‘Are U.S. stocks in a bear market? ‘

Depends, apparently, on the denomination of measure, no?

http://pricedingold.com/charts/DJIA-1985.pdf

Hi Cam, et al,

Cam is making very intelligent conjecture here and I have to agree its getting dicey but the difficulty is that we still don’t know as transparently in China what’s really going on, as we do, for example, in the U.S. . I mean, what’s going on in the U.S. is egregious and outrageous and unprecedented on many levels, as everyone here often speaks of, yet it is all out in the open for all to see, which makes it even more egregious and sickening.

China, on the other hand is a completely different ballgame. Its very nature is hidden, from the way it does business to the culture/thinking of its people. The U.S. shadow economy to GDP ration is $2/14T according to Professor Feige, University of Wisconsin, while China’s is at least 6/10 if not 1/1, according to Credit Suisse’s report and references in my upcoming book on China.

Yes, I do mean that the shadow economy in China could very well be equal to its official GDP of $10T. So then, looking at what’s on the surface, which is a rising credit crisis here, (eg, China’s SHIBOR interbank rates are recently spiking) it certainly looks like its getting dicey and worrisome as far as those specific banking system shenanigans go. Yes, commercial/industrial sector bank lending is highly leveraged, but mortgage lending is the opposite, very little leverage in the residential housing market; so compare that to the residential subprime scenario which was the main trigger back in ’08. We can suggest that municipal level /commercial/industrial lending may be where the trigger lies here, BUT there are massive pools of existing shadow cash reserves here to respond with.

The other two China factors being watched are that domestic spending and real estate prices; both are far stronger and more stable than any official recognition of official reporting on their current status. And in both cases, that is significantly supported by and driven by the massive shadow economy here.

Note I am differentiating between the degree of possible crisis in 1) China’s industrial/commercial debt, 2) govt/municipal debt, and 3) private sector consumer debt (mortgages/autos/credit cards). In the case of 3), there is an extremely low level of debt and of no concern. Therefore, its like comparing apples and oranges, I suggest its very hard to say how this will all play out, lots of unknown possible random black swans that can come out of nowhere like a rogue wave and capsize the unsuspecting ship…

I don’t have any intelligent knowledge and commentary on the idea of outflows from China and Japan to U.S. bonds and equities other than obviously the situation can get out of balance rather quickly. 50% of S&P500 earnings are international, mostly now Asia/China driven, so there are all kinds of conclusions we might come to…

Cheers, Mario

I think I will be leaning towards the idea that the Dow will rise to your 16,800 level rather than suffer anything more than a minor setback, Rick. It may go far beyond that too (and in short order) if my theory has any validity.

My reasoning is fairly straight forward and relates primarily to what I see developing at the macro level in global capital flows.

Talk of “tapering” and rising bond yields has recently seen significant pressures arise where the emerging economies are concerned and capital outflows are now materializing in near instant impact on many markets from China to Brazil.

These countries amongst others are scrambling to ease restrictive walls erected in the past that were designed to limit the impacts of the many QE’s that threatened their economies as instead money has rapidly changed direction.

Over in Japan, the threat of negative yield is forcing banks, pension funds and insurers to reallocate cash abroad and the effect will most likely show up as increased buying of both Treasuries and US equity markets in coming months.

We can appreciate that Europe does not have much to offer those big Japanese funds as risks remain elevated in the financial sector of Europe and the ongoing recessionary conditions do not offer the security that is demanded.

Likewise, Japanese funds will be reluctant to invest too heavily in China for both political and economic reasons but certainly the recent conflicts between the two giants will see limits on how much money is shifted there.

This essentially leaves the US and Canada as the best harbours of opportunity and it is those countries that are now offering the most stability for the very sizeable deposits seeking both shelter and opportunity.

Trillions of Yen are now on the line as the outcome of both bond troubles and the recent stock market collapse due to the Abe governments tinkering cause a rethinking of where to store wealth for that countries huge pension class.

So money will be departing Japan in vast volumes as funds seek performance but also as they gird themselves against the coming shocks that will almost certainly drive some of those in the financial sector into insolvency if they do not act.

I have little doubt the more savvy of firms in Japan are now concluding they must make a move before it is too late. They will not allow themselves to wither based on a mad experiment in reflation that is already creating economic havoc. Even loyal Japanese money is mercenary when it comes to survival and flight from JGB’s and domestic stocks is all but assured as the current process has been so unstable.

In China meanwhile that country now appears to be on the cusp of an epic credit drama and it is not inconceivable a collapse in both the manufacturing sector and housing prices is on the horizon as global demand for production falls amidst increasing difficulties in acquiring new finance.

I don’t suggest that idea lightly either but if what we are now hearing emanate from Asian shores has merit then China will soon be heading for an asset value collapse as it has reached peak credit and tremendous risks are now arising in part due to the extreme leverage in the system but also as a result of a triggering by capital departure related to dynamics in global interest rates and bond markets.

It is less than certain that any of the events now arising could have been adequately predicted as an outcome of “tapering” talk and how that would immediately feed into worries in bond markets where the current troubles are being felt most acutely.

We are already seeing signs of money washing ashore here in North America that will almost certainly guarantee inflation now lies ahead although when it actually bites is anyone’s guess. One thing we can be sure of though is that any large scale movements of wealth that result in dollars being repatriated home for whatever reason will bring on a dilution of the currency on our own soil.

How large that dilution becomes is the key question but impacts will certainly be felt as cash floods into assets and therefore feeds directly into the accounts of those who are sellers of assets. This aspect is unquestionably inflationary as it puts cash directly into the hands of vendors and so is quite unlike the more benign digital creation of reserves undertaken by the Federal reserve.

There is no doubt though that North America and more specifically the US is seen as the globes refuge of economic and political stability.

It is the go-to place for wealth preservation and opportunities in equity markets given their sustained growth pattern and the strength of the companies that are listed here despite all the complaints that markets are only floating on a sea of manufactured digital liquidity.

Low relative real estate prices meanwhile have been well telegraphed creating one of the more obvious options for overseas investors who see limited growth in their own countries.

Many have not yet experienced an asset collapse as was witnessed here in the US and in China’s case as with Hong Kong, Singapore and others there continues to be an epic property bubble that remains intact.

It is my belief therefore that real estate will continue to rise strongly in America in coming years for the relative opportunity it offers foreigners and this is despite the creep in rates we are now seeing. It is simply the obvious choice for money seeking a refuge.

Meanwhile. with so many Chinese producers and manufacturers living quite literally on the edge of their finance lifeline due to the excessive uncontrolled buildup of credit there, current high interest rates for grey market loans and an allocation of corporate debt repayment far in excess of norms we have an dangerous risk scenario now in play.

As I mentioned I do think it is possible for a collapse in manufacturing to take place in that environment and have come to the conclusion that the most serious outcome would be that global supply of manufactured goods would be disrupted almost overnight.

Impacts would be felt in shipping, banking, availability of products on store shelves and of course balance of trade numbers in short order.

Perhaps this is what the Trannies chart is really warning us as impending. Not that transport itself will be the problem but rather that flows of finished goods are destined to be reduced as inventories are depleted and market forces clear the corporate Chinese decks in an apocalyptic credit event.

One of the considerations we always discuss when looking at the prospects for inflation is that there must be too many dollars chasing too few goods for the idea to have validity. Usually though we only view this in light of our own local economies but the same principle should apply on a global scale.

In this case what I refer to is the combination of funds flowing back to the US too quickly and the circumstances arising where China’s manufacturing backbone could be suddenly disrupted as a result of uncontrolled past excess in lending activities.

As China is the worlds largest producer of manufactured goods it just stands to reason that a serious disruption there brought on by an edifice of credit that is on the verge of imploding will conclude with a noticeable drop in supply and thus a quick rise in price everywhere.

We live in a globalized world and therefore must consider these ramifications as our current reliance on overseas manufactures is nothing short of a dependency. In many cases there are no other alternatives available.

It is clear too that companies can fail (if only over the short term during reorganization) for reasons other than a shortfall in demand and the first amongst those reasons may be a shortage of available credit to keep functioning or second, an inability to meet debt repayment schedules. These events are both underway there now.

When I consider these ideas in light of the significant (latent) capital flows back to the US and the implications that past debt monetization is really a double edged sword (we ship out inflation first but it always comes back like a boomerang in the end) I can only conclude that the combination of massive funds flows from both Japan and China almost simultaneously is setting up the circumstances for a tremendous rise in US equity markets as the conditions for inflation finally raise their head with a vengeance.

This is just conjecture of course.

None of us can truly define the future but it was inevitable that the huge distortions in global finance generated by the many interventions untaken to date would inevitably find a way to intrude on the delicate balance that seems to be keeping most investors in a state of near complacency.

That could all end very soon.