China Matters

Tyler Durden's picture




 

Submitted by Lance Roberts via RealInvestmentAdvice.com,

China Matters

Over the past few days I have repeatedly heard the following statement:

“China isn’t that important as it is only 7% of the U.S. economy.”

While that may be a true statement in relation to the economy, it is a far different matter when it comes to the financial markets.

With financial markets so closely correlated, what happens in China has a direct and immediate impact on U.S. markets. Beginning in 2014, China financial markets went parabolic as investors levered up to speculate. This is not the first time this happened, and is a sharp reminder of why the perils of leverage should not be readily dismissed.

The problem is, as shown in the chart below, that what happens in China is not isolated just to China. As money flees those markets, it also rapidly exits the U.S. markets as fears of contagion spread.

China-SP500-010706

While the Chinese government has injected liquidity, suspended trading in almost half of the listed equities and encouraged pension funds to buy securities, arrested short-sellers and “disappeared” corporate executives, these actions have done little to stem the decline as investors “panic sell” in a rush to safety.

That collapse, if history is any guide, is likely not done as yet which suggests that the financial rout in other markets are only just beginning.

Speaking Of Margin

Last year, margin debt in China reached $264 Billion. After adjusting for the size of the two markets, is about double that of the roughly $500 billion in margin debt in the U.S.

This difference in relative size was given as a prime example about how margin debt is not a problem for the U.S. This is incorrect, and just another example of the MSM’s willful blindness to the facts. The fact is that the relative size of margin debt in the past has not been a “safety net” that investors should rely on. As shown, the level of real (inflation-adjusted) margin debt as a percentage of real GDP has reached levels only witnessed at the peaks of the last two financial bubble peaks in the U.S.

Margin-Debt-GDP-010716

The same is seen in the raw levels of margin debt with respect to the financial markets.

Margin-Debt-010716

While no single indicator should be relied upon as a measure to manage a portfolio, it should be well understood by now that leverage is a “double-edged sword.” While rising margin debt levels provide the additional liquidity to drive stock prices higher on the way up, it also cuts just as deeply when prices fall.

China is clearly showing the consequences of the unwinding of leverage. Despite government actions to stem the decline, investors are finding ways to extract their capital back out of the market in fears of a repeat of the 2008 crash. It is a lesson that should be studied and learned, again, by investors today.

Just as the Federal Reserve encouraged investors to jump into the financial markets by providing liquidity and suppressing interest rates, China also encouraged their population to do the same. Instead of taking actions to control the rise, they (both the U.S. and China) encouraged it. The problem is that when the “bubble” pops – it becomes uncontrollable.

As investors, it is our job to analyze the data and understand the inter-relationships between various data points and our portfolios. While margin debt is but only one “breadcrumb” on the trail, when combined with declining momentum, excessive deviations from long-term means, and weak economic growth, a larger picture of overall “risk” begins to emerge.

Does this mean that investors should “panic sell” immediately and run into the safety of cash? No. However, it does suggest that investors should be much more cautious about portfolio allocations and the degree of risk being undertaken as it relates to long-term investors objectives.

Technical Supports Under Attack

Earlier this week, I discussed the importance for the market to hold support at 1990 on the S&P 500. That level is under critical attack this morning as the market slides over concerns of China.

“Importantly, the ongoing topping process continues in earnest. As shown in the two charts below, the current topping process is very akin to the processes witnessed at the previous two major market peaks in 2000 and 2007.

You can clearly see the topping process being made over the last 18 months in the market. Until, or unless, the market can break out of the current downward trend, the risk of lower asset prices remains elevated.”

SP500-MarketUpdate-010516-3

More importantly, if we step back to a “weekly” view of the markets we get a better picture of the level of deterioration currently in progress. As shown in the chart below, not only have both lower sell signals been triggered by deterioration in price momentum, the short and long-term moving averages have now crossed.

SP500-MarketUpdate-010716-2

Since the turn of the century, the two primary moving averages have only crossed three other times – at the peak of the markets in 2001 and early 2008, and in 2011. The difference in 2011 is that while the sharp decline in the prices due to the debt ceiling debate caused the moving averages to cross, the two lower sell signals were not triggered. This kept portfolios allocated more towards equities at that time.

The current topping process, as discussed on Tuesday, is more akin to that seen in 2000 and early 2008. With primary moving averages now crossed, sell signals in place and markets trading below supports, rallies in equities should be used to rebalance portfolios and reduce risk. 

While the markets are not “technically” in a “bear market” currently, it is important to remember that they weren’t in 2001 and early 2008 either. Waiting to make adjustments until after full recognition of the event doesn’t leave you many options.

Just some things to think about.

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Thu, 01/07/2016 - 13:04 | 7012050 khnum
khnum's picture

Walmart 1.4 million employees....China matters

Thu, 01/07/2016 - 13:06 | 7012061 SethDealer
SethDealer's picture

china market has yellow fever

Thu, 01/07/2016 - 13:08 | 7012083 Thought Processor
Thought Processor's picture

 

 

It's like getting food poisening after a big family dinner.  After one person goes down, better find a toilet cause everyone ate the same shit.

Thu, 01/07/2016 - 13:16 | 7012131 Herd Redirectio...
Herd Redirection Committee's picture

I've heard some sheep baah "Why now?  Whats happened?"

I told them "Crisis 7 years ago WAS NOT RESOLVED.  It was just delayed.  The old kicking the can down the road.  A handful of people (central bankers) have inordinate amount of power, and because they were the ones who delayed the crisis, it gives them the power to stop delaying it further as well.  I.E. they can cause the crisis to re-emerge at the time of their choosing."

And that, my friends, is what we are currently experiencing.

Thu, 01/07/2016 - 13:23 | 7012182 Sam Clemons
Sam Clemons's picture

The Shanghai went up about 250% in a year.  7% falls are basically normal after penny stock performance like that.  Great markets we have now.  Gambler's paradise.

Thu, 01/07/2016 - 13:18 | 7012140 KnuckleDragger-X
KnuckleDragger-X's picture

Yeah, what would happen if all the Chinese shit magically disappeared from the shelves. That 7% is a pretty narrow indicator of real economic flow.......

Thu, 01/07/2016 - 13:05 | 7012057 yogibear
yogibear's picture

Before when China was going up the liberal media told us China going up will help the US big-time.

Now that China is going down the same media tells us China is insignificant.

LOL, double talk. 

Thu, 01/07/2016 - 13:19 | 7012153 KnuckleDragger-X
KnuckleDragger-X's picture

Remember when Japan was going to be the dominant world economy? Good times.......

Thu, 01/07/2016 - 13:47 | 7012349 Max Steel
Max Steel's picture

Chinese deval and plunging Chinese equity market spooked market big time. Funny thing is that falling RMB is actually good for Chinese growth,the only growth engine in earth.. Also, we are perhaps reaching the limits of monetary policy, it lends - it does not give.

Thu, 01/07/2016 - 13:07 | 7012077 Yellen's_Boytoy
Yellen's_Boytoy's picture

Cramer on CNBC saying China doesn't matter as we speak... I know, I know, don't flog me... I just happened to turn it on for the first time in over a year...  I also wanted to know whcih way the market is going and after watching for 5 minutes, I am comfortable staying short...

Thu, 01/07/2016 - 13:38 | 7012259 Yen Cross
Yen Cross's picture

Cramer needs to buy a suit that fits his trolish body.

 He wears those cheesey '90's style huge lapel double breasted rayon monstrosities, that look like he's going to go play Pee Wee football in the Hamptons.

Thu, 01/07/2016 - 13:09 | 7012088 lordbyroniv
lordbyroniv's picture

Sum Ti Wong

Thu, 01/07/2016 - 13:28 | 7012216 Dragon HAwk
Dragon HAwk's picture

One Day all this chart porn is going to Flat line...

  and then it will be,       Find Lee Right...

Thu, 01/07/2016 - 13:11 | 7012101 OregonGrown
OregonGrown's picture

China?  As per CNBS, the only thing that matters is what Jim Cramer thinks!  

 

That foo is working OT today!

Thu, 01/07/2016 - 13:22 | 7012108 two hoots
two hoots's picture

All the money we sent to China for cheap goods is now returning  (with the Chinese) as they buy our homes, businesses, and equities.  Consequences, everything has consequences. 

Thu, 01/07/2016 - 13:13 | 7012113 RopeADope
RopeADope's picture

China is the dead canary in the early warning cage. But the bosses long ago shut down the elevator and convinced all the miners to continue working, just trust them that the air is safe.

Thu, 01/07/2016 - 13:15 | 7012130 NEOSERF
NEOSERF's picture

I would hope we all can agree that the world's second (China) and third (Japan) largest and fourth (GermanY) which is under seige as so much of Europe is with NorthAfrican refugees, cannot collapse to the degree they have without dragging down the rest of the world...it is a mathematical certainty that this happens.

Thu, 01/07/2016 - 13:25 | 7012192 Kprime
Kprime's picture

the fed is buying the US market with printed fiat, they may as well buy china, japan, and germany.

Thu, 01/07/2016 - 13:19 | 7012151 Ms No
Ms No's picture

China doesn't want to allow the Oligarchs to choose the timing of the contrived collapse of the banker run globalist economy. 

Oh fook you pay now! 

Thu, 01/07/2016 - 13:21 | 7012160 E.F. Mutton
E.F. Mutton's picture

Dow just went -300.  Plunge Protection Team....ACTIVATE!  Form of: WMT Shares and shitloads of them lol

Thu, 01/07/2016 - 13:23 | 7012178 Kprime
Kprime's picture

if only the feds would release a list of the shares they are directly buying and a list of the companies they already own we could figure out how much of the value of the country has been stolen by the fascist state.

Thu, 01/07/2016 - 13:24 | 7012183 NEOSERF
NEOSERF's picture

The Wonder Twins actually look like a young Jack Lew and Janet Yellen...the J&J twins....

Thu, 01/07/2016 - 13:32 | 7012240 E.F. Mutton
E.F. Mutton's picture

As long as Janet doesn't show up on TV in purple tights.  I'm afraid that would put me over the edge.

Thu, 01/07/2016 - 13:41 | 7012308 RobD
RobD's picture

Need some Clorox for my minds eye now, thanks a bunch.

Thu, 01/07/2016 - 13:25 | 7012193 two hoots
two hoots's picture

PPT will soon run out of fiat powder.   Might just have to let things take their natural course.

Thu, 01/07/2016 - 13:22 | 7012165 SheepDog-One
SheepDog-One's picture

We used to hear 'we're fine here due to China's economy, as long as China is good we're good'....now that China's economy and markets are puking, it's suddenly and conveniently no big deal. How the financial media whores can live with themselves proves they're crazy sociopaths.

Thu, 01/07/2016 - 13:22 | 7012170 NEOSERF
NEOSERF's picture

In fact as of right now, we can say that #2, #3, #7, #8, #10, #11,#12,#13, #14, #18,#19, #22, #24, #25 are all under fairly significant stress right now and collectively they are quite a bit more than the average GDP of the US and probably comprise some 65% of the oil market too.

 

Rank Country/Region GDP (Millions of US$)    World[9] 77,269,168    European Union[n 1][9] 18,527,116 1  United States 17,348,075 2  China 10,356,508 3  Japan 4,602,367 4  Germany 3,874,437 5  United Kingdom 2,950,039 6  France 2,833,687 7  Brazil 2,346,583 8  Italy 2,147,744 9  India 2,051,228 10  Russia[n 2] 1,860,598 11  Canada 1,785,387 12  Australia 1,442,722 13  South Korea 1,410,383 14  Spain 1,406,538 15  Mexico 1,291,062 16  Indonesia 888,648 17  Netherlands 880,716 18  Turkey 798,332 19  Saudi Arabia 746,248 20   Switzerland 703,852 21  Nigeria 573,999 22  Sweden 570,591 23  Poland 547,894 24  Argentina 543,061 25  Belgium 534,230

 

Thu, 01/07/2016 - 13:39 | 7012292 A82EBA
A82EBA's picture

Gold miners up 4%

JPM down 4%

Thu, 01/07/2016 - 13:54 | 7012393 CNBCrap
CNBCrap's picture

Every time I turn on CNBC he's talking about how clean the restrooms are at the McDonald's on the way in to the studio.

Thu, 01/07/2016 - 13:55 | 7012396 mcq
mcq's picture

pfhh... only 7%.

Thu, 01/07/2016 - 14:28 | 7012634 The Dogs of Moar
The Dogs of Moar's picture

Not to worry, lads. Not to worry.

The PBOC and Chinese politicians are only doing at the beginning of 2016 what the Fed and American politicians did in March of 2009:

EXCEPT IN REVERSE

On March 9, 2009 the Dow average hit 6547 and then turned on no news or fundamentals, and climbed 12,000 points just on the baby breath of Barack O.

In February 2014, the weak dollar came out of a telephone booth in its spandex suit bulging with muscles from head to toe.

 The Chinese are knocking off what the Fed did then, except in reverse.  It's down from its bubble high of 5200 in the beginnig of 2015  to 3125 today.

The big difference between the two countries' manipulation is the fact that the Fed waited over 4 years to push the USD into the stratosphere while the PBOC is wasting no time returning the yuan to where it was when the US was whinging that it was too low.

As the the world slips into a mega recession, a dirt cheap yuan should guarantee China all the export business they want in the scary years to come

But not to worry.

The Chinese will return its markes to their steady state as soon as Blankfein cashes in his chips and gets out of town. 

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