Is the China Boom Bogus?

China's economy appears to have recovered its growth since Nov08, but China counts GDP differently than we do.  When we sign a Stimulus Bill, we wait until the money is actually spent to count it; when China does, they count it immediately, even if it sits on a budget or in a bank.  When we ship a product to retail, we wait until it is actually sold to count it; when China ships, they count the retail price immediately.  And so on.  Is China really back on an 8% growth path?  Exports are down, and assets are way up (housing is up, stocks were way up until the last two weeks, etc.).  Maybe the budgeted funds are being used by banks for speculation?  If Goldman Sachs ran China, you betcha this is what would be happening.

If the West does not pick up, this could end badly.  Presumably the Chinese are counting on that.  And so is the vast consensus of economists.  But that same consensus got it terribly wrong in 2007, and indeed over and over if you check back on consensus forecasts.  Some Western economies have perked up, like Australia, but they are commodity-based economies which gain from China stockpiling and focusing on building intermediate goods, even if they never get sold at retail.  Some of the Euro economies popped above zero, and maybe they will emerge with sustainable growth.  And of course the US had a smaller drop in Q2 than expected (-1% vs -1.5% expected), with a trend towards a positive Q3.  

I analyzed that report before in discussing the likely W-Shaped Recession.  Let's look at it from the Chinese point of view.  For their bogus recovery to gain legs, they need the US consumer to begin buying again.  But consumer spending was down in Q2, retail sales disappointed, and indeed the whole private sector is still sinking, not rising.  The Q2 story was largely driven by a spike in US defense spending.  If that continues and drives GDP positive, it won't mean much at all for the Chinese.  If the Stimulus finally kicks in, that could mean something, but again would largely go to infrastructure projects of little direct benefit to the Chinese.  

It is also unclear if the Q2 trend should be extrapolated.  Given how GDP is calculated, a tiny increment in a quarter can mislead.  Let's do some math.  The GDP in 2007 was $14T, and a bit less in 2008, down something like 6% or almost $1T.  (The numbers keep being revised downward.)  Let's say we sit around $13T economy.  1% growth is an increase over a year of $130B, or $32.5B a quarter.  If the Stimulus pops out a $32.5B increase in Q3, it will be extrapolated on an annual basis to a 1% increase over what GDP would have been.  

Of course, since we count differently than the Chinese, the question is how much of that $32.5B would actually contribute to GDP.  Something like $100B of stimulus was spent in Q2, and yet the impact on annualized GDP was much less than that, an estimated 0.15%, plus some part of the State spending contribution of 0.30%.  Let's call it 0.20% contribution.  $13T times 0.20% is $26B.  This means the $100B had only a $26B impact in the quarter, a pathetic return, and even more pathetic if you consider the quarterly impact multiplied by 4x to annualize. $100B should have driven it up by 3%!  (Each $32.5B should get 1% growth.)  It appears that the vaunted Keynesian Multiplier is not working.

This is all part and parcel of why the worse is in front of us.  For a stock market perspective, read this piece "The Bounce is Aging, But The Depression is Young" below the fold.

The Bounce Is Aging, But The Depression Is Young
August 20, 2009

By Bob Prechter

The following is an excerpt from Robert Prechter's Elliott Wave Theorist.  Elliott Wave International is currently offering Bob's recent Elliott Wave Theorist, free.

On February 23, EWT called for the S&P to bottom in the 600s and then begin a sharp rally, the biggest since the 2007 high. The S&P bottomed at 667 on March 6. Then the stock market and commodities went almost straight up for three months as the dollar fell.

On March 18, Treasury bonds had their biggest up day ever, thanks to the Fed’s initiating its T-bond buying program. The next day, EWT reiterated our bearish stance on Treasury bonds. T-bond futures declined relentlessly from the previous day’s high at 130-15 to a low of 111-21 on June 11.

That’s when there were indications of impending trend changes. The June 11 issue called for interim tops in stocks, metals and oil and a temporary bottom in the dollar. The Dow topped that day and fell nearly 800 points; silver reversed and fell from $16 to $12.45; gold slid about $90; and oil, which had just doubled, reversed and fell from $73.38 to $58.32. The dollar simultaneously rallied and traced out a triangle for wave 4. Bonds bounced as well. As far as I can tell, our scenarios at all degrees are all on track.

Corrective patterns can be complex, so we should hesitate to be too specific about the shape this bear market rally will take. But from lows on July 8 (intraday) and 10 (close), the stock market may have begun the second phase of advance that will fulfill our ideal scenario for a three-wave (up-down-up) rally. In concert with rising stocks, bonds have started another declining wave, and the dollar appears to have turned down in wave 5 (see chart in the June issue), heading toward its final low. Although commodities should bounce, their wave patterns suggest that many key commodities will fail to make new highs this year in this second and final phase of partial recovery in the overall financial markets.

Meanwhile, our forecast for a change in people’s attitudes to a less pessimistic outlook is proceeding apace. Here are some of the reports evidencing this change:

More than 90 percent of economists predict the recession will end this year. [The] vast majority pick 3rd quarter as the time. (AP, 5/27)

Manufacturing and housing reports this week may offer signs that the recession-stricken U.S. economy is within months of hitting bottom, economists said. (USA, 6/15)

Fewer people say they’ve prospered over the past year than in decades, a USA TODAY/Gallup Poll finds. Over the past two months, however, expectations for the future have brightened significantly amid rising optimism about a stock market rebound and economic turnaround. “I think the administration is going in the right direction,” says… Now 36% of those surveyed in the Gallup-Healthways well-being poll say the economy is getting better. That’s not exactly head-over-heels exuberance, but it is double the number who felt that way at the beginning of the year and a notable spike in the nation’s frame of mind. Thirty-three percent say they’re satisfied with the way things are going in the United States; in January, just 13% did. (USA, 6/23/09)

If only to confirm the socionomic causality at work, an economist quoted in the article above muses, “The one anomaly in the puzzle is that people shouldn’t be feeling better because the jobs market is so terrible and unemployment is likely to keep rising.” Of course it would be an anomaly, and people should not feel better, if mood were exogenously caused. But it is endogenously regulated, and it precedes social actions, which produce events such as job creation and elimination. That people feel better is evident in our rising sociometer, the stock market. If the rally continues, economists will soon agree that the Fed’s “quantitative easing” and Congress’ massive spending are “working.” Those predicting more inflation and hyperinflation will have the last seeming confirmation of their opinions. Then, a few months from now, some economists will probably express similar puzzlement when the stock market starts plummeting again despite the fact that the economy has improved.

But all of these considerations are temporary. Conditions are relative, and behind the scenes, the depression has been, and still is, grinding away.

For more information, download the FREE 10-page issue of Bob Prechter’s recent Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979. 

Comments

[George Soroes]

I don't think you will have much luck talking the Chinese market down. Third waves up starting in Shanghai and SnP. Best of luck to the shorts!

[jeff]

Is the China Boom Bogus? No China is in 1909 in terms of the DOW

[chuan]

Dow Jones Industrial Average
(DJI: ^DJI)
Index Value: 9,350.05
Trade Time: 4:02pm ET
Change: Up 70.89 (0.76%)
Prev Close: 9,279.16

I expected a gain of +95 but I got +70 today, cant complain.....
But Friday tomorrow Uncle Sam/Goldman Sach will get me +165 to close around 9515, failing which 21-08-2009 shall be deemed a Yankee-Curse-Day...

[I. Sosceles]

One of your most insightful posts, Yelnick.

[dlu]

yelnick,
I think that was pretty obvious. After USSR its china's turn. but question is who is going to gain? As EWI says "there is a phoenix somewhere." EWI has INDIA in sight. but the rally in india is corrective not impulsive as they think.I can see a nice wxy developing B wave on sensex not a la dow 2003-2007. Therefore,I see no market anywhere in the world with nascent offshoots of bull run not in near term for at least a few years.
Can you shed some light on this. thanks for the post.

[Mike McQuaid]

NDX daily chart, Bollinger band (20,2) is a tight 60.19. RSI(14) is 58, trend is up. No topping candle formation is present, just a sideways trading range for 20 days (one day shy of fib 21). From my little Okie dugout this is a recipe for a rally.

[Mike McQuaid]

NDX is just shy of the trendline across the top since October '07.

[Mike McQuaid]

XLF showed two hanging men on the 13 & 14th and gapped down. Today the gap closed and the index closed at the high, all the while the middle Bollinger band hasn't been touched for weeks. RSI(14) hasn't fallen under 50 for weeks either. This is still a bullish chart.

[Alfie Andn]

Location: New York in transit after Highland Holiday

Time of Day: 7pm

Time Spent: 2 hours

Price: 500

Her Place: she visited my hotel

Description: About 5ft tall wavy brown hair, 38 years old with a spot on her chin and a stud through her tongue.

Comments: Ruby was suppose to stay all night, however after a meal and obtaining advance payment, she made her way to the toilet and then disappeared. Beware of using this girl, she is not very attractive and very unreliable. I phoned the agency and they did not even appear sorry

Recommended: No

Would You Return: No

[kld]

Alfie, I had her and she was great! Definitly two thumbs up!

[stupid]

Alfie Andn and Kld

Are you stupid or what?
You admit you violated the law and leave your IP address/identity.

[Alfie Andh]

Violated the law, same as Goldman Sachs huh!
part of the coming great depression culture - get used to it! The roaring sixties, seventies, eighties, nineties are over
Have you not studied the great Precter Socionomics - Stupid!
Stock up your freezer! Slaughter your own chickens _ Money isn’t everything and will soon be worthless -
My reports present an insight in social mood and if studied carefully they are value tips on sentiment and short term market behaviour. They complement and add to the great analysis of Elliot theory in this forum.
THE KID AND I ARE INNOCENT we do this in the name of research into social mood, essential in deciding future market moves, just as you do it with Elliot wave theory. Visiting cat houses has long been a traditional tool in value investing.

[MHD]

Yelnick...what's your view on the timing of wave C and its bottom, if we actually have a Prim C down? Some ewavers have us in a swift decline and a bottom in March 2010. Neely had us bottoming by the end of the year with his current count, which he may or may not change. EWI seems to be less clear on how fast this decline might be. Any thoughts?
Also wanted to say your site is always interesting to read and I always look forward to your articles and views.

[yelnick]

MHD, thanks for your kind remarks. As to the bottom IF we have the big wave 3 (EWI count), they have not been definitive on a date. In contrast Neely has or at least had pegged Jan2010. Using a Gann methodology - same slope down as up -he is likely to move that out in time by two months and a slightly less steep slope to beyond March.

Given that EWI's wave 1 lasted from Oct07 to Mar09, or 17 months, I would expect their wave 3 to last at least that long, if not closer to 27 months (1.6x). If we top here in Sept, that would count out to a range of Mar- Nov 2011. And we wouldn't be done; a wave 4 would follow and then the final wave 5.

We can overlay some seasonality and cyclicality to these numbers. Normal good season is Nov to May; bad season Sep to Nov. The four-year Presidential cycle should bottom around election 2010 and peak around election 2012. The four year cycle occasionally right shifts its mid-term low (eg 1987). But a model which has a bottom in late 2010 or early 2011 fits, and then a wave 4 high around election 2012, and a final drop to the mid-term 2014. If we fail to really bottom in late 2010, the seasonal factor (buy in Nov, sell in May) may right-shift the eventual wave 3 bottom to fall 2011.

[Jakbqwik]

As of 45-minutes ago, I'm long Gold, Silver, & China (in that order)...looking for a 12-month return of +350% on Gold, +90% on Silver, and +50% on the Shanghai index...I will exit all three positions once my profit targets are reached.

And no, I'm not using stops. Boom or bust, baby!

[Neely the Guru]

EWI been nailing this market with high precision while NEOWAVE, with its false claims, has been miserable forecaster.

[Jakbqwik]

Gold, Silver, and Shanghai index going up, up, up; while USD & US Bond prices going down, down, down over the next 2-years.

US Stocks should trade within a tight (10%) range for the next 2-years.

[Upstart]

Carl Futia says, for us Elliott fans, the move has all the characteristics of the third wave off the March low.

Then it appears we're in the 3rd of a 3rd.

[chuan]

Dow Jones Industrial Average (DJI: ^DJI)
Index Value: 9,517.21
Trade Time: 3:32pm ET
Change: 167.08 (1.78%)

Prev Close: 9,350.05
-----------------------------------------------------
"But Friday tomorrow Uncle Sam/Goldman Sach will get me +165 to close around 9515, failing which 21-08-2009 shall be deemed a Yankee-Curse-Day...

Posted by: chuan | Thursday, August20,2009 at 03:33 PM "
Just for record, all my transactions happily completed at 9515 around 3.30 your time at 9515 , to the dot, QED.Handsome rewards.

I am grateful for the invaluable helps rendered by Goldman Sachs and Bernanke et al, failing which
today August21 would have to be declared "Yankee Curse " Day.

The fact that i am thousands of miles away in a foreign cave(n never step foot in this Yankee land) can spot your Dow's movements almost to-the-dot (9515 against the intraday peak, of 9517) speak volume of how bogus and cartoony your Dow Market is.It's such a simple straight forward matter, and yet i read of all sorts of contorted and confusing (misleading) arguments being churned day in and day out here and all other places.

FYI, i am using a simple and primitive method (5000yrs old, you know(remember?) the "Chinese"-approach(that which ought to be cursed, everytime you failed to talk the market down n humiliated/hurt by the market)

I shall name my Dow method as chuanwave to make it proprietory , or CHUANWAVE (so as to be in the same league as EWI,NEOWAVE....)

Any taker/investor? we are open for business!

[psycho_puppies]

Chuan,
Happy "Yankee-Curse-Day"!!! Now What?

[Neely the Guru]

Chuan,

u think this is the top?

[chuan]

psycho_puppies/Neely the Guru

Sorry, i missed this page.

Dow should range-trade moving 9500 to 9440 to 9595 to 9360 ....then peak(top) 9635-9650 on Sept 14 n Sept15 followed by 5 days correction of 500points(5%),supported around 9160 Sept21 n 22.

You long or short?