Wednesday, April 25, 2007

Interesting read

A good article I read today.

Too much like 1929


"The two major players in the world financial system at that time were the United
States and Great Britain. The United States was the emerging industrial power,
whereas Great Britain was the mature and stagnating industrial power. The
central bank of the emerging industrial power (the US) printed money in an
effort to prop up the economy of the mature industrial power (Great Britain).
The inflation of the money supply resulted in the overheating of the economy and
the stock market of the emerging industrial power. It was the crash in the stock
market of the emerging industrial power (the US) that brought about the crash in
all the world’s stock markets and the Great Depression followed later.

Now fast forward to today, and what you see is China as the emerging industrial
power and the United States as the mature and stagnating industrial power. China
is printing money in an effort to prop up the economy of the mature industrial
power (the US). The inflation of the money supply is resulting in the
overheating of the Chinese economy and stock market. Very interestingly, on
February 27, 2007, it was the sharp 9% one-day drop in the Chinese stock market
that led to the sharp drop in stock markets worldwide, including the US. People
may be conditioned to think that economic events in developing countries pale in
significance to economic events in the US, and may fail to see how what happens
“way over there” in China would have any significant impact on their economic
well-being. But how different the truth really is. I think most people even now
after the February 27th turn of events, fail to grasp why the US stock market
sold off so sharply after the Chinese stock market sell off occurred first. The
idea that a foreign stock market could dictate what happens in the US stock
market almost offends the American sense of national pride (so the event is
casually dismissed as “market irrationality”). A word of advice: you better get
used to it, as there is much more of that to come. The crash is coming."

2 comments:

65Trader said...

Interesting article. I was reading somewhere about how investing in foreign markets wasn't necessary since US companies are international. This author also said "When the US sneezes the world catches a cold."

If you compare EEM to SSO, they are almost in lockstep. Very strange. SSO almost leads EEM.

I think that the China markets must eventually go down and take us with them, but I hope there will be plenty of warning before that happens.

IM said...

Sleep with one eye open towards China. A 9% sell off in China followed by a 400 point drop in the Dow tells us something. The Shanghai Composite is nearing a blow off top. Possibly another 10-15% to go. Take as much advantage of this bull run for the next few weeks. I know I am and I will be buying any pullback till I see the Shanghai Composite collapse. Then I am outta here.