``The margin of safety is the central concept of investment. A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning and by reference to a body of actual experience". Benjamin Graham
Recently I stumbled upon some quants predicting (ZeroHedge) a crash in China’s stock markets over the next few days.
Although there have been many doing so, what attracted my attention is that they had the temerity to quantify the period for the said event-particularly, July 17 to July 27.
This group seems to have a good track record of predicting events, in contrast to most of their genre (whom were caught with the recent market meltdown), albeit mostly way TOO early based on their site.
I have no idea whether these will occur or not, but I won’t bet on their side.
Although based on Figure 4 by US global Investors, China is clearly operating in bubble territory.
Figure 4: US Global Investors: Monetary Expansion in China
As caveat, bubbles normally take time to reach a climax. For instance, the US real estate bubble ballooned from 2002-2006, while global stock markets inflated from 2003-2007. True, today’s China bubble could risk being pricked hastily or abruptly, but in my view, this may seem too early.
It’s because normal bubble cycles need sustained massive infusions (we seem to be seeing the first phase) and the vast concentrations or clustering of resource misallocations that could either become huge enough to be extremely sensitive to interest rate hikes or would require continued exponential amplification of credit to maintain present price levels or a pyramiding dynamics…until the structure in itself can’t be sustained (usually interest rates from market or policy induced does the trick).
I doubt if we have reached that point.
Besides, I think that the risks seem more tilted towards government debt bubbles as global governments appear predisposed to activating money printing solutions at any signs of renewed weakness or distress in their respective domestic economies.
Remember, the present environment, for the officialdom, is construed as signs of policy based accomplishments, hence, more of the same treatment will likely be applied but at higher dosages, if asset (stock) markets fall.
Unfortunately, such policies seem to direct people into speculating more than investing.
Global policymakers, as we have reiteratively been asserting, appear to target the stock markets as the preferred signaling channel to communicate “recovery” to the public.
Figure 5: US Global Funds: Strong Loan Growth in China
And global central banks appear willing to inflate more by maintaining loose money policies to encourage bank lending growth, rather than to tighten in order to support sentiment (albeit mostly speculative) or the “animal spirits”.
In the case of China (see figure 5), the surge in loan growth appears to have triggered some alarm bells in the officialdom, as the People’s Bank of China (PBoC) had reportedly been mulling to “switch to more direct lending controls” to temper growth and where recent sales of Chinese Treasury bills saw the government accepting higher rates (Forbes). Given ample evidences of sustained economic growth, it is believed that China would begin to increase interest rates by 2010 (Bloomberg).
Hence we see the odds seem likely for a correction from severely overbought levels than from a prospect of a crash as foreseen by the quants.
However, Chinese policymakers, like their US counterparts seem to be increasingly in a bind. An early tightening (increase rates or bank reserves) or if the market sees the need for higher rates, could set off renewed volatility hence, the likelihood for both the governments to press for asset friendly bubble blowing policies.
Figure 6: Russia’s RTSI: A Probable Path For China’s SSEC
Nonetheless, in figure 6, China’s (black) trajectory could probably follow Russia (black red), where the latter saw its stock benchmark fell by 80% during the recent crisis and rebounded by 129% and has corrected by 29% at its most recent trough and appears to be on a path to recovery.
Since March of this year, China’s Shanghai Index has shown no pause from its winning streak- a valid cause of concern.
For the meantime, financial systems that have been less leveraged than their counterparts in the developed countries seem likely to absorb more of the inflationary policies adopted by their national governments and or transmitted by the US Federal Reserve.
Last week, perhaps due to this, several Asian bellwethers either broke their resistance levels or are adrift at these levels attempting for a breakout see figure 7.
Figure 7: Stockcharts.com: ASEAN Bourses
So far only Malaysia (MYDOW) has successfully cleared the hurdle while Singapore (STI), Korea (KOSPI) and Indonesia (IDDOW) are almost over the threshold point.
Meanwhile other bourses such as Taiwan, Hong Kong and Pakistan are likewise approaching their respective resistance levels with a probable test to break these barriers soon. Next week perhaps?
From where we stand, momentum appears to tell us that the next leg could likely be up for most of Asian bourses mostly led by ASEAN bellwethers.
And this should include the Philippine Phisix.
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