China Goes Parabolic

During cyclical recoveries such as the one now underway in the global equity markets copper is the commodity to watch. In fact, there has never been a cyclical recovery in which copper was left behind, which makes its current behavior so troubling – it just does not support the global rally that began in 2003 with emerging markets.

As usual, U.S. equity markets languished even as the rest of the world exploded, owing to the fact that our primary export is not goods or services, but debt. But I digress. Back to the price of copper and the global rally now underway and in full swing across (most of) the globe. To get a full perspective we have to go back to the beginning in January 2003 when the biggest % movers among the relevant indicators broke down as follows:

  • Copper up 280%
  • China (Shanghai) up 272%
  • Dow up 54%
  • S&P 500 up 57%
  • NASDAQ up 59%
  • Gasoline (NY harbor) up 92%

Over that period of time the USD has declined 30% (trade weighted basis). Since the only measure that means anything is what you get for your dollar, you have to subtract for the decreased purchasing power of your base currency. In the U.S. it looks pretty darn mediocre as cyclical recoveries go.

China is now like the U.S. was back in the 20’s ( growth aspect) and their stock market is in a parabolic move.Their economy is over-heating and millions of Chinese brokerage accounts have been opened with speculation now running rampant with the general public. So far the ‘new’ capitalist Chinese public are and have been enjoying a great move higher. I suspect that we will see China experience the same type of market crash that the United States had in 1929. Clearly the Chinese stock market can’t continue to go up 1 and 2% everyday like it has been.

Since the Chinese are making a big deal about the 2008 Olympics, kinda like their coming out party. Their stock market cannot continue the parabolic ascent for another year. I suspect they will be taking action to cool speculation and try to let the air out of the balloon slowly. Some how I don’t buy it that they will be able to let the air out slowly, most often the air comes out fast.

With hedge funds flushed with paper assets purchased with cash from the Yen carry trade the unwinding of that trade will be swift and furious. We saw the preview to that on FEB 27th and the final unwind won’t be pretty. The Chinese are going to get their first lesson on how capital markets can go up and go down. Since they have been the engine of global growth when they implode they will take others down with them.

About the Guest Author: Mazyar Hedayat is the President and principal Attorney at M. Hedayat & Associates, P.C. He is also the President of Aegis Title Services, Inc. Mazy has held Series 63 and 7 licenses, and has been a licensed business broker. He works with small businesses from inception to sale, and with small business owners as well. He has also written about small and medium-sized businesses throughout his career. Feel free to contact him at 630.378.2200 or by e-mail at mmhedayat1@gmail.com.