The China Sea is gathering storm

If there were a war between China and Japan (the #2 and #3 economy), the US (#1 economy) will most likely support Japan and all the economical forecasts in this book as of 1/2013 will be off and we will be in a global recession.

There have been disputes with the islets between China, Taiwan, Japan, Korea, Philippine and Vietnam for the presumed oil or gas in the near-by ocean. The disputes have been mild for over 40 years (I remember the protest when I was a college student) and no side wants to do anything until recently. All these countries would not want to agitate China and China would not want to harm the trading relations. Now, the U.S. wants to side with countries against China. With the backing of the U.S.'s Seventh Fleet and the U.S.'s promises (hidden but quite obvious to me), all these countries suddenly cry out loudly for the last few years.

If China starts the dispute initially, China grossly miscalculates and grossly underestimates the might of the U.S. navy. If Japan resumes the dispute, they are risking losing trade (#1 export to China) and tourists from China.

It is the U.S.'s intention to remain as #1 and the most powerful as the big brother in this part of the globe. It is not a wise decision unless we still live in the past glory when you're either my puppet or my enemy. Most likely, it is decided by the politicians who want to divert our attentions as they cannot resolve our problems such as employment.

If the U.S. wants to promote selling weapons to Asian countries (the U.S. is #1 in exporting weapons), we are playing a risky game and the potential profit most likely will not justify the consequences.

China might withdraw the loans and we would be back to the worst depression in our history. It is quite dumb for China to loan us money to build the Asian missile wall against N. Korea and most probably against China too. When Japan and Korea fight against each other on the disputed islet, which position would we want to side with? If your answer is both, should we send missiles from one of our battleships to another one of our own?

We cannot afford another war. We've spent $1.365 trillion in the two current wars so far. We cannot visualize how much is one billion, not to mention one trillion. The current tallest building in the world (in Dubai) costs about $1.5 billion. We can build about nine hundred (900, not a typo) tallest buildings in the world and not even fathom of how many jobs would be created.

Not to mention the human suffering. China is not a tiger, but it is far from a paper tiger. Japan's navy is stronger than most folks in the U.S. can ever imagine. Japan has been the aggressor to China for centuries and has been war criminals against Korea and China in WW2. They have not compensated all the damages to Asian countries that they destroyed during WW2.

As usual, we always pick up the brick, aim and hit our own big toe. It was Vietnam, then the two wars in Middle East and now potentially the China Sea. We have not yet learned lessons from the French, the Brits and the Russians who had been all to Vietnam, Afghan and they all lost big.

No politicians would tell us that all our troubles are due to the high expense of the wars we participated. We have had about 20 years of secular bear market due to the Vietnam War, followed by about 20 years of secular bull market due to the lack of war, and now 12 years of bear market (as of 2012) due to the Middle East wars. At the mean time, many of us do not have jobs or at least under employed. I rest my case.

The disputes will not be good for all countries involved. The U.S. does not have sufficient resources to start another war. Hope it will not happen. Let the sleeping dogs lie and silence is the gold. The one who started to surface the dispute is grossly miscalculated.

Afterthoughts.

·         The point of my blog is not on the dispute itself: Why the dispute re-surfaces after 50 years or so? I suspect it is the U.S.'s hidden agenda. My guesses are: Help Obama reelection, the U.S. returning to S.E. Asia, selling weapons in the region (the U.S. is already #1 in weapon export), containing China... The unexpected outcome is which side the U.S. will be when there is a dispute between S. Korea and Japan. If you look at the map, I can tell one disputed islet is closer to Vietnam / Philippines and the other one is closer to Taiwan. However, it is not the point of the blog.

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My e-book Debunk the Myths of Buffett could save you a lot of money.

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(c) 2010-13 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

A non-correlation of market cycle and business cycle

A non-correlation of market and business

The Business (same as economic) Cycle is supposed to lag the Market Cycle¹ by about 6 months as the stock market is a leading indicator of the economy. As of February of 2013, this has not occurred, therefore the US economy is in a non-correlation to its stock market.

The market has recovered most of its losses from 2007-2008.

The economy is still in a recession considering the high unemployment and under-employment and the poor GDP growth. The global economies are more inter-connected than before, and our trade partners are also not doing well. Though there have been some recent signs of recovery in the U.S. economy, the job recovery may never reach to its previous peak.

Is this non-correlation important to us, the retail investors?

For an economist, the Business Cycle is important. For an investor, the Market Cycle is important. The economists forecast business growth, GDP growth, job growth, housing start…, and plan accordingly. The investors care about the potential appreciation of their portfolios.

It could be the beginning of this non-correlation for the coming decade. There is a good chance economists can no longer depend on the previous correlation to use the market to predict the economy. As long as the market is moving up, the investors are not concerned with the non-correlation. 

However, most likely the market will correlate again in the future with the economy as there has always been a correlation as far as I can remember.


When the following reasons of this non-correlation change, then the correlation will continue and we will be back to normal.

The reasons for this non-correlation

1.       Most big companies are now global companies.

Hiring at these multinational corporations (MNCs) depends on where offer the greatest benefits, including low workforce salary, educated workers, tax credits, less tax …. A good portion of MNCs' incomes are from foreign countries. Hence the U.S. market is getting less correlated with the U.S. economy which uses local employment as a measurement.

2.       Too many government interventions.

The government bailed out too many companies that should fail. No companies are too big to fail. It has not punished the executives/bankers to get us into this recession thru their greed. The market may falsely expect that future failing companies will be bailed out.

3.       There is still much easy money.

Since the American recession, banks use government money to invest in the market instead of loaning it to small businesses and house buyers to stimulate the economy. In addition, the demands from businesses and potential house buyers have been reduced. Corporations have the highest cash reserves for a long while.

When the government borrows a lot of money (to the ceiling literally), everything including the market looks good. However, somehow and sometime the taxpayers pay for those debts to China, Japan and whatever other treasury buyers. Today the U.S. has a benefit: It will repay the debtors with depreciated dollars.

A country loses its competitive edge if a good percentage of the GDP is used for servicing those debts.  If the USA were a company that cannot service its debts, it would be bankrupt.

Most believe this is the prime reason.
 

4.       Regulations appropriate for the health of the market is typically not boasting the economy. The expected ObamaCare is discouraging small businesses from hiring.

5.      Today's market may not be a good market indicator if this were considered to be a commodity unit (a combination of natural resources including gold) or Swiss Francs instead of the USD.

6.       There are too many factors that influence both the market and the economy in separate directions. Examples include the recent shale energy discovery and never-ending wars.

What should be done

1.       The government cannot pump that much cash into the economy.

Depreciating our currency is a short-term solution at best as it would improve our trades both ways.

A depreciated currency would encourage foreigners to buy the United States’ assets that would not be good for long term. To illustrate, if the GE building were sold to a foreigner, GE would pay rents to a foreigner for years to come. It is similar to selling our know-hows to a foreign country - the seller has immediate benefit at the expense of losing its competitive edge.

2.       The United States government must address and service the debt better now! The high debt will deteriorate the United States’ competitive edge to foreign countries. A high percentage of our GDP to service the debts will not help the economy.

3.       Its citizens and the government need to bite the bullet with more taxes, more incentives to create jobs, less entitlements, less welfare… Ending the current two wars and avoiding future wars is almost mandatory to improve the economy.

4.       The economy cannot be recovered without job recovery. The money spent in creating jobs will be better spent than on welfare and unemployment benefits.

Footnote.

¹Freedy, my fellow commentator, said,

Tony, the market can only act as a leading indicator or proxy of economic activity if there is consensus on the direction. Sometimes what is coming in six months is fairly predictable but at other times when pundits are at odds the future course is fuzzy. So market indices are really tracking where consensus "thinks" GDP is going'.

To be clear a market index is a summary of where consensus believes the economy is headed and this sentiment is a proxy for forward earnings. For the playing stocks and not the index, it is their cumulative sentiment which acts a guide.

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Afterthoughts.

·         We can still use the past to data to predict the future. However, it can be getting less and less useful.

* The economy conditions changes. We did not have most today's regulations in the depression. Examples abound.

* Employment is one of the major metrics in the Business Cycle. Our economy may recover without recovering employment (unemployment ).

Why? The world is more globally connected. The corporations make more money by shifting jobs to any other country.

* QE, printing money, foreign loans (to China...), reserve currency, debt ceiling all mean the same: Live in a higher living standard that we can afford.

When Uncle Sam uses all the tools to maintain our living standard and being the world policeman (a paper one when our economy is screwed up beyond repair), he is running out of tools. Each tool is a temporary fix but a long term trap.

* The shale energy could save the entire US economy and another war could do the opposite. You cannot find this info from any economical charts and data.




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My e-book Debunk the Myths of Buffett could save you a lot of money in investing.

http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

(c) 2013 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

Secular Bull Market is Coming!

My definitions

A secular stock market is a prolonged period (about 15 to 20 years) that the market is heading in one particular direction. There have been secular bear markets and secular bull markets depending on the direction of the stock market.

Market cycles exist within a secular market. Market cycles last for about 5 years. The market cycle of 2000-2007 lasts for about 7 years and the recent one from 2007-to 2012 lasts for about 5 years.

Within a year there are often two mini market cycles. The market (represented by S&P500 index or SPY) dips and surges and they provide the best time to sell on surges and best time to buy on dips.

The secular market cycle, market cycle and yearly dips (also known as mini market cycles) are not scientific concepts. Hence, their average durations are very rough estimates.

Market Cycle vs. Economical Cycle

Understanding Market Cycle is important to investors and Economical Cycle (also known as Business Cycle) is important to economists and businessmen. Do not be confused with the two. Secular economy cycle always follows secular market cycle at least from the last 60 years. The economy cycle usually lags the market cycle by 6 months.  

My prediction: The secular bull will start in 2017

Whenever a famous person predicts with any certainty that the end of the world is coming or the Dow will double next year, it is loudly broadcasted over the news. I predict that the next secular bull market will start as early as in 2017 (Note: After Obama’s election win, I changed it from 2015 to 2017). As a nobody, who ought to take my prediction seriously?  If this really happens, remember you heard it (with legitimate reasons for this) from me first!

This is a bold prediction! There are reasons why it may happen and also reasons considered why it might not happen. I could write a book on this topic but I will spare you the details. However, let us carefully scrutinize the coming events to better clarify my prediction. Act on the prediction otherwise all is lost!

Timing is everything even though there is nothing truly considered as perfect timing. But be aware that reacting too early as it can cost you money, or too late as to miss the opportunity.

Past secular markets

If the market is good, the economy is good and every person would have a job. Even the poor would benefit from the more generous government benefits and increased individual generosity. I have identified the last three secular bull and bear markets:

     Secular bear market: 1960-1980
     Secular bull  market:  1980-2000
     Secular bear market: 2000-now

I did not include secular markets before 1960 as those times do not resemble today’s market conditions.

In a secular bull market, every investor is a genius. Most of our stocks rise with the tide in a bull market. With the profits from the market, we spend more on disposable consumer products and even give to the poor more generously.

The cause of secular markets: War or lack of war

What causes the secular markets that usually last for about 20 years? My contribution to this theory is that war is the major common denominator to the determination of secular bull or secular bear markets. Though I have not read any article that distinguishes it out, I am sure the concept is so obvious that someone would reach the same conclusion. In the 1960s, it was the Vietnam War and the effects after this war. Today it is the two wars in the Middle East. Wars cost us a lot of resources. When these resources are devoted to the economy, the economy will grow.

After each major war, our leaders do not immediately forget the harmful effects at least for a while. They cannot get re-elected with a new war, so there will be no war for a long while. That’s my explanation of the secular bull market from 1980-2000. After the year 2000, the leaders forgot the harmful effects of wars and history repeated itself.

Wars are the primary cause of a secular bear market and bubbles are the triggers to recessions. In 2000, we had the internet bubble and we had the housing bubble in 2008. With minor exceptions, all bubbles are caused by excessive valuation and they will come back to the average value eventually. In 2000, many internet companies had no profits or their P/Es were very high from the average P/E. In 2008, the market housing value was too high to the availability of credit. The only exception is the recent price of gold which does not really appreciate that much as the dollar depreciates.

If the government concentrates its efforts on the economy rather than wars, it could detect the bubble earlier before its burst and at least the economy would have had a soft landing rather than the hard landing in 2008.  Remind the politicians to avoid any future war.

I expect we’ll have a prolonged bull market as early as in 2017 after ending the two wars completely. By 2014, the housing problem should be solved by absorbing the inventory and the Euro crisis should also be resolved. Until the politicians forget the harmful effects from the war, the secular bull market will continue for the next 15 to 20 years.

Secular bull market could be postponed to 2020

The following events may prevent a secular bull market starting in 2017 and postpone it to 2020 or earlier:

1.       A United States war with China due to protecting Taiwan from invasion. When the Chinese government cannot suppress the internal unrest and to detract attention of its own inability, it would forces invade Taiwan. More likely, a trade blockage would be more effective with tight economical ties with each other.

2.       Another probable cause for war is the U.S. military backing of Japan and other Asian countries on the disputes of the islands near Japan or the Philippines.

3.       World climate change adversely affects the food supply. If the technology that has improved the production of food in last 50 years did not continue, there would be a famine in poor countries. 

 

4.       Global warming leads to many problems such as the shortage of drink water.

5.       Natural disasters such as earthquakes and hurricanes. California is long due for a big one.

6.       Huge budget deficit.

If the government continues to spend unfunded: the prolonged unbalanced budget could never get us out of the recession. In addition, the government’s excessive obligations on generous welfare, social security, Medicare and other entitlement budgetary obligations are growing too quickly and lead to imminent bankruptcy.

The Fiscal Cliff has not really been fixed and we are still too deep into debts.

7.       The trapped gas and oil could provide us with enough energy for the next 50 years. The successful extraction could accelerate the start of the secular bull market back to 2015.

Conclusion

Be realistic: re-access these developments and adjust such predictions accordingly. An accurate prediction would better determine the risk of the market.

If the secular bull market starts in 2017, the average 20 year cycle would have shortened to 17 years.

Statistically, there are three recessions in a secular bear market. Is it coincident? As of January of 2013, there were two so far. 

Disclaimer.

Invest at your own discretion. This article is only intended for your information to devise strategies. Past successes will not guarantee future results.

Afterthoughts.

·         I predicted a market top on April, 2012 within days.

I’m not sure how accurate are my current predictions. It will be interesting to find out with the following dates Jan. 1, 2017 and Jan. 1, 2020 for secular bull market.

·         Signs of economy recovery.

1.       Increase corporate profits.

2.       Increase employment.

3.       Increase housing starts.

4.       Decrease Federal deficit.

As of 1/2013, #2 and #3 seem improving. #1 is OK. However #4 is not.

When you borrow money (#4), you can improve #1 to #3. I have doubts about this economy recovery.

·         From the Chapter: Storming China Sea.

We cannot afford another war. We've spent $1.365 trillion in the two current wars so far. We cannot visualize how much is one billion, not to mention one trillion. The current tallest building in the world (in Dubai) costs about $1.5 billion. We can build about nine hundred (900, not a typo) tallest buildings in the world and not even fathom of how many jobs would be created.

------
My e-book Debunk the Myths of Buffett could save you a lot of money.

http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

(c) 2010-13 Tony Pow

Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.