San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Monday, August 31, 2015

China Did Not Cause The Stock Market Correction

China is a dramatic example of economic success when even a tiny piece of capitalism is permitted to exist in a country.  The repudiation of communism and the adoption of a state controlled "capitalism" has catapulted China from a economically backwards third world country to an economic juggernaut in just one generation.   However, despite all the evidence that capitalism creates wealth for everyone, the control freak career politicians in China can no more keep their hands off the economy than their cousins in the Socialist Democracy of Amerika can.  There is no doubt that unfettered capitalism is best for everyone in a society but the career politicians are not about to let anything be unfettered but their own power to meddle.  So guess which form of capitalism is allowed to exist?  You guessed it.  Fettered capitalism is encouraged, provided it stays on the government leash.
Recently Chinese authorities have been directly intervening in their stock market in a vain attempt to prevent it from going down.  I guess they have some sort of "face-saving" problem when the stock market drops.  Apparently many Chinese citizens believe the career politicians who rule over them are capable of continually sustaining stock market rises and utterly eliminating stock market drops.  That set of conditions does not exist in the real world and the longer politicians try to control the stock market the worse the eventual correction will be.  China is now in the middle of a serious bear market in stocks that is the direct result of inflation  of the yuan and government interventions into the stock market.  The best thing the Chinese rulers could do would be to leave everything alone and let the market sort it out. That, of course, will never happen.  Meanwhile, stock market speculators in other markets around the world have used the Chinese bear market as an excuse to precipitate corrections in their markets as well.  Indeed, China was labeled as the prime cause for the correction in SDA stock markets during the last two weeks.
The graph below illustrates the exchange rate between the Chinese yuan and the Amerikan dollar.  It is a five year graph.  Note that in 2011 a dollar would purchase 6.8 yuan.  Note that in early 2014 a dollar would purchase 6.05 yuan.  Note that a dollar today would purchase 6.4 yuan.  The stock market correction of the past two weeks has been largely attributed to China and the manipulation of its currency by its rulers.  The precipitous drop in the stock market in the end of August began when China devalued its currency overnight.  The graph below shows that devaluation.  The yuan went from 6.2/1 dollar to 6.4/1 dollar.  That represents a devaluation of 3% and it returned the yuan to its average rate of exchange to the dollar over the past five years.  Why, I ask you, should, would or could that devaluation cause a 12%+ drop in Amerikan stock markets?  The answer doesn't. 

Chinese Yuan
If devaluing the yuan to an exchange rate of 6.4/1 dollar is such a disastrous thing to do, how is it that both the Chinese and Amerikan economies were humming along smoothly throughout 2012 when the exchange rate between the two currencies was essentially the same?  Furthermore, if devaluing the yuan against the dollar is such a horrible thing to do, why did the Amerikan stock markets not drop by 12% in the spring of 2014 when essentially the same rate of devaluation took place?  The answer to both of these questions, as you should have figured out by now, is that the exchange rate between the yuan and the dollar has nothing to do with the most recent stock market correction, despite what the economic media's best and brightest might have to say about it.
Jack Bogel, founder of the Vanguard family of mutual funds, hammered the nail on the head with his commentary on the most recent correction.  Here, in part, is what he had to say, "The stock market's wild ride over the past week has been the biggest exercise in sheer unadulterated speculation....It's just speculators not speculating on what they think is going to happen but what they think other speculators think is going to happen.  This speculative binge that we're seeing here … has nothing to do with the fundamentals behind the long-term value of equities in particular, which are created by the values of corporations, earnings and dividends, and reinvestment in the business."  I couldn't have said it better myself.
So how are economic fundamentals right now?  Let's have a look:

Here is the rate of increase in the Gross Domestic Product for the past 10 years:

Here is the rate of corporate earnings growth for the past ten years:

Here is the rate of growth in commercial and industrial loans, always a sign of economic strength:

And lest you think all of the positive information indicated above is simply the result of inflation, here is the rate of inflation over the past ten years:

I rest my case.

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