Opening Statement from September 2015 Intelligent Investor

Opening Statement from the September 2015 Intelligent Investor

Originally published on September 2, 2015

In late 2014 we warned investors about a new period we expected to begin within one to three years. 

Since then we have witnessed several historic events strengthening the argument that this new period has commenced. A brief list of these events is as follows: 

1. Soaring Dollar (late-2014 to current)

2. Collapse in Oil Pricing (mid-2014 to current)

3. Soaring Interest Rates in Russia (overnight in November 2014)

4. Swiss Depegging the Franc from Euro (January 2015) 

5. Weak & Delayed Response by Oil Industry (2014 to current) 

6. Greece’s Bailout Events (2010 to current) 

7. China’s Stock Bubble (late-2014 to current) 

8. Chinese Government’s Market Interventions (July & Aug 2015)

9. China’s Devaluation of the Yuan (August 11, 2015)

10. China’s Financial System Issues (mid-2013 to current)

The recent global selloff in the capital markets has confirmed the beginning of this new economic period.

In the August 2015 issue of the CCPM Forecaster, when discussing the Chinese economy, stock market bubble and government interventions, we concluded that things were “not going to end well.” We recently witnessed one stage of these dire consequences. After reporting a huge decline (8.3%) in exports for the month of July, China devalued the yuan by 2% on August 11. The following day the yuan was further devalued by nearly 1%.

China’s currency devaluation sparked a sudden collapse in the global capital markets. But the worrisome export data from China was not the sole reason for the devaluation. China has also been experiencing sizable capital outflows due to the yuan’s strength (via its peg to the US dollar). Thus, devaluation makes Chinese exports more competitive, reduces capital outflows and sends a message to international officials, financial institutions and investors that China is making progress towards creating a free floating currency. This will aid its efforts to become a reserve currency. On the other hand, the Chinese government’s recent stock market interventions remain as a concern to those who had hoped China would transition into a free market economy. 

Within days of the yuan devaluation, commodities began to sell off hard as investors digested the implications of China’s economic slowdown. Soon after the capital markets followed suit. Then on Monday August 24, 2015 the Dow Jones Industrial Average collapsed by more than 1000 points in premarket trading due to panic selling and programmed order execution by financial institutions.

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