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Lots of other foreign stock markets are having huge gains in the 15 to 30% range. China’s stock market has performed dismally, losing 50% in the last 5 years, however. Even though China is booming, their stock market isn’t. This appears to be a paradox. An explanation is offered by Weijian Shan http://www.feer.com/articles1/2005/0512/free/p005.html “The real reason can be found in economic fundamentals. China’s economic growth is so driven by capacity expansion, or fixed-asset investments, that investments now account for more than 50% of the gross domestic product, more than any other country at any time in the history of economic development. The relentless capacity expansion has led to economy-wide overcapacity and overcompetition, to such an extent that the profit margins of the firms are constantly squeezed. Data show that the prices of Chinese exports to the U.S. have fallen by more than a quarter since 1997 whereas the price index for China’s raw materials has risen by about 20%. If growth only translates into ever declining profitability for Chinese firms and decreasing return to their shareholders, is there any wonder why their stock prices also fall?” This is plausible. However, in any case, I wish to point out that there are huge stock bubbles appearing in large overseas markets. It is reasonable to suggest this may translate over into the US stock markets, essentially flat for the last few years. It is in the light of speculation bubbles in stock markets that I would like to point out that gold bugs (ultra conservative ones) will be tempted to get in on the stock bull party. Of course, what better sector than gold stocks? But, if you have read me, you know that I prefer bullion to gold stock by far since I don’t look for capital gains but would rather protect wealth. But that is me. There are times to be in protective mode and times to make lots of money. These times are for protective mode, hot stock markets regardless. Thus, the challenge to gold bugs. The issue here is, there are strong stock markets emerging, and this is going to try gold bugs who are looking for (expecting) stock market collapses. Also, US economic data remains relatively strong for now. As long as the US economy continues to post this kind of good data, dropping unemployment and still low historical interest rates, and consumer spending that remains somewhat strong, the US stock markets may also find their way into the emerging world stock speculation boom. Of course, the US housing bubble is dying rapidly, and the Fed has indicated several times in plain text that they intend to stop the US housing bubble. They are succeeding. With the US housing bubble providing from 600 to 800 billion$ of stimulus to the US economy, it does not look good for the US consumer in 2006. But speculation bubbles are nothing rational. And we may indeed get another US stock bubble in 2006. The problem is, with any bubble, you never know when to get out before it is too late. At some point, an investor has to take money OUT of a market and park it. Preferably in GOLD. But most people rarely get out, and the latest stock bulls are a case in point. However, I want to point out that I expect a US economic crash to start within a year. Now last year, I said 2005 would probably go along well for the US, until the housing bubble slows and stops. That is happening now. What I am wondering right now is, will the US join the emerging stock bulls overseas? That may indeed come. What would your reaction be in such a case is the subject of this segment. First of all, let us outline what I see as the present reason for these stock bulls. Gains of 40 and 50% are nothing but spectacular. But how is Japan to justify this performance when economic statistics are just barely turning up there? For the last year, economic statistics have been alternatively good and bad in Japan. One month, the Japanese Ministry of Finance says deflation appears to be dissipating, and there is a modest .2% rise in consumer prices. The next month, Japanese consumer prices fall slightly .1%. There is some optimism in their producer index. It has risen slightly to a positive number, according to Japan’s ministry of economy, trade and industry. Industrial production is moderately increasing. The problem that I have is, with a 3% increase in these statistics, sure it looks as if Japan is gaining traction economically, but does this justify a 40% rise in the Nikkei?????? No. The answer for that kink of stock market gain lies with the love of speculation that Japan has become enamored with. They certainly were NOT that way when they built up Japan into the world’s most dynamic manufacturer after WW2. Now, I am using the Nikkei as an example of what is going on world wide. The stock booms overseas are largely speculation booms, and fit completely with the mentality of the present times, namely, easy and fast money. Since there have been few decent yielding investments for the last 5 years, obviously lots of money is going to chase these stock bubbles, and perhaps the US is going to follow suit too. But these are all manifestations of financial excess, and these stock booms are not really driven by economic statistics that justify 40% plus gains. Rather, those kind of gains are typically speculation driven rates of increase. What is happening is, the world has not suffered a great depression since the 1930s, there is a great deal of liquidity and easy money in all modern economies, and we are witnessing the beginning of bubble 3, a world stock boom. With stock increases in the 40% range, this may become a big mania. But, at these rates of increase, the time for these markets to peak and crash will come swiftly. I am wondering if that time has not already appeared. With successive bubbles you get faster and faster gestation periods. So, if I am right, these stock booms may already be ready to deflate. Of course, with all bubbles, it is almost impossible to predict their demise, but 40% rates of increase definitely qualify as advanced bubble behavior. But they may go on into 2006, become the latest manias, replace the real estate bubbles, and then we will see a wild ride. The problem is that, we have now had two successive bubbles in the US and Japan is starting number three, a stock bubble. Will we follow? The bubbles were, For Japan, Stock,
1980s to early 90’s The US has had: Stock
bubble 1990s to 2001 Emerging stock bubble in 2006? (I think this likely will not happen because the housing bubble will severely curtail US consumer spending)… Japan is more able to sustain a new bubble than the US for various reasons, one being that they have already suffered through a mild deflation for over a decade. But, as I said, their economic growth does NOT justify a 40% gain in the Nikkei, hence I call it wholly speculative as of this time. And it could already be late in the tooth. One thing that I have learned is that, with modern economic mechanisms and the internet, you need to speed up your time scales for market developments. Money is so fluid and chases hot markets so rapidly that, a new stock boom can rapidly mature in half the time that the last one did. This is a new paradigm. (I call this my half life paradigm) But, in any case, gold bugs are going to be challenged by the behavior of stock markets in 2006, which defy all logic and don’t reflect real economic fundamentals any more. Rather they are speculation markets only. Speculation is the game today. Not investing. You will have to decide how much you are willing to put into these tempting hot speculation markets… And your greed instinct is going to be tempted in 2006 too, and that is going to include the gold markets. Gold is going to do very well this year. But why not just buy the bullion then? Given the fact that speculation is so endemic to the world financial landscape and investor mindset of the new millennium, don’t you think prudence should take the foreground?
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