End of the Line! China and Germany Look Ready to Pop

The U.S. stock market has finally hit a speed bump after more than six years of a Fed- and QE-driven rally. The S&P 500 is up 232% since March of 2009 despite this unprecedented stimulus in the feeblest economic recovery in history.

But since late December 2014, U.S. stocks have gone nowhere as investors face some growing realities.

GDP, retail sales, production and exports are slowing.

The dollar’s sharp rise in recent years has crushed global exports.

Long term interest rates are rising consistently… what I call the beginning of the end of stimulus policies designed to keep rates low forever.

Meanwhile, in just six months Germany saw its key stock market, the DAX, rise nearly 50% from mid-October into early April.

Germany’s bubble has shot up 245% since March 2009 — greater than the U.S., despite its slower economy.

It won’t last!

DAX Germany 2007 - 2015

As I’ve explained many times, starting last year Germany has the worst demographic trends of any country in the world lasting through 2022. It’s even worse than Japan’s demographic cliff in the 1990s!

There’s one reason Germany has held up as well as it has in the last year: the euro.

When the euro falls, German exports soar. Between April 2014 and March 2015 the euro fell 25%. Its long-term peak was in July 2008 at 1.60 dollars. It hit 1.05 in March — 34.5% lower!

Consider that Germany exports 50% of its GDP. That’s one of the highest ratios in the world.

Hence, the falling euro gives it a huge advantage. But the euro has barely budged for three months…

That explains why the DAX has fallen 10% since early April, which is when I believe it reached its long-term peak. When the next great crash hits, it’s likely to take the DAX down to its early 2009 low, at least — a 72% crash likely by early 2017.

But if Germany looks bad, there’s nothing short of “terrible” to say about China! China’s stock market makes Germany’s late-stage bubble look pathetic!

Shanghai Composite 2005 - 2015

 

China saw the shortest and steepest bubble from early 2005 to late 2007, up over 500% in less than two years. Its crash into 2008 was one of the largest, down 72%.

After a “dead” market from 2010 into mid-2014, China’s stocks have literally exploded again… up 159% in a straight shot in one year while its economy and exports have continued to slow!

A 48% late-stage bubble in Germany unwarranted by its demographics… 159% in China despite its weakening economy.

What’s driving this mania?

The greatest real estate bubble in modern history just had the legs cut out from underneath it.

So in recent months, investors urgent to find new gains have suddenly piled into stocks.

Cities like Vancouver, Sydney, Melbourne, New York — they’ve all inflated to unnatural highs due to the baby boomers and wealthy Chinese desperate to get out of China.

Now that these cities are cracking, investors are speculating in stock markets — but not ours as the many visible headwinds facing the U.S. made foreign markets like Germany and China look like better deals.

This is the opposite of what happened in the early 2000s. As U.S. stocks crashed from March 2000 onward, investors jumped into real estate, creating a bubble into early 2006.

New trading accounts have skyrocketed since. Two-thirds belong to people that don’t have so much as a high school diploma.

Like I say, the dumb money always piles in right before the market crashes!

Just look at what happened last time. The great late-stage bubble came out of China right before the whole thing popped, and they crashed more than anybody. The exact same thing is happening again!

China’s bubble recently hit 5,500. It’s likely to go a bit higher, but I do not see the Shanghai Composite exceeding its 2007 all-time high of just over 6,000.

I’m expecting China to suffer an 83% crash likely by early 2017, to its 2005 lows near 1,000 — minimum!

The emergence of these late-stage bubbles while the world’s leading economies stall is the clearest sign yet that this global bubble is getting ready to burst.

Subscribe to Boom & Bust to see why I believe we’ve already entered a recession and why I see this bubble bursting much sooner than many expect. You’ll see it coming well ahead of the rest.

Don’t dally. Protect yourself NOW!

Harry

Follow me on Twitter @harrydentjr

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Categories: Forecasts

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.