He Predicted China’s Downfall… And He Could Make You A Fortune In 2016
Shortly after Chinese stocks tanked last summer (dragging down global markets as well), I warned that the situation in China was much worse than you might think.
Spurred by economic worries and the devaluation of the yuan, Chinese stocks were still up more than 40% year-to-date after the selloff.
To put it simply, we saw more pain on the horizon.
Here’s what my colleague Jared Levy said about the situation back then:
| For a number of years, all we heard from government officials was how fast the country was expanding… how quickly the middle class was expanding… how well the economy was performing… But we now know things weren’t as wonderful as they were made out to be. There’s a lot we don’t actually know about what’s going on inside the country’s walls, which has led to confusion over whether the market is cheap or about to tank. Here’s what we do know: 1) Government meddling has propped up China’s stock market. 2) Even as the Chinese stock market has stabilized, economic data continues to deteriorate. 3) The Chinese yuan is being devalued. In simple terms, China is caught in a downward spiral where its solutions spark bigger problems elsewhere that will eventually come back to hurt China again. |
Those words proved prophetic.
We’re just one week in to the New Year and the situation has reared its ugly head again. And it’s causing massive selling in stock markets around the world, including right here in the United States.
#-ad_banner-#On Monday, weak manufacturing data out of China sparked a selloff, sending its benchmark index (the Shanghai Composite) down nearly 7%. This prompted a complete shutdown for the day’s trading, in accordance with China’s new “circuit breaker” policy.
For those who are unfamiliar, a circuit breaker is where trading is halted if there’s a large downside move in an index. For China, the circuit breaker would kick in after a 5% plunge, halting trading for 15 minutes, and then a complete shutdown for the day once stocks fall a total of 7%.
Now, before you chalk this policy up as “typical” of the Chinese, just know that most major markets have similar mechanisms in place, including here in the U.S. (Although it should be noted that the U.S. circuit breaker shuts down trading for the day after a 20% decline.)
The move shook global markets, sending the Dow Jones Industrial Average down by as much as 400 points on Monday. Soon, it became apparent that Chinese stocks would continue to slide as investor confidence continued to erode.
On Thursday, Chinese shares plummeted another 7% after the opening bell and trading was again halted — this time within 30 minutes of the open. It was the shortest trading day for Chinese stocks in 25 years, and policymakers have since decided to suspend the circuit breaker mechanism. Stocks in the U.S. fell sharply as a result, with the Dow taking a nearly-400 point hit.
Just like Jared warned readers after China’s stock market debacle last summer, it’s become clear that China’s attempts to boost the economy and mitigate sharp declines in its stock market are actually hurting more than helping. And the simple fact is that no one has been able to trust the data coming out of China for years. Many investors ignored this fact as long as economic growth continued and Chinese equities continued marching higher.
Now, the chickens are coming home to roost.
This article in the Wall Street Journal explains the situation best:
| All things being equal, a cheaper currency should be welcome news for China… But there is a difference between an ordinary decline in a market-based currency and a managed decline in a government-controlled exchange rate like China’s. Facing depreciation pressure, China seems to have two choices: Allow the currency to fall to a market-determined level all at once or go for a slow devaluation. But given the disruptions a rapid fall would cause… it really has only one. The go-slow strategy has costs of its own, though. Repeated interventions drain currency reserves, which fell by more than $100 billion in December. Using foreign currency to buy up yuan also shrinks the domestic money supply, counteracting stimulus efforts. What’s more, a slow-motion devaluation creates a one-way bet against the currency, giving market players an incentive to pull money out of China sooner rather than later. |
The article goes on to make the point that China should have begun making the transition from a fixed (or “pegged”) currency managed by the government to a free exchange years ago. They’re just getting started with the transition now, and the move looks desperate. And that’s exactly what it is. Growth is slowing, so the authorities want to devalue the currency to boost exports. Stocks are falling, so the government is spending billions to buy shares and limit the damage — but to no avail.
Add it all up, and you have a crisis of confidence, plain and simple. And investors around the world are feeling the pain. Until the situation abates, it would be prudent to think twice before putting any new money to work during this selloff. At some point, we’ll get a golden opportunity to buy shares of quality companies that have been unfairly punished during this rout. We’re just not quite there yet.
One thing I would recommend right now is to listen to Jared Levy. He’s been right about China for months now, as he generally is with all of his market guidance. That’s why we’re so excited about the new options strategy that Jared has recently unveiled to the public. (For more details on it, you can read last week’s issue.)
For the past several months, Jared has been using his “Levy Technique” strategy to steer his Profit Amplifier readers to annualized gains of 123%, 220%, 508% and more. He just released a new presentation detailing how his technique works and how you can use it to make the same kinds of gains he and his readers make every week. To view the presentation, visit this link.