Money and Markets: Investing Insights

China Will Cause a World of Hurt in 2016

Boris Schlossberg & Kathy Lien | Wednesday, January 13, 2016 at 4:20 pm

(Please join me in welcoming two of the world’s most respected investment analysts to the Weiss Research team! Boris Schlossberg and Kathy Lien (click here for bios) — both regulars on CNBC — are widely quoted and sought after by cautious investors the world over. We believe their insights will help make 2016 among your most profitable years ever! — Martin Weiss)

Market Roundup Dow 16,151.41 (-364.81) S&P 1,890.28 (-48.40) NASDAQ 4,526.06 (-159.85) 10-YR Yield 2.07% (-0.04) Gold $1,093.20 (+$8.00) Oil $31.38 (-$0.14)

Here in America, we say that the brightest flame burns the quickest. But in China, Lao Tzu, one of the greatest Eastern Philosophers, once said, “The flame that burns twice as bright burns half as long.” Either way, China is struggling to keep her flame burning. And while the candle won’t be burning out anytime soon, even if it flickers it would bring darkness to every corner of the world. When economic giants slow, the world suffers, and you need to be prepared because China’s new economic plan will soon be approved.

For the past 30 years, China was the hottest economy in the world. Its double-digit growth rates fueled everyone from developed to emerging-market nations and protected many countries from deeper downturns during the Global Financial Crisis. But don’t be mistaken; China does not look at the world as a charity case. The leaders there are singularly focused on what is best for China, regardless of consequences. Right now, China’s focus is to shift its economy from manufacturing to consumption, and it will stop at nothing to achieve that goal.
China will not hesitate to bring on a world of hurt in 2016 to achieve its policy targets. Chinese officials are preparing for their most ambitious economic transformation since the “reform and opening up” policy of 1978 — yes, the one that turned China into the greatest economic success story of the past three decades. The growth-at-all-costs model is no longer going to work if they want sustainable growth. By 2020, China plans to double incomes from 2010 levels because the average worker needs to earn a lot more than 56,300 yuan a year (the equivalent of $8,600) to have enough disposable income to support a consumer-based economy. They also want to create 10 million jobs a year, but they’ve been light on the details.

China wants to double the income of citizens by 2020.

The only concrete announcement they made was to drop the “one-child policy” and adopt a two-child policy. Ending the one-child policy is a smart move, but it will take decades to pay off. Over a quarter of China’s population is 50 and over and, according to the World Bank, in spite of the relaxation of the one-child policy, China’s working population will shrink 10% by 2040. Many Chinese have grown accustomed to having only one child and the financial burden of having more than one could deter some families from taking advantage of a program that the government desperately needs to work. Recent surveys find that only a quarter of women who are able to have another child plan on doing so.
For now, the days of 10% growth in China are clearly over and the country is headed for its slowest expansion in decades with repercussions that will be felt around the world. China’s focus on environment and social reforms will be costly. Remember that one day in August (the 24th) when the Shanghai stock market dropped 8.5%, causing the Dow Jones Industrial Average to drop almost 600 points? With Chinese growth expected to hit a wall in 2016, the most dramatic and disruptive period for emerging and developed markets is upon us. And that could mean the end to the bull market in U.S. stocks.
So to make money in 2016, it will be extremely important to be selective, not only about the stocks you choose to buy but also the markets you choose to invest in.
Best wishes,
Boris and Kathy

Our Readers Speak

Regular columnist Mike Larson takes a look at your recent comments:
Is “Sell Everything” the best advice you’ve heard from Wall Street in a long time? Or the worst? Several of you weighed in on my column yesterday highlighting the RBS call.
Reader Richard said: “There is no way that anyone can convince me that RBS is not correct. The world cannot pay the debts we have built. It’s time for cleansing and it won’t be pretty.”
Reader Howard countered by saying you can’t stay on the sidelines forever: “Finding the bottom is never easy. When you have had historically low prices in commodities, at some point the smart money will re-enter the market. This market has been in decline for some time and each of us will decide when the time is right. Don’t wait too long.”
Reader Larry shared this view about how the market backdrop has changed for the longer term: “You can make money when stocks go up, and you can make money when stocks go down. The climate, however, has changed over the past year. We previously bought on dips. Now we better sell/sell short/buy inverse ETFs when the general market bounces up into technical resistance.
“I just made 10% on my portfolio with bearish trades, and I plan to do it again after this expected bounce. It is not rocket science. You just can’t do bullish trades in bearish markets without losing money.”
Reader Scott concurred with the bear market assessment, saying: “The market has been in a monthly bear sell mode since April 2015. The downside is just getting started. Since April-May, the strategy has been to get out of longs and sell rallies. Has been working gangbusters for me.
“Income is no good if your underlying asset declines 20%, 30%, 50% or more – look at oil. Better to be sitting totally in cash, waiting for the long-term trend to change back up. It could be quite a while – one to two years at least, maybe more. Look how long gold has been in a downtrend – over four years now.”
Finally, Reader Craig said: “I agree about the ‘no panic selling’ view. Stocks will continue to drop and several small-to-medium-size oil companies will file for bankruptcy. These are interesting times and if you play your cards right, you will make lots of money.”
Thanks for sharing these opinions. Yesterday’s late day bounce and the early strength today are evidence that short-term, oversold rallies are possible at any time. They could even carry for a few hundred Dow points over the span of a few days.
But over the long term, I agree that we’ve seen a major change of character in the markets. That raises all kinds of new risks … but also massive profit opportunities, as Readers Craig, Scott, and Larry point out.
Didn’t comment yet? Then don’t wait – use the discussion board below to share your thoughts now.

Other Developments of the Day

Iranian forces detained and held 10 U.S. sailors yesterday after they strayed into the Islamic Republic’s territorial waters. But Iran said that the intrusion was accidental, and the U.S. apologized, and released them after only a brief time.
Last year was a record for mega-deals in corporate America and around the world. The problem? Now all those companies have to pay for them. This Bloomberg story points out that corporations will have to raise a record $280 billion this year to finance previously announced M&A deals, up from $258 billion last year.
Unfortunately, they’re going to have to do so in a debt market that’s growing increasingly hostile by the week. That means companies will have to pay higher interest rates or make other concessions to bond buyers in order to get deals done. The risk of a major deal failure, and subsequent market volatility, is also clearly on the rise.
The National Football League is bringing professional football back to Los Angeles. Team owners voted in favor of billionaire Stanley Kroenke’s proposal to relocate the St. Louis Rams to a new stadium complex that will be built in Inglewood, California.
The glass-roofed facility will cost as much as $3 billion, and likely include peripheral entertainment facilities. The San Diego Chargers were granted an option to join the deal, potentially giving L.A. two NFL teams. It will take a few years to complete the facility, during which time the Rams will probably play their games at the Los Angeles Memorial Coliseum.
What do you think about Iran’s latest move in the Persian Gulf? Will some of these mega-deals start failing, and how will markets react? Do you think the NFL is making the right move by heading back to Los Angeles? Hit up the comment section below and let me hear about it.
Until next time,
Mike Larson

The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.