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07 febrero 2007

China And The Crash of '29

When assets are priced with record levels of optimism, reality will disappoint. As Dr. Marc Faber said recently "the art dealers are bullish on art, the commodity traders bullish on commodities, the real estate guys bullish on real estate, the stock traders bullish on stocks, everybody has something to buy." Therefore the wise contrarian strategy is interest-bearing cash. Over the next few years, most assets will fall in value as risk returns to the market and leverage is unwound. In the future, credit will be extended with greater caution.

Cash Rich and Debt Free China
An economy reliant on debt and speculation is not sustainable. This is as true now, as it was back then. It does not bode well for the United States. Parts of Asia however, especially China, are cash rich and debt free. Their middle class is just beginning to emerge. Just as the crash of 1929 marked the transition of the U.S. economy from the 'factory' to the 'finance' phase, so this year's crash will mark China's economic progression.

Looking at the chart above provided by Elliot Wave International, the 'idealized' long term wave pattern suggests a major sell-off for the United States. In our last article, we discussed many reasons why investors should be selling most assets at this time. The U.S. stock market will struggle sideways for many years under the burden of debt, the deleveraging of its economy, and the weakening of the U.S. dollar. China and other Asian countries, currently in the 'factory' phase (similar to the U.S. in the 1920's), will also undergo a significant correction over the next few years. However, as the Chinese begin to develop consumerism, especially when fueled with debt ('finance' phase), their markets will significantly outperform the U.S.


Why Now Is Not the Time To Buy

Recent reports from China, describe novice investors creating hour-long lines outside of stockbroker offices. The two mainland Chinese markets are "running at triple the daily volume of just last year." In manias throughout history, waves of neophytes are the last to join a market before it crashes. Also in Asia, the Vietnam stock market is up ~40% in 2007 and ~180% since 2006. These signs of speculative fervor warn an investor that it is time to sell.

The Hong Kong Index and Straits Times (Singapore) Index wave forecasts from Elliotwave.com imply harsh "C" waves down with losses greater than 50% over the next few years. After this major correction, these Asian indexes would complete sideways trading roughly a decade long. Our contrarian analysis also indicates that the U.S. dollar will have a sharp rally during this period.