerging market stocks, they speculative push to garner higher yields or returns has always ended up badly.

As shown in the chart above, the first bubble and burst occurred in 2001. It took almost 4.5 years before that particular investment bubble was unwound.

The second bubble began in early 2006 and after a blistering run popped in mid-2007. Almost 7-years later that bear market ended as the fuse was lit for a new surge to record highs over the last several months.

STOP

Take a very close look at the chart above as there is something eerily familiar about it.

As I stated, throughout history emerging markets have gone through a continuous series of booms and busts driven primarily by speculative greed. Whether it was chasing higher yielding debt instruments or just hopes of more lucrative stock market returns, these chases occurred very late in the market cycle when returns became lean in more mature markets.

The chart below shows why the chart above is so familiar.

China-SP500-Index-063015

The boom/bust cycle of the Chinese Shanghai index has a relationship to the S&P 500 index. The first bubble in China occurred as the "Dot.com" bubble in the U.S. moved into a full speculative frenzy.

After the bursting of that bubble, money primarily stayed domestically oriented until late in the "real estate/credit" bubble. At that late stage, speculation had once again reached the "irrational exuberance" phase as beliefs of ongoing stable economic growth, and the rise of emerging market dominance filled the airwaves. In just a few short months, those dreams were rapidly shattered as economic, and market realities, came to the fore.

Following the "financial crisis," money once again stayed focused primarily in domestic indices as the Federal Reserve flooded the system with liquidity to boost asset prices in hopes of stabilizing a weak economic backdrop. However, as the Federal Reserve ended its last liquidity program, money flooded into China once again chasing liquidity and hopes of higher returns.

The recent plunge in the Chinese market may, or may not be, the sound of the latest bubble popping as I write this missive. However, there are two very important warnings be given here:

1) The current bubble will eventually end, just as the last two have, in a rather disastrous plunge for those chasing returns.

2) The plunge will also likely be coincident with an unwinding of excesses in the S&P 500.

The current belief is that the economic environment is stable, and growing enough, to support and foster continued expansion in domestic markets for the foreseeable future. Of course, that was also the belief at the peak of the previous two bubbles as well.

I think that Art Cashin could very well be right. Greece may not be "the thing." We need to keep a close eye on China as it may well be the leading indicator for what happens next in the U.S.

*  *  *

But then again there's this from Goldman Sachs this morning:

Although Chinese equities have taken quite a hit, the manner in which they have fallen seems bullish in nature.

WTF!?

 

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Tue, 06/30/2015 - 12:18 | 6254398 KnuckleDragger-X
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Nonsense, it's all shiny forever, now where'd I put my crack pipe......

Tue, 06/30/2015 - 12:33 | 6254452 Pinto Currency
Pinto Currency's picture

 

 

No surprise.

If you rig the global gold price, you rig interest rates globally and get global bubbles.

Tue, 06/30/2015 - 12:19 | 6254400 WTFUD
WTFUD's picture

There's enough information out there without a guessing game.

Tue, 06/30/2015 - 12:20 | 6254405 q99x2
q99x2's picture

What's to worry. We've been waiting 7 years for this.

Tue, 06/30/2015 - 12:23 | 6254412 lehmen_sisters
lehmen_sisters's picture

That quote by Goldman Sacks , LOL. " ..seems bullish in nature"

Tue, 06/30/2015 - 13:07 | 6254626 SpeakerFTD
SpeakerFTD's picture

I think they're right.  Looks like a once-in-a-lifetime blow off leg coming in China - maybe up to 850 on that chart.

Then a once-in-a-lifetime collapse below 100.
Tue, 06/30/2015 - 12:24 | 6254414 Bobbo
Bobbo's picture

That bites!

Tue, 06/30/2015 - 12:27 | 6254431 onewayticket2
onewayticket2's picture

the market "identifies" with success.

 

best, 

Rachel Dolezar

Tue, 06/30/2015 - 12:35 | 6254457 Haager
Haager's picture

It was a 3-days down so far. Odds are high for a rebound before next wave down sets in.

Tue, 06/30/2015 - 12:36 | 6254461 joseJimenez
joseJimenez's picture

The greed is based on the fact that our policy makers are always going to do the wrong thing.  If they allowed the markets to do the job it would be messy but it would bounce right back.  Of course, no guarantee that the govt cronies would survive the liquidation phase.

Tue, 06/30/2015 - 12:47 | 6254519 Bangin7GramRocks
Bangin7GramRocks's picture

Why would it bounce right back? There will be food riots in major cities and martial law will be declared. It will be brutal and many will die. Your fairy tale about the "free markets" working it all out quickly is simply laughable. If it is all left to fail, you will be lucky to live long enough to see it "bounce back".

Tue, 06/30/2015 - 15:50 | 6254692 hootowl
hootowl's picture

But,...but,...but,....As soon as Ovomit and the insatiable Mooch declare themselves permanent denizens of the Rainbow House on pennsylvania Avenue, he/she/it/they and Val-Jar The Horrible will be able to issue defacto legislation that will fix the world.

SCOTUS won't block him.  There are now enough demons populating the Supreme House of Corruption so that he can count on them to support his every political and culturally disintegrative endeavor.

The Repugnicans have rolled over and slithered back into the cesspool of the brain-dead from which they were just recently resurrected, so they have abdicated any remnant of authority they may have imagined themselves to have.  Perhaps one of the 175 repugnican candidates for POTUS can rescue the stupid party from the cesspool of the brain-dead from which it has consigned itself.

Perhaps they may even find a Natural Born Citizen among the huge horde of ignorami Repugnicans that want to lead this "Democracy" (NOT) into the historical oblivion the NWO Elites have planned for us.

But, nevermind, all is well.  Ovomit and the insatiable Mooch will soon have it all under control........As soon as the insatiable Mooch gets back from her next multimillion dollar taxpayer-paid safari and skiing trip, and Ovomit works his handicap down under 30.

Tue, 06/30/2015 - 12:38 | 6254471 BoPeople
BoPeople's picture

Duh ... however, in the past, China followed the S&P and was not a leading indicator.

In a world where money meant something, the decrease in collateral prices should put more prices on collateral. However, in this financialized market money means nothing. All that matters is price and that is run by computers.

Tue, 06/30/2015 - 12:43 | 6254500 ersatz007
ersatz007's picture

Up up and away in my beautiful, my beautiful balloon...

Tue, 06/30/2015 - 12:45 | 6254507 Kirk2NCC1701
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Confucius say "Beware of Dragon with 7-year itch"

Tue, 06/30/2015 - 12:46 | 6254511 Yen Cross
Yen Cross's picture

    Yep, I agree... Moar shadow puppet theatre. The Chinese debt load is truly staggering.

   Like a flaming hot potato stuffed with Jalapeno peppers.

Tue, 06/30/2015 - 13:11 | 6254653 froze25
froze25's picture

And Janet Yelling is producing the sour cream herself.  That paints a nice picture doesn't it.

Tue, 06/30/2015 - 12:55 | 6254567 CouldBeWorse
CouldBeWorse's picture

I can't say I'm very impressed by the analysis here.   The inflating/deflating of the dot.com and financial bubbles were global events.  My guess is the author could take any major index and it will broadly follow the S&P 500 up and down.  Perhaps a more useful graphic would be for the two indexes to be normalized.  That way we could at least compare the magnitude of the moves.  As presented all we know is direction.

I found the pizza ad running in the left column more informative.

Tue, 06/30/2015 - 12:59 | 6254581 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

Bear Bear Everywhere! Well, the Chinese stock is out of bear territory. Yuan is at two month high. $21 trillion deposits, $4 trillion Forex reserve, thousands tons of gold, the world's largest trading nation, largest auto market, arguably the world's largest economy in terms of PPP etc etc - no, China canNOT be compared to Greece. Nothing to see here, kids go home.

Tue, 06/30/2015 - 13:10 | 6254641 SpeakerFTD
SpeakerFTD's picture

You're right.  China is much, much worse.  The numbers you quote are dwarfed by magnitudes by the overvalued assets supporting them.  It will take two generations to recover the wealth that will be destroyed before this is over.

Tue, 06/30/2015 - 13:07 | 6254589 earleflorida
earleflorida's picture

there have been boom and bust in america from tyme immenmorial. the beginning of the 20th c. was the fast and furious period of america's industrial revolution so to say. today, america is but a shadow of itself!

'we have farm'd-out our manufacturing base, and now survive on a service sector/ retail [esp] dependent on guess who?'

when the market implodes-- here, in the invincible ussa, there will be egg-foo-yung on many faces of disbelief?!? 

china has all asian markets that will smell the yuan lotus flowering a mania in a upside-down tullipian ussa.

the quintessential sick[?] man-- the sinking of the atlantists--all hail thy nwo[?] born out ex`exceptionalism.  

Tue, 06/30/2015 - 16:50 | 6255527 Arnold
Arnold's picture

 Current Chicoms have had eons of wisdom, all cast aside.

Tue, 06/30/2015 - 16:24 | 6255449 Hope Copy
Hope Copy's picture

Everyone, please take note, the People's Bank of China is a COMMUNIST ENTITY, thus the buying of stock to maintain the market is also a large measure of control putting Chinese Yuan Renminbi

inTO the FOREIGN INVESTORS pocket. These failing gone public companies will just fall back into the communist stat's control having little effect on the general public of COMMUNIST CHINA. THIS IS AS WHAT HAS HAPPENED TO RUSSIA. INFLATION FOR CHINA and needed. The REST of the WORLD is in a SELF styled DEPRESSION with DEFLATIONARY GOVERNMENTAL PRESSURE.

Tue, 06/30/2015 - 16:44 | 6255517 Arnold
Arnold's picture

I haven't been nimble since the sixties.

 

http://mentalfloss.com/article/49956/10-old-sayings-we-need-bring-back

 

Catching my attention lately, rather than TEOWAWKI.

 

 

 

Tue, 06/30/2015 - 20:00 | 6256262 Dead Canary
Dead Canary's picture

China fell off the ugly tree and now it's hitting every branch on the way down.

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