Over the past year the Shanghai Index has been up 102% – a remarkable run in anyone’s book. Yesterday, in a move that suggests it has run too far, too fast, it gave up 7% in the session.
This pulled the bears out of the woodwork. According to Bloomberg:
“The Shanghai Composite Index, the world’s worst performer in August, may fall another 25 percent as China’s economic recovery isn’t 'sustainable,' former Morgan Stanley Asian economist Andy Xie said.”
Xie added, “The market is in deep bubble territory.”
Perhaps; it’s not hard to argue that the index needs to consolidate. The Shanghai is full of speculators and it goes from boom to bust with more rapidity than the NYSE – and it moves more on government signals than it does on antiquated things like earnings or dividends.
The 102% gain this year was due to the fact that China pumped $586 billion into the economy and did it with speed. Much of this money has been misdirected and misspent, but i t should be enough to push the GDP to a 9.4% growth rate in the next quarter.
This, of course, makes the mandarins nervous about overheating, so they are cutting the amount of new loans. Again from Bloomberg:
China may have 200 billion yuan of new loans in August, the Beijing-based Caijing reported today on its Web site. That compares with 7.4 trillion yuan for the first half of 2009 and 355.9 billion yuan in July alone. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said this month.
That’s all well and good. The short-term lesson you take away from this is you should sell China now and buy back on the dip. But the real take away is that government stimulus packages drive up stock markets.
The NEXT U.S. Bubble
If you go to www.recovery.gov and look at the chart on the bottom right, these government numbers would tell you that we have only spent a portion of the stimulus money.
There is almost a trillion dollars coming down the pipe. The Obama administration with the Fed and Treasury want to create another bubble. No one wants the second Great Depression on their watch, so they are kicking it down the road another five years. In the future you might be pissed, but right now is the time to go full and start making money.
The $787 billion stimulus is a lot of money. Much of it will go to infrastructure, smart grids, roads and natural gas pipelines.
Contracts for the government will be signed this month. I am putting together a list of companies in the construction arena that will benefit from this largess. The last time I traded these I made 80% in a matter of weeks.
A secondary cause of all this spending will be hyper-inflation. I’ve put together a free report that will make you legitimately rich from an unlikely investment vehicle. Follow this link for my gold report.
Other Articles Related To This Topic:
