Will a Chinese Economic Downturn Lead to Global Collapse?

Starting off, we have four questions and what you may not get to read in many publications.  For each question you can choose one of three answers, a, b, or c.  Take the time to do the quiz before looking at the answers.

Question 1: Who holds the majority of US government debt?  Is it:

a) China

b) Japan

c) USA

Question 2: What percentage of products consumed in the US are produced in the US?  Is it:

a) 25%

b) 58%

c) 88%

Question 3: What percentage of products consumed in the US are produced in China?  Is it:

a) 78%

b) 23%

c) 2.7%

Question 4: American personal bank accounts held by US citizens currently contain:

a) $10 billion

b) $100 billion

c) $10 trillion

You can scroll to the bottom for the answers. But now let’s turn out attention to why the US market makes all-time highs in the face of negative news.

Despite messages being overwhelmingly bearish based on the accumulated debts of all the nations around the world, you just have to realize one thing: the market knows this already. In other words, the known is already discounted into the future expected price. The markets have already reacted to this news. It’s old.

The other thing is, US markets are NOT going up just because the US Federal Reserve is printing money. US markets are going up because corporate earnings are increasing — and increasing substantially. One reason is certainly because many of them are finding effective strategies to avoid nation based taxes, but a far more important reason is because these companies are producing goods and services that you and I want to buy and use.

Much of this is technology basedi. US corporations have more cash in the bank than at any time in history. US markets are simply not going to collapse whilst this is the case. And we should not forget, the new energy methods (such as fracking) are providing prodigious lower cost opportunities that are feeding right through all levels of the economy.

Having said that, US markets have now repeated history and they are due a retrace, which is likely this year and early next.

The other things you should see, 2014 is looking very 1994, where despite fears that interest rate rises would decimate the recovery of house prices in both the US and UK in that year, (and Australia too at that time) stock markets retraced briefly but housing continued to rise afterwards.

China may well be in the beginnings of a downturn which is due about now. Everything we are used to seeing at the top of a cycle, is taking place; credit issues, tall buildings, bling and wealth on clear display. But I would not expect a huge collapse. A slowdown, but not a downturn.

As we know, China’s economy has mightily affected the rest of the world. We will just have to be patient as things unfold. However, I think the US remains the more dominant player. And in the US, they are only just beginning their next real estate cycle. And here’s the important point: after every down turn the US has emerged stronger than before.

Now, back to the quiz at the top. The answers? The answers are all ‘c’. Did you get four out of four? I bet not. These are surprising answers, yes? You shouldn’t be surprised if the doom and gloom on the US turns into something much different.

Phil Anderson
for Markets and Money

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Phillip J Anderson is an Australian academic, author and student of stock, commodity and real estate cycles. Drawing on the work of British economist Fred Harrison and American technical analyst WD Gann, Phil developed his own theory about 18-year real estate cycles in the early 1990s. Since then, Phil has been using cycle theory to guide his own investment decisions — crediting the phenomenon with his decision to move to a 100% cash position in July of 2007, just before the GFC wreaked havoc on the Australian stock market. He has also built up a lucrative property portfolio here and in the UK. Phil is currently predicting a 14-year boom in Australian house prices.

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