For many US stock market observers and especially participants, “panic” seemed to be a term long-forgotten prior to 2020’s developments. Indeed, the days of Mortgage-Backed Securities and other toxic financial products bringing the worldwide (rather than US-only) financial system to its knees seemed to be behind us, with stock markets flirting with all-time highs and prosperity… abounding?
Some of you, especially readers who are more accustomed with our work, were most likely raising an eyebrow for quite a while and rightfully so.
For many reasons, such as:
- All-time highs when it comes to the stock market and the stellar performance of other assets aren’t necessarily correlated with the “real” economy. If we compare “real” (inflation-adjusted) wage growth for example to asset price performance, we will quickly realize that gains haven’t exactly been distributed equally. To put it differently, it would be a severe overstatement to say that the average American has benefited tremendously. Yes, there were 401k’s that were doing well and what not but the main beneficiaries of the current asset price status quo have been the wealthier US citizens, citizens wealthy enough to have robust exposure to the assets that have done so well rather than the average debt-laden American
- When times are good, nobody cares about the costs but make no mistake, a steep price needed to be paid for this more or less artificial prosperity: zero-zone interest rates and up to $1 trillion per year in liquidity over in the US, negative interest rates and even more liquidity at the height of its monetary easing program over in the European Union, the list could go on and on. We have actually dedicated an article to just that, the “diminishing returns” perspective on anything from China to the West
- The US financial system going from growth stages which revolved around just one “in your face” bubble (the Dot-Com Bubble, followed by the infamous real estate bubble) to the current status quo, where the landscape is dominated by multiple bubbles that had to be inflated to kick the proverbial can down the road. Each individual bubble is more than capable of bringing down the financial system in and of itself, let’s not even discuss scenarios related to multiple bubbles popping at the same time
- Speaking of the “bringing down the financial system” dimension, this is actually not that difficult at this point in time. A mere blip on the economic growth radar that is left untackled (from a monetary and fiscal stimulus perspective) would be more than enough to generate a let’s call it “derivatives apocalypse” that puts today’s grossly over-leveraged financial system on a downward death spiral
We could continue with reason after reason, but it should be abundantly clear that something is amiss here. On the one hand, we had stellar asset prices to the point of irrational exuberance in the markets and on the other hand, we have a system so fragile that a mere caught would be more than enough to bring the party to an abrupt end in the absence of massive stimulus.
Under such circumstances, would it really be that much of a stretch to state that at this point, the “wealth” more and more people are talking about on various economic news outlets is simply “paper” wealth to a significant degree?
Of course not.
From the perspective of China, this situation is anything but stellar for two main reasons:
- Unfortunately, investment activity is still “hype-dependent” in many sectors of the Chinese economy and as such, the fact that hype had moved toward irrationally exuberant Western markets isn’t exactly good news
- One would think that under such circumstances, China was patiently waiting for the Western party to be over but that is just not the case. Why? Simply because as mentioned on numerous occasions (with even an article dedicated to this very topic), China is not perceived as a safe haven destination by the market. As such, even with the party having arguably ended in the West, capital is quite likely to flee China, as counter-intuitive as it may sound
What does this mean to an investor interested in gaining exposure to Chines assets?
It simply means that being patient and keeping your eyes on the proverbial prize is the name of the game. A wise investor understands that long-term opportunities abound in China but the same investor also realizes that in light of current market conditions, waiting for buying opportunities tends to make more sense than pulling the trigger right away.
To put it differently, let us assume the US stock market amusement park ride would have been ended completely due to the authorities not engaging in the stimulus measures the market demanded. Needless to say, Chinese assets would take a dramatic hit, with investors from all over the world fleeing “risky” markets such as China and seeking refuge in safe haven assets, for example US Treasuries. Again, as counter-intuitive as it may seem, capital would most likely not flee the US in this specific scenario despite the crisis originating in the United States, with the Great Recession case study being relevant in this respect. Instead, it is likely to flow from riskier US assets such as stocks to “safer” ones such as Treasuries.
However, a savvy investor also understands that the market isn’t always “right” and that in such scenarios, it might be giving too much credit to certain US assets, while various Chinese assets are being grossly under-priced. Therefore, our investor decides that now is the time to pull the proverbial trigger, much to the surprise or even amusement of his peers, and starts building a robust Chinese asset portfolio at depressed prices, while other market participants are too scared to take meaningful action.
Will it be easy?
Will it be stress-free?
Of course not, going against the crowd never is.
But in our view, it would be the smart thing to do and should you or your organization need assistance when it comes to organizing the entire endeavor, the ChinaFund.com team is at your disposal.