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Wednesday, January 20, 2016

CHINA GROWTH HITS 25-YEAR LOW

Well, the world stock market continues to be declining and American oil today plunged nearly 7% to $26.55/barrel.  At one point the Dow Jones Industrial Average was around minus 550, but has recovered some.  So, what's the problem?  Financial analysts like to blame China.

China's growth rate last year hit a 25-year low of 6.8%:

Is this terrible?  Well, the Shanghai Stock Exchange has dropped:


To begin understanding what is happening, here is a chart of GDP (Gross Domestic product) proportions:


Keep in mind that the USA still dominates in GDP size, but China is #2 and catching up.  Note that Japan is #3 and sinking.  #4 is Germany.

So how really bad is China's 6.8% GDP rate increase?  Here is a somewhat surprising comparison with regards to GDP growth rate percentage (latest available):

#1      Macau 11.9
#3      Turkmenistan  10.1
#4      Mongolia  9.1
#6      Ivory Coast  8.5
#6      Myanmar  8.5
#10    Sierra Leone  8.0  (Remember the UN saying Ebola is over?  A new case was reported today.)
#11    India  7.5
#14    Tanzania
#16    Uzbekistan  7.0
#19    CHINA  6.8
#33    Uganda  6.0
#42    Vietnam  5.5
#77    Saudi Arabia  3.6
#82    South Korea  3.5  
#93    United Kingdom  3.2
#93    Afghanistan  3.2
#99    Singapore  3.0
#121  United States  2.4
#142  Norway  1.8
#150  Germany  1.4
#150  European Union 1.4
#156  Japan  1.3
#176  Russia  0.5
#178  France  0.4
#179  Brazil  0.3
#183  Italy  -0.2
#185  Iraq  -0.5
#195  Ukraine  -6.5
#198  Libya  -19.8

The above says a lot, and also nothing much.  A clear danger signal is that Chinese households and companies now spend an equivalent of 20% of GDP on interest payments, more than the U.S., Japan or the U.K., and, as the yuan weakens, funds are moved into foreign investments.

  • The central government could cut interest rates, but more capital will flee the country.  
  • If interest rates are increased, debt-plagued companies will go bankrupt.  

This is called being between a rock and a hard place.

A useful indicator is the Volatility Index, or VIX:

The VIX hit a "recent" high around 90 when the market crashed just before the time Barack Obama became president at the end of 2008.  Note the upswing this past week.  That is indicative of obvious metastability:

If the VIX remains below 20, nothing much to fear.  Today it went up to 32 and seems to be settling just below 30.  Keep in mind that the VIX is representative and not anticipatory, so even with obvious down and up trends, you just won't be able to accurately predict those historically significant leaps.

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