All eight of the major international stock indexes were down last week with an average loss of -6.57 percent, according to Doug Short, despite Friday’s -531 point plunge in the Dow Jones Industrial Average, driven by fears of an economic collapse in China. But this year China’s Shanghai Index is still up +8.44 percent and the U.S. S&P 500 Index is down only -4.27 percent. The nasty hit to investors last week could be just a correction in a five-year bull market. But if China is starting a currency war, investor pain could get intense.
By January 2000, the advanced Western Powers had prevailed over the Soviet Union, formed the European Union, and had entered what was being described as a transformational period of technological advancement. Yet the average stock market return for the group was a barely positive +.08 percent.
Investment performance on a percentage basis for the world’s biggest stock exchanges over the 15 year period was India +409; China +149; US +35; Hong Kong +29; Japan -2.3; Germany -3.2; UK -7.1; and France –22.
Those investment returns would have be substantially worse if adjusted for US inflation of +43.2 percent during the period.
China’s Shanghai exchange had been on a tear this year, up 59.72 percent by mid-June. But Breitbart News warned in a July Fourth article titled “China’s Lehman Brothers Weekend Begins,” that the “Red Dragon” was about to suffer the type negative tipping point event that the U.S. suffered in November 2008 that kicked off the financial crisis.
Despite the communist authorities’ $200 billion attempt to avoid a full-fledged crash over the next month, the Shanghai Exchange plunged by what was considered a gut-wrenching dive of -10 percent for the week ending July 31.
Breitbart News warned on July 27 in “China’s Communists Lose Control of Market” that the failure of the authorities to arrest the stock market crisis was metastasizing into a crisis of leadership that threatened the ability of Chinese state-owned-banks to continue Ponzi funding to insolvent state-owned-enterprises that power China’s export economy.
On August 1, China’s Communist Party went all-in with a $6 trillion back-stop of the Shanghai Exchange prices and $1 trillion of liquidity in an authoritarian attempt to stem the market crash.
Christine Lagarde, Managing Director of the International Monetary Fund, told a news conference the same morning that she saluted China’s massive central government intervention as preventing the “disorderly functioning” of markets. “That is the duty of central authorities,” she said. “The fact that they want to maintain a level of liquidity that is commensurate with an orderly process is quite good.”
Lagarde sought to reassure the financial community that at the IMF: “We believe that the Chinese economy is resilient and strong enough to withstand that kind of significant variation in the markets.” Based on the strong endorsement, the Shanghai exchange led all markets by rising +2.20 percent for the week of August 7 and +5.91 for August 14.
But Breitbart News warned on August 14 in an article titled “China Could Suffer $1 Trillion Foreign Capital Flight’ that China had already suffered $300 billion in capital flight in 2014. With the country beginning to devalue their currency we cautioned that another $1 trillion in foreign currency could flee China by the end of 2015 due to currency risks.
The Bank for International Settlement’s estimates U.S. dollar-based lending to companies and countries outside the U.S., mostly in emerging markets, has doubled to $9 trillion since 2009. Breitbart alerted readers, if China’s three percent devaluation started a currency war, the debt service cost of emerging market would skyrocket.
The futures markets in Asia are opening only down slightly after Taiwan, Korea and South Korea banned short selling and added substantial liquidity too their banking systems to support stock prices. But if China announces another devaluation, worldwide stock selling pressure could return with a vengeance.