BarroMetrics Views: Black Swan?
One of my closest friends, and one of the more successful Singaporean locals, Mic Lin, asked me yesterday if the emerging market turmoil could be the Black Swan event I had alluded to in my blogs. My answer was, of course, ‘yes’. Under normal conditions, I would not have thought so; but these are not not normal conditions.
I view current conditions much like the political tinder box that preceded the assination of Archduke Ferdinand. The event, on its own, ought not to have been enough to begin World War I; however, in its context, it turned out to be enough of a match to set alight the political and economic power keg that had been brewing at the time.
We face a similar sort of situation economically - the Western nations have gone on a spending spree, a spree that could lead to massive inflation once the deposits sitting with the Reserve Banks of the US, EU etc hit main street. The US Federal Reserve is now finding out just how difficult extrication (read ‘tapering’) is going to be.
In this regard, it’s interesting that little attention has been paid to the Chinese stock market. Interesting, because most commentators and economists, ackwnledge just how important China is, and will continue to be, for Western recovery. Yet, the Chinese stock market is under performing its Western counterparts.
Figure 1 is the Shanghai Index. We see that it has broken support, at 2399; it hen did a classical retest, and then tested the lower boundary at 2000 since the breakdown at 2000.
I expect to see that support broken no later than the end of August. From there we should see a test of 1728. That support needs to hold because if it gives way, a test of 1099 to 1210 is on the cards.
What I wonder is whether a breakdown of the Chinese stock market below 1729 will lead to contagion in the West?
FIGURE 1 Shanghai Composite